What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-04 · 272 added, 326 removed, 83 unchanged (88% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, including without limitation statements regarding:

projections of revenues, expenses, earnings, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position;

projections of revenues, expenses, earnings, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, and our liquidity position;

cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions or divestitures;

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assumptions underlying any of the foregoing;

any potential impact of the COVID-19 pandemic on the company’s business;

the expected impact of the COVID-19 pandemic on the company’s business;

and any other statements that address events or developments that Thermo Fisher intends or believes will or may occur in the future.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.

While the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company’s estimates change, and readers should not rely on those forward-looking statements as representing the company’s views as of any date subsequent to the date of the filing of this Quarterly Report.

Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth under the caption “Risk Factors” in the company’s Annual Report on Form 10-K for the year ended December 31, 2020 (which is on file with the SEC) as updated under the heading “Risk Factors” in Part II, Item 1A of this report on Form 10-Q.

A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Risk Factors” in the company’s Annual Report on Form 10-K for the year ended December 31, 2021 (which is on file with the SEC).

Important factors that could cause actual results to differ materially from those indicated by forward-looking statements include risks and uncertainties relating to:

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implementation of strategies for improving growth;

general economic conditions and related uncertainties, dependence on customers' capital spending policies and government funding policies;

general economic conditions and related uncertainties;

dependence on customers’ capital spending policies and government funding policies;

the effect of economic and political conditions and exchange rate fluctuations on international operations;

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any natural disaster, public health crisis or other catastrophic event;

and the effect of laws and regulations governing government contracts, as well as the possibility that expected benefits related to recent or pending acquisitions, including our pending acquisition of PPD, Inc., may not materialize as expected.

The company develops, manufactures and sells a broad range of products that are sold worldwide.

The company expands the product lines and services it offers by developing and commercializing its own technologies and by making strategic acquisitions of complementary businesses.

and the effect of laws and regulations governing government contracts, as well as the possibility that expected benefits related to recent or pending acquisitions may not materialize as expected.

The company refers to various amounts or measures not prepared in accordance with generally accepted accounting principles (non-GAAP measures).

These non-GAAP measures are further described and reconciled to their most directly comparable amount or measure under the section “ Non-GAAP Measures ” later in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

Thermo Fisher Scientific Inc.

enables customers to make the world healthier, cleaner and safer by helping them accelerate life sciences research, solve complex analytical challenges, improve patient health through diagnostics and the development and manufacture of life-changing therapies, and increase laboratory productivity.

Markets served include pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics.

The company’s operations fall into four segments (Note 4):

Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Services.

The company mobilized in early 2020 to support the COVID-19 pandemic response with products and services that help analyze, diagnose and protect from the virus.

However, the company saw a significant reduction in customer activity in several businesses by late March 2020 that materially adversely affected primarily the 2020 results of the Analytical Instruments segment and, to a lesser extent, some businesses within the company’s other three segments.

The negative impact has significantly lessened so far in 2021, but could worsen later in the year dependent on the success of global efforts to control and unwind from the pandemic and economic activity ramping up.

Several of the company’s businesses have had a significant increase in revenues due to sales of products and services addressing diagnosis and treatment of COVID-19, including test kits and, to a lesser extent, products and services for therapy and vaccine development and manufacturing.

While these positive impacts are expected to continue through 2021, the duration and extent of future revenues from such sales are uncertain and dependent primarily on customer testing as well as therapy and vaccine demand.

Sales in the third quarter of 2021 were $9.33 billion, an increase of $0.81 billion from the third quarter of 2020.

Excluding the effects of currency translation and acquisitions, revenues increased $0.59 billion (7%).

In the third quarter of 2021, total company operating income and operating income margin were $2.28 billion and 24.4%, respectively, compared with $2.43 billion and 28.5%, respectively, in 2020.

Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Biopharma Services.

Financial Highlights - First Quarter 2022 Compared with First Quarter 2021

Three months ended

April 2, April 3,

(Dollars in millions except per share amounts) 2022 2021 Change

$ 11,818 $ 9,906 19 %

GAAP operating income 2,821 3,049 (7) %

GAAP operating income margin 23.9 % 30.8 % (6.9) pt

Adjusted operating income (non-GAAP measure)

3,450 3,510 (2) %

Adjusted operating income margin (non-GAAP measure)

29.2 % 35.4 % (6.2) pt

GAAP diluted earnings per share attributable to Thermo Fisher Scientific Inc.

5.61 5.88 (5) %

Adjusted earnings per share (non-GAAP measure)

7.25 7.21 1 %

THERMO FISHER SCIENTIFIC INC.

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Overview (continued)

Net income decreased slightly to $1.90 billion in the third quarter of 2021 from $1.93 billion in the third quarter of 2020, primarily due to a decrease in operating income, offset in part by an increase in the income tax provision.

During the first nine months of 2021, the company’s cash flow from operations totaled $6.86 billion compared with $4.95 billion for 2020.

On January 15, 2021, the company acquired, within the Laboratory Products and Services segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS for $834 million in net cash consideration.

Organic Revenue Growth

Three months ended

April 2, 2022

Revenue growth 19 %

Impact of acquisitions 18 %

Impact of currency translation (2) %

Organic revenue growth* (non-GAAP measure)

* Results may not sum due to rounding

Since 2020, the Life Sciences Solutions and Specialty Diagnostics segments as well as the laboratory products business have supported COVID-19 diagnostic testing, scaling and evolving their molecular diagnostics solutions and plastic consumables businesses to respond to the ongoing COVID-19 pandemic.

