What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 99 added, 92 removed, 309 unchanged (38% of the section changed)

37 unchanged sentences

AND RESULTS OF OPERATIONS

Overview (continued)

Financial Highlights

Three months ended Six months ended

July 2, July 3, July 2, July 3,

Consolidated Results

Three months ended Nine months ended

October 1, October 2, October 1, October 2,

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

11 unchanged sentences

Organic Revenue Growth

Three months ended Six months ended

July 2, 2022 July 2, 2022

Three months ended Nine months ended

October 1, 2022 October 1, 2022

Revenue growth 14 % 17 %

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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 $0.63 billion and $1.42 billion in the second quarter of 2022 and 2021, respectively, and $2.31 billion and $3.87 billion in the first six months of 2022 and 2021, respectively.

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

Sales of products related to COVID-19 testing were $0.44 billion and $1.57 billion in the third quarter of 2022 and 2021, respectively, and $2.75 billion and $5.44 billion in the first nine months of 2022 and 2021, respectively.

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

We saw growth in the academic and government market as we remain well positioned to meet customer needs.

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

The industrial and applied market was strong, driven by robust demand for our analytical instruments.

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

During the second quarter and first six months of 2022, sales growth was strong in the Asia Pacific region, particularly China, and in North America.

Sales declined in Europe during the second quarter and first six months of 2022 due to lower COVID-19 testing demand.

During the third quarter and first nine months of 2022, strong sales growth in North America and the Asia Pacific region, including China, was partially offset by a decline in COVID-19 testing demand.

In Europe, sales declined during the third quarter and first nine months of 2022 due to lower COVID-19 testing demand.

Contributions to organic revenue during the third quarter and first nine months of 2022 were driven by the Laboratory Products and Biopharma Services and Analytical Instruments segments, as offset by the Life Sciences Solutions and Specialty Diagnostics segments.

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

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• Delivering a unique value proposition to our customers.

GAAP operating income margin and adjusted operating income margin decreased in the second quarter and first six months 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 across all segments to address higher inflation.

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

This was partially offset by strong pricing realization across all segments to address higher inflation while also driving strong productivity.

GAAP operating income margin in 2022 was also impacted by higher amortization expense as a result of 2021 acquisitions.

In the second quarter of 2021, GAAP operating income margin was impacted by an impairment of acquired technology.

THERMO FISHER SCIENTIFIC INC.

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AND RESULTS OF OPERATIONS

Overview (continued)

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.

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The acquisition expands the segment’s bioscience offerings.

Results of Operations

Segment Results

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 Six months ended

July 2, July 3, July 2, July 3,

Three months ended Nine months ended

October 1, October 2, October 1, October 2,

(Dollars in millions) 2022 2021 2022 2021

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AND RESULTS OF OPERATIONS

Results of Operations (continued)

Life Sciences Solutions

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 35.1 % 48.9 % -13.8 pt

The decrease in organic revenues in the second quarter of 2022 was primarily due to lower revenue in the genetic sciences business, driven by moderation in testing demand to diagnose COVID-19, partially offset by strong growth in the bioproduction business.

The decrease in organic revenues in the third quarter of 2022 was primarily due to lower revenue in the genetic sciences business, driven by moderation in testing demand to diagnose COVID-19, partially offset by very strong growth in the bioproduction business.

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

Six months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

Nine months ended Organic* (non-GAAP measure)

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 43.3 % 50.7 % -7.4 pt

The decrease in organic revenues in the first six months of 2022 was driven by a combination of moderation in testing demand to diagnose COVID-19 with lower sales of genetic sciences products, largely offset by strong demand in the bioproduction and biosciences businesses.

The decrease in organic revenues in the first nine months of 2022 was primarily due to lower revenue in the genetic sciences business, driven by moderation in testing demand to diagnose COVID-19, partially offset by very strong growth in the bioproduction business.

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

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Three months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 23.8 % 17.8 % 6.0 pt

The increase in organic revenues in the second quarter of 2022 was due to increased demand in the electron microscopy and chromatography and mass spectrometry businesses.

