Company: SIGMA ALDRICH CORP
CIK: 90185
SIC: 5160
Filing Date: 2015-02-12 00:00:00

ITEM 1 - BUSINESS
Item 1.
Business.
(a)
General Development of Business
The Company was incorporated under the laws of the State of Delaware in May 1975. Effective July 31, 1975 (the "Reorganization"), the Company succeeded, as a reporting company, Sigma International, Ltd., the predecessor of Sigma Chemical, and Aldrich Chemical, both of which had operated continuously for more than 20 years prior to the Reorganization. The Company's principal executive offices are located at 3050 Spruce Street, St. Louis, Missouri, 63103.
On September 22, 2014, Sigma-Aldrich Corporation entered into the Merger Agreement with Merck KGaA. The Merger Agreement, among other things, provides for Merck KGaA to acquire the Company at a price of $140 per share in cash, without interest. The acquisition will be accomplished through the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly-owned subsidiary of Merck KGaA. The Merger Agreement and the consummation of the transactions contemplated thereby were unanimously approved by the Board. A special meeting of stockholders of the Company was held on December 5, 2014, whereby stockholders voted upon and approved a proposal to adopt the Merger Agreement. The Merger Agreement remains subject to the satisfaction or waiver of specified closing conditions, including the receipt of certain antitrust and governmental approvals and other customary closing conditions.
On October 31, 2014, the Company acquired Cell Marque Corporation, an industry-leading provider of in vitro diagnostic antibody reagents and kits.
(b)
Financial Information About Segments
The Company operates in one segment. Information concerning sales for the Company's business units is provided in Note 15 - Company Operations by Business Unit to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
(c)
Narrative Description of Business
The Company, a leading life science and high technology company focused on enhancing human health and safety, manufactures and distributes 250,000 chemicals, biochemicals and other essential products and 46,000 equipment products to more than 1.4 million customers globally in research and applied labs as well as in industrial and commercial markets. With three distinct business units - Research, Applied and SAFC Commercial - the Company is committed to enabling science to improve the quality of life. The Company operates in 37 countries and sells into approximately 160 countries, serving roughly 100,000 accounts worldwide. The Company manufactures approximately 84,000 of its products.
Products and Services
The Company's business unit structure is aligned into three market-focused business units that are defined by the customers and markets they serve: Research, Applied and SAFC Commercial.
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Research - Our products and services, which include chemicals, reagents and kits, are enabling scientific research to discover and develop new drugs and materials;
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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;
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SAFC Commercial - Our product and service solutions are used by customers to develop and commercially manufacture biopharma, pharma and electronics products. Our comprehensive offerings include media and critical raw materials for industrial cell culture, contract manufacturing services, pharmaceutical safety testing services, and organometallic precursors for semiconductor manufacturing.
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Sales and Distribution
During 2014, the Company sold products and services to approximately 100,000 accounts representing over 1.4 million individual customers, including pharmaceutical companies, universities, commercial laboratories, industrial companies, biotechnology companies, non-profit organizations, governmental institutions, diagnostic, chemical and electronics companies and hospitals. Our Research and Applied business units, with an average order size of approximately $500 dollars, accounted for 75 percent of the Company's net sales in 2014 and 2013 and 76 percent of the Company's net sales in 2012. Through its SAFC Commercial business unit, the Company also makes its chemical products available in larger-scale quantities for use in manufacturing. Sales of these products accounted for 25 percent of net sales in 2014 and 2013 and 24 percent of net sales in 2012.
Customers and potential customers, wherever located, are encouraged to contact the Company by telephone or via its website (www.sigma-aldrich.com) to place orders or obtain technical staff consultation. Information on the website does not constitute a part of this Report. Shipments are made every scheduled work day from all locations conducting distribution activities. The Company strives to ship its products to customers on or near the same day an order is received and carries inventory levels which it believes appropriate to maintain this practice.
Production and Purchasing
The Company has manufacturing and distribution facilities in Madison, Milwaukee and Sheboygan, Wisconsin; St. Louis, Missouri; Lenexa, Kansas; Houston and Round Rock, Texas; Bellefonte, Pennsylvania; Haverhill and Natick, Massachusetts; Urbana, Illinois; Miamisburg and Cleveland, Ohio; Carlsbad and Rocklin, California; Laramie, Wyoming; Australia; Brazil; Canada; Germany; India; Ireland; Israel; Japan; Singapore; Switzerland; Taiwan; and the United Kingdom. Biochemicals are primarily produced by extraction and purification from yeast, bacteria and other naturally occurring animal and plant sources. Organic and inorganic chemicals are primarily produced by synthesis. Chromatography media and columns are produced using proprietary chemical synthesis and proprietary preparation processes. Similar processes are used to produce filtration and sample collection products.
There are approximately 250,000 chemical and biochemical products and 46,000 equipment products listed on our web site and in the Sigma, Aldrich, Fluka and Supelco catalogs. The Company manufactures approximately 84,000 of the chemical and biochemical products it sells, which represented approximately 60 percent of sales in 2014. Products not manufactured by the Company are purchased from many sources either under contract or in the open market.
None of the Company's 10,000 suppliers accounted for more than 5 percent of the Company's chemical, biologic or equipment purchases in 2014. The Company has generally been able to obtain adequate supplies of products and materials to meet its needs. No assurance can be given that shortages will not occur in the future.
Whether a product is produced by the Company or purchased from suppliers it is subjected to the same quality control procedures. Quality control is performed by a staff of chemists, biologists and lab technicians in our network of labs around the world.
Patents, Trademarks and Licenses
The Company holds approximately 470 issued or pending patents, over 800 licenses and has over 950 registered trademarks and trademark applications worldwide. The Company's significant trademarks are the brand names: "Sigma-Aldrich," "Sigma," "Aldrich," "Fluka," "Riedel-de Haën," "Supelco," "SAFC," "SAFC Biosciences," "SAFC Hitech," "Genosys," "Proligo," "Pharmorphix," "Cerilliant," "Vetec," "BioReliance" and "Cell Marque." Their related registered logos and trademarks are expected to be maintained indefinitely. Approximately 75 percent of the Company's issued patent portfolio has a remaining life of at least five years.
The Company is aware of the desirability for patent and trademark protection for its products. The Company believes that other than its brand names, no single patent, license or trademark (or related group of patents, licenses or trademarks) is material in relation to its business as a whole.
In addition to patents, the Company relies on trade secrets and proprietary know-how in the conduct of its business. The Company seeks protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. The Company makes efforts to require its employees, directors, consultants and advisors, outside scientific collaborators and sponsored researchers, other advisors and other individuals and entities to execute confidentiality agreements upon the start of employment, consulting or other contractual relationships with the Company. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some other parties, the agreements provide that all inventions conceived by the individual will be the Company's exclusive property. These agreements may not provide meaningful protection for or adequate remedies
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to protect the Company's technology in the event of unauthorized use or disclosure of information. Furthermore, the Company's trade secrets may otherwise become known to, or be independently developed by, its competitors.
Dependence on a Single Customer or Product
During the year ended December 31, 2014, no single customer accounted for more than 2 percent, and no single product accounted for more than 1 percent, of the Company's net sales.
Backlog
The vast majority of customer orders are shipped from inventory on the day ordered, resulting in limited backlog. Individual items may occasionally be out-of-stock. These items are shipped as soon as they become available. Some orders for larger scale quantities specify a future delivery date, which we exclude from our backlog calculation. At December 31, 2014, the backlog of firm orders was not significant at approximately 4 percent of sales. The Company anticipates that substantially all of the backlog as of December 31, 2014 will be shipped during 2015.
Competition
The markets for the Company's products, services and technologies are both competitive and price sensitive. The Company believes it is a major supplier of biochemical and organic chemical products and kits used in scientific research and testing laboratories, including industrial applications, genomic and proteomic research, biotechnology, pharmaceutical development and as key components in pharmaceutical, diagnostic, environmental and other high technology manufacturing. The Company offers approximately 296,000 chemical, biologic and equipment items, some of which are unique with limited demand. There are many competitors that offer a narrower range of chemicals and many others offering a broader range of equipment products.
In all product areas, the Company competes primarily on the basis of customer service, product availability, quality and price. The Company's main marketing vehicles include its website, www.sigma-aldrich.com, as well as printed catalogs under the Sigma, Aldrich, Fluka and Supelco brands. These vehicles are supplemented with advertisements in life science, chemical and other scientific journals and trade publications, the distribution of special product brochures, the electronic distribution of various advertisements and product data, apps, social media, news releases related to new product offerings and through personal visits with customers from management, sales and technical representatives.
Compliance with Regulations
The Company is subject to extensive regulation by federal, state and local governments and similar international agencies relating to the manufacture, sale and distribution of its products. These regulations govern the Company’s manufacture, use, labeling, packaging, storage and distribution of chemicals and hazardous substances. The Company is also subject to import, export and customs regulations, similar international laws and regulations, and statutes and regulations relating to government contracting. The Company has automated systems, processes and procedures in place to support compliance with these regulations, which are enforced by governmental agencies such as the CBP, DEA, DHS, DOC, DOT, FDA, NRC and USDA and similar international agencies.
The Company believes that it is in compliance in all material respects with federal, state and local regulations relating to the manufacture, sale and distribution of its products. The Company also believes that due to its automated systems, processes and procedures in place it conducts its global business in compliance in all material respects with applicable statutes and regulations as promulgated in the more than 160 countries into which we sell our products. While we believe we are in compliance in all material respects with such laws and regulations, any noncompliance could result in substantial fines or otherwise restrict our ability to conduct our business.
The Company is also subject to federal, state, local and international laws and regulations regulating the emission or discharge of materials into the environment, or otherwise relating to the protection of the environment, in those jurisdictions where the Company operates or maintains facilities. Examples of these laws and regulations include, but are not limited to, the CAA, CWA, CERCLA, SARA, PPA and RCRA. The Company does not believe that any liability arising under, or compliance with, these laws and regulations will have a material effect on our business, and no material capital expenditures are currently expected for environmental control.
R&D
R&D expenses were 2.4 percent of sales in 2014 and 2013 and 2.6 percent of sales in 2012. The R&D expenses relate primarily to efforts to add new manufactured products and enhance manufacturing processes. Self-manufactured products accounted for approximately 60 percent of net sales in 2014.
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Number of Persons Employed
The Company had approximately 9,300 employees as of December 31, 2014. The total number employed in the United States was approximately 4,700 with the remaining 4,600 employed by the Company's international subsidiaries. The Company employs approximately 3,300 people who have degrees in chemistry, biochemistry, engineering or other scientific disciplines, including approximately 430 with Ph.D. degrees.
Approximately 281 of the 4,600 persons employed by the Company's international subsidiaries were members of unions. None of the Company's employees in the United States were members of unions. The Company believes its labor relations are good.
(d)
Financial Information About Geographic Areas and Business Units
Information concerning sales by geographic area and business unit for the years ended December 31, 2014, 2013 and 2012, is located in Note 15 - Company Operations by Business Unit to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
The Company's sales to customers located outside the United States were 64 percent in 2014 and 2013 and 65 percent in 2012. These sales were made directly by the Company, by its subsidiaries located in 37 other countries and by a global network of independent distributors.
(e)
Available Information
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statements on Schedule 14A and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on the Company's web site at www.sigma-aldrich.com as soon as reasonably practicable after being filed electronically with or furnished to the SEC. The information on the website does not constitute part of this Report.
(f)
Executive Officers of the Registrant
The executive officers of the Company are:
Name of Executive Officer
Age
Positions and Offices Held
Jan A. Bertsch
Executive Vice President and Chief Financial Officer
Gilles A. Cottier
Executive Vice President and President, SAFC Commercial
Eric M. Green
Executive Vice President and President, Research
Michael F. Kanan
Vice President and Corporate Controller
George L. Miller
Senior Vice President, General Counsel & Secretary
Karen J. Miller
Senior Vice President, Corporate Development and Corporate Communications
Douglas W. Rau
Vice President, Human Resources
Rakesh Sachdev
President and Chief Executive Officer
Franklin D. Wicks
Executive Vice President and President, Applied
There is no family relationship between any of the officers or directors. These officers serve at the pleasure of the Board subject to the terms of any employment or similar agreements.
Ms. Bertsch has been Executive Vice President and Chief Financial Officer of the Company since March 2012. She also served as Treasurer from September 2012 until September 2013. She was previously Vice President, Controller and Principal Accounting Officer of Borg Warner Inc. from August 2011 to February 2012 and Vice President and Treasurer of Borg Warner Inc. from December 2009 to July 2011. From July 2008 to November 2009, Ms. Bertsch was Senior Vice President, Treasurer and Chief Information Officer for Chrysler Group, LLC and Chrysler LLC, and from May 2006 to June 2008, she was Chief Information Officer of Daimler Chrysler's Chrysler Group and Mercedes Benz NAFTA organizations and Chrysler LLC.
Mr. Cottier has been Executive Vice President and President, SAFC Commercial of the Company since January 2013. Prior to that, he was President of SAFC since January 2009 and was made an Executive Vice President of the Company in 2011. He served as President of the Research Essentials business unit of the Company from July 2005 until January 2009.
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Mr. Green has been Executive Vice President and President, Research of the Company since January 2013. Prior to that, he was Vice President and Managing Director, International (or APAC) of the Company since October 2009. Previously, he served as Vice President, International Sales and Operations of the Company from August 2005 to September 2009.
Mr. Kanan has been Vice President and Corporate Controller of the Company since April 2009. Prior to that, he served as Vice President Finance-Light Vehicle Systems of ArvinMeritor from October 2006 to April 2009.
Mr. Miller has been Senior Vice President, General Counsel and Secretary of the Company since October 2009. Prior to that, he served as General Counsel of Novartis Services, Inc. from September 2008 to September 2009, and as General Counsel of Novartis Corporation from December 2005 to August 2008.
Ms. Miller has been Senior Vice President, Corporate Development and Corporate Communications of the Company since January 2013. Prior to that, she was Senior Vice President, Strategy & Corporate Development of the Company since May 2009 and was previously Vice President, Strategy & Corporate Development of the Company from January 2009 through May 2009. Prior to that, she served as Controller of the Company for more than five years.
Mr. Rau has been Vice President, Human Resources of the Company since October 2005.
Mr. Sachdev has been President and Chief Executive Officer of the Company since November 2010. He previously served as Senior Vice President, Chief Financial Officer and Chief Administrative Officer of the Company from May 2009 to November 2010. Previously, he served as Vice President and Chief Financial Officer of the Company from November 2008 to May 2009. Prior to that, he served as Senior Vice President and President, Asia Pacific of ArvinMeritor from March 2007 to July 2008.
Dr. Wicks has been Executive Vice President and President, Applied of the Company since January 2013. Prior to that, he was President of Research and has been an Executive Vice President of the Company since February 2011. He previously served as President of the Research Essentials and Specialties business units of the Company from January 2009 to February 2011 and Managing Director-U.S. & Canada from January 2010 to February 2011. Prior to that, he served as President of SAFC for more than five years.
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ITEM 1A - RISK FACTORS
Item 1A.
Risk Factors.
Our business is subject to certain risks and uncertainties, including, among others, certain economic, political and technological factors. You should carefully consider the risk factors below, together with other matters described in this Report or incorporated herein by reference, in evaluating our business and prospects. If any one or more of the following risks occurs, our business, results of operations, financial condition, cash flows and liquidity could be adversely impacted and the trading price of our common stock could decline. Additional risks not presently known to us or that we currently deem immaterial may also adversely impact our business, results of operations, financial condition, cash flows and liquidity.
The announcement and pendency of our proposed merger with Merck KGaA could adversely affect our business, financial results and operations.
The announcement and pendency of the proposed acquisition of our Company by Merck KGaA could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the proposed merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed acquisition. We could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.
We are also subject to restrictions on the conduct of our business prior to the consummation of the merger as provided in the Merger Agreement, including, among other things, certain restrictions on capital spending levels, our ability to repurchase shares, increase our dividend, acquire other businesses, sell, transfer or license our assets, amend our organizational documents and incur indebtedness. These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations.
Failure to complete the proposed merger could adversely affect our business and the market price of our common stock.
There is no assurance that the closing of the merger will occur. Consummation of the merger is subject to satisfaction or waiver of specific closing conditions, including, among other things, the receipt of certain antitrust and governmental approvals and other customary closing conditions. We cannot predict with certainty whether and when any of the outstanding conditions will be satisfied. In addition, the Merger Agreement may be terminated under certain specified circumstances. If the Merger Agreement is terminated under specified circumstances, we are required to pay Merck KGaA a termination fee. If the merger is not consummated, our stock price will likely decline as our stock has recently traded at prices based on the proposed per share price for the merger. We will have incurred significant costs, including, among other things, the diversion of management resources, for which we may receive little or no benefit if the closing of the merger does not occur. A failed transaction may result in negative publicity and a negative impression of our Company in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price.
Our performance may be affected by the economic conditions in the United States and in other nations where we do business.
Declining economic conditions as a result of inflation, rising interest rates, limitations on access to and the functioning of capital markets, changes in spending patterns at pharmaceutical, biotechnology and diagnostic companies and the effects of governmental initiatives to manage economic conditions may have a negative impact on our consolidated results of operations, financial condition and cash flows. Overall demand for our products could be reduced as a result of a global economic recession, especially in such customer segments as the pharmaceutical, biotechnology, diagnostic, chemical, industrial and electronics industries and academia.
We face significant competition, including changes in pricing.
The markets for our products and services are both competitive and price sensitive. Many of our competitors have significant financial operations, sales and marketing resources and experience in research and development. Existing or new competitors could develop new technologies that compete with our products and services or even render our products obsolete. If a competitor develops superior technology or cost-effective alternatives to our products and services, our business could be harmed.
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The markets for some of our products are also subject to specific competitive risks because these markets are highly price competitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This may reduce profits and possibly sales. Failure to anticipate and respond to price competition may also impact sales and profits.
New entrants or significant expansion of sales channel and logistics competitors may erode sales.
Our businesses are rapidly evolving and intensely competitive, and we have many competitors in e-commerce services, warehousing and logistics. Some of our current and potential competitors have greater resources, more customers, and/or greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing and devote more resources to technology, infrastructure, fulfillment and marketing. Competition may intensify as our competitors deploy or improve their technology and speed of delivery to customers or as established companies in other market segments expand to become competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content and electronic devices, may increase our competition. The Internet facilitates competitive entry and comparison shopping, and increased competition may reduce our sales and profits.
Consolidation trends in both our industry and that of our customers have changed industry dynamics.
The industries in which we compete have been subject to increasing consolidation for the past several years. Consolidation in our industries could result in existing competitors increasing their market share through business combinations and result in stronger competitors, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. We cannot predict with certainty how industry consolidation would affect our competitive position.
Additionally, there has been a trend toward consolidation among our customers, notably in the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts. Larger consolidated customers may be able to exert increased pricing pressure on industry participants.
We must continually offer new products and technologies.
Our success depends in large part on continuous and timely development and introduction of new products that address evolving customer needs and changes in the market. We believe customers in our markets display a significant amount of loyalty to their supplier of a particular product. We also believe that because of the initial time investment required by many of our customers to reach a purchasing decision for a new product, it may be difficult to regain that customer once the customer purchases a product from a competitor. To the extent we are not the first to develop, offer and/or supply new products, customers may buy from our competitors or make products themselves, causing our competitive position to suffer.
These facts have led us to focus significant efforts and resources on the development and identification of new technologies, products and services. As a result, we have a very broad product line and are continually seeking to develop, license or acquire new technologies, products and services to further broaden our offerings. If we fail in these efforts, our customers likely will purchase products from our competitors, significantly harming our business. Once we develop or obtain a technology, to the extent that we fail to timely introduce new and innovative products that are accepted by our markets, we could fail to obtain an adequate return on our R&D, licensing and acquisition investments and could lose market share to our competitors, which may be difficult or impossible to regain and could damage our business.
In addition, technology innovations, which our current and potential customers might have access to, could create alternatives to our products and reduce or eliminate the need for our products. Our failure to develop, introduce or enhance products able to compete with new technologies in a cost-effective and timely manner could have an adverse effect on our business, results of operations and financial condition.
Our sales and results of operations depend on our customers’ research and development efforts and their ability to obtain funding for these efforts.
Our customers include researchers at companies in the pharmaceutical, biotechnology, diagnostic, chemical, electronics and related industries, academic institutions, government laboratories and private foundations. Fluctuations in the R&D budgets of these researchers and their organizations could have a significant effect on the demand for our products. Our customers determine their R&D budgets based on several factors, including the need to develop new products, the availability of governmental and other funding, competition and the general availability of resources. As we continue to expand our international operations, we expect R&D spending levels in markets outside of the United States will become increasingly important to us.
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R&D budgets fluctuate due to changes in available resources, spending priorities, general economic conditions, institutional and governmental budgetary limitations and mergers of companies in the key industry sectors we serve. Our business could be seriously harmed by any significant decrease in life science and high technology R&D expenditures by our customers. In addition, credit availability may impact the ability of small, emerging pharmaceutical, biotechnology and diagnostic companies to access funding.
A portion of our sales have been to researchers whose funding is dependent on grants from government agencies across the globe. In the United States, these agencies include the U.S. National Institute of Health, the National Science Foundation, the National Cancer Institute and similar agencies or organizations. Government funding of research and development is subject to the political process and budget process, which are often unpredictable. Any shift away from funding of life science and high technology R&D, delays surrounding the approval of governmental budget proposals or further United States federal government shutdowns may cause our customers to delay or forgo purchases of our products and services, which could damage our business.
Some of our customers receive funds from approved grants at a particular time of year, many times set by government budget cycles. In the past, such grants have been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds may affect the timing of purchase decisions by our customers and, as a result, cause fluctuations in our sales and operating results.
Likewise, public support of R&D in key markets in Europe and elsewhere has come under pressure, which may lead to decreased sales of our products in those jurisdictions.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its presence in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in emerging markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected. For these reasons, sales within emerging markets carry significant risks. However, a failure to continue to expand the Company’s business in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
Due to heavy reliance on manufacturing and related operations to produce, package and distribute the products we sell, our business could be adversely affected by disruptions of these operations.
We rely upon our manufacturing operations to produce products accounting for approximately 60 percent of our sales and several products are produced solely at one facility. Our quality control, packaging and distribution operations support all of our sales. Any significant disruption of those operations for any reason, such as labor unrest, power interruptions, fire, natural disasters or other events beyond our control, could adversely affect our sales, product distribution and customer relationships and therefore adversely affect our business. While insurance coverage may reimburse us, in whole or in part, for profits lost from such disruptions, our ability to provide these products in the longer term may affect our sales growth expectations and results.
If we experience a significant disruption in our information technology systems or if we fail to implement new systems and software successfully, our business could be adversely affected.
We depend on information systems throughout the Company to control our manufacturing processes, process orders, manage inventory, process and bill shipments to and collect cash from our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our property, plant and equipment and record and pay amounts due vendors and other creditors. Additionally, in 2014, approximately 48 percent of the Company’s Research and Applied sales originated through e-commerce. As a part of our ongoing effort to upgrade our current information systems, we are implementing new enterprise resource planning software and other software applications to manage certain business operations. As we upgrade or change systems, we may suffer interruptions in service, loss of data or reduced functionality and other problems could arise that we have not foreseen. Such problems could adversely impact our ability to provide quotes, take customer orders and otherwise run our business in a timely manner. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, it may be difficult to improve or maximize our profit margins. As a result, our results of operations and cash flows could be adversely affected.
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Our information technology systems may be susceptible to damage, disruptions or shutdowns due to natural disasters, power outages, hardware failures, viruses, break-ins, sabotage, acts of terrorism, acts of vandalism, hacking, cyber-terrorism and similar misconduct. Although we strive to have appropriate security controls in place, prevention of security breaches cannot be assured, particularly as cyber threats continue to evolve. We may be required to expend additional resources to continue to enhance our security measures or to investigate and remediate any security vulnerabilities. If we were to experience a prolonged disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales and customers and/or increased costs, which could adversely affect our business.
We are subject to regulation by various federal, state, local and international agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture and distribution of products and environmental matters.
Some of our operations are subject to regulation by various United States federal agencies and similar state and international agencies, including the CBP, DEA, DHS, DOC, DOT, FDA, NRC, USDA and other comparable United States, state, local and international governmental agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, handling, sales, distribution, importing and exporting of products. If we fail to comply with any or all of these regulations, we may be subject to fines or penalties, have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our sales.
In addition to the foregoing, we have agreements in place for the sale of our products to government entities; consequently, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these statutes and regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.
We may be exposed to certain regulatory and financial risks related to climate change.
Our manufacturing processes for certain products involve the use of chemical and other substances that are regulated under various international, federal, state and local laws governing the environment. In the event that any future climate change legislation would require that stricter standards be imposed by domestic or international environmental regulatory authorities with respect to the use and/or levels of possible emissions from such chemicals and/or other substances, we may be required to make certain changes and adaptations to our manufacturing processes. There can be no assurance that any such changes would not have a material effect on our financial condition, results of operations and cash flows.
We are subject to regulations that govern the handling of hazardous substances.
We are subject to various international, federal, state and local laws and regulations that govern the handling, transportation, manufacture, use, storage, disposal and sale of substances that are or could be classified as toxic or hazardous substances. Some risk of environmental and property damage and environmental liabilities, including potential cleanup liability relating to currently or formerly owned or operated sites or third party disposal sites and liabilities relating to the exposure to hazardous substances, is inherent in our operations and the products we manufacture, sell or distribute. Any failure by us to comply with the applicable government regulations could also result in product recalls or impositions of significant fines and restrictions on our ability to carry on with or expand a portion or possibly all of our operations. If we fail to comply with any or all of these regulations, we may be subject to fines or penalties, have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our sales.
Changes in worldwide tax rates or tax benefits will impact our tax expense and profits.
We are subject to a variety of taxes in numerous local, regional, national and international jurisdictions. The laws regulating the taxes to which we are subject may change. We have no control over these changes and their impact, if any, on our results. Additionally, results of tax audit activity may also impact our tax provision and our profits. We reflect changes in our actual or forecast income tax rates as relevant facts and circumstances are known to us.
Litigation may harm our business.
Substantial, complex or extended litigation could cause us to incur significant costs and distract our management. For example, lawsuits by governmental authorities, employees, shareholders, suppliers, collaborators, distributors, customers, competitors or others with protected intellectual property could be very costly and substantially disrupt our business. Disputes from time to time with such companies, organizations or individuals are not uncommon, and we cannot provide assurance that we will always be able to resolve such disputes or do so on terms favorable to us. Unexpected results could cause us to have financial exposure in these matters in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these liabilities, therefore impacting profits.
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Potential product liability claims could affect our earnings and financial condition and harm our reputation.
We face potential liability claims arising out of the use of or exposure to our products and/or services. We carry product liability insurance coverage, generally available in the market, but which is limited in scope and amount. While our products are generally used by trained scientists and operators, there is no assurance that they will be used in accordance with our terms and conditions of sale. As a result, we could be forced to defend ourselves in connection with the use of these products or services.
Although we seek to reduce our potential liability through measures such as contractual indemnification provisions with customers and/or suppliers, we cannot assure you that such measures will be enforced or effective. Our results of operations, financial position and cash flows could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the indemnity, although applicable, is not executed in accordance with its terms or if our liability exceeds the amount of applicable insurance or indemnification. There can be no assurance that our insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to us. Unexpected results could cause us to have financial exposure in these matters in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these liabilities, therefore impacting profits.
If we fail to maintain adequate quality standards for our products and services, our business may be adversely affected and our reputation harmed.
Our life science and high technology customers are often subject to rigorous quality standards to obtain and maintain regulatory approval of their products and the manufacturing processes that generate them. A failure to maintain, or in some instances upgrade, our quality standards to meet our customers’ needs could result in a breach of our contractual obligations or the loss of a customer’s regulatory license, which may cause us to incur significant liabilities to such customers or result in substantial sales losses and reputational harm.
Demand for our products and services is subject to the commercial success of our customers’ products, which may vary for reasons outside our control.
Even if we are successful in securing utilization of our products in a customer’s manufacturing process, sales of many of our products and services remain dependent on the timing and volume of the customer’s production, over which we have no control. The demand for our products depends on regulatory approvals and frequently depends on the commercial success of the customer’s supported product. Regulatory processes are complex, lengthy and expensive and can often take years to complete. Commercial success of a customer’s product, which would drive demand in their production and commensurate demand for our products and services, is dependent on many factors, some of which can change rapidly, despite early positive indications.
We rely heavily on third party transportation providers and other package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to ship products or import materials, increase our costs, lower our profitability and harm our reputation.
We emphasize our prompt service and shipment of products as a key element of our sales and marketing strategy. We ship a significant number of products to our customers through independent package delivery companies. In addition, we transport materials between our worldwide facilities and import raw materials from worldwide sources. Consequently, we rely heavily on both sea and air cargo carriers and other third party package delivery providers. If any of our key third party providers were to experience a significant disruption in services such that any of our products, components or raw materials could not be delivered in a timely fashion, our costs may increase and our relationships with certain customers may be adversely affected. In addition, if these third party providers increase prices and we are not able to find comparable alternatives or make adjustments to our selling prices, our profitability could be adversely affected.
Fluctuations in the availability, quality and prices of raw materials could negatively impact our financial results.
Our operations depend upon our ability to obtain high quality raw materials at reasonable prices. Although most of our raw materials are available from a number of potential suppliers, the availability and costs of these raw materials may fluctuate significantly from time to time. If we are unable to obtain the materials we need at a reasonable price, we may not be able to produce certain of our products or we may not be able to produce certain of these products at a marketable price, which could have an adverse effect on our results of operations.
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If we fail to attract and retain key personnel, our business could be adversely affected.
Most of our products and services are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop, manufacture and market our products and provide our services. In addition, some of our manufacturing, quality control, safety and compliance, information technology, sales and e-commerce related positions require persons possessing highly technical skills. Our success depends in large part upon our ability to identify, hire, retain and motivate highly skilled professionals. We face intense competition for these professionals from our competitors, customers, marketing partners and other companies throughout the industries in which we compete. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would seriously damage our business.
We depend heavily on the services of our senior management. We believe that our future success depends on the continued services of our management team. Our business may be harmed by the loss of a significant number of our senior management members in a short period of time.
Rapid changes in the healthcare industry could directly or indirectly adversely affect our business.
A significant portion of our sales is derived from companies in the healthcare industry. This industry has undergone significant changes in an effort to control costs. These changes include:
•
development of large and sophisticated group purchasing organizations;
•
healthcare reform legislation;
•
consolidation of pharmaceutical companies;
•
increased outsourcing of certain activities, including biotechnology and pharmaceutical, to low-cost offshore locations;
•
lower reimbursements for R&D; and
•
legislative limitations on healthcare research.
We expect the healthcare industry to continue to change in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing the ability to perform healthcare related research and the delivery or pricing of healthcare services or mandated benefits, may cause healthcare industry customers to purchase fewer of our products and services or to reduce the prices they are willing to pay for our products or services.
We may be unable to establish and maintain collaborative development and marketing relationships with business partners, which could result in a decline in sales or slower than anticipated growth rates.
As a part of our business strategy, we have formed, and intend to continue to form, strategic alliances and distribution arrangements with partners relating to the development and commercialization of certain of our existing and potential products to increase our sales and to leverage our product and service offerings. Our success will depend, in part, on our ability to maintain these relationships and to cultivate additional, acceptable strategic alliances with such companies.
In addition, we cannot ensure that parties with which we have established, or will establish, collaborative relationships will not, either directly or in collaboration with others, pursue alternative technologies or develop alternative products in addition to, or instead of, products offered as a result of these collaborations. Our business partners may also experience financial or other difficulties that lessen their value to us and to our customers. Our results of operations and opportunities for growth may be adversely affected by our failure to establish and maintain successful collaborative relationships.
Lack of early success with our pharmaceutical and biotechnology customers could exclude us from future business with those customers.
A number of the products we sell to pharmaceutical and biotechnology customers are incorporated into the customers’ drug manufacturing processes. In some cases, once a customer chooses a particular product for use in a drug manufacturing process, it is unlikely that the customer will later switch to a competing alternative. In many cases, the regulatory license for the product will specify the products qualified for use in the process. Obtaining the regulatory approvals needed for a change in the manufacturing process is time consuming, expensive and uncertain. Accordingly, if a pharmaceutical or biotechnology customer does not select our products early in its manufacturing design phase for any number of reasons, including, but not limited to, cost, ease of use, ability to supply large quantities or similar reasons, we may lose the opportunity to participate in the customer’s manufacturing of such product. Because we face competition in this market from other companies, we run the risk that our competitors could win significant early business with a customer making it difficult for us to recover the late stage commercialization opportunity.
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Our failure to protect our intellectual property may significantly harm our results of operations.
Our success and ability to compete is dependent in part on our ability to protect and maintain proprietary rights to our intellectual property, particularly trade secrets and proprietary know-how. We generally enter into confidentiality and proprietary information agreements with our employees, consultants and advisors. These agreements may not provide meaningful protection for or adequate remedies to protect the Company’s technology in the event of unauthorized use or disclosure of information. Efforts to address any infringement of our proprietary rights could result in diversion of management’s time and significant costs through litigation or otherwise. In addition, the laws of other countries may not protect our intellectual property rights to the same extent as the laws of the United States. Any failure to adequately protect our proprietary rights could result in our competitors offering similar services, potentially resulting in the loss of one or more competitive advantages and decreased sales.
Despite efforts to protect our proprietary rights, existing trade secret, copyright, patent and trademark laws afford us only limited protection. Others may attempt to copy or re-engineer aspects of our products or obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our products or trade secrets, or deter others from developing similar products. Further, monitoring the unauthorized use of our products and other proprietary rights is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our results of operations and reputation.
We may become involved in disputes regarding our intellectual property rights, which could result in prohibition of the use of certain technology in current or planned products, exposure of the business to significant liability and diversion of management’s focus.
We and our major competitors spend substantial time and resources developing and patenting new and improved products and technologies. Many of our products are based on complex, rapidly developing technologies. Further, while we strive to respect others’ intellectual property, we may not have identified each and every instance where our products may infringe or utilize intellectual property rights held by others. Thus, we cannot provide assurance that others will not claim that we are infringing their intellectual property rights or that we do not in fact infringe those rights.
We have been and may in the future be sued by third parties alleging that we are infringing upon their intellectual property rights. Any claims, with or without merit, could:
•
be expensive;
•
take significant time and divert management’s focus from other business concerns;
•
if successful, require us to stop the infringing activity, redesign our product or process or license the intellectual property in question, thereby resulting in delays and loss or deferral of sales;
•
require us to pay substantial damage awards; and/or
•
require us to enter into royalty or licensing agreements which may not be available on acceptable terms, if at all.
If we are unable to obtain a royalty agreement or license on acceptable terms, or are unable to redesign our products or processes to avoid conflicts with any third party patent, we may be unable to offer some of our products, which could result in reduced sales.
Foreign currency exchange rate fluctuations may adversely affect our business.
Since we are a multinational corporation that sells and sources products in many different countries, changes in exchange rates have in the past, and could in the future, adversely affect our cash flows and results of operations. Reported sales and purchases made and expenses incurred in non-U.S. currencies by our international businesses, when translated into U.S. Dollars for financial reporting purposes, fluctuate due to exchange rate movement. For example, the effect of translating foreign currency sales into U.S. Dollars decreased 2014 and 2013 sales by 1 percent and decreased 2012 sales by 3 percent. The effect of translating foreign earnings into U.S. Dollars decreased 2014, 2013 and 2012 EPS by $0.09, $0.05 and $0.22, respectively. 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.
We are subject to economic, political and other risks associated with our significant international business, which could adversely affect our financial results.
We operate internationally through wholly-owned subsidiaries located in North and South America, Europe, Asia, the Middle East, Australia and Africa. Sales outside the United States were in excess of 64 percent of total sales in 2014. We expect that
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sales from international operations will continue to represent a growing portion of our sales. During 2014, approximately 17 percent of the Company’s United States operations’ chemical and equipment purchases were from international suppliers. In addition, many of our manufacturing facilities, employees and suppliers of our international operations are located outside the United States. Our sales and earnings could be adversely affected by a variety of factors resulting from our international operations, including, without limitation:
•
future fluctuations in foreign currency exchange rates;
•
complex regulatory requirements and changes in those requirements;
•
trade protection measures, tariffs, royalties or taxes and import or export licensing requirements or restrictions;
•
multiple jurisdictions and differing tax laws, as well as changes in those laws;
•
restrictions on our ability to repatriate investments and earnings from international operations;
•
changes in the political or economic conditions in a country or region, particularly in developing or emerging markets;
•
difficulty in staffing and managing worldwide operations;
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changes in shipping costs;
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difficulties in collecting on accounts receivable; and
•
difficulties enforcing intellectual property rights.
If any of these risks materialize, we could face a loss of sales and/or substantial increases in costs, which could adversely affect our operating results.
Acquisitions are an important part of our growth strategy.
We have acquired or invested in several businesses and technologies and routinely review additional opportunities. Certain risks exist including, without limitation, the potential for:
•
increasing debt levels to fund sizable acquisitions;
•
the acquisition or investment failing to provide, or delays in realizing, the benefits originally anticipated by management;
•
difficulties in integrating the operations and systems of the acquired businesses and in realizing operating synergies;
•
difficulties in assimilating and retaining employees and customers of the acquired companies;
•
management’s attention being diverted to the integration of the acquired businesses or acceptance of the acquired technology;
•
rising interest rates on debt needed to provide cash to fund the purchase price of acquisitions; and
•
unanticipated contract or regulatory issues.
None of these difficulties have been historically significant, but if they were to be in the future, we may be unable to achieve expectations from our acquisition strategy. In addition, we compete with other companies for suitable acquisition targets and may not be able to acquire certain targets that we seek. Also, certain businesses we have acquired or invested in may not generate the cash flow and/or earnings or other benefits we anticipated at the time of their acquisition. If we are unable to successfully complete and integrate acquisitions in a timely manner, such acquisitions may adversely affect our profitability.
We expect to continue to implement various process improvement initiatives that may not achieve the desired results, thereby potentially reducing our profitability.
We have implemented a number of changes designed to improve operating efficiencies and reduce costs. We expect to continue to identify opportunities for operational efficiencies and cost reductions and implement changes to achieve these efficiencies, which could result in significant charges. Such actions may lead to, among other things, the consolidation and integration of products, brands, facilities, functions, systems and processes and/or a reduction of our talent pool and available resources, any or all of which might present significant management challenges. There can be no assurance that such actions will be accomplished as rapidly as anticipated or that the full extent of expected cost reductions will be achieved.
Our business may be adversely affected by a decrease in the availability of commercial paper or other forms of credit or an increase in our cost of capital.
We had $145 of commercial paper outstanding at December 31, 2014. If the market for commercial paper or other forms of credit becomes restricted or unavailable, or our cost of capital significantly increases due to a credit rating downgrade, an economic downturn or uncertainty or other factors, our business could be adversely affected, including our consolidated results of operations, financial condition and cash flows.
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Our sales and operating results may vary from the guidance we publish and from period to period.
Our sales and operating results may vary significantly from the guidance we publish, from quarter to quarter and from year to year, depending on a variety of factors including, without limitation, those previously identified within other risk factors and the following:
•
the timing of our cost of products and services sold, R&D, sales and marketing expenses and other charges;
•
the timing of significant custom sales orders, typically associated with our SAFC Commercial business;
•
the expected higher level of sales growth in our SAFC Commercial business creating downward pressure on overall gross profit margins;
•
an increase in the sale of commoditized Research products creating downward pressure on overall gross profit margins;
•
changes in GAAP; and
•
unanticipated loss of market value of the securities we hold.
Our expense levels are based in part on our future sales expectations. Consequently, sales or profits may vary significantly from quarter to quarter or from year to year, and sales and profits in any interim period may not be indicative of results in subsequent periods.
We have significant inventories on hand.
We maintain significant inventories and have an allowance for slow-moving and obsolete inventory. Any significant unanticipated changes in future product demand or market conditions, including the current uncertainty in the global market, could also have an impact on the value of inventory and adversely impact our results of operations. Additionally, if it would become necessary to rework product to make it saleable, this additional effort would impact our costs and operating results.
We may incur impairment charges on our goodwill and other intangible assets with indefinite lives that would reduce our earnings.
We are subject to ASC Topic 350 which requires that goodwill and other intangible assets that have an indefinite life be tested at least annually for impairment. Goodwill and other intangible assets with indefinite lives must also be tested for impairment between the annual tests if a triggering event occurs that would likely reduce the fair value of the asset below its carrying amount. As of December 31, 2014, goodwill and other intangible assets with indefinite lives represented approximately 18 percent of our total assets. If we determine that there has been an impairment, our financial results for the relevant period would be reduced by the amount of the impairment, net of tax effects, if any. There were no indicators of impairment as of December 31, 2014.
Our share price will fluctuate.
Both the market price and the daily trading volume of our common stock will continue to be subject to fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations and business prospects. In addition to the risk factors discussed above, the price and volume volatility of our common stock may be affected by:
•
operating results that vary from the expectations of securities analysts and investors;
•
the financial performance of the major end markets that we target;
•
the operating and securities price performance of companies that investors consider to be comparable to us;
•
announcements of strategic developments, acquisitions and other material events by us or our competitors;
•
changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, commodity and equity prices and the value of financial assets; and
•
failure to consummate the pending Merck KGaA transaction.
Dividends on our common stock and share repurchases could change in the future.
In 2014, we paid annual dividends of $0.92 per share and had repurchased a total of 102 million shares of common stock, and in 2013, we paid annual dividends of $0.86 per share and had repurchased a total of 101 million shares of common stock. The Company does not currently anticipate repurchasing any additional stock following expiration of our stock repurchase program authorization in November 2014 and due to the pending Merck KGaA transaction. Similarly, in our agreement with Merck KGaA, we agreed not to increase our dividend above current levels. The failure to maintain or pay dividends or repurchase shares may adversely affect the market price of our common stock.
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ITEM 1B - UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments.
None.

ITEM 2 - PROPERTIES
Item 2.
Properties.
The following table shows the location, land area, building area and function of the properties the Company owned or leased at December 31, 2014.
The Company considers the properties to be well maintained, in sound condition and repair and adequate for 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 - LEGAL PROCEEDINGS
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 - RESERVED
Item 4.
Mine Safety Disclosures.
Not applicable.
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PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
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 on the NASDAQ Global Select Market. The trading symbol is SIAL. On January 31, 2015, there were 433 shareholders of record of the Company's common stock.
The Company expects to continue its policy of paying regular quarterly cash dividends. Future quarterly dividends are expected to remain at current levels given the restrictions as provided in the Merger Agreement.
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, 2014 (in millions except per share amounts):
Issuer Purchases of Equity Securities
The Company is currently restricted from repurchasing any additional stock following expiration of our stock repurchase program authorization in November 2014. Such authorization was not extended due to the pending Merck KGaA transaction.
For additional information on the Company's prior 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 - SELECTED FINANCIAL DATA
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 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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
Proposed Merger with Merck KGaA
On September 22, 2014, Sigma-Aldrich Corporation entered into the Merger Agreement with Merck KGaA. The Merger Agreement, among other things, provides for Merck KGaA to acquire the Company at a price of $140 per share in cash, without interest. The acquisition will be accomplished through the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly-owned subsidiary of Merck KGaA. The Merger Agreement and the consummation of the transactions contemplated thereby were unanimously approved by the Board. A special meeting of stockholders of the Company was held on December 5, 2014, whereby stockholders voted upon and approved a proposal to adopt the Merger Agreement. The Merger Agreement remains subject to the satisfaction or waiver of specified closing conditions, including the receipt of certain antitrust and governmental approvals and other customary closing conditions. Other than the costs associated with this Merger Agreement discussed in Note 11 - Other Charges to the Company's consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data of Part II of this Report, no other effects of the transaction have been recorded in the Company's consolidated financial statements. In certain circumstances, upon termination of the Merger Agreement termination fees would be payable.
We are also subject to restrictions on the conduct of our business prior to the consummation of the merger as provided in the Merger Agreement, including, among other things, certain restrictions on capital spending levels, our ability to repurchase shares, increase our dividend, acquire other businesses, sell, transfer or license our assets, amend our organizational documents and incur indebtedness.
For additional information related to the Merger Agreement, please refer to our September 22, 2014 Form 8-K. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to the September 22, 2014 Form 8-K.
Background
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 9,300 employees worldwide.
The Company is aligned 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 and 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 51 percent of sales in 2014.
•
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 24 percent of sales in 2014.
•
SAFC Commercial - Our products and service solutions are used by customers to develop and commercially manufacture biopharma, pharma and electronics products. Our comprehensive offerings include media and critical raw materials for industrial cell culture, contract manufacturing services, pharmaceutical safety testing services, and organometallic precursors for semiconductor manufacturing. This business unit generated 25 percent of sales in 2014.
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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, Asia Pacific and elsewhere do have some impact on demand for our products and services from certain 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 and 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, 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 improve our productivity and more efficiently leverage our global manufacturing and distribution network.
Key Business Trends and Highlights
In operating our business and monitoring our performance, we consider a number of performance measures, as well as trends affecting our industry as a whole, which include the following:
•
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 while still complying with the terms of the Merger Agreement.
•
Consolidation Among Large Pharmaceutical Companies: Our customers include large pharmaceutical companies, some of which have undertaken significant merger and acquisitions activity or may be considering such actions in the future. The capital spending and research and development funding levels of the merged companies can have a significant impact on the demand for our products.
•
Macroeconomic Concerns Impacting Funding: Uncertainties in the United States, Europe and Asia Pacific around the macroeconomic environment have impacted overall research funding.
•
Foreign Currency Exchange Rate Fluctuations: Since we are a multinational corporation that sells and sources products and services in many different countries, 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 foreign 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.
•
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, were 48 percent of the Company's total sales of Research and Applied products during both 2014 and 2013.
•
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.
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Highlights of our consolidated results for the year ended December 31, 2014 are as follows:
•
Sales were $2,785, 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 51.0 percent, an increase from 50.3 percent in 2013. Operating income margin was 24.5 percent, compared to 24.4 percent in 2013.
•
Net income was $500 compared to $491 in 2013. Changes in foreign currency exchange rates as compared to the prior year, reduced otherwise reportable net income by $11.
•
Diluted net income per share was $4.17, compared to $4.06 in 2013. Income taxes were 26.1 percent and 25.3 percent of pretax income for 2014 and 2013, respectively.
•
Net cash provided by operating activities for the year ended December 31, 2014 was $640, a decrease of $1 from last year.
•
Total debt was $445 at December 31, 2014, an increase of $80 since December 31, 2013. The increase in debt levels was driven by additional borrowings of commercial paper for the Cell Marque acquisition in October 2014.
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 other 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 2015 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, 2014.
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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.
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 $2,785 in the year ended December 31, 2014, up 3 percent from 2013. The effect of changes in foreign currency exchange rates decreased sales by $21 or 1 percent. Excluding the effects of changes in foreign currency exchange rates and changes due to acquisitions and divestitures, sales increased organically by $105 or 4 percent.
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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 and changes due to acquisitions and divestitures, sales increased organically by $92 or 4 percent.
The change in sales for each of the Company's business units is as follows:
2014 Compared to 2013
Research total sales were $1,404 for the year ended December 31, 2014, compared to $1,402 for the prior year. Sales increased organically by $19 or 1 percent from the prior year. Sales through our dealer networks led the organic growth. Higher sales to our Academic, Government and Hospitals and Pharma customers also contributed to the organic growth. All geographic regions contributed to Research's overall growth in the period.
Applied total sales were $680 for the year ended December 31, 2014, compared to $629 for the prior year. Sales increased organically by $49 or 8 percent from the prior year. The primary driver of growth was higher 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 in the period.
SAFC Commercial total sales were $701 for the year ended December 31, 2014, compared to $673 for the prior year. Sales increased organically by $37 or 6 percent from the prior year. The organic growth was led by our Life Science Products and Life Science Services businesses. All geographic regions contributed to SAFC Commercial's overall growth in the period.
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 in the period.
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 our Life Science Products and Life Science Services businesses, most notably our custom pharmaceutical manufacturing and industrial cell culture media
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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.
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, 2014, 2013 and 2012 were as follows:
Cost of Products and Services Sold and Gross Profit Margin
Gross profit is calculated as sales less cost of products and services sold and gross profit margin is gross profit expressed as a percentage of sales. 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 profit margin for the years ended December 31, 2014, 2013 and 2012 were 51.0%, 50.3% and 51.4%, respectively.
The following table reflects the significant contributing factors to the net change in gross profit margin for the years ended December 31, 2014 and 2013, respectively:
The increase in gross profit margin for 2014 as compared to 2013 was primarily the result of cost leverage obtained from higher sales levels and higher pricing and benefits associated with acquisitions and divestitures. The overall increase was partially offset by unfavorable impacts from changes in foreign currency exchange rates.
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.
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SG&A
SG&A increased $27 during the year ended December 31, 2014 as compared to the same period in 2013 primarily due to higher compensation costs and $10 of gains on asset sales, net of certain impairments, in 2013 that did not repeat in 2014.
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.
R&D Expenses
Annual R&D expenses were largely unchanged from 2012 to 2014. 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.
Other Charges
Restructuring Costs
Programs Implemented During 2014
In the third quarter of 2014, the Company committed to the closure of a facility in Europe. This closure is expected to impact approximately 80 employees and further reduce the Company's fixed cost structure. Total restructuring costs are expected to be $16, comprised of $12 to reduce the value of the assets associated with this facility and $4 of employee termination costs. During the year ended December 31, 2014, $15 of these restructuring costs were recognized.
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 impacted approximately 90 employees and was intended to further reduce the Company's fixed cost structure. Total restructuring costs associated with this plan were $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. During the year ended December 31, 2014, the remaining $2 of these restructuring costs were recognized. As of December 31, 2014, all exit activities were complete.
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 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.
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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.
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
Costs of $16 associated with the pending Merck KGaA transaction and $1 associated with the October 2014 acquisition of Cell Marque were incurred during the year ended December 31, 2014. Costs of $5 associated with merger and acquisition activity were incurred during the second quarter of 2013. 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.
Income Taxes
The Company's effective tax rate reflects the tax benefits of having significant operations outside the U.S. which are taxed at rates lower than the U.S. A reconciliation of the difference between income taxes computed at the U.S. federal statutory rate of 35% and the Company's effective tax rate for the years ended December 31 is as follows:
During 2014, the Company incurred an increase in costs for uncertain tax positions as a result of audit activity while 2012 resulted in a net benefit as a result of statute of limitation expirations. In 2013, the Company benefited from several tax rate and law changes, primarily the reduction in the UK statutory tax rate and the retroactive extension of the 2012 U.S. R&D tax credit in 2013.
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 $640 for the year ended December 31, 2014 was largely unchanged from the same prior year period. Increased uses of cash for income tax payments were offset by improved performance in working capital, primarily inventory and accounts payable.
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
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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.
Investing Activities
Cash used in investing activities for the year ended December 31, 2014 increased $188 compared to the same prior year period. This increase was driven by the use of $170 for the acquisition of Cell Marque coupled with increased capital spending of $18 in 2014.
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.
Financing Activities
Cash used in financing activities for the year ended December 31, 2014 decreased $462 compared to the same prior year period. This decrease is due to the net issuance of $81 of short-term debt during the year ended December 31, 2014, compared to a net repayment of short-term debt of $318 in the same prior year period. In 2014, share repurchases declined $61 compared to 2013 primarily as a result of the Company's suspension of its share repurchase program due to the pending Merck KGaA transaction. During the year ended December 31, 2013, strong free cash flow enabled the Company to repay a substantial amount of its debt.
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.
The Company paid dividends of $109, $103 and $97 during the years ended December 31, 2014, 2013 and 2012, respectively.
Share Repurchases
At December 31, 2014 and 2013, the Company had repurchased a total of 102 million and 101 million shares, respectively, of an authorized repurchase of 110 million shares. This authorization expired in November 2014 and was not extended due to the pending Merck KGaA transaction. There were 119 million shares outstanding as of December 31, 2014. The Company is currently restricted from repurchasing any additional stock due to the pending Merck KGaA transaction.
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, 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. The facility matures on May 10, 2018. At December 31, 2014 and December 31, 2013, the Company did not have any borrowings outstanding under this facility. The amount available under the facility is reduced by the amount of commercial paper outstanding. At December 31, 2014 and December 31, 2013, the Company had $145 and $65, respectively, outstanding under its commercial paper program.
Sigma-Aldrich Japan GK has two credit facilities with a total commitment of 2 billion Japanese Yen (approximately $17 U.S. Dollars), with one facility expiring April, 30, 2015 and the other representing a line of credit with no expiration. No borrowings were outstanding under these facilities at both December 31, 2014 and December 31, 2013.
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In addition to those mentioned above, the Company has other short-term credit facilities denominated in foreign currencies having a total commitment of approximately $3. No borrowings were outstanding under these facilities at both December 31, 2014 and December 31, 2013.
The Company had a $200 multi-currency European revolving credit facility with a syndicate of banks which matured on March 13, 2014.
Long-term debt was $300 at both December 31, 2014 and 2013. This liability consists of 3.375% fixed rate Senior Notes due November 1, 2020.
Total debt at December 31, 2014 was $445 compared to $365 at December 31, 2013. Total debt as a percentage of total capitalization was 12.4 percent and 11.2 percent at December 31, 2014 and 2013, respectively.
As of December 31, 2014, the Company had sufficient net worth, as defined in the underlying credit agreement, to allow for borrowing the full capacity under the facility without any restriction related to compliance with the debt covenants. For a description of the Company's material financial debt covenants, see Note 7 - Notes Payable to the Company's consolidated financial statements in Item 8 - Financial Statements and Supplementary Data of Part II in this Report.
At December 31, 2014, substantially all 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 will 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 will 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 may 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 2014 or 2013.
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, compliance and other matters that arise in the ordinary course of business, as well as putative state class action lawsuits arising out of the proposed merger transaction with Merck KGaA. 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, 2014, (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
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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.
Aggregate Contractual Obligations
The following table presents contractual obligations of the Company at December 31, 2014:
(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 $54 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 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2014.
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, 2014, the Company's outstanding debt represented 12.4 percent of total book capitalization (total debt plus shareholders' equity). Approximately 67 percent of the Company's outstanding debt at December 31, 2014 is at a fixed rate. Cash flows from operations, cash on hand and available credit facilities are expected to be sufficient to meet the anticipated cash requirements of operating the business. It is management's view that market risk or variable interest rate risk 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 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
($ In Millions, Except Share and Per Share Data)
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 $107, $111 and $104 for the years ended December 31, 2014, 2013 and 2012, 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, 2014 or 2013.
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, 2014 or 2013.
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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.
Effect of New Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principles-based approach to the recognition of revenue. The core principle of the standard is when an entity transfers goods or services to customers it will recognize revenue in an amount that reflects the consideration the entity expects to be entitled to for those goods or services. The update outlines a five-step model and related application guidance, which replaces most existing revenue recognition guidance. ASU No. 2014-09 also requires disclosures that will enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company has not yet selected a transition method and it has not determined the effect, if any, of the standard on its ongoing financial condition and results of operations.
NOTE 2: Proposed Merger with Merck KGaA
On September 22, 2014, Sigma-Aldrich Corporation entered into the Merger Agreement with Merck KGaA. The Merger Agreement, among other things, provides for Merck KGaA to acquire the Company at a price of $140 per share in cash, without interest. The acquisition will be accomplished through the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly-owned subsidiary of Merck KGaA. The Merger Agreement and the consummation of the transactions contemplated thereby were unanimously approved by the Board. A special meeting of stockholders of the Company was held on December 5, 2014, whereby stockholders voted upon and approved a proposal to adopt the Merger Agreement. The Merger Agreement remains subject to the satisfaction or waiver of specified closing conditions, including the receipt of certain antitrust and governmental approvals and other customary closing conditions. Other than the costs associated with this Merger Agreement discussed in Note 11 - Other Charges to the Company's consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data of Part II of this Report, no other effects of the transaction have been recorded in the Company's consolidated financial statements. In certain circumstances, upon termination of the Merger Agreement termination fees would be payable.
The Company is also subject to restrictions on the conduct of its business prior to the consummation of the merger as provided in the Merger Agreement, including, among other things, certain restrictions on capital spending levels, the ability to repurchase shares, increase its dividend, acquire other businesses, sell, transfer or license assets, amend organizational documents and incur indebtedness.
For additional information related to the Merger Agreement, please refer to the Company's September 22, 2014 Form 8-K. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to the September 22, 2014 Form 8-K.
NOTE 3: Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts for the years ended December 31, 2014 and 2013 are as follows:
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NOTE 4: Inventories
The principal categories of inventories at December 31, 2014 and 2013 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.
NOTE 5: Property, Plant and Equipment, net
The principal categories of property, plant and equipment, net at December 31, 2014 and 2013 are as follows:
NOTE 6: Intangible Assets
The Company's amortizable and unamortizable intangible assets at December 31, 2014 and 2013 are as follows:
On October 31, 2014, the Company acquired Cell Marque, an industry-leading provider of in vitro diagnostic antibody reagents and kits, for approximately $170 in cash. The Company has estimated the preliminary allocation of the total purchase price consideration as follows: $17 acquired net operating assets; $66 acquired intangible assets, consisting principally of customer relationships; and $87 goodwill. The preliminary purchase price allocation is subject to potential adjustment as the Company finalizes its fair value determination of net assets acquired, which will be completed within one year from the date of acquisition. Any adjustments to the preliminary purchase price allocation may impact the amounts of recognized intangible assets and goodwill. Cell Marque was not material to the Company's consolidated statements of income for the 12 months ended December 31, 2014 and 2013, either on a reported or pro forma basis.
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During the year ended December 31, 2013, the Company did not acquire any intangible assets or goodwill.
The Company recorded amortization expense related to amortizable intangible assets of $25, $27 and $32 for the years ended December 31, 2014, 2013 and 2012, 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 $22 to $28 from 2015 through 2019.
The changes in net goodwill for the years ended December 31, 2014 and 2013 are as follows:
Current period acquisition and divestitures relate to the preliminary purchase price allocation for the Cell Marque acquisition made during 2014. The preliminary allocation will be finalized within one year from the date of acquisition.
NOTE 7: Notes Payable
Notes payable consist of the following at December 31, 2014 and 2013:
(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. The facility matures on May 10, 2018. At December 31, 2014 and December 31, 2013, the Company did not have any borrowings outstanding under this facility. The amount available under the facility is reduced by the amount of commercial paper outstanding. The carrying value of the commercial paper outstanding approximates its fair value. 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, as defined in the underlying credit agreement. 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 was 12.5 percent and 0.0 percent, respectively, at December 31, 2014.
(2)
Sigma-Aldrich Japan GK has two credit facilities having a total commitment of 2 billion Japanese Yen (approximately $17), with one facility expiring April 30, 2015 and the other representing a line of credit with no expiration. No borrowings were outstanding under these facilities at both December 31, 2014 and December 31, 2013.
(3)
There were no borrowings under these facilities, which have total commitments in U.S. Dollar equivalents of approximately $3, at December 31, 2014 and December 31, 2013.
The Company has provided a guarantee for any outstanding borrowings from one of the short-term credit facilities of the wholly-owned Japanese subsidiary. At December 31, 2014, there were no existing events of default that would require the Company to honor this guarantee.
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NOTE 8: Long-Term Debt
Long-term debt consists of the following at December 31, 2014 and 2013:
(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.
Total interest expense incurred on short-term and long-term debt, net of amounts capitalized, was $8, $9 and $8 in 2014, 2013 and 2012, respectively.
The fair value of long-term debt was approximately $312 and $298 at December 31, 2014 and 2013, 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 conducts business in many parts of the world and is subject to risks associated with changing foreign currency exchange rates. Accordingly, the Company uses derivative instruments designated as cash flow hedges and net investment hedges, as well as derivative instruments that are not designated as hedging instruments to mitigate a portion of this risk. These derivative instruments are primarily comprised of foreign currency forward exchange contracts, and are classified within Level 2 of the fair value hierarchy for which 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 forward exchange 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 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. The Company uses foreign currency forward exchange contracts to mitigate a portion of the foreign currency risks 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. At December 31, 2014 and 2013, the Company had outstanding notional principal amounts of $187 and $298, respectively, in foreign currency forward exchange contracts associated with cash flow hedging transactions.
The following table summarizes the fair values of the foreign currency forward exchange contracts designated as cash flow hedges at December 31, 2014 and 2013:
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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, 2014, 2013 and 2012, net of immaterial tax effects.
As of December 31, 2014, the majority of these contracts are in established currencies including the Euro, Japanese Yen and British Pound. During the next twelve months the Company expects $23 of unrealized gains included in AOCI, based on the value of these contracts as of December 31, 2014, 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.
Net Investment Hedges
The Company also holds investments in international subsidiaries that own net assets denominated in foreign currencies. The U.S. Dollar value of these foreign currency denominated net assets fluctuate as the exchange rate fluctuates. From time to time the Company will enter into net investment hedges to reduce the variability in the U.S. Dollar equivalent of net asset values due to changes in exchange rates. During 2014, the Company entered into foreign currency forward exchange contracts with third party banks to hedge certain net assets denominated in the Euro and Swiss Franc.
These hedges have been designated as net investment hedges and qualify for hedge accounting treatment, whereby changes in fair value of the derivative are reported in OCI. 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 investing activities section of the Company's consolidated statements of cash flows. Gains or losses related to the ineffective portion of these hedging instruments were not material for the year ended December 31, 2014. At December 31, 2014 and 2013, the Company did not have any outstanding foreign currency forward exchange contracts associated with net investment hedging transactions.
Derivatives Not Designated As Hedging Instruments
The Company also uses foreign currency forward exchange contracts, which are not designated as hedging instruments, primarily to hedge a portion of 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 fair value 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, 2014, 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, 2014, 2013 and 2012. The notional amount of open foreign currency forward exchange contracts at December 31, 2014 and 2013 was $195 and $199, 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 $39, $43 and $42 in 2014, 2013, and 2012, respectively. Minimum rental commitments for non-cancelable leases in effect at December 31, 2014, are as follows:
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NOTE 11: Other Charges
Restructuring Costs
Programs Implemented During 2014
In the third quarter of 2014, the Company committed to the closure of a facility in Europe. This closure is expected to impact approximately 80 employees and further reduce the Company's fixed cost structure. Total restructuring costs are expected to be $16, comprised of $12 to reduce the value of the assets associated with this facility and $4 of employee termination costs. During the year ended December 31, 2014, $15 of these restructuring costs were recognized.
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 impacted approximately 90 employees and was intended to further reduce the Company's fixed cost structure. Total restructuring costs associated with this plan were $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. During the year ended December 31, 2014, the remaining $2 of these restructuring costs were recognized. As of December 31, 2014, all exit activities were complete.
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 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.
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
Costs of $16 associated with the pending Merck KGaA merger and $1 associated with the October 2014 acquisition of Cell Marque were incurred during the year ended December 31, 2014. Costs of $5 associated with merger and acquisition activity were incurred during the second quarter of 2013. 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.
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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:
The Company's effective tax rates for the years ended December 31, 2014, 2013 and 2012 were 26.1%, 25.3% and 29.8%, respectively. These rates reflect the tax benefits of the Company's significant international operations in countries that have lower statutory tax rates than the U.S. statutory tax rate. During 2014, the Company incurred an increase in costs for uncertain tax positions as a result of audit activity while 2012 resulted in a net benefit as a result of statute of limitations expirations. In 2013, the Company benefited from several tax rate and law changes, primarily the reduction in the U.K. 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 $1,735 at December 31, 2014. 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, 2014 and 2013 resulted from the following temporary differences:
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The net operating loss carryforwards relate to domestic and international operations. At December 31, 2014, $7 of these deferred tax assets expire between 2015 and 2034. The Company has provided valuation allowances on these deferred tax assets of approximately $3. 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:
At December 31, 2014, 2013 and 2012, respectively, there are $38, $24 and $20 of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
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The Company believes it is reasonably possible that the unrecognized tax benefits at December 31, 2014 may decrease by approximately $3 due to audit activity and statute of limitation expirations in several jurisdictions within 12 months of December 31, 2014.
The Company accrues interest, net of tax, and penalties related to unrecognized tax benefits as components of its income tax provision. The Company recognized approximately $1 of expense in 2014, no expense in 2013, and $1 of expense in 2012 related to interest and penalties. The Company had accrued approximately $4 and $3 for the payment of interest, net of tax, and penalties as of December 31, 2014 and 2013, respectively.
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, compliance and other matters that arise in the ordinary course of business, as well as putative state class action lawsuits arising out of the proposed merger transaction with Merck KGaA. 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, 2014, (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: Equity Instruments and Share Based Compensation
The Company's authorized number of shares outstanding is 450 million shares at December 31, 2014 compared to 300 million shares at December 31, 2013. This increase was approved by shareholders at the Company's annual meeting on May 6, 2014 to enhance the Company's flexibility to consider and respond to future business needs and opportunities.
The 2014 LTIP, which was approved by shareholders at the Company's annual meeting on May 6, 2014 and replaced 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 2014 LTIP permits the distribution of up to 7,000,000 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 2014 LTIP. Shares issued under the 2014 LTIP may be authorized and unissued shares or treasury shares. The 2014 LTIP permits the award of non-qualified stock options and other stock-based awards to those members of the Board of Directors who 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, 6,997,840 shares of the Company's common stock remain available for award under the 2014 LTIP at December 31, 2014.
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As of December 31, 2014, the Company expects $20 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 1.4 years, or fully upon a change in control.
Stock-based compensation expense is included in SG&A. The stock-based compensation expense for the years ended December 31, 2014, 2013 and 2012 was $23, $22 and $17, respectively. The tax benefit related to the expense for the years ended December 31, 2014, 2013 and 2012 was $8, $7 and $6, respectively.
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, 2014, the Company granted a total of 452,875 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, 2014 is as follows:
The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $54, $35 and $52, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $19.79, $20.11 and $18.67 per share, respectively.
Performance Shares. Performance Share awards in 2014, 2013 and 2012 were 65,010, 104,545 and 224,560 shares, respectively. A summary of the criteria for the Performance Share awards can be found in the table below.
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(1) Of the 65,010 Performance Shares awarded in 2014, 3,340 were awarded on February 10, 2014 and subject to different performance criteria than those noted within the table above. These Performance Shares have a 3 year performance period beginning January 1, 2014 and ending December 31, 2016, with 50 percent vesting on the three-year anniversary of the award date and 50 percent vesting on the four-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 four-year anniversary of the award date.
(2) 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.
(3) 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 notes (1) and (2) 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.
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A summary of the Company's nonvested Performance Shares as of December 31, 2014, and changes during the year then ended, is reflected in the table below.
(1)
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, 2014, 2013 and 2012 was $90.18, $75.00 and $71.73, 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, 2014, the Company granted a total of 80,245 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, 2014, and changes during the year then ended, is reflected in the table below.
(1)
Includes reductions due to employee terminations.
The weighted average grant date fair value of RSUs granted during the years ended December 31, 2014, 2013 and 2012 was $93.66, $74.30 and $71.45, 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-
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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 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 adjusted Company operating income, consolidated Company free cash flow and individual/business unit objectives which are funded based on achievement of consolidated adjusted Company EPS (and for the business unit Presidents, allocated based on achievement of certain financial metrics 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.
Effective December 31, 2012, the U.S. defined benefit pension plan was frozen. Participants under this plan have not been accruing service-based benefits and have been treated as inactive for accounting purposes. Effective January 1, 2013, the affected employees were eligible for additional contributions under an enhanced defined contribution plan.
In the fourth quarter of 2014, the Board approved and management communicated the termination of the Company's U.S. defined benefit pension plan effective December 31, 2014. Final asset distribution is expected to be complete in 2015 following Internal Revenue Service approval.
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.
Effective June 30, 2014, post-retirement medical plan was eliminated for participants aged 65 and above. As a result, the projected benefit obligation decreased by $17 in 2014.
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:
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The rate assumptions associated with the pension and post-retirement medical benefit plans to determine periodic pension costs are as follows:
The expected employer contributions and benefit payments are shown in the following table for the pension and post-retirement medical benefit plans:
(1)
The Company's U.S. defined benefit pension plan was terminated effective December 31, 2014, pending Internal Revenue Service approval. Final asset distribution is expected in 2015.
(2)
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 in both 2013 and 2012, 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
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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.
As a result of the U.S. pension plan termination, the benefit obligations are the best-estimate termination liability consisting of estimated annuity premiums and lump-sum payouts. Annuity Pricing Rate Composites were used to estimate annuity premiums. The 2014 discount rate is the weighted average implicit discount rate taking into account the estimated annuity premiums and lump-sum payouts.
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, 2014 are as follows:
Fair Value Measurements at December 31, 2014
Fair Value Measurements at December 31, 2013
(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
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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 had been to hold a mix of approximately 75 percent of investments in U.S. and International equities and 25 percent in bonds. In the third quarter of 2014, in light of the planned termination of the U.S. pension plan, the investment strategy was revised to hold 100% of investment assets in fixed income funds, which contain mainly government and investment-grade corporate 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 7.39 percent in 2014, 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.
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 $23, $22 and $11 for the years ended December 31, 2014, 2013 and 2012 respectively.
NOTE 17: Other Assets and Liabilities
Other current assets
Other current assets are summarized as follows:
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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:
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:
There were no common shares excluded from the calculation of weighted average shares for the year ended December 31, 2014. 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.
- 55 -
NOTE 19: Share Repurchases
At December 31, 2014 and 2013, the Company had repurchased a total of 102 million and 101 million shares, respectively, of an authorized repurchase program of 110 million shares. This authorization expired in November 2014 and was not extended due to the pending Merck KGaA transaction.
NOTE 20: Accumulated Other Comprehensive Income
The following table shows the components of AOCI for the twelve months ended December 31, 2014.
The following table shows the components of AOCI for the twelve months ended December 31, 2013.
- 56 -
The following table shows the components of AOCI for the twelve months ended December 31, 2012.
During 2014, amounts reclassified from AOCI include gains of $6 into costs of products and services sold and gains of $2 into SG&A. 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, amounts reclassified from AOCI include losses of $6 into SG&A. These adjustments are net of immaterial tax effects.
- 57 -
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, 2014 and 2013, 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, 2014. We also have audited the Company’s internal control over financial reporting as of December 31, 2014, 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, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Sigma-Aldrich Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission .
- 58 -
The scope of management’s assessment of internal control over financial reporting as of December 31, 2014, included all of the Company’s subsidiaries except Cell Marque Corporation (Cell Marque), which was acquired by the Company on October 31, 2014. Total assets related to Cell Marque of approximately $172 million and revenues for the period subsequent to the acquisition (October 31, 2014 - December 31, 2014) of approximately $5 million were included in the consolidated financial statements of Sigma-Aldrich Corporation and subsidiaries as of and for the year ended December 31, 2014. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Cell Marque as of December 31, 2014.
/s/ KPMG LLP
St. Louis, Missouri
February 12, 2015
- 59 -
Selected Quarterly Financial Data (Unaudited):
The following tables present certain unaudited consolidated quarterly financial information for each quarter of 2014 and 2013. 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 costs related to merger and acquisition activity of $11 and $6 for the quarters ended September 30 and December 31, 2014, respectively, and pretax restructuring charges of $1, $1, $14 and $1 for the quarters ended March 31, June 30, September 30 and December 31, 2014, respectively.
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.
- 60 -

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

ITEM 9A - CONTROLS AND PROCEDURES
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, 2014. 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, 2014 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, 2014. 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, 2014, our internal control over financial reporting is effective based on these criteria.
The scope of management's assessment of the effectiveness of internal control over financial reporting included all of the Company's subsidiaries except Cell Marque, which was acquired by the Company on October 31, 2014. Total assets related to Cell Marque of approximately $172 and revenues for the period subsequent to the acquisition (October 31, 2014 - December 31, 2014) of approximately $5 were included in our consolidated financial statements as of and for the year ended December 31, 2014.
KPMG LLP, our independent registered public accounting firm, has issued a report of the effectiveness of internal control over financial reporting which also excluded an evaluation of the internal control over financial reporting of Cell Marque as of December 31, 2014.

ITEM 9B - OTHER INFORMATION
Item 9B.
Other Information.
None.
- 61 -
PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
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 2015 Proxy Statement, which will be filed within 120 days after December 31, 2014, 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 2015 Proxy Statement is incorporated herein by reference.
Code of Ethics
Information under the caption "Related Party Disclosure" of the 2015 Proxy Statement is incorporated herein by reference.

ITEM 11 - EXECUTIVE COMPENSATION
Item 11.
Executive Compensation.
Information under the captions "Director Compensation," "Compensation Discussion and Analysis," "Compensation Committee Report" and "Information Concerning Executive Compensation" of the 2015 Proxy Statement is incorporated herein by reference.

ITEM 12 - SECURITY OWNERSHIP
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 2015 Proxy Statement is incorporated herein by reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2015 Proxy Statement is incorporated herein by reference.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services.
Information under the caption "Audit Firm Fee Summary" of the 2015 Proxy Statement is incorporated herein by reference.
- 62 -
PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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.
Exhibits.
See Index to Exhibits on page of this Report.
- 63 -
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)
By
/s/ Michael F. Kanan
February 12, 2015
Michael F. Kanan, Vice President and Corporate Controller
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By
/s/ Rakesh Sachdev
February 12, 2015
Rakesh Sachdev, President, Chief
Executive Officer and Director (Principal Executive Officer)
Date
By
/s/ Jan A. Bertsch
February 12, 2015
Jan A. Bertsch, Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date
By
/s/ Michael F. Kanan
February 12, 2015
Michael F. Kanan, Vice President and Corporate Controller (Principal Accounting Officer)
Date
By
/s/ Rebecca M. Bergman
February 12, 2015
Rebecca M. Bergman, Director
Date
By
/s/ Michael L. Marberry
February 12, 2015
Michael L. Marberry, Director
Date
By
/s/ W. Lee McCollum
February 12, 2015
W. Lee McCollum, Director
Date
By
/s/ Avi M. Nash
February 12, 2015
Avi M. Nash, Director
Date
By
/s/ J. Pedro Reinhard
February 12, 2015
J. Pedro Reinhard, Director
Date
By
/s/ D. Dean Spatz
February 12, 2015
D. Dean Spatz, Director
Date
By
/s/ Barrett A. Toan
February 12, 2015
Barrett A. Toan, Chairman and Director
Date
- 64 -
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed
Herewith
Form
Period
Ending
Exhibit
Filing
Date
2.1
Agreement and Plan of Merger, dated January 8, 2012, by and among Sigma-Aldrich Corporation, Sigma-Aldrich Holding LLC, Sigma-Aldrich Acquisition LLC, BioReliance Holdings, Inc., and Avista Capital Partners GP, LLC+
8-K
2.1
01/09/12
2.2
Agreement and Plan of Merger, dated as of September 22, 2014, by and among Sigma-Aldrich Corporation, Merck KGaA and Mario II Finance Corp.+
8-K
2.1
09/22/14
3.1
Certificate of Incorporation of Sigma-Aldrich Corporation, as amended
10-Q
06/30/14
3.1
07/24/14
3.2
Sigma-Aldrich Corporation By-Laws, as amended
10-Q
06/30/12
3.2
07/24/12
4.1
Indenture dated October 28, 2010, between Sigma-Aldrich Corporation and Deutsche Bank Trust Company Americas, as trustee
8-K
4.1
10/28/10
4.2
Form of Global Note representing the 3.375% Notes due November 1, 2020, dated as of October 28, 2010, between Sigma- Aldrich Corporation and Deutsche Bank Trust Company Americas, as Trustee
8-K
4.2
10/28/10
10.1
Form of Change in Control Agreement for Named Executive Officer (similar agreements also exist for certain executive officers)*
8-K
10(b)
11/16/10
10.2
Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
Def.
Proxy
Appendix A
03/14/11
10.3
Sigma-Aldrich Corporation 2014 Long-Term Incentive Plan*
Def.
Proxy
Appendix B
03/21/14
10.4
Form of Performance Share Award Agreement, issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
8-K
10(a)
02/14/11
10.5
Form of Incentive Stock Option Agreement issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
8-K
10(b)
02/14/11
10.6
Form of Non-Qualified Stock Option Agreement issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
8-K
10(c)
02/14/11
10.7
Form of Restricted Stock Unit Agreement issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
8-K
10(a)
02/23/11
10.8
Sigma-Aldrich Corporation Cash Bonus Plan*
8-K
10.1
05/06/10
10.9
Form of Performance Share Award Agreement (revised), issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
10-Q
03/31/12
10.1
04/24/12
10.10
Form of Restricted Stock Unit Agreement (annual grant), issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
10-Q
03/31/13
10.1
04/25/13
10.11
Form of Performance Share Award Agreement (revised to replace ROE with ROIC as performance metric), issued under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan*
10-Q
03/31/13
10.2
04/25/13
10.12
Executive Employment Agreement dated as of February 14, 2011, by and between Sigma-Aldrich Corporation and Rakesh Sachdev *
8-K
10(a)
02/14/11
- -
10.13
Amended and Restated Executive Employment Agreement, dated as of September 3, 2013, by and between Sigma-Aldrich Corporation and Rakesh Sachdev*
10-Q
09/30/13
10.1
10/22/13
10.14
Performance Share Award Agreement for Rakesh Sachdev under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan (Five-Year Vest), dated as of September 3, 2013*
10-Q
09/30/13
10.2
10/22/13
10.15
Performance Share Award Agreement for Rakesh Sachdev under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan (Three-Year Vest), dated as of September 3, 2013*
10-Q
09/30/13
10.3
10/22/13
10.16
Non-Qualified Stock Option Agreement for Rakesh Sachdev under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan, dated as of September 3, 2013*
10-Q
09/30/13
10.4
10/22/13
10.17
Description of Material Compensatory Arrangements Contained in Offer Letter Between Sigma-Aldrich Corporation and Jan A. Bertsch*
10-Q
03/31/12
10.2
04/24/12
10.18
Performance Share Award Agreement for Jan A. Bertsch under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan (Four-Year Vest), dated as of February 10, 2014*
10-Q
03/31/14
10.1
04/24/14
10.19
Performance Share Award Agreement for Jan A. Bertsch under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan (Three-Year Vest), dated as of February 10, 2014*
10-Q
03/31/14
10.2
04/24/14
10.20
Non-Qualified Stock Option Agreement for Jan A. Bertsch under the Sigma-Aldrich Corporation 2003 Long-Term Incentive Plan, dated as of February 10, 2014*
10-Q
03/31/14
10.3
04/24/14
10.21
Form of Indemnification Agreement (similar agreements also exist for certain executive officers)*
8-K
10(a)
11/16/10
10.22
European Revolving Credit Facility Agreement and Form due March 13, 2014, dated March 13, 2007, between Sigma-Aldrich Corporation and a syndicate of banks
8-K
10.1
03/14/07
10.23
Credit Agreement, dated as of May 10, 2012, by and among Sigma-Aldrich Corporation, as Borrower, certain lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent
10-Q
06/30/12
10.1
07/24/12
10.24
Amendment No. 1 to Credit Agreement, dated as of December 2, 2013, by and among Sigma-Aldrich Corporation, as Borrower, certain lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent
10-K
12/31/13
10.20
02/06/14
10.25
2005 Flexible Deferral Plan*
S-8
4.1
11/09/11
10.26
First Amendment to 2005 Flexible Deferral Plan*
S-8
4.2
11/09/11
10.27
Deferred Election Form to 2005 Flexible Deferral Plan (contained as Exhibit 1 to the plan)*
10-K
12/31/10
10(ab)
02/09/11
10.28
Supplemental Retirement Plan*
10-K
12/31/10
10(ac)
02/09/11
10.29
401(k) Restoration Plan*
10-K
12/31/13
10.25
02/06/14
Subsidiaries of Registrant
X
Consent of Independent Registered Public Accounting Firm
X
31.1
Certification of Chief Executive Officer required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act
X
31.2
Certification of Chief Financial Officer required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act
X
- -
32.1
CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
X
32.2
CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
*
Represents management contract or compensatory plan or arrangement
+
The Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. Note: This only applies to Exhibits under Item 601(b)(2) of Reg S-K
- -

Market Capitalization: 16496590.223144531
1-Year Return: -0.0004341671301517636
252-Day Return: $252_day_return