The biosciences and bioproduction businesses have expanded their capacity to meet the needs of pharma and biotech customers as they have expanded their own production volumes to meet global vaccine manufacturing requirements.

Additionally, our pharma services business has provided our pharma and biotech customers with the services they needed to develop and produce vaccines and therapies globally.

While these positive impacts are expected to continue through 2022, the duration and extent of future revenues from such sales are uncertain and dependent primarily on customer testing as well as therapy and vaccine demand.

Sales of products related to COVID-19 testing were $1.68 billion and $2.45 billion in the first quarter of 2022 and 2021, respectively.

During the first quarter of 2022 demand from biotech and pharma customers was very strong, driven by our unique value proposition and trusted partner status.

We saw growth in the academic and government market due to a positive funding environment.

The industrial and applied market was particularly strong, led by robust demand from semiconductor and materials sciences customers.

The diagnostics and healthcare market declined due to decreased demand for COVID-19 testing products.

During the first quarter of 2022, sales growth was strong in the Asia Pacific region, particularly China, modest in North America, and flat in Europe.

The company continues to execute its proven growth strategy which consists of three pillars:

• A commitment to high-impact innovation,

• Scale in high-growth and emerging markets, and

• A unique value proposition to our customers.

GAAP operating income margin and adjusted operating income margin decreased in the first quarter of 2022 due primarily to the expected impact of incorporating recent acquisitions, lower COVID-19 testing volumes, and strategic growth investments.

This was partially offset by strong pricing realization and productivity improvements to address inflation.

GAAP operating income margin was also impacted by higher amortization expense as a result of 2021 acquisitions.

The company’s references to strategic growth investments generally refer to targeted spending for enhancing commercial capabilities, including expansion of geographic sales reach and e-commerce platforms, marketing initiatives, expanded service and operational infrastructure, research and development projects and other expenditures to enhance the customer experience, as well as incentive compensation and recognition for employees.

The company’s references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system including reduced costs resulting from implementing continuous improvement methodologies, global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, and low cost region manufacturing.

Notable Recent Acquisitions

On January 15, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS for $830 million in net cash consideration.

The European viral vector manufacturing business provides manufacturing services for vaccines and therapies to biotechnology companies and large biopharma customers.

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The acquisition enables the company to accelerate the availability of reliable and accurate advanced molecular diagnostics at the point of care.

On September 30, 2021, the company assumed operating responsibility, within the Laboratory Products and Services segment, of a new state-of-the-art biologics manufacturing facility in Lengnau, Switzerland from CSL Limited to perform pharma services for CSL with capacity to serve other customers as well.

The company expects to make fixed lease payments aggregating to $555 million (excluding renewals) from 2021 to 2041, with additional amounts dependent on the extent of revenues from customers of the facility other than CSL.

On April 15, 2021, the company entered into a definitive agreement under which it will acquire PPD, Inc.

for $47.50 per share for a total cash purchase price of $17.4 billion plus the assumption of approximately $3.5 billion of net debt.

PPD provides a broad range of clinical research and specialized laboratory services to enable customers to accelerate innovation and increase drug development productivity.

In 2020, PPD generated revenue of $4.7 billion.

Upon close of the transaction, PPD will become part of the Laboratory Products and Services Segment.

Shareholders holding in aggregate approximately 60% of the issued and outstanding shares of common stock of PPD on April 15, 2021, have approved the transaction by written consent.

No further action by other PPD shareholders is required to approve the transaction.

On July 16, 2021, the company and PPD each received a request for additional information and documentary materials from the FTC, in connection with the FTC’s review of the proposed merger.

The effect of the Second Request is to extend the waiting period imposed under the HSR Act until the 30th day after substantial compliance by the company and PPD with the Second Request, unless the waiting period is terminated earlier by the FTC.

As of October 22, 2021, both the company and PPD had certified substantial compliance with the Second Request.

The transaction remains subject to the satisfaction of customary closing conditions, including termination of the HSR Act waiting period and receipt of applicable regulatory approvals outside the U.S.

Subject to the satisfaction of the required closing conditions, we continue to expect the merger to be completed by the end of 2021.

The company intends to finance the purchase price with cash on hand and the net proceeds from issuances of debt, including the senior notes issued in October 2021.

The company is currently evaluating a future debt offering and the timing of such transaction is subject to market and other conditions.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2020, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements.

There have been no significant changes in the company's critical accounting policies during the first nine months of 2021.

THERMO FISHER SCIENTIFIC INC.

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AND RESULTS OF OPERATIONS

Overview (continued)

On September 30, 2021, the company assumed operating responsibility, within the Laboratory Products and Biopharma Services segment, of a new state-of-the-art biologics manufacturing facility in Lengnau, Switzerland from CSL Limited to perform pharma services for CSL with capacity to serve other customers as well.

On December 8, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, PPD, Inc., a U.S.-based global provider of clinical research services to the pharma and biotech industry, for $15.99 billion in net cash consideration and $43 million of equity awards exchanged.

The addition of PPD’s clinical research services enhances our offering to biotech and pharma customers by enabling them to accelerate innovation and increase their productivity within the drug development process.

In 2020, PPD generated revenues of $4.68 billion.

On December 30, 2021, the company acquired, within the Life Sciences Solutions segment, PeproTech, Inc., a U.S.

based developer and manufacturer of recombinant proteins, for $1.86 billion in net cash consideration.