The increase in segment income margin resulted primarily from strong volume pull through and productivity improvements, offset in part by strategic growth investments.

Six months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

The increase in organic revenues in the third quarter of 2022 was driven by increased demand across each of the segment’s businesses, with particular strength in the chromatography and mass spectrometry and electron microscopy businesses.

The increase in segment income margin resulted primarily from profit on higher sales, favorable business mix, and productivity improvements, offset in part by strategic growth investments.

Nine months ended Organic* (non-GAAP measure)

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 21.7 % 18.8 % 2.9 pt

The increase in organic revenues in the first six months of 2022 was due to increased demand in the electron microscopy and chromatography and mass spectrometry businesses.

The increase in segment income margin resulted primarily from strong volume pull through, productivity improvements and business mix, offset in part by strategic growth investments.

The increase in organic revenues in the first nine months of 2022 was due to increased demand across all the segment’s businesses, with particular strength in the electron microscopy and chromatography and mass spectrometry businesses.

The increase in segment income margin resulted primarily from profit on higher sales, productivity improvements and business mix, offset in part by strategic growth investments.

THERMO FISHER SCIENTIFIC INC.

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AND RESULTS OF OPERATIONS

Results of Operations (continued)

Specialty Diagnostics

Three months ended Organic* (non-GAAP measure)

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Segment income margin 20.6 % 22.7 % -2.1 pt

The decrease in organic revenues in the second quarter of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the immunodiagnostics and microbiology businesses, as well as our healthcare market channel.

The impact of lower COVID-19 testing volume on segment income margin was more than offset by strong productivity improvements and positive business mix.

Six months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

The decrease in organic revenues in the third quarter of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the transplant diagnostics and immunodiagnostics businesses.

The impact of lower COVID-19 testing volume on segment income margin was partially offset by positive business mix and productivity improvements.

Segment income margin in the third quarter of 2021 was also impacted by a $13 million credit to cost of product revenue as a result of changing the method of accounting for inventories.

Nine months ended Organic* (non-GAAP measure)

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 22.4 % 23.3 % -0.9 pt

The decrease in organic revenues in the first six months of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the immunodiagnostics and transplant diagnostics businesses.

The decrease in segment income margin was primarily due to lower COVID-19 testing volume, largely offset by productivity improvements.

The decrease in organic revenues in the first nine months of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the immunodiagnostics and transplant diagnostics businesses.

The decrease in segment income margin was primarily due to lower COVID-19 testing volume, largely offset by productivity improvements and positive business mix.

Segment income margin in the first nine months of 2021 was also impacted by a $13 million credit to cost of product revenue as a result of changing the method of accounting for inventories.

Laboratory Products and Biopharma Services

Three months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 13.0 % 11.0 % 2.0 pt

The increase in organic revenues in the second quarter of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the research and safety market channel and pharma services business and, to a lesser extent, the laboratory products business.

The acquisition of PPD, the company’s clinical research business, contributed $1.72 billion of revenue during the second quarter.

The increase in segment income margin was primarily due to strong productivity and the benefit of recent acquisitions, largely offset by strategic growth investments and unfavorable business mix.

Six months ended Organic* (non-GAAP measure)

(Dollars in millions) July 2,

The increase in organic revenues in the third quarter of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the pharma services business and research and safety market channel.

The acquisition of PPD, the company’s clinical research business, contributed $1.82 billion of revenue during the third quarter of 2022.

The increase in segment income margin was primarily due to favorable business mix, productivity improvements, and the benefit of recent acquisitions, partially offset by strategic growth investments.

Segment income margin in the third quarter of 2021 was also impacted by a $20 million credit to cost of product revenue as a result of changing the method of accounting for inventories.

Nine months ended Organic* (non-GAAP measure)

(Dollars in millions) October 1,

2022 October 2,

Change Currency

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Segment income margin 12.3 % 12.8 % -0.5 pt

The increase in organic revenues in the first six months of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the research and safety market channel and pharma services business and, to a lesser extent, the laboratory products business.

The acquisition of PPD, the company’s clinical research business, contributed $3.38 billion of revenue during the first six months of 2022.

The decrease in segment income margin was primarily due to business mix and strategic growth investments, offset in part by the benefit of recent acquisitions.

The increase in organic revenues in the first nine months of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the research and safety market channel and pharma services business.

The acquisition of PPD, the company’s clinical research business, contributed $5.20 billion of revenue during the first nine months of 2022.

The decrease in segment income margin was primarily due to strategic growth investments and business mix, offset in part by the benefit of recent acquisitions.

Segment income margin in the first nine months of 2021 was also impacted by a $20 million credit to cost of product revenue as a result of changing the method of accounting for inventories.

* Results may not sum due to rounding

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AND RESULTS OF OPERATIONS

Results of Operations (continued)

Non-operating Items

Three months ended Six months ended

July 2, July 3, July 2, July 3,

Three months ended Nine months ended

October 1, October 2, October 1, October 2,

(Dollars in millions) 2022 2021 2022 2021

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11.8 % 14.2 % 13.1 % 14.9 %

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, largely offset by lower average interest rates.

Net interest expense (interest expense less interest income) decreased due primarily to lower average interest rates on debt and higher average interest rates on cash balances, partially offset by the increase in debt to finance the acquisition of PPD and for general corporate purposes.

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 the second quarter and first six months of 2022 includes $18 million of net gains and $123 million of net losses on investments, respectively.

In the first six months of 2022 and 2021 GAAP other income/(expense) also includes $26 million and $197 million, respectively, of losses on the early extinguishment of debt (Note 7).

The company’s GAAP and adjusted tax rates decreased in 2022 compared to 2021 primarily due to releases of valuation allowances of $88 million and $175 million for the three and six months ended July 2, 2022, respectively, in jurisdictions where the deferred tax assets are now expected to be realized.

The company’s 2022 GAAP tax rate was also impacted by changes in tax rates and higher amortization expense as a result of 2021 acquisitions.

In the second quarter of 2021 the company recorded a $162 million income tax benefit on an intra-entity transfer of fixed assets.

GAAP other income/(expense) in the third quarter and first nine months of 2022 also includes $12 million and $135 million, respectively, of net losses on investments.

GAAP other income/(expense) in the third quarter and first nine months of 2021 also includes $25 million and $23 million, respectively, of net gains on investments.

In the first nine months of 2022 and 2021 GAAP other income/(expense) also includes $26 million and $197 million, respectively, of losses on the early extinguishment of debt (Note 7).

The company’s GAAP and adjusted tax rates decreased in 2022 compared to 2021 primarily due to releases of valuation allowances of $189 million in the first nine months of 2022 in jurisdictions where the deferred tax assets are now expected to be realized.

The company’s 2022 GAAP tax rate was also impacted by changes in tax rates and higher amortization expense as a result of 2021 acquisitions, as well as a net benefit of $208 million resulting from tax audit settlements in the third quarter of 2022 (see Note 5).

During the third quarter and first nine months of 2021 the company recorded income tax benefits on intra-entity transactions of $96 million and $258 million, respectively.

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

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

July 2, December 31,

(In millions) 2022 2021

(In millions) October 1, 2022 December 31, 2021

Cash and cash equivalents $ 2,919 $ 4,477

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AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

cost arising from the dividends.

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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 July 2, 2022, the company’s short-term debt totaled $1.01 billion.

As of October 1, 2022, the company’s short-term debt totaled $1.01 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 July 2, 2022, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit.

Six months ended

July 2, July 3,

(In millions) 2022 2021

As of October 1, 2022, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit.

Nine months ended

(In millions) October 1, 2022 October 2, 2021

Net cash provided by operating activities

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Operating Activities

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

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

An increase in inventories used cash of $1.12 billion, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $0.73 billion primarily due to the timing of payments for compensation.

Cash payments for income taxes were $0.83 billion during the first six months of 2022.

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

A decrease in accounts receivable provided $0.25 billion of cash.

Cash payments for income taxes were $1.05 billion during the first nine months of 2022.

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

An increase in inventories used cash of $0.92 billion, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $0.58 billion primarily due to the timing of payments for compensation and income taxes.

Cash payments for income taxes were $1.27 billion during the first six months of 2021.

Cash payments for income taxes were $1.56 billion during the first nine months of 2021.

Investing Activities

During the first six months of 2022, acquisitions used cash of $0.04 billion.

During the first nine months of 2022, acquisitions used cash of $0.04 billion.

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

During the first six months of 2021, acquisitions used cash of $1.43 billion.

During the first nine months of 2021, 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.

Financing Activities

During the first six months of 2022, repayment of senior notes and net commercial paper activity used cash of $0.38 billion and $2.46 billion, respectively.

During the first nine months of 2022, repayment of senior notes and net commercial paper activity used cash of $0.38 billion and $2.46 billion, 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 $0.34 billion 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 August 5, 2022, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

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

In the fourth quarter of 2022, the company repurchased $1.00 billion of the company’s common stock (2.0 million shares), depleting the 2021 authorization.

As discussed in Note 7, in October 2022 the company issued senior notes for net proceeds of $735 million.

During the first nine months of 2021 repayment of senior notes used cash of $2.80 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 (4.1 million shares) and the payment of $0.29 billion 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 July 2, 2022.

The company’s commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially subsequent to December 31, 2021, except for the agreement to acquire The Binding Site Group.

The company expects that for all of 2022, expenditures for property, plant and equipment, net of disposals, will be between $2.3 and $2.5 billion.

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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.

• Costs/income associated with restructuring activities and large-scale abandonments of product lines, such as reducing overhead and consolidating facilities.

We exclude these costs because we believe that the costs related to restructuring activities and large-scale abandonment of product lines are not indicative of our normal operating costs.

• Equity in earnings/losses of unconsolidated entities;

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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.

The non-GAAP financial measures of the company’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 the company’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.

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AND RESULTS OF OPERATIONS

Non-GAAP Measures (Continued)

Three months ended Six months ended

July 2, July 3, July 2, July 3,

Three months ended Nine months ended

October 1, October 2, October 1, October 2,

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

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Restructuring and other costs (c)

24 119 26 133

Amortization of acquisition-related intangible assets 594 423 1,803 1,295

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AND RESULTS OF OPERATIONS

Non-GAAP Measures (Continued)

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

(b) Adjusted results 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 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 Q1 2021 and Q2 2021 also exclude $13 million of charges for compensation due to employees at recently acquired businesses at the date of acquisition and $110 million of charges for impairment of acquired technology, respectively.

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

Adjusted results in Q2 2021 also exclude amortization of bridge loan commitment fees related to a pending acquisition.

(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/law changes.

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

Adjusted results in the third quarter of 2022 also exclude $22 million of charges for inventory write-downs associated with large-scale abandonment of product lines.

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

(c) Adjusted results exclude restructuring and other costs consisting principally of severance, impairment of long-lived assets, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations.

Adjusted results in the third quarter of 2021 also exclude $4 million of credits for the settlement of environmental-related matters, offset in part by $3 million of net charges for pre-acquisition related matters.

Adjusted results in the first nine months of 2021 also exclude $13 million of charges for compensation due to employees at recently acquired businesses at the date of acquisition and $110 million of charges for impairment of acquired technology.

(d) Adjusted results exclude net gains/losses on investments.

Adjusted results in the first nine months of 2022 and 2021 also exclude $26 million and $197 million, respectively, of losses on the early extinguishment of debt.

Adjusted results in the third quarter of and first nine months of 2021 also exclude $20 million and $26 million, respectively, of amortization of bridge loan commitment fees related to a pending acquisition.

(e) Adjusted provision for income taxes in 2022 and 2021 excludes incremental tax impacts for the reconciling items between GAAP and adjusted net income, incremental tax impacts as a result of tax rate/law changes and the tax impacts from audit settlements (including a $658 million benefit from an audit settlement in the third quarter of 2022).

Adjusted results in the third quarter of 2022 also exclude a $423 million charge for the impact of deferred tax realizability assessments as a result of audit settlements.

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 six months of 2022.

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

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis