Item 1B.
Unresolved Staff Comments.
None.
The following table shows the location, land area, building area and function of the properties the Company owned or leased at December 31, 2013.
The Company considers the properties to be well maintained, in sound condition and repair and adequate for its present needs. These properties generally have sufficient capacity for the Company's existing needs and near-term growth. The Company expects to continue to make capital investments in plants to support specific business opportunities.
Item 3.
Item 3.
Legal Proceedings.
See Note 13 - Contingent Liabilities and Commitments in Item 8 - Financial Statements and Supplementary Data of Part II of this Report, which is incorporated herein by reference.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock Data (per share) (Unaudited):
The Company's common stock is traded in the NASDAQ Global Select Market. The trading symbol is SIAL. On January 31, 2014, there were 513 shareholders of record of the Company's common stock.
The Company expects to continue its policy of paying regular quarterly cash dividends. Future dividends are dependent on future earnings, capital requirements and the Company's financial condition and are declared in the sole discretion of the Board.
See Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of Part III of this Report for information concerning securities authorized for issuance under the Company's equity compensation plans.
The following table presents share repurchases by the Company and any affiliated purchasers for the year ended December 31, 2013 (in millions except per share amounts):
Issuer Purchases of Equity Securities
The timing and number of shares purchased, if any, will depend on market conditions and other factors. The Board's authorization of management to purchase the remaining 8.9 million shares is effective until November 2014.
For additional information on the Company's share repurchase program, see Note 19 - Share Repurchases in Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
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Item 6.
Item 6.
Selected Financial Data.
Annual Financial Data:
The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and Item 7
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion And Analysis
($ In Millions, Except Per Share Data)
The following should be read in conjunction with the consolidated financial statements and related notes.
Overview
The Company is a leading life science and high technology company whose biochemical and organic chemical products, kits and services are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical, diagnostics and high technology manufacturing. Our customers include pharmaceutical and life science companies, university and government institutions, hospitals and a wide range of industrial companies. We believe over 1.4 million scientists and technologists use our products. We operate in 37 countries and have approximately 9,000 employees worldwide.
Effective January 1, 2013, the Company's business unit structure was realigned into three market-focused business units that are defined by the customers and markets they serve: Research, Applied and SAFC Commercial. The units are closely interrelated in their activities, share services such as order entry, billing, technical support, e-commerce infrastructure, purchasing and inventory control. The business units also share production and distribution facilities. Additionally, these business units are supported by centralized functional areas such as finance, human resources, quality, safety, compliance and information technology. A summary of our business units is as follows:
•
Research - Our products and services, which include chemicals, reagents and kits, enable scientists to discover and develop new drugs and materials. This business unit generated 52 percent of sales in 2013.
•
Applied - Our products and services, which primarily include high quality components and kits, chemical reagents, critical raw materials and certified reference standards, provide customized solutions to and constitute critical components and materials for diagnostic companies, testing laboratories and industrial companies. This business unit generated 23 percent of sales in 2013.
•
SAFC Commercial - Our products and services are used by our customers to develop and manufacture product and service solutions for the commercial production of pharma, biopharma and electronics products. Products and services include industrial cell culture media, active pharmaceutical ingredients, intermediates, raw materials, biological testing services and organometallic precursors for LED and semiconductor manufacturing. This business unit generated 25 percent of sales in 2013.
The Company has a broad customer base of commercial laboratories, pharmaceutical companies, industrial companies, universities, diagnostics companies, biotechnology companies, electronics companies, hospitals, governmental institutions and non-profit organizations located in the United States and internationally. The Company would not be significantly impacted by the loss of any one customer. However, global macro economic conditions and government research funding in the United States, the European Union and elsewhere do impact demand from certain of our customers.
Strategy
The Company's business strategy is designed to drive overall sales and earnings growth while maintaining a return on invested capital at an appropriate premium above the Company's cost of capital. Our key areas of focus address the most significant opportunities and challenges facing the Company, including:
•
Improving Customer Intimacy: To exceed our customers' expectations, we strive to offer the right selection of high quality products and services, to provide superior customer service and support as well as to consistently deliver products that meet published or agreed specifications when and where our customers need them. The continued enhancement of a leading e-commerce platform is a significant part of this approach.
•
Expanding Products and Services: Increasing our geographic coverage, particularly in the APAC region and Brazil, pursuing new and innovative technologies and expanding our product and service offerings organically and through strategic acquisitions should help us drive continued sales and earnings growth.
•
Accelerating Operational Excellence: Through the optimization of our worldwide footprint, strategic sourcing of our products and materials and driving efficiencies in our distribution networks and operating expenses, we strive to continually enhance our operating margins.
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Key Business Trends and Highlights
In operating our business and monitoring its performance, the Company considers a number of performance measures, as well as trends affecting our industry as a whole, which include the following:
•
Macroeconomic Concerns Impacting Funding: Uncertainties in the United States and Europe around the macroeconomic environment and the recent United States federal government shutdown have impacted overall research funding.
•
Industry Consolidation: Competition in the markets we serve remains fragmented with few companies possessing a significant share in any particular market, which allows some participants to continue consolidating specialty, regional and niche players in the industry. The Company plans to continue to explore opportunities to enhance sales growth and increase its market presence through strategic acquisitions.
•
Foreign Currency Exchange Rate Fluctuations: Since we are a multinational corporation that sells and sources products in many different currencies, changes in exchange rates have in the past, and could in the future, adversely affect our cash flows and results of operations. Due to the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations on future sales and operating results.
•
Emerging Market Growth: We continue to focus our sales efforts on emerging markets given the faster growth rates in these areas. In 2012, the Company further expanded its footprint in this area with the opening of a manufacturing facility in Kaohsiung, Taiwan that serves the electronic markets in Asia, an expanded distribution center and new packaging facility in Bangalore, India and a new packaging and quality control facility in Wuxi, China.
•
Increasing E-Commerce Channel Adoption: The internet continues to change the markets we serve in terms of access and exposure to existing and potential customers. Ensuring a strong presence in this channel is critical to our long term success as it enables us to find innovative ways to meet our customers' information and product selection needs. Worldwide sales of Research and Applied products through the Company's e-commerce channels, including both web-based and EDI platforms, have grown to 48 percent of the Company's total sales of Research and Applied products during 2013 as compared to 45 percent during 2012.
•
Pharmaceutical Partnerships and Outsourcing: We continue to take advantage of the expanded market opportunities brought about by several trends in the Pharmaceutical industry. These include the use of outsourcing partners, a shift towards biological drug development and an increase in industry-academia research partnerships.
Highlights of our consolidated results for the year ended December 31, 2013 are as follows:
•
Sales were $2,704, an increase of 3 percent compared to the same period last year. Excluding the changes in foreign currency exchange rates, which lowered sales by 1 percent, sales increased organically by 4 percent year over year.
•
Gross profit margin was 50.3 percent, down from 51.4 percent in 2012. Operating income margin was 24.4 percent, compared to 25.1 percent in 2012. This decline was largely attributable to $22 of restructuring and other charges incurred during 2013.
•
Net income was $491 compared to $460 in 2012. Changes in foreign currency exchange rates as compared to the prior year, reduced otherwise reportable net income by $7. Net income was reduced in 2013 due to $7 of after tax restructuring costs, $5 of after tax costs related to a licensing dispute settlement and $4 of after tax costs related to merger and acquisition activity. Net income was reduced in 2012 due to $6 of after tax restructuring costs and $4 of after tax costs related to merger and acquisition activity. Management believes these items affect comparability of results year over year. Excluding these items and the impact of changes in foreign currency exchange rates, adjusted net income would have increased 9 percent in 2013 when compared to 2012.
•
Diluted net income per share was $4.06, compared to $3.77 in 2012. Income taxes were 25.3 percent and 29.8 percent of pretax income for 2013 and 2012, respectively.
•
Net cash provided by operating activities for the year ended December 31, 2013 was $641, an increase of $74 from last year.
•
Total debt was $365 at December 31, 2013, a decrease of $318 since December 31, 2012. The decrease was due to the use of cash to repay a portion of notes payable in 2013.
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Non-GAAP Financial Measures
The Company supplements its disclosures made in accordance with U.S. GAAP with certain non-GAAP financial measures. The Company does not, and does not suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, U.S. GAAP financial information. These non-GAAP measures may not be consistent with the presentation by similar companies in the Company's industry. Whenever the Company uses such non-GAAP measures, it provides a reconciliation of such measures to the most closely applicable U.S. GAAP measure.
With approximately 60 percent of sales denominated in currencies other than the U.S. Dollar, management uses currency adjusted growth, and believes it is useful to investors, to judge the Company's local currency performance. Organic sales growth data presented herein excludes currency impacts, and where indicated, changes due to acquisitions and divestitures. The Company calculates the impact of changes in foreign currency exchange rates by multiplying current period activity in local currency by the difference between current period exchange rates and prior period exchange rates; the result is the defined impact of "changes in foreign currency exchange rates" or "changes in FX." While we are able to report currency impacts after the fact, we are unable to estimate changes that may occur to applicable exchange rates in 2014 or any future period. Any significant changes in currency exchange rates would likely have a significant impact on our reported growth rates due to the large volume of our sales denominated in foreign currencies.