PeproTech provides bioscience reagents known as recombinant proteins, including cytokines and growth factors.

The acquisition expands the segment’s bioscience offerings.

Results of Operations

Third Quarter 2021 Compared With Third Quarter 2020

The company’s management evaluates segment operating performance using operating income before certain charges/credits as defined in Note 4 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2021.

Accordingly, the following segment data are reported on this basis.

Three months ended

(In millions) October 2,

2021 September 26,

Change Currency

Translation Acquisitions/ Divestitures Operations

April 2, April 3,

(Dollars in millions) 2022 2021

Life Sciences Solutions

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Analytical Instruments

1,476 1,336 140 14 — 126

Specialty Diagnostics

1,362 1,430 (68) 7 — (75)

Laboratory Products and Services

3,487 3,112 375 29 26 320

(716) (781) 65 (4) — 69

Laboratory Products and Biopharma Services

Consolidated revenues

$ 11,818 $ 9,906

Sales in the third quarter of 2021 increased $809 million from the third quarter of 2020.

Aside from the effects of currency translation and acquisitions, revenues increased $588 million (7%) driven by higher demand.

Sales of products that address COVID-19 testing and treatment increased $0.08 billion to $2.05 billion in the third quarter of 2021.

Conditions were strong in each of the company’s end markets during the third quarter of 2021.

Sales were particularly strong in pharma and biotech driven by strong market dynamics, the company’s role in supporting customers across a wide range of therapeutic areas, and demand from biopharma customers as they continue to invest in their research and development pipelines.

Sales to customers in industrial and applied markets benefited from increased customer activity.

Customers in the academic and government market increased demand as a result of positive funding trends.

Sales to customers in diagnostics and healthcare markets were strong as customer demand for non-COVID-19 response products and services has nearly returned to pre-pandemic levels;

however, this strength was more than offset by lower COVID-19 testing year-over-year.

Sales growth was strong in Europe and the Asia-Pacific region and flat in North America during the third quarter of 2021.

In the third quarter of 2021, total company operating income and operating income margin were $2.28 billion and 24.4%, respectively, compared with $2.43 billion and 28.5%, respectively, in 2020.

The decrease in operating income was primarily due to sales mix and strategic growth investments in 2021 to support the company’s near and long-term growth, which were offset in part by profit on higher sales and productivity improvements.

Productivity improvements are calculated net of inflationary cost increases.

In the third quarter of 2021, the company recorded restructuring and other costs of $77 million.

In the third quarter of 2020, the company recorded restructuring and other costs of $37 million.

See Note 12 for restructuring charges expected in future periods.

Segment Results

Note 4 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2020, describes the company’s measurement of segment income.

There have been no significant changes in measurement methods used to determine segment income.

The company’s references to individual businesses contributing to fluctuations in segment revenues refer to those fluctuations that drove notable changes in amount and/or percentage and are identified in decreasing order of magnitude.

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Results of Operations (continued)

Three Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Life Sciences Solutions

$ 3,721 $ 3,424 9 %

Analytical Instruments

1,476 1,336 10 %

Specialty Diagnostics

1,362 1,430 (5) %

Laboratory Products and Services

3,487 3,112 12 %

(716) (781) (8) %

Consolidated Revenues

$ 9,330 $ 8,521 9 %

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) April 2,

2022 April 3,

Change Currency

Translation Acquisitions/ Divestitures

Revenues $ 4,231 $ 4,203 1 % (2) % 3 % (1) %

Segment income 2,176 2,279 (5) %

Life Sciences Solutions

$ 1,821 $ 1,879 (3) %

Segment income margin 51.4 % 54.2 % -2.8 pt

* Results may not sum due to rounding

The decrease in organic revenues in the first quarter of 2022 was primarily due to lower revenue in the genetic sciences business, driven by lower demand for testing to diagnose COVID-19, largely offset by strong growth in bioproduction and biosciences products.

The decrease in segment income margin resulted primarily from sales mix and strategic growth investments, offset in part by productivity improvements.

Analytical Instruments

Specialty Diagnostics

310 398 (22) %

Laboratory Products and Services

Subtotal Reportable Segments

2,778 2,803 (1) %

Cost of Revenues Charges

Selling, General and Administrative Charges (Credits)

Restructuring and Other Costs

Amortization of Acquisition-related Intangible Assets

Consolidated Operating Income

$ 2,278 $ 2,426 (6) %

Reportable Segments Income Margin

29.8 % 32.9 %

Consolidated Operating Income Margin

24.4 % 28.5 %

Income from the company’s reportable segments decreased 1% to $2.78 billion in the third quarter of 2021 due primarily to sales mix and strategic growth investments in 2021 to support the company’s near and long-term growth, which were offset in part by profit on higher sales and productivity improvements.

Life Sciences Solutions

Three Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) April 2,

2022 April 3,

Change Currency

Translation Acquisitions/ Divestitures

Revenues $ 1,518 $ 1,387 9 % (2) % — % 12 %

Operating Income Margin 48.9 % 54.9 % -6.0 pt

Sales in the Life Sciences Solutions segment increased $297 million in the third quarter of 2021.

Sales increased $148 million (4%) due to higher revenues at existing businesses and $90 million due to acquisitions.

The favorable effects of currency translation resulted in an increase in revenues of $59 million.

The increase in revenues at existing businesses was primarily driven by demand for biosciences and bioproduction products.

The decrease in operating income margin for the segment resulted primarily from strategic growth investments and sales mix, offset in part by profit on higher sales.

Segment income 301 272 10 %

Segment income margin 19.8 % 19.6 % 0.2 pt

* Results may not sum due to rounding

THERMO FISHER SCIENTIFIC INC.

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Results of Operations (continued)

Analytical Instruments

Three Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Revenues $ 1,476 $ 1,336 10 %

Operating Income Margin 17.8 % 12.8 % 5.0 pt

Sales in the Analytical Instruments segment increased $140 million in the third quarter of 2021.

Sales increased $126 million (9%) due to higher revenues at existing businesses.

The favorable effects of currency translation resulted in an increase in revenues of $14 million.

The increase in revenues at existing businesses was due to increased demand for materials and structural analysis instruments and, to a lesser extent, chromatography and mass spectrometry instruments.

The increase in operating income margin for the segment was primarily due to a $108 million charge in 2020 related to a long-term supply contract (discussed in Note 8), profit on higher sales and productivity improvements, offset in part by strategic growth investments.

The increase in organic revenues in the first quarter of 2022 was due to increased demand across all of the segment’s primary businesses, with particular strength in electron microscopy instruments and, to a lesser extent, chromatography and mass spectrometry.

The increase in segment income margin resulted primarily from profit on higher sales and, to a lesser extent, sales mix, offset by strategic growth investments.

Specialty Diagnostics

Three Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) April 2,

2022 April 3,

Change Currency

Translation Acquisitions/ Divestitures

Revenues $ 1,482 $ 1,615 (8) % (1) % — % (7) %

Operating Income Margin 22.7 % 27.9 % -5.2 pt

Sales in the Specialty Diagnostics segment decreased $68 million in the third quarter of 2021.

Sales decreased $75 million (-5%) due to lower revenues at existing businesses.

The favorable effects of currency translation resulted in an increase in revenues of $7 million.

The decrease in revenues at existing businesses was due to decreased demand for COVID-19 testing products, offset in part by increased demand for clinical diagnostics and immunodiagnostics products and transplant diagnostics products.

The decrease in operating income margin for the segment was primarily due to strategic growth investments, sales mix and the decrease in sales, offset in part by a $13 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1).

Laboratory Products and Services

Three Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Segment income 353 428 (17) %

Segment income margin 23.9 % 26.5 % -2.6 pt

* Results may not sum due to rounding

The decrease in organic revenues in the first quarter of 2022 was due to decreased demand, primarily driven by products addressing treatment of COVID-19, partially offset by growth in the healthcare markets channel, transplant diagnostics and clinical diagnostics businesses.

The decrease in segment income margin was primarily due to sales mix and, to a lesser extent, strategic growth investments, partially offset by productivity improvements.

Laboratory Products and Biopharma Services

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) April 2,

2022 April 3,

Change Currency

Translation Acquisitions/ Divestitures

Revenues $ 5,442 $ 3,597 51 % (2) % 47 % 6 %

Operating Income Margin 11.0 % 11.4 % -0.4 pt

Sales in the Laboratory Products and Services segment increased $375 million in the third quarter of 2021.

Sales increased $320 million (10%) due to higher revenues at existing businesses and $26 million due to an acquisition.

The favorable effects of currency translation resulted in an increase in revenues of $29 million.

The increase in revenues at existing businesses was primarily due to increased demand in each of the segment’s principal businesses:

the research and safety market channel, the pharma services business and the lab products business.

The decrease in operating income margin for the segment was primarily due to strategic growth investments, substantially offset by profit on higher sales and a $20 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1).

Other Income/Expense

The company reported other income of $14 million in the third quarter of 2021 compared to other expense of $39 million in the third quarter of 2020.

In 2021, other income includes $25 million of gains on investments, offset in part by $20 million for amortization of bridge loan commitment fees related to the pending acquisition of PPD.

In 2020, other expense includes

Segment income 620 531 17 %

Segment income margin 11.4 % 14.8 % -3.4 pt

* Results may not sum due to rounding

The increase in organic revenues in the first quarter of 2022 was primarily due to higher sales in the research and safety market channel and, to a lesser extent, laboratory product business.

The acquisition of PPD, the company’s clinical research business, contributed $1.66 billion of revenue during the first quarter.

The decrease in segment income margin was primarily due to strategic growth investments and sales mix, partially offset by profit on higher sales.

Non-operating Items

Three months ended

April 2, April 3,

(Dollars in millions) 2022 2021

Net interest expense

GAAP other income/(expense) (163) (183)

Adjusted other income/(expense) (non-GAAP measure)

GAAP tax rate 11.9 % 15.1 %

Adjusted tax rate (non-GAAP measure)

14.1 % 16.0 %

Net interest expense (interest expense less interest income) increased due primarily to the increase in debt to finance the acquisition of PPD and for general corporate purposes, offset in part by lower average interest rates.

See additional discussion under the caption “Liquidity and Capital Resources” below.

GAAP other income/(expense) and adjusted other income/(expense) includes currency transaction gains, losses on non-operating monetary assets and liabilities, and net periodic pension benefit cost/income, excluding the service cost component.

GAAP other income/(expense) in 2022 also includes $141 million of net losses on investments and $26 million of losses on the early extinguishment of debt (Note 7).

GAAP other income/(expense) in 2021 also includes $197 million of losses on the early extinguishment of debt.

