THERMO FISHER SCIENTIFIC INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Reference is made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations to Notes to the Consolidated Financial Statements , which begin on page F-1 of this report. Management’s Discussion and Analysis of Financial Condition and Results of Operations for 2020 is included in Item 7 of the company’s 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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. Overview 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, increase laboratory productivity, and improve patient health through 18 THERMO FISHER SCIENTIFIC INC. diagnostics and the development and manufacture of life-changing therapies. Markets served include pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics. The company’s operations fall into four segments (Note 4): Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Biopharma Services. Consolidated Results (Dollars in millions except per share amounts) 2022 2021 Change Revenues $ 44,915 $ 39,211 15 % GAAP operating income $ 8,393 $ 10,028 (16) % GAAP operating income margin 18.7 % 25.6 % (6.9) pt Adjusted operating income (non-GAAP measure) $ 10,985 $ 12,138 (9) % Adjusted operating income margin (non-GAAP measure) 24.5 % 31.0 % (6.5) pt GAAP diluted earnings per share attributable to Thermo Fisher Scientific Inc. $ 17.63 $ 19.46 (9) % Adjusted earnings per share (non-GAAP measure) $ 23.24 $ 25.13 (8) % Organic Revenue Growth Revenue growth 15 % Impact of acquisitions 18 % Impact of currency translation (3) % Organic revenue growth* (non-GAAP measure) 0 % * 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 2023, 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 $3.11 billion and $7.26 billion in 2022 and 2021, respectively. During 2022 demand from pharma and biotech customers was very strong, driven by our differentiated customer value proposition and trusted partner status. We saw good growth in the academic and government market as we remain well positioned to meet customer needs. The industrial and applied market was strong, driven by robust demand for our analytical instruments serving our semi-conductor and materials science customers. The diagnostics and healthcare market declined due to decreased demand for COVID-19 testing products. During 2022, robust 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, strong sales were more than offset during 2022 due to lower COVID-19 testing demand. Contributions to organic revenue during 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: • Developing high-impact, innovative new products, • Leveraging our scale in high-growth and emerging markets, and • Delivering a unique value proposition to our customers. GAAP operating income margin and adjusted operating income margin decreased in 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. 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 19 THERMO FISHER SCIENTIFIC INC. 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. The European viral vector manufacturing business provides manufacturing services for vaccines and therapies to biotechnology companies and large biopharma customers. The acquisition expands the segment’s capabilities for cell and gene vaccines and therapies. On February 25, 2021, the company acquired, within the Life Sciences Solutions segment, Mesa Biotech, Inc., a U.S.-based molecular diagnostic company. Mesa Biotech has developed and commercialized a PCR based rapid point-of-care testing platform available for detecting infectious diseases including COVID-19. The acquisition enables the company to accelerate the availability of reliable and accurate advanced molecular diagnostics at the point of care. 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. 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. On December 30, 2021, the company acquired, within the Life Sciences Solutions segment, PeproTech, Inc., a U.S.-based developer and manufacturer of recombinant proteins. PeproTech provides bioscience reagents known as recombinant proteins, including cytokines and growth factors. The acquisition expands the segment’s bioscience offerings. On January 3, 2023, the company acquired, within the Specialty Diagnostics segment, The Binding Site Group, a U.K.-based provider of specialty diagnostic assays and instruments to improve the diagnosis and management of blood cancers and immune system disorders. The acquisition expands the segment’s portfolio with the addition of pioneering innovation in diagnostics and monitoring for multiple myeloma. Segment Results The company’s management evaluates segment operating performance using operating income before certain charges/credits as defined in Note 4. Accordingly, the following segment data are reported on this basis. (Dollars in millions) 2022 2021 Revenues Life Sciences Solutions $ 13,532 $ 15,631 Analytical Instruments 6,624 6,069 Specialty Diagnostics 4,763 5,659 Laboratory Products and Biopharma Services 22,511 14,862 Eliminations (2,515) (3,010) Consolidated revenues $ 44,915 $ 39,211 Life Sciences Solutions Organic* (non-GAAP measure) (Dollars in millions) 2022 2021 Total Change Currency Translation Acquisitions/ Divestitures Revenues $ 13,532 $ 15,631 (13) % (3) % 1 % (12) % Segment income $ 5,582 $ 7,817 (29) % Segment income margin 41.2 % 50.0 % (8.8) pt The decrease in organic revenues in 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 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. 20 THERMO FISHER SCIENTIFIC INC. Analytical Instruments Organic* (non-GAAP measure) (Dollars in millions) 2022 2021 Total Change Currency Translation Acquisitions/ Divestitures Revenues $ 6,624 $ 6,069 9 % (5) % 0 % 14 % Segment income 1,507 1,197 26 % Segment income margin 22.8 % 19.7 % 3.1 pt The increase in organic revenues in 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. Specialty Diagnostics Organic* (non-GAAP measure) (Dollars in millions) 2022 2021 Total Change Currency Translation Acquisitions/ Divestitures Revenues $ 4,763 $ 5,659 (16) % (3) % 0 % (13) % Segment income 1,024 1,280 (20) % Segment income margin 21.5 % 22.6 % (1.1) pt The decrease in organic revenues in 2022 was 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 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 Organic* (non-GAAP measure) (Dollars in millions) 2022 2021 Total Change Currency Translation Acquisitions/ Divestitures Revenues $ 22,511 $ 14,862 51 % (3) % 45 % 10 % Segment income 2,872 1,844 56 % Segment income margin 12.8 % 12.4 % 0.4 pt The increase in organic revenues in 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. PPD, the company’s clinical research business, contributed $7.11 billion of revenue during 2022. The increase in segment income margin was primarily due to the benefit of recent acquisitions, profit on higher sales, and productivity improvements, offset in part by strategic growth investments. Segment income margin in 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 Non-operating Items (Dollars in millions) 2022 2021 Net interest expense $ 454 $ 493 GAAP other income/(expense) (104) (694) Adjusted other income/(expense) (non-GAAP measure) 13 38 GAAP tax rate 9.0 % 12.5 % Adjusted tax rate (non-GAAP measure) 13.0 % 14.6 % 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 2022 also includes $160 million of net losses on investments, $26 million of losses on the 21 THERMO FISHER SCIENTIFIC INC. early extinguishment of debt (Note 10), partially offset by $67 million of net gains on derivative instruments to address certain foreign currency risks and $2 million of net settlement gains on pension plans. GAAP other income/(expense) in 2021 also includes $767 million of losses on the early extinguishment of debt and $36 million of financing costs associated with obtaining bridge financing commitments in connection with the agreement to acquire PPD (Note 2), offset in part by $66 million of net gains on investments. The company’s GAAP and adjusted tax rates decreased in 2022 compared to 2021 primarily due to releases of valuation allowances of $87 million in 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 (see Note 8). The company’s 2021 GAAP and adjusted tax rates were also impacted by income tax benefits on intra-entity transactions totaling $284 million. The effective tax rate in both 2022 and 2021 was 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 were higher than its income tax expense for financial reporting purposes and totaled $1.23 billion and $2.18 billion in 2022 and 2021, respectively. The company expects its GAAP effective tax rate in 2023 will be between 7% and 9% 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 approximately 11% in 2023. The company has operations and a taxable presence in approximately 70 countries outside the U.S. Some of these countries have lower tax rates than the U.S. The company’s ability to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries. Based on the dispersion of the company’s non-U.S. 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. 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. December 31, December 31, (In millions) 2022 2021 Cash and cash equivalents $ 8,524 $ 4,477 Total debt 34,488 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 December 31, 2022, the company’s short-term debt totaled $5.58 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 10). 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 December 31, 2022, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit. 22 THERMO FISHER SCIENTIFIC INC. (In millions) 2022 2021 Net cash provided by operating activities $ 9,154 $ 9,312 Net cash used in investing activities (2,159) (21,932) Net cash (used in) provided by financing activities (2,810) 6,581 Free cash flow (non-GAAP measure) 6,935 6,809 Operating Activities During 2022, cash provided by income was offset in part by investments in working capital. Increases in accounts receivable and inventories used cash of $0.43 billion and $0.83 billion, respectively, primarily to support growth in sales. An increase in accounts payable provided cash of $0.65 billion. Cash payments for income taxes were $1.23 billion during 2022. During 2021, cash provided by income was offset in part by investments in working capital. Increases in accounts receivable and inventories used cash of $0.20 billion and $1.07 billion, respectively, primarily to support growth in sales. An increase in accounts payable provided cash of $0.48 billion. Changes in other assets and other liabilities used cash of $0.72 billion primarily due to the timing of tax and incentive compensation payments. Cash payments for income taxes were $2.18 billion during 2021. The company is contingently liable with respect to certain legal proceedings and related matters. An unfavorable outcome that differs materially from current accrual estimates, if any, for one or more of the matters described under the heading “ Product Liability, Workers Compensation and Other Personal Injury Matters, ” in Note 12 could have a material adverse effect on the company’s financial position as well as its results of operations and cash flows. Investing Activities During 2022, acquisitions used cash of $0.04 billion. The company’s investing activities were principally for the purchase of property, plant and equipment for capacity and capability investments. During 2021, acquisitions used cash of $19.40 billion. The company’s investing activities also included the purchase of $2.52 billion of property, plant and equipment. The company expects that for all of 2023, expenditures for property, plant and equipment, net of disposals, will be approximately $2.0 billion. Financing Activities During 2022, issuance of senior notes provided $3.19 billion in cash. Repayment of senior notes and net commercial paper activity used cash of $0.38 billion and $2.16 billion, respectively. The company’s financing activities also included the repurchase of $3.00 billion of the company’s common stock (5.3 million shares) and the payment of $0.46 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. All of the shares of common stock repurchased by the company during the fourth quarter of 2022 were purchased under this program, depleting the 2021 authorization. On November 10, 2022, the Board of Directors authorized the repurchase of up to $4.00 billion of the company’s common stock. Early in the first quarter of 2023, the company repurchased $3.00 billion of the company's common stock (5.2 million shares). At February 23, 2023, authorization remained for $1.00 billion of future repurchases of the company’s common stock. During 2021, issuance of senior notes provided $18.14 billion of cash. A net increase in commercial paper obligations provided cash of $2.51 billion. Repayment of debt used cash of $11.74 billion, including $4.30 billion to repay the debt assumed in the acquisition of PPD. 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 $0.40 billion in cash dividends. In addition to the obligations on the balance sheet at December 31, 2022, which include, but are not limited to, debt (Note 10), unrecognized tax benefits (Note 8), operating leases (Note 11), pension obligations (Note 7) and contingent consideration (Note 14), the company has entered into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods, services or fixed assets and to pay royalties (Note 12). 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 23 THERMO FISHER SCIENTIFIC INC. 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: • 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 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; 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/law 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 the company’s results of operations and cash flows included in this Form 10-K 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. (Dollars in millions except per share amounts) 2022 2021 Reconciliation of adjusted operating income and adjusted operating income margin GAAP operating income $ 8,393 18.7 % $ 10,028 25.6 % Cost of revenues adjustments (a) 46 0.1 % 8 0.0 % Selling, general and administrative expenses adjustments (b) 37 0.1 % 144 0.4 % Restructuring and other costs (c) 114 0.3 % 197 0.5 % Amortization of acquisition-related intangible assets 2,395 5.3 % 1,761 4.5 % Adjusted operating income (non-GAAP measure) $ 10,985 24.5 % $ 12,138 31.0 % Reconciliation of adjusted other income/(expense) GAAP other income/(expense) $ (104) $ (694) Adjustments (d) 117 732 Adjusted other income/(expense) (non-GAAP measure) $ 13 $ 38 24 THERMO FISHER SCIENTIFIC INC. (Dollars in millions except per share amounts) 2022 2021 Reconciliation of adjusted tax rate GAAP tax rate 9.0 % 12.5 % Adjustments (e) 4.0 % 2.1 % Adjusted tax rate (non-GAAP measure) 13.0 % 14.6 % Reconciliation of adjusted earnings per share GAAP diluted earnings per share (EPS) attributable to Thermo Fisher Scientific Inc. $ 17.63 $ 19.46 Cost of revenues adjustments (a) 0.12 0.02 Selling, general and administrative expenses adjustments (b) 0.09 0.36 Restructuring and other costs (c) 0.29 0.50 Amortization of acquisition-related intangible assets 6.07 4.43 Other income/expense adjustments (d) 0.30 1.84 Provision for income taxes adjustments (e) (1.70) (1.49) Equity in earnings/losses of unconsolidated entities 0.44 0.01 Adjusted EPS (non-GAAP measure) $ 23.24 $ 25.13 Reconciliation of free cash flow GAAP net cash provided by operating activities $ 9,154 $ 9,312 Purchases of property, plant and equipment (2,243) (2,523) Proceeds from sale of property, plant and equipment 24 20 Free cash flow (non-GAAP measure) $ 6,935 $ 6,809 (a) Adjusted results exclude charges for the sale of inventories revalued at the date of acquisition. Adjusted results in 2022 also exclude $27 million of 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, impairments of long-lived assets, charges/credits for environmental-related matters, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations. Adjusted results in 2022 also exclude $14 million of gain on the sale of intellectual property. Adjusted results in 2021 also exclude $122 million of charges for impairments of acquired intangible assets and $35 million of charges for compensation due to employees at recently acquired businesses at the date of acquisition. (d) Adjusted results exclude net gains/losses on investments and losses on the early extinguishment of debt. Adjusted results in 2022 also exclude $67 million of net gains on derivative instruments to address certain foreign currency risks and $2 million of net settlement gains for pension plans. Adjusted results in 2021 also exclude $36 million of charges for amortization of bridge loan commitment fees related to a pending acquisition. (e) Adjusted provision for income taxes 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 2022). Adjusted results in 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 The company’s discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to acquisition-related measurements and income taxes. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 25 THERMO FISHER SCIENTIFIC INC. The company believes the following represent its critical accounting policies and estimates used in the preparation of its financial statements: Acquisition-related Measurements Business Combinations The company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of the company’s acquisitions, requires the use of significant judgment with regard to (i) the fair value and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. The company estimates the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which include estimates of customer attrition and technology obsolescence rates. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. See Note 2 for additional information about our recent business combinations. Goodwill and Indefinite-lived Intangible Assets The company evaluates goodwill and indefinite-lived intangible assets for impairment annually and when events occur or circumstances change that would more likely than not reduce the fair value of an asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts, among others. Goodwill and indefinite-lived intangible assets totaled $41.20 billion and $1.24 billion, respectively, at December 31, 2022 (see Note 1 for additional information). Estimates of discounted future cash flows require assumptions related to revenue and operating income growth rates, discount rates and other factors. For the goodwill impairment tests, the company also considers (i) peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the respective reporting units and (ii) estimated weighted average costs of capital. Different assumptions from those made in the company’s analysis could materially affect projected cash flows and the company’s evaluation of goodwill and indefinite-lived intangible assets for impairment. Except as described below, the company performed the quantitative goodwill impairment test for all of its reporting units and indefinite-lived intangible assets. Determinations of fair value based on projections of discounted cash flows, which decreased from the prior year projections primarily due to higher discount rates, and based on peer revenues and earnings trading multiples, which also decreased from the prior year, were sufficient to conclude that no impairments of goodwill or indefinite-lived intangible assets existed at the end of the tenth fiscal month of 2022, the date of the company’s annual impairment testing. There were no interim impairments of goodwill or indefinite-lived intangible assets in 2022. There can be no assurance, however, that adverse events or conditions will not cause the fair values of these assets to decline. Should the fair values of the company’s reporting units or indefinite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rates, charges for impairment may be necessary. With the completion of the PPD acquisition in December 2021, the company established two new reporting units that solely consist of the legacy PPD businesses, the book carrying values of which equaled their fair values as of the acquisition date. During its annual 2022 goodwill impairment assessments, the company performed qualitative assessments of these reporting units and determined that no events had occurred and no circumstances had changed that would more-likely-than-not reduce the fair values of the reporting units below their carrying amounts. As a result, the company did not perform the quantitative goodwill impairment tests for these reporting units. Given that the fair values of the reporting units were unlikely to be substantially in excess of their carrying values as of the annual 2022 assessment date, relatively small decreases in future cash flows versus anticipated results, decreases in peer trading multiples and/or increases in weighted average costs of capital could result in impairment of goodwill. The reporting units consisting of the legacy PPD businesses had $13.41 billion of goodwill, and an overall carrying value of $19.30 billion as of December 31, 2022. Definite-lived Intangible Assets Definite-lived intangible assets totaled $16.21 billion at December 31, 2022 (see Note 1 for additional information). Certain definite-lived intangible assets have largely independent cash flows. The company reviews these definite-lived intangible assets for impairment individually when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows, which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. Most of the company’s definite-lived intangible assets are used in conjunction with other assets, such as property, plant and equipment and operating lease right-of-use assets. In these situations, the company considers 26 THERMO FISHER SCIENTIFIC INC. the asset groups to be the units of account for impairment testing. The company recorded impairments of $0.12 billion in 2021 (see Note 16). Income Taxes Unrecognized Tax Benefits In the ordinary course of business there is inherent uncertainty in quantifying the company’s income tax positions. The company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the company has recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Should tax return positions that the company expects are sustainable not be sustained upon audit, the company could be required to record an incremental tax provision for such taxes. The company’s liability for these unrecognized tax benefits totaled $0.57 billion at December 31, 2022, compared to $1.12 billion at December 31, 2021, primarily as a result of an audit settlement (see Note 8). The company operates in numerous countries under many legal forms and, as a result, is subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the company to interpret the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, currency exchange restrictions or the company’s level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and hence the company’s net income. Valuation Allowances The company estimates the degree to which tax assets will result in a benefit, after consideration of all positive and negative evidence, and provides a valuation allowance for tax assets that it believes will more likely than not go unused. In situations in which the company has been able to determine that its deferred tax assets will be realized, that determination generally relies on future reversals of taxable temporary differences and expected future taxable income. If it becomes more likely than not that a tax asset will be used, the company reverses the related valuation allowance. Any such reversals are recorded as a reduction of the company’s tax provision. The company’s tax valuation allowance totaled $1.32 billion at December 31, 2022, compared to $0.97 billion at December 31, 2021, primarily driven by the assessment of additional tax assets resulting from an audit settlement during the year (see Note 8). Should the company’s actual future taxable income by tax jurisdiction vary from estimates, additional allowances or reversals thereof may be necessary. Recent Accounting Pronouncements A description of recently issued accounting standards is included under the heading “ Recent Accounting Pronouncements ” in Note 1.