Management also uses free cash flow, a non-GAAP measure, to judge its performance and ability to pursue opportunities that enhance shareholder value. Free cash flow is defined as net cash provided by operating activities less capital expenditures. Management believes this non-GAAP information is useful to investors as a supplemental measure of our ability to generate cash.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the periods presented. Actual results could differ from those estimates under different assumptions or conditions.
The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period.
Inventories. Inventories are valued at the lower of cost or market. The Company regularly reviews inventories on hand and records a provision for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The provision for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
Long-Lived Assets. Long-lived assets, including intangibles with definite lives, are amortized over their expected useful lives. Goodwill and other intangibles with indefinite lives are not amortized against earnings. Goodwill is assessed annually for impairment. All long-lived assets are assessed whenever events and changes in business conditions indicate that the carrying amount of an asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair market value. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair market value of these assets and a potential associated impairment. There were no indications of impairment as of December 31, 2013.
Pension and Other Post-Retirement Benefits. The determination of the obligation and expense for pension and other post-retirement benefits is dependent on the Company's selection of certain assumptions used by actuaries to calculate such amounts. Those assumptions are described in Note 16 - Pension and Post-retirement Benefit Plans to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II in this Report and include, among others, the discount rate, expected return on plan assets and rates of increase in compensation and health care costs.
In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the Company's pension and other post-retirement benefit obligations and the Company's future expense. A one percent increase or decrease in the discount rate assumption or the expected return on plan assets would not have a material impact on the Company's consolidated financial statements.
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Taxes. The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. The Company regularly reviews its potential tax liabilities for tax years subject to audit. In management's opinion, adequate provisions for income taxes have been made for all years presented.
The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and currently enacted tax rates for each jurisdiction. No provision has been made for U.S. income taxes on the undistributed earnings of the Company's international subsidiaries where the earnings are considered permanently reinvested. Recognition of U.S. taxes on undistributed earnings of the international subsidiaries would be triggered by a management decision to repatriate those earnings, although there is no current intention to do so.
Deferred tax assets and liabilities are recognized for the future tax benefits or liabilities attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when it believes that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.
Results of Operations
The following is a summary of our financial results (in millions, except per share amounts):
Net Sales
Sales were $2,704 in the year ended December 31, 2013, up 3 percent from 2012. The effect of changes in foreign currency exchange rates decreased sales by $22 or 1 percent. Excluding the effects of changes in foreign currency exchange rates, sales increased organically by $92 or 4 percent. Pricing and volume contributed 1 percent and 3 percent, respectively, to the organic growth.
Sales were $2,623 in the year ended December 31, 2012, up 5 percent from 2011. Acquisitions completed in 2012 contributed $136 or 5 percent to this sales growth. The effect of changes in foreign currency exchange rates decreased sales by $83 or 3 percent. Excluding the effects of acquisitions and changes in foreign currency exchange rates, sales increased organically by $65 or 3 percent. Pricing and volume contributed 2 percent and 1 percent, respectively, to the organic growth.
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The change in sales for each of the Company's business units is as follows:
2013 Compared to 2012
Research total sales were $1,402 for the year ended December 31, 2013, compared to $1,398 for the prior year. Sales increased organically by $27 or 2 percent from the prior year. The increase in organic sales was primarily driven by growth in sales through our dealer networks from our "dealers as partners" programs and an increase in sales to our Pharmaceutical customers. The overall increase was partially offset by a decline in sales to the Academic, Government and Hospital markets due largely to lower government grants and other funding to academic institutions resulting primarily from sequestration in the United States. Geographically, the increase in Research's organic sales for the year ended December 31, 2013 compared to the prior year was largely led by the EMEA and APAC regions.
Applied total sales were $629 for the year ended December 31, 2013, compared to $598 for the prior year. Sales increased organically by $28 or 5 percent from the prior year. The increase in organic sales was primarily driven by growth in sales to customers in the Diagnostic and Testing markets, where our products are used as critical components for diagnostic kits and sales of standards and certified reference materials to clinical testing laboratories. All geographic regions contributed to Applied's overall growth.
SAFC Commercial total sales were $673 for the year ended December 31, 2013, compared to $627 for the prior year. Sales increased organically by $37 or 6 percent from the prior year. The organic growth was led by strong sales within our Life Science Products and Services business, most notably our custom pharmaceutical manufacturing and industrial cell culture media products. This growth was partially offset by lower sales in our Hitech electronics business, primarily from year-over-year pricing declines for certain metal organic precursors used by the LED industry. Geographically, the increase in SAFC Commercial's organic sales for the year ended December 31, 2013 compared to the prior year was largely led by the Total Americas and EMEA regions.
2012 Compared to 2011
Research total sales were $1,398 for the year ended December 31, 2012, compared to $1,427 for the prior year. Sales increased organically by $18 or 1 percent from the prior year. The increase in organic sales was driven by growth in sales through our dealer networks as a result of the launch of our "dealers as partners" program. The overall increase was partially offset by a decline in sales to Pharmaceutical customers driven by major downsizing, consolidation and outsourcing of R&D to contract research organizations in both the United States and Europe. Geographically, the increase in organic sales for the year ended December 31, 2012 compared to the prior year was led by the APAC and EMEA regions.
Applied total sales were $598 for the year ended December 31, 2012, compared to $581 for the prior year. Sales increased organically by $25 or 4 percent from the prior year. The increase in organic sales was primarily driven by growth in sales to customers in the Diagnostic and Testing markets, where our products are used as critical components for diagnostic kits and sales of standards and certified reference materials to clinical testing laboratories. All geographic regions contributed to Applied's overall growth.
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SAFC Commercial total sales were $627 for the year ended December 31, 2012, compared to $497 for the prior year. Sales increased organically by $22 or 5 percent from the prior year. The organic growth was led by strong sales within our Life Science Products business and our custom pharmaceutical manufacturing and industrial cell culture media products. All geographic regions contributed to SAFC Commercial's overall growth.
2014 Outlook
We expect to drive improved sales growth in 2014 through our enhanced focus on our customers, an improved government funding environment and continued higher growth in emerging markets. Considering the current macro-economic environment, we expect to grow 2014 sales organically in the low-to-mid single digit range with a slight improvement over 2013 growth.
Gross Profit and Expenses
Key items from the consolidated statements of income expressed as a percentage of sales and the effective tax rate for the three years ended December 31, 2013, 2012 and 2011 were as follows:
Gross Margin
Gross margin is calculated as sales less cost of products and services sold. Cost of products and services sold includes direct materials, labor, distribution and overhead costs associated with the Company's products and services. The company's gross margin was 50.3% in 2013 compared to 51.4% in 2012.
The following table reflects the significant contributing factors to the net change in gross profit margin for the years ended December 31, 2013 and 2012, respectively:
The largest contributor to the decline in gross margin in 2013 as compared to 2012 was a shift in product mix among our business units. Products in our SAFC Commercial business unit in general have lower margins than products in our Research and Applied business units. This is primarily due to SAFC Commercial products that require more intensive manufacturing and quality control processes, and are generally sold in bulk rather than in smaller quantities as in our Research and parts of our Applied business units, as well as other market dynamics. Because the SAFC Commercial business is the fastest growing unit of our total business, approximately 50 basis points of the total gross margin decline in 2013 was due to a greater share of SAFC Commercial sales in the total product mix.
The largest contributor to the decline in gross margin in 2012 as compared to 2011 was the effect of acquisitions, principally BioReliance, which carries lower gross margins than the rest of our businesses.
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SG&A
SG&A increased $7 during the year ended December 31, 2013 as compared to the same period in 2012. Gains on asset sales, net of certain impairments, of $10 were offset by higher compensation and other costs. Excluding these asset gains, SG&A as a percentage of sales was about the same as 2012.
SG&A increased $8 during the year ended December 31, 2012 as compared to the same period in 2011, but as a percentage of sales declined to 23.1% from 23.8%. Higher expenses attributable to acquisitions completed in 2012 of $41 were partially offset by lower costs resulting from the Company's cost reduction initiatives of $17 and changes in foreign currency exchange rates, which lowered SG&A by $16.
R&D Expenses
R&D expenses relate primarily to efforts to add new manufactured products, create and develop new technologies and enhance manufacturing processes. Self-manufactured products currently account for approximately 60 percent of total sales. R&D expenses as a percentage of sales have trended down slightly since 2011 as a result of management's efforts to carefully prioritize R&D spending to the most appropriate projects.
Restructuring and Other Charges
Restructuring Costs
Programs Implemented During 2013
In the third quarter of 2013, the Company committed to a restructuring plan to exit a manufacturing site in Europe. This exit activity impacts approximately 90 employees and is intended to further reduce the Company's fixed cost structure. Total restructuring costs are expected to be $12, comprised of $9 to reduce the value of the assets impacted by these restructuring activities and $3 of employee termination costs. Once fully implemented, the Company expects annual pre-tax savings associated with these activities in a range from $3 to $4. During the year ended December 31, 2013, $10 of these restructuring costs were recognized.
Programs Implemented During 2012
In the second quarter of 2012, the Company committed to a restructuring plan to exit various sales office locations in Europe. These exit activities impacted approximately 30 employees and were intended to further reduce the Company's fixed cost structure by streamlining the sales force in Europe. Total restructuring costs associated with this plan were $4 and were incurred during 2012. As of December 31, 2012, all exit activities were complete.
In the third quarter of 2012, the Company committed to a restructuring plan to reduce global headcount by approximately 130 employees to further reduce the Company's fixed cost structure. Total restructuring costs associated with this plan were $5 and were incurred during 2012. As of December 31, 2012, all exit activities were complete.
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Programs Implemented Prior to 2012
In the fourth quarter of 2009, the Company committed to a restructuring plan that included exit activities at five manufacturing sites in the U.S. and Europe. These exit activities impacted approximately 240 employees and were intended to reduce the Company's fixed cost structure and better align its global manufacturing and distribution footprint. Total restructuring costs associated with this plan were $41 and were incurred as follows: $8 in 2011, $24 in 2010 and $9 in 2009. As of December 31, 2011, all exit activities were complete.
Licensing Dispute Settlement
Costs of $7 were incurred during the second quarter of 2013 for the settlement of a licensing dispute associated with certain products.
Costs Related to Mergers and Acquisitions
Third party costs of $5 associated with merger and acquisition activity were incurred during the second quarter of 2013. Third party costs of $5 were incurred during the first quarter of 2012 related to the January 2012 acquisition of BioReliance and the March 2012 acquisition of Research Organics.
Interest, net
Net interest expense was $4 in 2013 and 2012 and $7 in 2011. Higher average borrowing levels were more than offset by lower weighted average interest rates for the year ended December 31, 2012, compared to 2011.
Income Taxes
Income taxes, which include federal, state and international taxes, were 25.3%, 29.8% and 28.6% of pretax income in 2013, 2012 and 2011, respectively. The lower effective tax rate for 2013 compared to 2012 is primarily due to a shift in the mix of earnings towards jurisdictions where the tax rate is lower than the U.S. statutory tax rate, as well as tax benefits from law changes in several jurisdictions. The higher effective tax rate for 2012 compared to 2011 is primarily due to higher state and local taxes, lower tax benefits from the manufacturer's deduction and the absence of an R&D tax credit in 2012.
Our effective tax rate for 2014 is expected to be approximately 27%.
Liquidity and Capital Resources
The Company's cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:
Operating Activities
Net cash provided by operating activities of $641 increased $74 or 13 percent in 2013 compared to 2012. The increase was largely driven by lower uses of cash for working capital. Specifically, cash used for accounts receivable, inventory and accounts payable was $28 compared to $49 in 2012. In 2013, the reduction of inventory generated $12 in operating cash flow compared to a use of cash for inventory in 2012 of $44. Initiatives to lower inventory without sacrificing customer service levels drove the reduction in inventory in 2013 as compared to 2012. Also contributing to the increase in operating cash flow was $33 of higher net income after adjusting for depreciation and amortization.
Net cash provided by operating activities of $567 increased $72 or 15 percent in 2012 compared to 2011. The increase was primarily driven by higher net income of $33 after adjusting for depreciation and amortization and lower uses of cash for working capital. Specifically, cash used for accounts receivable, inventory and accounts payable was $49 in 2012 compared to $75 in 2011.
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Investing Activities
Cash used in investing activities for the year ended December 31, 2013 decreased $403 compared to 2012. This decrease was primarily due to cash used for acquisitions during 2012 of $391 that did not repeat in 2013. Capital spending was $100 in 2013 compared to $114 in 2012.
Cash used for investing activities of $511 in 2012 increased $320 from 2011. This increase was primarily due to cash used for acquisitions of $391 during 2012 compared to $75 in 2011. Capital spending was $114 in 2012 compared to $104 in 2011.
Financing Activities
Cash used in financing activities of $533 in 2013 increased $527 from 2012. This increase is due to the net repayment of $318 of short-term debt during 2013, as compared to a net issuance of short-term debt of $161 during 2012. During 2012, additional debt was issued to fund acquisition activity. Cash used for share repurchases increased to $146 in 2013, up from $124 in 2012.
Cash used in financing activities of $6 in 2012 decreased from $200 in 2011. This decrease was due primarily to a $100 repayment of long-term debt in 2011 which did not recur in 2012. The Company also issued $161 net of short-term debt primarily to fund acquisition activity during 2012 as compared to a net issuance of short-term debt of $81 in 2011.
The Company paid dividends of $103, $97 and $86 during the years ended December 31, 2013, 2012 and 2011, respectively.
Share Repurchases
At December 31, 2013 and December 31, 2012, the Company had repurchased a cumulative total of 101 million and 99 million shares, respectively, of an authorized repurchase of 110 million shares. There were 119 million shares outstanding as of December 31, 2013. The Company expects to continue to offset, in whole or in part, the dilutive impact of issuing share-based incentive compensation with future share repurchases. The Company may repurchase additional shares, but the timing and amount, if any, will depend on market conditions and other factors.
Liquidity and Risk Management
Liquidity risk refers to the risk that the Company might be unable to meet its financial obligations in a timely manner or fund its business on an ongoing basis. Factors that could cause such risk to arise include a disruption to the securities markets, downgrades in the Company's credit rating or the unavailability of funds. In addition to the Company's cash flows from operations, the Company utilizes commercial paper, short-term multi-currency debt, cash on hand and long-term debt programs as funding sources. The Company also maintains committed bank lines of credit to support its commercial paper borrowings. Downgrades in the Company's credit rating or other limitations on the ability to access short-term financing, including the ability to refinance short-term debt as it becomes due, would increase interest costs and adversely affect profitability.
The Company has considered the potential impact of recent trends in the global economic environment on its liquidity and overall financial condition, particularly with respect to availability of and the Company's access to short-term credit, including the market for commercial paper. Supported by discussions held with the Company's lenders, management does not believe that a significant risk exists of commercial paper or other credit becoming unavailable within the next twelve months. Management believes that the Company's financial condition is such that internal and external resources are sufficient and available to satisfy the Company's requirements for debt service, capital expenditures, selective acquisitions, dividends, share repurchases, funding of pension and other post-retirement benefit plan obligations and working capital presently and for the next twelve months.
The Company has a $600 five-year revolving credit facility with a syndicate of banks in the United States that supports the Company's commercial paper program. On December 2, 2013, the Company entered into an amendment to extend the termination date of the facility to May 10, 2018 from May 10, 2017. There were no changes to the terms and conditions of the facility as a result of the amendment. At December 31, 2013 and December 31, 2012, the Company did not have any borrowings outstanding under the facility. However, the amount available under the facility is reduced by the amount of commercial paper outstanding. At December 31, 2013 and December 31, 2012, the Company had $65 and $381, respectively, outstanding under its commercial paper program.
The Company also has a $200 seven-year multi-currency European revolving credit facility with a syndicate of banks maturing March 13, 2014. At December 31, 2013 and December 31, 2012, the Company did not have any borrowings outstanding under this facility.
Sigma-Aldrich Korea Limited has a short-term credit facility denominated in Korean Won with a total commitment of 20 billion Korean Won ($19 U.S. Dollars) expiring June 30, 2014. No borrowings were outstanding at December 31, 2013 and December 31, 2012.
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Sigma-Aldrich Japan has two credit facilities denominated in Japanese Yen having a total commitment of 2 billion Japanese Yen ($19 U.S. Dollars) with one facility due April, 30, 2014 and the other representing a line of credit with no expiration. No borrowings were outstanding at December 31, 2013 and December 31, 2012.
In addition to those mentioned above, the Company has other short-term credit facilities denominated in foreign currencies having a total commitment of $3. At December 31, 2013 and December 31, 2012, the Company had $0 and $2 in borrowings outstanding under these facilities, respectively.
Long-term debt was $300 at both December 31, 2013 and 2012. This liability consists of 3.375% fixed rate Senior Notes due November 1, 2020.
Total debt at December 31, 2013 was $365 compared to $683 at December 31, 2012. Total debt as a percentage of total capitalization was 11.2 percent and 21.1 percent at December 31, 2013 and 2012, respectively.
As of December 31, 2013, the Company had sufficient net worth to allow for borrowing the full capacity under each credit facility without any restriction related to compliance with the respective debt covenants. For a description of the Company's material financial debt covenants, see Note 7 - Notes Payable and Note 8 - Long-Term Debt to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II in this Report.
At December 31, 2013, a majority of the Company's cash and cash equivalents were held by its subsidiaries outside of the U.S. The Company expects that existing U.S. liquidity or access to capital to be sufficient to fund its U.S. operating activities and cash commitments for investing and financing activities. In addition, the Company expects that existing international liquidity or access to capital to be sufficient to fund its international operating activities and cash commitments for investing and financing activities.
The Company earns income globally. The undistributed earnings of our international subsidiaries are considered to be permanently reinvested in international jurisdictions. The Company has no immediate need or intentions to distribute any of the funds held outside of the U.S. If the Company were to remit undistributed earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for international tax credits) and withholding taxes payable to various international jurisdictions.
On October 5, 2009, the Company announced a major expansion of its existing license agreement with Sangamo to include the exclusive rights to develop and distribute ZFP-modified cell lines for commercial production of protein pharmaceuticals and ZFP-engineered transgenic animals for livestock, companion animals and therapeutic protein production. Under this agreement, the Company made initial payments of $20 to Sangamo, consisting of an upfront license payment of $15 and $5 for the purchase of shares of Sangamo common stock. The Company has since sold all of its shares in Sangamo common stock. Sangamo is eligible to earn additional contingent commercial license fees of up to $5 based on certain conditions and additional contingent milestone payments of up to $25 based on cumulative sales. No material amounts were paid to Sangamo under this agreement in either 2013 or 2012.
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Other Matters
The Company is involved in legal proceedings incidental to its business, as described below:
Insurance and Other Contingent Liabilities and Commitments
The Company is subject to potential liabilities arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, environmental, employment and other matters that arise in the ordinary course of business. The Company's operations and a number of its products are highly regulated by various governmental agencies around the world and the Company is periodically involved in reviews, investigations and proceedings by governmental agencies. Failure to meet the standards and licensing requirements of these agencies can lead to penalties which can include substantial fines and/or operating restrictions.
The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. Although the Company believes the amounts reserved are probable and appropriate based on available information, the process of estimating losses involves a considerable degree of judgment by management and the ultimate amounts could vary materially. The Company has self-insured retention limits and has obtained insurance to provide coverage above the self-insured limits for claims made against it, subject to certain limitations and exclusions. At December 31, 2013, (i) reserves have been provided to cover expected payments for these self-insured amounts,(ii) there were no contingent liabilities that management believes are reasonably likely to have a material adverse effect on the Company's consolidated financial condition, results of operations, cash flows or liquidity and (iii) there were no material commitments outside of the normal course of business. Material commitments in the normal course of business include notes payable, long-term debt, lease commitments and pension and other post-retirement benefit obligations which are disclosed in Note 7 - Notes Payable, Note 8 - Long-Term Debt, Note 10 - Lease Commitments and Note 16 - Pension and Post-retirement Benefit Plans, respectively, to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
Aggregate Contractual Obligations
The following table presents contractual obligations of the Company at December 31, 2013:
(1)
Purchase obligations include open purchase orders, long-term service and supply agreements and other contractual obligations.
See Note 8 - Long-Term Debt and Note 10 - Lease Commitments to the Company's consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data of Part II of this Report for additional disclosures related to long-term debt and lease commitments, respectively.
See Note 16 - Pension and Post-retirement Benefit Plans to the Company's consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data of Part II of this Report for obligations with respect to the Company's pension and post-retirement medical benefit plans. Obligations related to the pension and post-retirement benefit plans are not included within the above table.
The above table excludes $37 of liabilities related to uncertain tax positions. See Note 12 - Income Taxes to the Company's consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data of Part II of this Report for detail on this obligation.
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Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Inflation
Management recognizes that inflationary pressures may have an adverse effect on the Company through higher asset replacement costs and higher material and other operating costs. The Company tries to minimize these effects through focused cost reduction programs and productivity improvements as well as price increases to its customers. It is management's view that inflation, net of customer price increases, has not had a significant impact on the Company's consolidated financial statements during the three years ended December 31, 2013.
Market Risk Sensitive Instruments and Positions
The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.
Interest Rates
At December 31, 2013, the Company's outstanding debt represented 11.2 percent of total book capitalization. Approximately 82 percent of the Company's outstanding debt at December 31, 2013 is at a fixed rate. We believe that cash flows from operations, cash on hand and available credit facilities are sufficient to meet the anticipated cash requirements of operating the business. It is management's view that market risk or variable interest rate risk, based on current conditions, will not significantly impact the Company's results of operations or financial condition, including liquidity. Interest rates are further described in Note 7 - Notes Payable and Note 8 - Long-Term Debt to the consolidated financial statements in Item 8
Item 8.
Financial Statements and Supplementary Data.
Sigma-Aldrich Corporation
Consolidated Statements of Income
($ In Millions, Except Per Share Data)
See accompanying notes to consolidated financial statements.
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Sigma-Aldrich Corporation
Consolidated Statements of Comprehensive Income
($ In Millions)
See accompanying notes to consolidated financial statements.
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Sigma-Aldrich Corporation
Consolidated Balance Sheets
($ In Millions, Except Per Share Data)
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Sigma-Aldrich Corporation
Consolidated Statements of Stockholders' Equity
($ In Millions)
See accompanying notes to consolidated financial statements.
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Sigma-Aldrich Corporation
Consolidated Statements of Cash Flows
($ in Millions)
See accompanying notes to consolidated financial statements.
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Sigma-Aldrich Corporation
Notes to Consolidated Financial Statements
NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. The Company develops, manufactures, purchases and distributes a broad range of high quality biochemical and organic chemical products, kits and services that are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical, diagnostics and high technology manufacturing.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Financial Instruments. Financial instruments are recorded at fair value, except as described in Note 8 - Long-Term Debt.
Sales. Product sales, which include shipping and handling fees billed to customers, are recognized upon transfer of title of the product to the customer, which generally occurs upon shipment to the customer, and is not dependent upon any post-shipment obligations. Sales of services are recognized utilizing the proportional performance method, whereby sales for each stage of a project are recognized based upon the stage's cost as a proportion of the total cost that will be incurred for that project.
R&D. Expenditures relating to the development of new products, services and processes, including significant improvements to existing products, services or processes, are expensed as incurred as R&D.
Income Taxes. The provision for income taxes is based on pretax income reported in the consolidated statements of income and currently enacted tax rates for each jurisdiction. No provision has been made for U.S. income taxes on the undistributed earnings of the Company's international subsidiaries where the earnings are considered permanently reinvested.
Deferred tax assets and liabilities are recognized for the future tax benefits or liabilities attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when it believes that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and investments with original maturities of less than three months.
Property, Plant and Equipment. The cost of property, plant and equipment is depreciated over the estimated useful lives of the assets using the straight-line method with lives generally ranging from 3 to 12 years for machinery and equipment, 3 to 7 years for information technology and 15 to 40 years for buildings and improvements. Depreciation expense was $111, $104 and $89 for the years ended December 31, 2013, 2012 and 2011, respectively. The Company capitalizes interest as part of the cost of constructing major facilities and equipment.
Goodwill. ASC Subtopic 350-20 "Goodwill" requires the Company to assess goodwill for impairment rather than to systematically amortize goodwill against earnings. This goodwill impairment test compares the fair value of a reporting unit to its carrying amount, including goodwill. The Company operates as one reporting unit and its fair value exceeds its carrying value, including goodwill. The Company has determined that no impairment of goodwill existed at December 31, 2013 or 2012.
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever conditions indicate that the carrying value of the assets may not be fully recoverable. Such impairment tests are based on a comparison of the pretax undiscounted cash flows expected to be generated by the asset to the recorded value of the asset. If impairment is indicated, the asset value is written down to its market value if readily determinable or its estimated fair value based on discounted cash flows. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair value of these assets and any potential associated impairment. The Company has determined that no indications of impairment existed at December 31, 2013 or 2012.
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Foreign Currency Translation. Most of the Company's non-U.S. operations use local currency as their functional currency. Subsidiaries that do not use the U.S. Dollar as their functional currency translate assets and liabilities at period end exchange rates and profit and loss accounts at the weighted average exchange rates during the reporting period. Resulting translation gains and losses are included as a separate component of stockholders' equity in AOCI. Assets and liabilities denominated in a currency other than the subsidiary's functional currency are translated to the subsidiary's functional currency at period end exchange rates. Resulting gains and losses are recognized in the consolidated statements of income.
Use of Estimates. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the periods presented. Actual results could differ from those estimates under different assumptions or conditions.
Reclassifications. The accompanying consolidated financial statements for prior years contain certain reclassifications to conform with the presentation used in 2013.
Effect of New Accounting Standards
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" that requires entities to disclose either on the face of or in the notes to the financial statements the effects of reclassifications out of AOCI. For items reclassified out of AOCI and into net income in their entirety, entities must disclose the effect of the reclassification on each affected net income item. For items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required disclosures. This ASU does not change the items currently reported in other comprehensive income and is effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of these provisions did not have a material impact on the consolidated financial statements of the Company.
NOTE 2: Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts for the years ended December 31, 2013 and 2012 are as follows:
NOTE 3: Inventories
The principal categories of inventories at December 31, 2013 and 2012 are as follows:
Inventories are determined using a weighted average actual cost method and are valued at the lower of cost or market.
The Company regularly reviews inventories on hand and records a provision for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The provision for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
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NOTE 4: Property, Plant and Equipment, net
The principal categories of property, plant and equipment, net at December 31, 2013 and 2012 are as follows:
NOTE 5: Acquisitions
For the year ended December 31, 2013, the Company did not complete any acquisitions.
On January 31, 2012, the Company completed its acquisition of all of the outstanding shares of BioReliance, a provider of global biopharmaceutical testing services. BioReliance provides services that include biologic, specialized toxicology and animal health testing to pharmaceutical, biopharmaceutical, diagnostics and other life science customers worldwide. As a provider of biological safety testing, its service offering helps facilitate the development, manufacturing and commercialization of biological drugs and helps enable its clients to register their products worldwide. As a service provider of toxicology studies, BioReliance also enables its clients to launch new small molecule drugs worldwide. BioReliance is headquartered in Rockville, Maryland, with additional operations in Glasgow and Stirling, Scotland and sales offices in Tokyo, Japan and Bangalore, India.
This acquisition was accounted for using the acquisition method of accounting and, accordingly, its results were included in the Company's consolidated financial statements from the date of acquisition. Total consideration to acquire BioReliance was $353 (net of $11 of cash acquired) and was funded with a combination of existing cash and short-term debt. The process of assigning fair values to the assets acquired and liabilities assumed was complete as of December 31, 2012 and was recognized as follows:
Goodwill resulting from the acquisition is largely attributable to the existing workforce of BioReliance and synergies expected to arise as a result of the acquisition. BioReliance's global pharmaceutical testing services are intended to enable the Company to build a specialized services platform that complements its existing product and technology strengths. The objective of the acquisition is to expand the Company's participation in the biological drug market and help forge deeper and stronger strategic ties with existing and new customers. The goodwill was not deductible for tax purposes.
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BioReliance contributed $111 to the Company's 2012 net sales after its acquisition on January 31, 2012. Had the BioReliance acquisition been completed as of the beginning of 2011, the Company's unaudited pro forma net sales for the years ended December 31, 2012 and 2011 would have been $2,632 and $2,631, respectively. Net income of BioReliance was not material to the Company's consolidated statements of income for the years ended December 31, 2012 and 2011, either on a reported or pro forma basis.
NOTE 6: Intangible Assets
The Company's amortizable and unamortizable intangible assets at December 31, 2013 and 2012 are as follows:
During the year ended December 31, 2013, the Company did not acquire any intangible assets or goodwill. During the year ended December 31, 2012, the Company added $155 of acquired intangible assets and $222 of acquired goodwill for acquisitions made during 2012.
The Company recorded amortization expense related to amortizable intangible assets of $27, $32 and $17 for the years ended December 31, 2013, 2012 and 2011, respectively. Amortizable intangible assets are amortized over their estimated useful lives, which range from one to twenty years, using the straight-line method. The Company expects to record annual amortization expense for all existing intangible assets in a range from approximately $21 to $24 from 2014 through 2018.
The changes in net goodwill for the years ended December 31, 2013 and 2012 are as follows:
Acquisition and divestiture activity during the current period is related to the finalization of purchase accounting for certain acquisitions as well as the writeoff of goodwill associated with the sale of the net assets of SAGE Labs in April 2013.
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NOTE 7: Notes Payable
Notes payable consist of the following at December 31, 2013 and 2012:
(1)
The Company has a $600 five-year revolving credit facility with a syndicate of banks in the United States that supports the Company's commercial paper program. On December 2, 2013, the Company entered into an amendment to extend the termination date of the facility to May 10, 2018 from May 10, 2017. At December 31, 2013 and December 31, 2012, the Company did not have any borrowings outstanding under this facility. However, the amount available under the facility is reduced by the amount of commercial paper outstanding. The facility contains financial covenants that require the maintenance of a ratio of consolidated debt to total capitalization of no more than 65.0 percent and an aggregate amount of subsidiary debt plus consolidated secured debt of no more than 25.0 percent of total net worth. The Company's total consolidated debt as a percentage of total capitalization and aggregate amount of subsidiary debt plus consolidated secured debt as a percentage of total net worth, as defined in the underlying credit agreement, was 11.7 percent and 0.0 percent, respectively, at December 31, 2013.
(2)
This facility contains financial covenants that require the maintenance of consolidated net worth of at least $750, a ratio of consolidated debt to total capitalization of no more than 55.0 percent and an aggregate amount of subsidiary debt plus consolidated secured debt of no more than 25.0 percent of total net worth. The Company's consolidated net worth, consolidated debt as a percentage of total capitalization and aggregate amount of subsidiary debt plus consolidated secured debt as a percentage of total net worth, as defined in the underlying credit agreement, were $2,754, 11.7 percent and 0.0 percent, respectively, at December 31, 2013.
(3)
There were no outstanding borrowings under this facility, which had a total commitment of 20 billion Korean Won ($19), at December 31, 2013.
(4)
Sigma-Aldrich Japan GK has two credit facilities having a total commitment of 2 billion Japanese Yen ($19), with one facility due April 30, 2014 and the other representing a line of credit with no expiration. There were no borrowings under the facilities at December 31, 2013.
(5)
There were no borrowings under these facilities, which have total commitments in U.S. Dollar equivalents of $3, at December 31, 2013.
The Company has provided guarantees with respect to certain subsidiaries for any outstanding borrowings from the European revolving credit facility and the short-term credit facilities of the wholly-owned Korean and Japanese subsidiaries. At December 31, 2013, there were no existing events of default that would require the Company to honor these guarantees.
As of December 31, 2013, the Company had sufficient net worth to allow for borrowing the full capacity under each facility without any restriction related to compliance with the respective financial debt covenants.
NOTE 8: Long-Term Debt
Long-term debt consists of the following at December 31, 2013 and 2012:
(1)
The Company has $300 of 3.375% Senior Notes due November 1, 2020. Interest on the notes is payable May 1 and November 1 of each year. The notes may be redeemed, in whole or in part at the Company's option, (i) at any time at specific redemption prices plus accrued interest or (ii) three months prior to the maturity date at a redemption price equal to 100% percent of the principal amount plus accrued interest.
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Total interest expense incurred on short-term and long-term debt, net of amounts capitalized, was $9, $8 and $13 in 2013, 2012 and 2011, respectively.
The fair value of long-term debt was approximately $298 and $315 at December 31, 2013 and 2012, respectively. The fair value of long-term debt was based upon a discounted cash flow analysis that used the aggregate cash flows from principal and interest payments over the life of the debt and current market interest rates.
NOTE 9: Financial Derivatives and Risk Management
The Company transacts business in many parts of the world and is subject to risks associated with changing foreign currency exchange rates. Accordingly, the Company uses both derivative instruments designated as cash flow hedges as well as derivative instruments that are not designated as hedges to help mitigate this risk. These derivative instruments are comprised of foreign currency forward exchange contracts, which are classified within Level 2 of the fair value hierarchy as their fair value is determined by using foreign currency market spot rates and forward points observable at commonly quoted intervals. The Company does not enter into foreign currency contracts for speculative trading purposes.
Cash Flow Hedges
A significant portion of the Company's cost of products and services sold is denominated in the U.S. Dollar, while approximately 60 percent of the Company's net sales are denominated in other currencies. Intercompany inventory purchases, which are sourced primarily from subsidiaries with U.S. Dollar functional currencies, are sold to customers by international subsidiaries in other local currencies. In the third quarter of 2012, the Company implemented a program to utilize foreign currency forward exchange contracts to mitigate the foreign currency risk associated with these forecasted intercompany inventory purchases.
These foreign currency forward exchange contracts have been designated as hedges of the variability of cash flows related to forecasted inventory purchases due to changes in foreign currency exchange rates. Changes in fair value of these derivatives are deferred in AOCI within stockholders' equity until the underlying hedged items are recognized in net income. Accordingly, the Company records cash flow hedge gains or losses within cost of products and services sold when the related inventory is sold to a customer. To the extent any portion of the hedge contract is determined to be ineffective, the increase or decrease in value of the contract prior to maturity will be recognized in income immediately. The cash flow impact from these derivatives is classified in the operating activities section of the Company's consolidated statements of cash flows, which is the same category as the underlying items being hedged. Gains or losses related to the ineffective portion of these hedging instruments were not material for the years ended December 31, 2013 and 2012. At December 31, 2013 and 2012, the Company had a notional principal amount of $298 and $254, respectively, in foreign currency forward exchange contracts outstanding.
The following table summarizes the fair values of the foreign currency forward exchange contracts designated as cash flow hedges at December 31, 2013 and 2012:
The following table summarizes the effect of the foreign currency forward exchange contracts designated as cash flow hedges on the Company's consolidated statements of comprehensive income for the years ended December 31, 2013 and 2012, net of immaterial tax effects.
As of December 31, 2013, the majority of these contracts are in established currencies including the Euro, Japanese Yen and British Pound. During the next 12 months, the Company expects an immaterial amount of unrealized gains included in AOCI, based on their valuation as of December 31, 2013, will be reclassified into income. The Company generally does not hedge its exposure to the exchange rate variability of future cash flows beyond the next ensuing twenty-four months.
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Derivatives Not Designated As Hedging Instruments
The Company also uses foreign currency forward exchange contracts, which are not designated as hedging instruments, to hedge the value of certain intercompany receivables and payables denominated in foreign currencies. The Company's objective is to minimize the impact of foreign currency exchange rate changes during the period of time between the original transaction date and its cash settlement. Gains and losses on these contracts are recorded in SG&A, based on the difference in the contract rate and the spot rate at the end of each month for all contracts still in force, and are typically offset either partially or completely by transaction gains and losses on the related intercompany receivables and payables. The duration of the contracts typically does not exceed six months. As of December 31, 2013, the majority of these contracts are in established currencies including the Euro, British Pound and Japanese Yen. The impact of these contracts was not material to the consolidated financial statements as of and for the years ended December 31, 2013 and 2012. The notional amount of open foreign currency forward exchange contracts at December 31, 2013 and 2012 was $199 and $196, respectively.
NOTE 10: Lease Commitments
The Company and its subsidiaries lease manufacturing, office and warehouse facilities and computer equipment under non-cancelable operating leases expiring at various dates. Rent expense was $43, $42 and $41 in 2013, 2012, and 2011, respectively. Minimum rental commitments for non-cancelable leases in effect at December 31, 2013, are as follows:
NOTE 11: Restructuring and Other Charges
Restructuring Costs
Programs Implemented During 2013
In the third quarter of 2013, the Company committed to a restructuring plan to exit a manufacturing site in Europe. This exit activity impacts approximately 90 employees and is intended to further reduce the Company's fixed cost structure. Total restructuring costs are expected to be $12, comprised of $9 to reduce the value of the assets impacted by these restructuring activities and $3 of employee termination costs. During the year ended December 31, 2013, $10 of these restructuring costs were recognized.
Programs Implemented During 2012
In the second quarter of 2012, the Company committed to a restructuring plan to exit various sales office locations in Europe. These exit activities impacted approximately 30 employees and were intended to further reduce the Company's fixed cost structure by streamlining the sales force in Europe. Total restructuring costs associated with this plan were $4 and were incurred during 2012. As of December 31, 2012, all exit activities were complete.
In the third quarter of 2012, the Company committed to a restructuring plan to reduce global headcount by approximately 130 employees to further reduce the Company's fixed cost structure. Total restructuring costs associated with this plan were $5 and were incurred during 2012. As of December 31, 2012, all exit activities were complete.
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Programs Implemented Prior to 2012
In the fourth quarter of 2009, the Company committed to a restructuring plan that included exit activities at five manufacturing sites in the U.S. and Europe. These exit activities impacted approximately 240 employees and were intended to reduce the Company's fixed cost structure and better align its global manufacturing and distribution footprint. Total restructuring costs associated with this plan were $41 and were incurred as follows: $8 in 2011, $24 in 2010 and $9 in 2009. As of December 31, 2011, all exit activities were complete.
Licensing Dispute Settlement
Costs of $7 were incurred during the second quarter of 2013 for the settlement of a licensing dispute associated with certain products.
Costs Related to Mergers and Acquisitions
Third party costs of $5 associated with merger and acquisition activity were incurred during the second quarter of 2013. Third party costs of $5 were incurred during the first quarter of 2012 related to the January 2012 acquisition of BioReliance and the March 2012 acquisition of Research Organics.
NOTE 12: Income Taxes
The components of income before income taxes consist of the following for the years ended December 31:
The provision for income taxes consists of the following for the years ended December 31:
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and the Company's effective tax rate are as follows for the years ended December 31:
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The tax audits and unrecognized tax positions provided a net benefit in 2012 and 2011 as a result of statute of limitation expirations of open examination periods by the taxing authorities. The international taxes benefit is primarily the result of certain countries in which the Company operates having lower statutory tax rates than the U.S. statutory tax rate and for 2012 and 2011, the benefits associated with certain international restructurings. The tax rate and law changes benefit in 2013 was primarily the result of changes in the UK statutory tax rate and the retroactive extension of the 2012 U.S. R&D tax credit in 2013.
Undistributed earnings of the Company's international subsidiaries amounted to approximately $1,417 at December 31, 2013. No U.S. income taxes have been provided for these undistributed earnings as the Company intends to indefinitely reinvest these earnings abroad. If the Company were to distribute these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for international tax credits) and withholding taxes payable to various international jurisdictions. At this time, it is not practicable to determine the amount of deferred income taxes that would be payable on the unremitted international earnings of the Company, assuming such earnings were distributed.
Deferred income tax provisions reflect the effect of temporary differences between consolidated financial statement and tax reporting of income and expense items. The net deferred tax assets/liabilities at December 31, 2013 and 2012 resulted from the following temporary differences:
The net operating loss carryforwards relate to domestic and international operations. At December 31, 2013, $9 of these deferred tax assets expire between 2014 and 2033. The Company has provided valuation allowances on these deferred tax assets of approximately $4. Realization of deferred tax assets representing net operating loss carryforwards for which a valuation allowance has not been provided is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards.
Deferred tax assets and liabilities in the preceding table, netted by taxing jurisdiction, are included in the following captions in the Company's consolidated balance sheets at December 31:
Uncertain Tax Positions. The Company and its subsidiaries file income tax returns for U.S. federal and various state, local and international taxes, as applicable. The Company is no longer subject to, with limited exceptions, U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2005.
The following table sets forth changes in the total gross unrecognized tax benefits, excluding interest and penalties, for the years ended December 31:
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At December 31, 2013, 2012 and 2011, respectively, there are $24, $20 and $21 of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
The Company believes it is reasonably possible that the unrecognized tax benefits at December 31, 2013 may decrease by approximately $2 due to audit activity and statute of limitation expirations in several jurisdictions within 12 months of December 31, 2013.
The Company accrues interest, net of tax and penalties, related to unrecognized tax benefits as components of its income tax provision. The Company recognized no expense in 2013 and approximately $1 of expense and $2 of benefit in 2012 and 2011, respectively, related to interest and penalties. The Company accrued approximately $3 for payment of interest, net of tax and penalties, as of December 31, 2013 and 2012.
NOTE 13: Contingent Liabilities and Commitments
The Company is involved in legal proceedings generally incidental to its business, as described below:
Insurance and Other Contingent Liabilities and Commitments
The Company is subject to potential liabilities arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, environmental, employment and other matters that arise in the ordinary course of business. The Company's operations and a number of its products are highly regulated by various governmental agencies around the world and the Company is periodically involved in reviews, investigations and proceedings by governmental agencies. Failure to meet the standards and licensing requirements of these agencies can lead to penalties which can include substantial fines and/or operating restrictions.
The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. Although the Company believes the amounts reserved are probable and appropriate based on available information, the process of estimating losses involves a considerable degree of judgment by management and the ultimate amounts could vary materially. The Company has self-insured retention limits and has obtained insurance to provide coverage above the self-insured limits for claims made against it, subject to certain limitations and exclusions. At December 31, 2013, (i) reserves have been provided to cover expected payments for these self-insured amounts, (ii) there were no contingent liabilities that management believes are reasonably likely to have a material adverse effect on the Company's consolidated financial condition, results of operations, cash flows or liquidity and (iii) there were no material commitments outside of the normal course of business. Material commitments in the normal course of business include notes payable, long-term debt, lease commitments and pension and other post-retirement benefit obligations which are disclosed in Note 7 - Notes Payable, Note 8 - Long-Term Debt, Note 10 - Lease Commitments and Note 16 - Pension and Post-retirement Benefit Plans.
NOTE 14: Common Stock
The 2003 LTIP permits the granting of incentive or nonqualified stock options as well as stock appreciation rights, performance shares, RSUs and other stock-based awards. The 2003 LTIP permits the distribution of up to 11,000,000 shares of the Company's common stock, subject to increase for any shares forfeited under other equity compensation plans after the effective date of the 2003 LTIP. Shares issued under the 2003 LTIP may be authorized and unissued shares or treasury shares. This plan permits the award of non-qualified stock options and other stock-based awards to those members of the Board of Directors who
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are not employees of the Company. Under the 2003 LTIP for 2012 and prior years, a non-employee Director received (i) an initial option to purchase 20,000 shares of Company common stock on the date of his or her initial election as a Director, (ii) 1,200 shares of stock granted on the first business day in January and (iii) additional awards of options to purchase 10,000 shares on the day after each annual shareholders' meeting if the non-employee Director had served on the Board for at least six months. Beginning in 2013, the Board (i) reduced the initial option grant for new Directors to two times their annual cash retainer, (ii) reduced the amount of additional option awards to an amount equal to 60 percent of a director's annual equity grant award and (iii) provided the other 40 percent in time-based RSUs, each of which vest one-third on each grant date anniversary. Incentive and nonqualified stock options may not have an option exercise price of less than the fair market value of the shares at the date of the grant. Including shares forfeited or swapped, 999,368 shares of the Company's common stock remain available for award under the 2003 LTIP at December 31, 2013.
As of December 31, 2013, the Company expects $22 of unrecognized expense related to granted, but nonvested stock-based compensation arrangements to be incurred in future periods. This expense is expected to be recognized over a weighted average period of 1.5 years.
Stock-based compensation expense is included in SG&A. The stock-based compensation expense for the years ended December 31, 2013, 2012 and 2011 was $22, $17 and $18, respectively. The tax benefit related to this expense was $7 for the year ended December 31, 2013 and $6 for the years ended December 31, 2012 and 2011.
Stock Options. The Company measures the total fair value of options on the grant date using the Black-Scholes option-pricing model and recognizes each grant's fair value as compensation cost over the period that the option vests. Options generally become exercisable from one to three years following the grant date and expire ten years after the grant date. During the year ended December 31, 2013, the Company granted a total of 791,760 stock options under the 2003 LTIP.
The weighted-average assumptions under the Black-Scholes option-pricing model for stock option grants are as follows:
Expected term-The expected term of the options represents the period of time between the grant date and the time the options are either exercised or forfeited, including an estimate of future forfeitures for outstanding options. In accordance with SEC Staff Accounting Bulletin No. 107, the Company has used the "simplified" method for "plain vanilla" options to estimate the expected term of options granted prior to 2008.
Expected volatility-The expected volatility is calculated based on an average of the historical volatility of the Company's stock price for a period approximating the expected term.
Risk-free interest rate-The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term.
Dividend yield-The dividend yield is based on the Company's authorized quarterly dividend, approved by the Board during the respective periods noted above, and the Company's expectation for dividend yields over the expected term.
A summary of the combined stock option activity and other data for the Company's stock option plans, including the 2003 LTIP, the Stock Option Plan of 2000 and the 1998 Directors' Non-Qualified Share Option Plans, for the year ended December 31, 2013 is as follows:
The aggregate intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $35, $52 and $30, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $20.11, $18.67 and $17.05 per share, respectively.
Performance Shares. Performance Share awards in 2013, 2012 and 2011 were 104,545, 224,560 and 220,305 shares, respectively. A summary of the criteria for the Performance Share awards can be found in the table below.
(1) Of the 104,545 Performance Shares awarded in 2013, 30,290 were awarded on September 3, 2013 and subject to different performance criteria than those noted within the table above. These Performance Shares have a three year performance period beginning July 1, 2013 and ending June 30, 2016, with 50 percent vesting on the three-year anniversary of the award date and 50 percent vesting on the five-year anniversary of the award date. Performance is measured by the Company achieving "Cumulative Free Cash Flow" during the performance period equal to or greater than $900. For these specific awards, the Company expenses the expected cost of the awards over the respective vesting periods beginning on the grant date with half ending on the three-year anniversary of the award date and half ending on the five-year anniversary of the award date.
(2) The payout range is determined at the end of the performance period.
Subject to meeting the performance criteria, the Performance Share grants will be paid in shares of the Company's common stock. Such shares do not pay or accumulate dividends, if any, during the vesting period. The Company expenses the expected cost of the awards over the vesting period beginning on the grant date and ending on December 31 of the third subsequent fiscal year, except for those discussed in note (1) above. The expense for the entire number of Performance Shares awarded is dependent upon the probability of achieving the specific financial targets and is recorded ratably over the vesting period.
A summary of the Company's nonvested Performance Shares as of December 31, 2013, and changes during the year then ended, is reflected in the table below.
(1)
Represents the entire amount of Performance Shares which vested during the year ended December 31, 2013. Of these vested Performance Shares, 510 were paid out in 2013 and the remainder were outstanding as of December 31, 2013.
(2)
Includes reductions due to employee terminations and reductions as a result of the Company not meeting certain performance targets.
The weighted average grant date fair value of Performance Shares granted during the years ended December 31, 2013, 2012 and 2011 was $75.00, $71.73 and $63.89, respectively.
Stock Awards. On January 3, 2012 and 2011, each non-employee Director received 1,200 shares of Company common stock. The 2012 and 2011 stock awards were expensed in the first quarter of 2012 and 2011, respectively, based on the fair market value of the Company's common stock at the date of grant. In 2013, the Company began granting the Directors stock options and RSUs in lieu of common stock awards.
Restricted Stock Units. The Company measures the total fair value of RSUs on the grant date using the Company's stock price at the time of the grant less the present value of the expected dividend stream during the vesting period. During the year ended December 31, 2013, the Company granted a total of 98,165 RSUs. RSUs awarded during the year have a vesting period of three years with some awards vesting one-third each year and most awards cliff vesting at the end of the three year period. The awards are expensed over their respective vesting period.
A summary of the Company's nonvested RSUs as of December 31, 2013, and changes during the year then ended, is reflected in the table below.
(1)
Represents the entire amount of RSUs that vested during the year ended December 31, 2013. Of the RSUs that vested, 17,862 were paid out in 2013.
(2)
Includes reductions due to employee terminations.
The weighted average grant date fair value of RSUs granted during the years ended December 31, 2013, 2012 and 2011 was $74.30, $71.45 and $61.24, respectively.
NOTE 15: Company Operations by Business Unit
The business unit structure is the Company's approach to serving customers and reporting sales rather than any internal division used to allocate resources. Net sales for the Company's business units are as follows:
The Company's Chief Operating Decision Maker is the CEO. The CEO and the Board review profit and loss information on a consolidated basis to assess performance and make overall operating decisions as well as resource allocations. The Company's business units are closely interrelated in their activities and share services such as order entry, billing, technical services, e-commerce, purchasing and inventory control, and also share production and distribution facilities. Additionally, these units are supported by centralized functional areas such as finance, human resources, quality, safety and compliance and information technology. Further, the Company's CEO, CFO and business unit Presidents participate in compensation programs in which a portion of their incentive compensation paid is based upon consolidated Company results for sales growth (and for the business unit Presidents, the sales growth in the business unit for which they are responsible), consolidated Company operating income, consolidated Company free cash flow and individual/business unit objectives based on consolidated Company EPS (and for the business unit Presidents, the profitability for certain sites within their respective business unit). Based on these factors, the Company has concluded that it operates in one segment.
Sales are attributed to countries based upon the location from which the product was shipped or services were performed. Products shipped from the U.S. to unaffiliated customer destinations outside of the U.S. are presented in the summary below:
Geographic financial information is as follows:
NOTE 16: Pension and Post-retirement Benefit Plans
The Company maintains several retirement plans covering substantially all U.S. employees and employees of certain international subsidiaries. Pension benefits are generally based on years of service and compensation. The Company also maintains post-retirement medical benefit plans covering some of its U.S. employees. Benefits are subject to deductibles, co-payment provisions and coordination with benefits available under Medicare. The Company has made a determination that the prescription drug benefits it provides are actuarially equivalent to the benefits provided under the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
In the fourth quarter of 2012, the Board approved and management communicated changes to our U.S. defined benefit pension plan so that, effective December 31, 2012, the pension plan would be frozen and future retirement service benefits would no longer be accrued under the plan. The freeze of future benefit accruals resulted in a reduction of the Company's projected benefit obligation of $16. As a result of the freeze, participants under the plan are no longer accruing service-based benefits and are being treated as inactive for accounting purposes. Effective January 1, 2013, the affected employees were eligible for additional contributions under an enhanced defined contribution plan.
Effective January 1, 2014, the Swiss defined benefit plan was amended from a final pay plan to a cash balance-type plan. The change resulted in a reduction of the Company's projected benefit obligation of $11.
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The following chart reconciles the funded status of the plans with amounts included in the Company's consolidated balance sheets:
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The components of the net periodic benefit costs are as follows:
The rate assumptions associated with the pension and post-retirement medical benefit plans to determine benefit obligations and additional year-end information are as follows:
The rate assumptions associated with the pension and post-retirement medical benefit plans to determine periodic pension costs are as follows:
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The expected employer contributions and benefit payments are shown in the following table for the pension and post-retirement medical benefit plans:
(1)
Expected payments for Post-Retirement Medical Benefit Plans are shown net of the expected Medicare subsidy receipts.
Pension Plans. For purposes of selecting a discount rate, the present value of the cash flows as of the measurement date is determined using the spot rates from the Mercer Above Mean Yield Curve, and based on the present values, a single equivalent discount rate is developed. This rate is the single uniform discount rate that, when applied to the same cash flows, results in the same present value of the cash flows as of the measurement date. The plans are assumed to continue in force for as long as the assets are expected to be invested. In estimating the expected long-term rate of return on assets, appropriate consideration is given to historical performance for the major asset classes held or anticipated to be held by the pension plans and to current forecasts of future rates of return for those asset classes. Cash flow and expenses are taken into consideration to the extent that the expected return would be affected by them. Because assets are held in qualified trusts, expected returns are not reduced for taxes.
The assets of the pension plans are invested with professional asset managers to produce a diversified portfolio. The Company believes the investments are sufficiently diversified to maintain a reasonable level of risk without unduly sacrificing return. Target asset allocations and weighted average asset allocations at December 31, 2013 are as follows:
Fair Value Measurements at December 31, 2013
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Fair Value Measurements at December 31, 2012
(1)
Level 1 instruments use observable market prices for the identical item in active markets and have the most reliable valuations.
(2)
Level 2 instruments are valued through broker/dealer quotation or through market-observable inputs for similar items in active markets. Equity securities categorized as Level 2 assets are primarily non-exchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets. Valuation is based on the net asset value of fund units held as derived from the fair value of the underlying assets.
Investment Strategy. The U.S. pension plan's overall investment strategy is to hold a mix of approximately 75 percent of investments in U.S. and International equities and 25 percent in bonds. Equities are managed in passive and managed funds across various asset classes. Bond funds contain government and investment-grade bonds.
The trustee has engaged an investment manager for the U.S. pension plan that has the responsibility of selecting investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance meeting the pension plan's investment guidelines.
The UK pension plan's overall investment strategy is to hold a mix of approximately 70 percent of investments in equities (42 percent UK equities and 28 percent non-UK equities) and 30 percent in bonds. Equities are managed in passive and managed funds. Bond funds contain government and investment grade bonds. A small portion of investments are held in insured annuities.
The Swiss pension plan's overall target investment strategy is to achieve a mix of 27.5 percent equities, 54.5 percent bonds, 15 percent real estate and 3 percent other. Equities are invested in large Swiss companies and institutional funds. Bond funds contain government and investment-grade bonds. Real estate holdings are in an institutional real estate fund.
The trustees of the international plans have engaged institutions that are believed to be reputable to invest the various plans' assets in funds with demonstrated historical performance and manage the various plans' assets in accordance with investment guidelines developed by the trustees.
Post-Retirement Medical Benefit Plans. For purposes of selecting a discount rate, the present value of the cash flows as of the measurement date is determined using the spot rates from the Mercer Above Mean Yield Curve, and based on the present values, a single equivalent discount rate is developed. This rate is the single uniform discount rate that, when applied to the same cash flows, results in the same present value of the cash flows as of the measurement date. Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement medical benefit plans. Medical costs were assumed to increase at an annual rate of 7.69 percent in 2013, decreasing ratably to a growth rate of 4.5 percent in 2030 and remaining at 4.5 percent per year thereafter. The effects of a one-percentage point increase or decrease in the assumed health care cost trend rates on the aggregate service and interest cost components and on the post-retirement benefit obligations are not material to the Company's consolidated financial statements. Benefits are funded as claims are paid.
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401(k) Retirement Savings Plan. The Company's 401(k) retirement savings plan provides retirement benefits to eligible U.S. employees in addition to those provided by the pension plan. The 401(k) plan permits participants to voluntarily defer a portion of their compensation, subject to Internal Revenue Code limitations. The Company also contributes a percentage of the employee's salary per year to the account of each eligible employee plus a percentage of the employee's salary deferral. The Company's policy is to fully fund the 401(k) plan. The cost for the 401(k) plan was $22, $11 and $9 for the years ended December 31, 2013, 2012 and 2011 respectively.
NOTE 17: Other Assets and Liabilities
Other current assets
Other current assets are summarized as follows:
Other assets
Other assets are summarized as follows:
Other current liabilities
Other current liabilities are summarized as follows:
Other liabilities
Other liabilities are summarized as follows:
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NOTE 18: Earnings Per Share
Basic EPS is calculated using the weighted average number of shares outstanding during each period. The diluted EPS calculation includes the impact of dilutive equity compensation awards.
A reconciliation of basic and diluted EPS, together with the related shares outstanding in millions for the years ended December 31, is as follows:
Potential common shares totaling 1 million were excluded from the calculation of weighted average shares for the years ended December 31, 2013 and 2012, because their effect was considered to be anti-dilutive. There were no common shares excluded from the calculation of weighted average shares for the year ended December 31, 2011.
NOTE 19: Share Repurchases
At December 31, 2013 and 2012, the Company had repurchased a total of 101 million and 99 million shares, respectively, of an authorized repurchase of 110 million shares. There were 119 million shares outstanding as of December 31, 2013. The Company expects to continue to offset in whole or in part the dilutive impact of issuing share-based incentive compensation with future share repurchases. The Company may repurchase additional shares, but the timing and amount, if any, will depend on market conditions and other factors.
NOTE 20: Accumulated Other Comprehensive Income
The following table shows the components of AOCI for the twelve months ended December 31, 2013.
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The following table shows the components of AOCI for the twelve months ended December 31, 2012.
The following table shows the components of AOCI for the twelve months ended December 31, 2011.
During 2013, amounts reclassified from AOCI include gains of $5 into cost of products and services sold and gains of $2 into SG&A. During 2012 and 2011, amounts reclassified from AOCI include losses of $6 and $3 into SG&A, respectively. These adjustments are net of immaterial tax effects.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sigma-Aldrich Corporation:
We have audited the accompanying consolidated balance sheets of Sigma-Aldrich Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sigma-Aldrich Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
St. Louis, Missouri
February 6, 2014
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Selected Quarterly Financial Data (Unaudited):
The following tables present certain unaudited consolidated quarterly financial information for each quarter of 2013 and 2012. Year-to-date EPS amounts may be different than the sum of the applicable quarters due to differences in weighted average shares outstanding for the respective periods.
Amounts impacting comparability include pretax third party costs related to merger and acquisition activity of $5 for the quarter ended June 30, 2013, pretax licensing dispute settlement costs of $7 for the quarter ended June 30, 2013 and pretax restructuring charges of $10 for the quarter ended September 30, 2013.
Amounts impacting comparability include pretax transaction cost related to recent acquisitions of $5 for the quarter ended March 31, 2012, and pretax restructuring charges of $0, $4, $4 and $1 for the quarters ended March 31, June 30, September 30, and December 31, 2012, respectively.
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Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Controls and Procedures
The Company's management, under the supervision and with the participation of the Company's CEO and CFO, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2013. Based upon their evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure. They have also determined in their evaluation that there was no change in the Company's internal controls over financial reporting during the quarter ended December 31, 2013 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.
Management's Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Under the supervision of and with the participation of management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (1992). Management has concluded that, as of December 31, 2013, our internal control over financial reporting is effective based on these criteria.
Item 9B.
Item 9B.
Other Information.
None.
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PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
Information under the captions "Board of Directors Nominees, Qualifications and Diversity," "Shareholder Proposals" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the 2014 Proxy Statement, which will be filed within 120 days after December 31, 2013, is incorporated herein by reference. For information with respect to executive officers of the Company, see "Executive Officers of the Registrant" included in Item 1 - Business of Part I of this Report.
Audit Committee and Audit Committee Financial Expert
Information under the caption "Directors Meetings and Committees-Audit Committee" of the 2014 Proxy Statement is incorporated herein by reference.
Code of Ethics
Information under the caption "Related Party Disclosure" of the 2014 Proxy Statement is incorporated herein by reference.
Information under the captions "Director Compensation," "Compensation Discussion and Analysis," "Compensation Committee Report" and "Information Concerning Executive Compensation" of the 2014 Proxy Statement is incorporated herein by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information under the captions "Security Ownership of Directors, Executive Officers and Principal Beneficial Owners" and "Equity Compensation Plan Information" of the 2014 Proxy Statement is incorporated herein by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information under the captions "Board of Directors Nominees, Qualifications and Diversity" and "Related Party Disclosure" of the 2014 Proxy Statement is incorporated herein by reference.
Item 14.
Item 14.
Principal Accounting Fees and Services.
Information under the caption "Audit Firm Fee Summary" of the 2014 Proxy Statement is incorporated herein by reference.
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PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)
Documents Filed as Part of this Report
Financial Statements.
See Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
Financial Statement Schedules.
All schedules are omitted as they are not applicable, not required or the information is included in the consolidated financial statements or related notes to the consolidated financial statements.
See Index to Exhibits on page of this Report.
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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.
SIGMA-ALDRICH CORPORATION
(Registrant)
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INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
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