The company’s GAAP and adjusted tax rates decreased in 2022 compared to 2021 primarily due to the benefits of our tax planning initiatives, including the release of the valuation allowance in a jurisdiction where the deferred tax assets are now expected to be realized.

The company’s GAAP tax rate was also impacted by changes in tax rates and higher amortization expense as a result of 2021 acquisitions.

THERMO FISHER SCIENTIFIC INC.

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Results of Operations (continued)

$37 million of costs for a terminated acquisition, primarily for amortization of bridge loan commitment fees and entering into currency hedging contracts.

Provision for Income Taxes

The company's effective tax rate was 12.5% for the third quarter of 2021.

During the quarter, the company recorded a $96 million income tax benefit related to a capital loss resulting from certain intra-entity transactions.

The company expects its effective tax rate for all of 2021 will be between 11% and 13% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits.

The effective tax rates in both 2022 and 2021 were also affected by relatively significant earnings in lower tax jurisdictions.

Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company’s cash payments for income taxes are higher than its income tax expense for financial reporting purposes and are expected to total approximately $1.35 billion in 2022.

In the third quarter of 2020, the company’s effective tax rate was 14.2%.

The company expects its GAAP effective tax rate in 2022 will be between 10% and 12% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits.

The effective tax rate can vary significantly from period to period as a result of discrete income tax factors and events.

The company expects its adjusted tax rate will be between 13% and 13.5% in 2022.

The company has operations and a taxable presence in approximately 70 countries outside the U.S.

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income tax provision among many countries, the company believes that a change in the statutory tax rate in any individual country is not likely to materially affect the company’s income tax provision or net income, aside from any resulting one-time adjustment to the company’s deferred tax balances to reflect a new rate.

First Nine Months of 2021 Compared With First Nine Months of 2020

Nine Months Ended

(In millions) October 2,

2021 September 26,

Change Currency

Translation Acquisitions/ Divestitures Operations

Life Sciences Solutions

$ 11,481 $ 7,800 $ 3,681 $ 300 $ 185 $ 3,196

Analytical Instruments

4,344 3,488 856 110 — 746

Specialty Diagnostics

4,212 3,376 836 76 — 760

Laboratory Products and Services

10,667 8,629 2,038 228 156 1,654

(2,195) (1,625) (570) (23) — (547)

Consolidated Revenues

$ 28,509 $ 21,668 $ 6,841 $ 691 $ 341 $ 5,809

Sales in the first nine months of 2021 increased $6.84 billion from the first nine months of 2020.

Aside from the effects of currency translation and acquisitions, revenues increased $5.81 billion (27%) primarily due to increased demand.

The first quarter of 2021 had three extra selling days compared to the first quarter of 2020.

The company's fourth quarter of 2021 will have four fewer selling days than the corresponding 2020 quarter.

Sales of products that address COVID-19 testing and treatment increased $3.34 billion to $6.78 billion in the first nine months of 2021.

Sales to customers in each of the company’s primary end markets grew.

Sales growth was strong in each of the company’s primary geographic areas.

In the first nine months of 2021, total company operating income and operating income margin were $7.49 billion and 26.3%, respectively, compared with $4.72 billion and 21.8%, respectively, in the first nine months of 2020.

The increase in operating income was primarily due to profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.

In the first nine months of 2021, the company recorded restructuring and other costs of $192 million (Note 12).

In the first nine months of 2020, the company recorded restructuring and other costs of $65 million.

Liquidity and Capital Resources

The company’s proven growth strategy has enabled it to generate free cash flow as well as access the capital markets.

The company deploys its capital primarily via mergers and acquisitions and secondarily via share buybacks and dividends.

April 2, December 31,

(In millions) 2022 2021

Cash and cash equivalents $ 2,752 $ 4,477

Total debt 33,255 34,870

Approximately half of the company’s cash balances and cash flows from operations are from outside the U.S.

The company uses its non-U.S.

cash for needs outside of the U.S.

including acquisitions, capacity expansion, and repayment of third-party foreign debt by foreign subsidiaries.

In addition, the company also transfers cash to the U.S.

using non-taxable returns of capital as well as dividends where the related U.S.

dividend received deduction or foreign tax credit equals any tax cost arising from the dividends.

As a result of using such means of transferring cash to the U.S., the company does not expect any material adverse liquidity effects from its significant non-U.S.

cash balances for the foreseeable future.

The company believes that its existing cash and cash equivalents and its future cash flow from operations together with available borrowing capacity under its revolving credit agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months.

As of April 2, 2022, the company’s short-term debt totaled $1.87 billion.

The company has a revolving credit facility with a bank group that provides up to $5.00 billion of unsecured multi-currency revolving credit (Note 7).

If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available.

As of April 2, 2022, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by approximately $4 million as a result of outstanding letters of credit.

THERMO FISHER SCIENTIFIC INC.

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AND RESULTS OF OPERATIONS

Results of Operations (continued)

Segment Results

Nine Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Life Sciences Solutions

$ 11,481 $ 7,800 47 %

Analytical Instruments

Liquidity and Capital Resources (continued)

Three months ended

April 2, April 3,

(In millions) 2022 2021

Net cash provided by operating activities

$ 2,202 $ 1,978

Specialty Diagnostics

Net cash used in investing activities

(670) (1,998)

Laboratory Products and Services

Net cash used in financing activities

(3,145) (4,850)

Free cash flow (non-GAAP measure)

Operating Activities

During the first three months of 2022, cash provided by income was offset in part by investments in working capital.

An increase in inventories used cash of $499 million, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $358 million primarily due to the timing of payments for compensation.

Cash payments for income taxes were $303 million during the first three months of 2022.

During the first three months of 2021, cash provided by income was offset in part by investments in working capital.

A decrease in accounts receivable provided $149 million of cash.

An increase in inventories used cash of $352 million, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $1.20 billion primarily due to the timing of payments for compensation.

Cash payments for income taxes were $542 million during the first three months of 2021.

Investing Activities

During the first three months of 2022, acquisitions used cash of $40 million.

The company’s investing activities also included the purchase of $640 million of property, plant and equipment for capacity and capability investments.

During the first three months of 2021, acquisitions used cash of $1.34 billion.

The company’s investing activities also included the purchase of $628 million of property, plant and equipment for capacity and capability investments.

Financing Activities

During the first three months of 2022, repayment of senior notes and net commercial paper activity used cash of $375 million and $633 million, respectively.

The company’s financing activities also included the repurchase of $2.00 billion of the company’s common stock (3.3 million shares) and the payment of $103 million in cash dividends.

On September 23, 2021, the Board of Directors authorized the repurchase of up to $3.00 billion of the company’s common stock.

At May 6, 2022, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

During the first three months of 2021 repayment of senior notes used cash of $2.80 billion.

The company’s financing activities also included the repurchase of $2.00 billion of the company’s common stock (4.1 million shares) and the payment of $87 million in cash dividends.

The company’s commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2021 and April 2, 2022.

The company expects that for all of 2022, expenditures for property, plant and equipment, net of disposals, will be between $2.5 and $2.7 billion.

Non-GAAP Measures

In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures such as organic revenue growth, which is reported revenue growth, excluding the impacts of revenues from acquired/divested businesses and the effects of currency translation.

We report organic revenue growth because Thermo Fisher management believes that in order to understand the company’s short-term and long-term financial trends, investors may wish to consider the impact of acquisitions/divestitures and foreign currency translation on revenues.

Thermo Fisher management uses organic revenue growth to forecast and evaluate the operational performance of the company as well as to compare revenues of current periods to prior periods.

We report adjusted operating income, adjusted operating income margin, adjusted other income/(expense), adjusted tax rate, and adjusted EPS.

We believe that the use of these non-GAAP financial measures, in addition to GAAP financial measures, helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company’s core operating performance, especially when comparing such results to previous periods, forecasts, and to the performance of our competitors.

Such measures are also used by management in their financial and operating decision-making and for compensation purposes.

To calculate these measures we exclude, as applicable:

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Non-GAAP Measures (continued)

• Certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition, significant transaction/acquisition-related costs, including changes in estimates of contingent acquisition-related consideration, and other costs associated with obtaining short-term financing commitments for pending/recent acquisitions.

We exclude these costs because we do not believe they are indicative of our normal operating costs.

• Costs/income associated with restructuring activities, such as reducing overhead and consolidating facilities.

We exclude these costs because we believe that the costs related to restructuring activities are not indicative of our normal operating costs.

• Equity in earnings/losses of unconsolidated entities;

impairments of long-lived assets;

and certain other gains and losses that are either isolated or cannot be expected to occur again with any predictability, including gains/losses on investments, the sale of businesses, product lines, and real estate, significant litigation-related matters, curtailments/settlements of pension plans, and the early retirement of debt.

We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods.

• The expense associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of up to 20 years.

Exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.

• The tax impacts of the above items and the impact of significant tax audits or events (such as changes in deferred taxes from enacted tax rate changes), the latter of which we exclude because they are outside of our normal operations and difficult to forecast accurately for future periods.

We report free cash flow, which is operating cash flow excluding net capital expenditures, to provide a view of the continuing operations’ ability to generate cash for use in acquisitions and other investing and financing activities.

The company also uses this measure as an indication of the strength of the company.

Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure.

The non-GAAP financial measures of Thermo Fisher Scientific’s results of operations and cash flows included in this Form 10-Q are not meant to be considered superior to or a substitute for Thermo Fisher Scientific’s results of operations prepared in accordance with GAAP.

Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth within the “Overview” and “Results of Operations” sections and below.

Three months ended

April 2, April 3,

(Dollars in millions except per share amounts) 2022 2021

Reconciliation of adjusted operating income

GAAP operating income

$ 2,821 $ 3,049

Consolidated Revenues

Cost of revenues adjustments (a)

Selling, general and administrative expenses adjustments (b)

Restructuring and other costs (c)

Amortization of acquisition-related intangible assets 609 423

Adjusted operating income (non-GAAP measure)

$ 3,450 $ 3,510

Segment Income

Life Sciences Solutions

Reconciliation of adjusted operating income margin

GAAP operating income margin 23.9 % 30.8 %

Cost of revenues adjustments (a) 0.1 % 0.1 %

Selling, general and administrative expenses adjustments (b) 0.0 % 0.1 %

Restructuring and other costs (c) 0.0 % 0.1 %

Amortization of acquisition-related intangible assets 5.2 % 4.3 %

Adjusted operating income margin ( non-GAAP measure)

29.2 % 35.4 %

Analytical Instruments

Specialty Diagnostics

Laboratory Products and Services

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Non-GAAP Measures (continued)

Three months ended

April 2, April 3,

(Dollars in millions except per share amounts) 2022 2021

Reconciliation of adjusted other income/(expense)

GAAP other income/(expense) $ (163) $ (183)

Adjustments (d) 167 197

Adjusted other income/(expense) (non-GAAP measure)

Reconciliation of adjusted tax rate

GAAP tax rate 11.9 % 15.1 %

Adjustments (e) 2.2 % 0.9 %

Adjusted tax rate (non-GAAP measure)

14.1 % 16.0 %

Subtotal Reportable Segments

Reconciliation of adjusted earnings per share

GAAP diluted earnings per share (EPS) attributable to Thermo Fisher Scientific Inc.

$ 5.61 $ 5.88

Cost of Revenues Charges

Selling, General and Administrative Charges

Restructuring and Other Costs

Cost of revenues adjustments (a) 0.03 0.02

Selling, general and administrative expenses adjustments (b) 0.02 0.04

Restructuring and other costs (c) 0.01 0.04

Amortization of acquisition-related intangible assets 1.54 1.06

(1,295) (1,256)

Consolidated Operating Income

$ 7,490 $ 4,723 59 %

Reportable Segments Income Margin

Other income/expense adjustments (d) 0.42 0.50

Provision for income taxes adjustments (e) (0.43) (0.33)

Equity in earnings/losses of unconsolidated entities 0.05 —

Adjusted EPS (non-GAAP measure)

$ 7.25 $ 7.21

Consolidated Operating Income Margin

Reconciliation of free cash flow

GAAP net cash provided by operating activities $ 2,202 $ 1,978

Purchases of property, plant and equipment (640) (628)

Proceeds from sale of property, plant and equipment 2 5

Free cash flow (non-GAAP measure)

$ 1,564 $ 1,355

Income from the company’s reportable segments increased 49% to $8.98 billion in the first nine months of 2021 due primarily to profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.

Life Sciences Solutions

Nine Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Revenues $ 11,481 $ 7,800 47 %

Operating Income Margin 50.7 % 48.6 % 2.1 pt

Sales in the Life Sciences Solutions segment increased $3.68 billion in the first nine months of 2021.

Sales increased $3.20 billion (41%) due to higher revenues at existing businesses and $185 million due to acquisitions.

The favorable effects of currency translation resulted in an increase in revenues of $300 million.

The increase in revenues at existing businesses was driven by a combination of increased demand for testing to diagnose COVID-19 with higher sales of biosciences products and genetic sciences products and strong demand in each of the segment’s businesses.

The increase in operating income margin for the segment resulted primarily from profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Results of Operations (continued)

Analytical Instruments

Nine Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Revenues $ 4,344 $ 3,488 25 %

Operating Income Margin 18.8 % 13.7 % 5.1 pt

Sales in the Analytical Instruments segment increased $856 million in the first nine months of 2021.

Sales increased $746 million (21%) due to higher revenues at existing businesses.

The favorable effects of currency translation resulted in an increase in revenues of $110 million.

The increase in revenues at existing businesses was due to increased demand for products sold by each of the segment’s primary businesses with particular strength in chromatography and mass spectrometry instruments as well as materials and structural analysis instruments.

The increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, a $108 million charge in 2020 related to a long-term supply contract (discussed in Note 8) and productivity improvements in 2021, offset in part by strategic growth investments and, to a lesser extent, sales mix.

Specialty Diagnostics

Nine Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Revenues $ 4,212 $ 3,376 25 %

Operating Income Margin 23.3 % 25.1 % -1.8 pt

Sales in the Specialty Diagnostics segment increased $836 million in the first nine months of 2021.

Sales increased $760 million (23%) due to higher revenues at existing businesses.

The favorable effects of currency translation resulted in an increase in revenues of $76 million.

The increase in revenues at existing businesses was due to higher demand primarily driven by products addressing treatment of COVID-19, with particular strength in sales of products sold through the segment's healthcare market channel, and to a lesser extent, clinical diagnostics and immunodiagnostics products.

The decrease in operating income margin for the segment was primarily due to inflationary cost increases, net of productivity improvements, sales mix and strategic investments, offset in part by profit on higher sales and, to a lesser extent, a $13 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1).

Laboratory Products and Services

Nine Months Ended

October 2, September 26,

(Dollars in millions) 2021 2020 Change

Revenues $ 10,667 $ 8,629 24 %

Operating Income Margin 12.8 % 10.8 % 2.0 pt

Sales in the Laboratory Products and Services segment increased $2.04 billion to $10.67 billion in 2021.

Sales increased $1.65 billion (19%) due to higher revenues at existing businesses and $156 million due to an acquisition.

The favorable effects of currency translation resulted in an increase in revenues of $228 million.

The increase in revenues at existing businesses was primarily due to increased demand in each of the segment’s principal businesses with particular strength in products sold through its research and safety market channel and, to a lesser extent, its laboratory products business and pharma services business.

The increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, acquisitions, sales mix and a $20 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1), offset in part by strategic growth investments.

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Results of Operations (continued)

Other Expense

The company reported other expense of $174 million and $36 million in the first nine months of 2021 and 2020, respectively.

In 2021, other expense includes $197 million of losses on the early extinguishment of debt and $26 million for amortization of bridge loan commitment fees related to the pending acquisition of PPD, offset in part by $23 million of gains on investments.

In 2020, other expense includes $81 million of costs related to a terminated acquisition, primarily for entering into currency hedging contracts and amortization of loan commitment fees.

Provision for Income Taxes

The company recorded a $906 million provision for income taxes in the first nine months of 2021.

During the second and third quarters of 2021, the company recorded income tax benefits on intra-entity transactions totaling $258 million.

The company recorded a $456 million provision for income taxes in the first nine months of 2020.

In the second quarter of 2020, the company implemented foreign tax credit planning in Sweden which resulted in $96 million of foreign tax credits, with no related incremental U.S.

income tax expense.

(a) Adjusted results in 2022 and 2021 exclude charges for the sale of inventories revalued at the date of acquisition.

(b) Adjusted results in 2022 and 2021 exclude certain third-party expenses, principally transaction/integration costs related to recent acquisitions and charges/credits for changes in estimates of contingent acquisition consideration.

(c) Adjusted results in 2022 and 2021 exclude restructuring and other costs consisting principally of severance, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations.

Adjusted results in 2021 also exclude $13 million of charges for compensation due to employees at recently acquired businesses at the date of acquisition.

(d) Adjusted results in 2022 and 2021 exclude net gains/losses on investments and losses on the early extinguishment of debt.

(e) Adjusted provision for income taxes in 2022 and 2021 excludes incremental tax impacts for the pre-tax reconciling items and incremental tax impacts as a result of tax rate changes.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2021 describe the significant accounting estimates and policies used in preparation of the consolidated financial statements.

There have been no significant changes in the company’s critical accounting policies during the first three months of 2022.

Recent Accounting Pronouncements

A description of recently issued accounting standards is included under the heading “ Recent Accounting Pronouncements ” in Note 1.

Liquidity and Capital Resources

Consolidated working capital (current assets less current liabilities) was $16.97 billion at October 2, 2021, compared with $11.65 billion at December 31, 2020.

Included in working capital were cash and cash equivalents of $12.03 billion at October 2, 2021 and $10.33 billion at December 31, 2020.

First Nine Months of 2021

Cash provided by operating activities during the first nine months of 2021 was $6.86 billion.

Cash provided by income was offset in part by investments in working capital.

A decrease in accounts receivable provided $111 million of cash.

An increase in inventories used cash of $916 million, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $582 million primarily due to the timing of payments for interest and compensation.

Cash payments for income taxes increased to $1.56 billion during the first nine months of 2021, compared with $656 million in the first nine months of 2020.

During the first nine months of 2021, the company’s investing activities used $3.24 billion of cash.

Acquisitions used cash of $1.52 billion.

The company's investing activities also included the purchase of $1.69 billion of property, plant and equipment for capacity and capability investments.

The company’s financing activities used $1.89 billion of cash during the first nine months of 2021.

Repayment of senior notes used cash of $2.81 billion.

Issuance of debt provided $3.12 billion of cash.

The company’s financing activities also included the repurchase of $2.00 billion of the company's common stock and the payment of $292 million in cash dividends.

On November 5, 2020, the Board of Directors authorized the repurchase of up to $2.50 billion of the company’s common stock.

On September 23, 2021 the Board of Directors replaced the existing authorization to repurchase the company’s common stock, of which $500 million was remaining, with a new authorization to repurchase up to $3.00 billion of the company’s common stock.

At November 4, 2021, authorization remained for $3.00 billion of future repurchases of the company’s common stock.

As discussed in Note 7, early in October 2021, the company issued senior notes for net proceeds of $11.83 billion.

The company's commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2020 and October 2, 2021 except for the agreement to acquire PPD, discussed in Note 2.

The company expects that for all of 2021, expenditures for property, plant and equipment, net of disposals, will be between $2.5 and $2.7 billion.

As of October 2, 2021, the company’s short-term debt totaled $19 million.

The company has a revolving credit facility with a bank group that provides up to $3.00 billion of unsecured multi-currency revolving credit (Note 7).

As of October 2, 2021, no borrowings were outstanding

THERMO FISHER SCIENTIFIC INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

under the company’s revolving credit facility, although available capacity was reduced by approximately $4 million as a result of outstanding letters of credit.

Approximately half of the company’s cash balances and cash flows from operations are from outside the U.S.

The company uses its non-U.S.

cash for needs outside of the U.S.

including acquisitions and repayment of acquisition-related intercompany debt to the U.S.

In addition, the company also transfers cash to the U.S.

using non-taxable returns of capital as well as dividends where the related U.S.

dividend received deduction or foreign tax credit equals any tax cost arising from the dividends.

As a result of using such means of transferring cash to the U.S., the company does not expect any material adverse liquidity effects from its significant non-U.S.

cash balances for the foreseeable future.

First Nine Months of 2020

Cash provided by operating activities was $4.95 billion during the first nine months of 2020.

Cash provided by income was offset in part by investments in working capital.

Increases in accounts receivable and inventories used cash of $858 million and $427 million, respectively, primarily to support growth in sales.

Changes in other assets and other liabilities provided cash of $1.04 billion primarily due to the timing of payments for compensation and income taxes.

Cash payments for income taxes totaled $656 million.

During the first nine months of 2020, the company’s investing activities used $884 million of cash, principally for the purchase of property, plant and equipment.

The company’s financing activities provided $1.01 billion of cash during the first nine months of 2020.

Issuance of senior notes provided cash of $3.46 billion.

Repayment of senior notes used cash of $712 million.

The company’s financing activities also included the repurchase of $1.50 billion of the company’s common stock and the payment of $250 million in cash dividends.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis