What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 138 added, 82 removed, 237 unchanged (48% of the section changed)

11 unchanged sentences

assumptions underlying any of the foregoing;

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

the COVID-19 pandemic;

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

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

the duration and severity of the COVID-19 pandemic;

the COVID-19 pandemic;

the need to develop new products and adapt to significant technological change;

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Consolidated Results

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(Dollars in millions except per share amounts) 2023 2022 Change

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July 1, July 2, July 1, July 2,

(Dollars in millions except per share amounts) 2023 2022 Change 2023 2022 Change

$ 10,687 $ 10,970 (3) % $ 21,397 $ 22,788 (6) %

GAAP operating income 1,578 2,001 (21) % 3,141 4,822 (35) %

GAAP operating income margin 14.6 % 23.9 % (9.3) pt

GAAP operating income margin 14.8 % 18.2 % (3.4) pt 14.7 % 21.2 % (6.5) pt

Adjusted operating income (non-GAAP measure)

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Adjusted operating income margin (non-GAAP measure)

21.8 % 29.2 % (7.4) pt

22.2 % 23.7 % (1.5) pt 22.0 % 26.6 % (4.6) pt

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

4 unchanged sentences

Organic Revenue Growth

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April 1, 2023

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July 1, 2023 July 1, 2023

Revenue growth (3) % (6) %

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* 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.

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These positive impacts are expected to continue at much lower levels in 2023 as customer testing as well as therapy and vaccine demand declines.

Sales of products related to COVID-19 testing were $141 million and $1.68 billion in the first quarter of 2023 and 2022, respectively.

During the first quarter of 2023, we saw good demand from pharma and biotech customers driven by our trusted partner status.

Sales of products related to COVID-19 testing were $0.08 billion and $0.63 billion in the second quarter of 2023 and 2022, respectively, and $0.22 billion and $2.31 billion in the first six months of 2023 and 2022, respectively.

During the second quarter of 2023, growth was flat from pharma and biotech customers driven by lower demand associated with COVID-19 vaccine and therapies, the impact on customers from a more challenging macroeconomic environment and the slow economic recovery in China.

We saw very strong growth across the academic and government market with great customer adoption of our high-impact innovation.

The industrial and applied market grew slightly, driven by continued strong demand for our analytical instruments serving our semiconductor and materials science customers, partially offset by the impact of a slow economic recovery in China.

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

During the second quarter of 2023, sales growth in North America and Asia Pacific declined, while Europe grew slightly.

Sales growth in all regions was impacted by decreased demand in 2023 for COVID-19 related products and the impact on customers from a more challenging macroeconomic environment.

Asia Pacific was impacted by the slow economic recovery in China.

Contributions to organic revenue during the second quarter of 2023 from the Laboratory Products and Biopharma Services and Analytical Instruments segments were more than offset by declines in the Life Sciences Solutions and Specialty Diagnostics segments.

During the first six months of 2023, we saw good demand from pharma and biotech customers driven by our trusted partner status, partially offset by the impact on customers from a more challenging macroeconomic environment.

We saw broad based strength across the academic and government market.

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

During the first quarter of 2023, sales growth in North America and Europe declined, while Asia Pacific grew slightly.

Sales growth in all regions was impacted by decreased demand in 2023 for COVID-19 related products.

Contributions to organic revenue during the first quarter of 2023 from the Laboratory Products and Biopharma Services and Analytical Instruments segments were more than offset by declines in the Life Sciences Solutions and Specialty Diagnostics segments.

During the first six months of 2023, sales growth in all major regions declined due to decreased demand for COVID-19 related products.

Contributions to organic revenue during the first six months of 2023 from the Laboratory Products and Biopharma Services and Analytical Instruments segments were more than offset by declines in 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 the first quarter of 2023 due primarily to lower COVID-19 related volumes, unfavorable business mix and strategic growth investments.

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 the first quarter of 2023 was also impacted by restructuring and other charges incurred for headcount reductions and facility consolidations in an effort to streamline operations (Note 9), as well as the impact of fixed intangible amortization expense on lower revenues.

• High-impact innovation,

• Our trusted partner status with customers, and

• Our unparalleled commercial engine.

GAAP operating income margin and adjusted operating income margin decreased in the second quarter and first six months of 2023 due primarily to lower COVID-19 related revenue, strategic growth investments and effects of currency translation.

This was partially offset by strong productivity improvements and strong pricing realization across all segments to address higher inflation.

GAAP operating income margin in the second quarter and first six months of 2023 was also impacted by restructuring and other charges incurred for headcount reductions and facility consolidations in an effort to streamline operations and limit the impact of expected lower revenue (Note 9).

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.

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initiatives, a lower cost structure following restructuring actions including headcount reductions and consolidation of facilities, and low cost region manufacturing.

Notable Recent Acquisitions

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The acquisition expands the segment’s portfolio with the addition of pioneering innovation in diagnostics and monitoring for multiple myeloma.

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Segment Results

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

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Analytical Instruments

1,749 1,607 3,472 3,125

Specialty Diagnostics

1,109 1,101 2,217 2,583

Laboratory Products and Biopharma Services

5,831 5,537 11,594 10,979

(465) (567) (961) (1,422)

Consolidated revenues

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Three months ended Organic* (non-GAAP measure)

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2023 April 2,

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Segment income margin 33.2 % 40.3 % -7.1 pt

The decrease in organic revenues in the first quarter of 2023 was primarily due to lower revenue in the genetic sciences and biosciences businesses, driven by moderation in COVID-19 related revenue.

The decrease in segment income margin resulted primarily from unfavorable business mix and significantly lower COVID-19 related revenue.

These decreases were partially offset by strong productivity.

The decrease in organic revenues in the second quarter of 2023 was primarily due to moderation in COVID-19 related revenue and, to a lesser extent, the impact on customers from a more challenging macroeconomic environment.

The decrease in segment income margin resulted primarily from significantly lower COVID-19 related revenue and business mix.

These decreases were partially offset by very strong productivity improvements.

Six months ended Organic* (non-GAAP measure)

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Change Currency

Translation Acquisitions/ Divestitures

Revenues $ 5,075 $ 7,523 (33) % (1) % 0 % (31) %

Segment income 1,653 3,503 (53) %

Segment income margin 32.6 % 46.6 % -14.0 pt

The decrease in organic revenues in the first six months of 2023 was primarily due to moderation in COVID-19 related revenue and, to a lesser extent, the impact on customers from a more challenging macroeconomic environment.

The decrease in segment income margin resulted primarily from significantly lower COVID-19 related revenue and business mix, partially offset by very strong productivity improvements.

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Analytical Instruments

Three months ended Organic* (non-GAAP measure)

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Segment income margin 24.7 % 21.4 % 3.3 pt

The increase in organic revenues in the first quarter of 2023 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, strong productivity improvements, and favorable business mix, offset in part by strategic growth investments.

The increase in organic revenues in the second quarter of 2023 was driven by increased demand across each of the segment’s businesses, with particular strength in the electron microscopy business.

The increase in segment income margin resulted primarily from very strong productivity improvements, strong volume and business mix, offset in part by strategic growth investments and effects of currency translation.

Six months ended Organic* (non-GAAP measure)

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Translation Acquisitions/ Divestitures

Revenues $ 3,472 $ 3,125 11 % (2) % 0 % 13 %

Segment income 853 645 32 %

Segment income margin 24.6 % 20.6 % 4.0 pt

The increase in organic revenues in the first six months of 2023 was due to increased demand across all 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 strong volume, business mix, and very strong productivity improvements, offset in part by strategic growth investments and effects of currency translation.

Specialty Diagnostics

Three months ended Organic* (non-GAAP measure)

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Segment income margin 26.7 % 22.1 % 4.6 pt

The decrease in organic revenues in the first quarter of 2023 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 impact of lower COVID-19 testing volume on segment income margin was partially offset by favorable business mix and strong productivity improvements.

The decrease in organic revenues in the second quarter of 2023 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, offset in part by underlying growth in the microbiology, immunodiagnostics and transplant diagnostics businesses.

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

Six months ended Organic* (non-GAAP measure)

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Translation Acquisitions/ Divestitures

Revenues $ 2,217 $ 2,583 (14) % (1) % 5 % (18) %

Segment income 577 596 (3) %

Segment income margin 26.0 % 23.1 % 2.9 pt

The decrease in organic revenues in the first six months of 2023 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by underlying growth in the immunodiagnostics and transplant diagnostics businesses.

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

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Three months ended Organic* (non-GAAP measure)

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Segment income margin 14.1 % 12.5 % 1.6 pt

The increase in organic revenues in the first quarter of 2023 was primarily due to higher sales in the pharma services and clinical research businesses.

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

The increase in organic revenues in the second quarter of 2023 was primarily due to higher sales in the clinical research and pharma services businesses.

The increase in segment income margin was primarily due to very strong productivity improvements, partially offset by effects of currency translation and strategic growth investments.

Six months ended Organic* (non-GAAP measure)

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Translation Acquisitions/ Divestitures

Revenues $ 11,594 $ 10,979 6 % (1) % 0 % 6 %

Segment income 1,617 1,311 23 %

Segment income margin 14.0 % 11.9 % 2.1 pt

The increase in organic revenues in the first six months of 2023 was primarily due to higher sales in the pharma services and clinical research businesses.

The increase in segment income margin was primarily due to very strong productivity improvements.

* Results may not sum due to rounding

Non-operating Items

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Net interest expense

$ 148 $ 112 $ 302 $ 230

GAAP other income/(expense) — 28 (46) (135)

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

(1) 10 (1) 14

GAAP tax rate 3.6 % 10.4 % 3.5 % 11.2 %

1 unchanged sentence

10.0 % 13.0 % 10.0 % 13.6 %

Weighted average diluted shares 388 394 388 394

Net interest expense (interest expense less interest income) increased due primarily to the company’s capital deployment initiatives, which included financing stock buybacks and the acquisition of The Binding Site Group (Note 2).

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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 first quarter of 2023 and 2022 also includes $43 million and $141 million, respectively, of net losses on investments.

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

The company’s GAAP and adjusted tax rates decreased in the first quarter of 2023 compared to 2022 primarily due to tax planning initiatives, which included a $144 million tax benefit resulting from a capital loss generated as part of an intra-entity transaction in the first quarter of 2023.

The company’s 2022 GAAP and adjusted tax rates were impacted by the release of an $82 million valuation allowance in a jurisdiction where the deferred tax assets are now expected to be realized.

The effective tax rates in both the first quarter of 2023 and 2022 were also affected by relatively significant earnings in lower tax jurisdictions.

GAAP other income/(expense) in the first six months of 2023 also includes $43 million of net losses on investments.

GAAP other income/(expense) in the second quarter and first six months of 2022 also includes $18 million and $(123) million, respectively, of net gains/(losses) on investments.

GAAP other income/expense in the first six months of 2022 also includes $26 million of losses on the early extinguishment of debt (Note 7).

The company’s GAAP and adjusted tax rates decreased in 2023 compared to 2022 primarily due to tax planning initiatives, including a tax benefit of $91 million, net of related tax expenses, from a foreign exchange loss on an intercompany debt refinancing transaction in the second quarter of 2023, as well as a $144 million tax benefit resulting from a capital loss generated in the first quarter of 2023 as part of an intra-entity transaction.

The GAAP and adjusted tax rates in 2023 were also impacted, to a lesser extent, by a decrease in pre-tax earnings compared to 2022.

The company’s GAAP and adjusted tax rates in 2022 were impacted by releases of valuation allowances of $88 million and $175 million in the second quarter and first six months of 2022, respectively, in jurisdictions where the deferred tax assets are now expected to be realized.

The effective tax rates in both 2023 and 2022 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 $1.40 billion in 2023.

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The company expects its GAAP effective tax rate in 2023 will be between 5% and 7% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits.

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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.

Weighted average diluted shares decreased in 2023 compared to 2022 due to share repurchases, net of option dilution.

Liquidity and Capital Resources

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

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(In millions) April 1, 2023 December 31, 2022

(In millions) July 1, 2023 December 31, 2022

Cash and cash equivalents $ 3,133 $ 8,524

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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 April 1, 2023, the company’s short-term debt totaled $6.12 billion.

As of July 1, 2023, the company’s short-term debt totaled $4.81 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 1, 2023, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit.

Three months ended

(In millions) April 1, 2023 April 2, 2022

As of July 1, 2023, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit.

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(In millions) July 1, 2023 July 2, 2022

Net cash provided by operating activities

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Operating Activities

During the first three months of 2023, cash provided by income was offset in part by investments in working capital.

During the first six months of 2023, cash provided by income was offset in part by investments in working capital.

Changes in other assets and other liabilities used cash of $1.50 billion primarily due to the timing of payments for compensation and income taxes.

Cash payments for income taxes were $0.57 billion during the first three months of 2023.

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

A decrease in accounts payable used cash of $0.87 billion.

Cash payments for income taxes were $0.78 billion during the first six months of 2023.

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

An increase in inventories used cash of $0.87 billion, primarily to support growth in sales.

Changes in other assets and other liabilities used cash of $0.74 billion primarily due to the timing of payments for compensation.

Cash payments for income taxes were $0.30 billion during the first three months of 2022.

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

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Investing Activities

During the first three months of 2023, acquisitions used cash of $2.70 billion.

The company’s investing activities also included the purchase of $0.46 billion of property, plant and equipment for capacity and capability investments.

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

The company’s investing activities also included the purchase of $0.64 billion of property, plant and equipment for capacity and capability investments.

During the first six months of 2023, acquisitions used cash of $2.75 billion.

The company’s investing activities also included purchases of $0.74 billion of property, plant and equipment for capacity and capability investments.

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

The company’s investing activities also included purchases of $1.15 billion of property, plant and equipment for capacity and capability investments.

The company expects that for all of 2023, expenditures for property, plant and equipment, net of disposals, will be approximately $1.7 billion.

Financing Activities

During the first three months of 2023 net commercial paper activity used cash of $0.50 billion.

During the first six months of 2023, repayment of senior notes used cash of $1.00 billion.

The company’s financing activities also included the repurchase of $3.00 billion of the company’s common stock (5.2 million shares) and the payment of $0.25 billion in cash dividends.

1 unchanged sentence

All of the shares of common stock repurchased by the company during the first quarter of 2023 were under this program.

At May 5, 2023, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

During the first three months of 2022 repayment of senior notes and net commercial paper activity used cash of $0.38 billion and $0.63 billion, respectively.

At August 4, 2023, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

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.

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 $0.22 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 subsequent to April 1, 2023.

The company expects that for all of 2023, expenditures for property, plant and equipment, net of disposals, will be approximately $2.0 billion.

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The company’s commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially subsequent to July 1, 2023, except for the agreement to acquire CorEvitas, LLC.

Non-GAAP Measures

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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.

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• 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.

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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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Selling, general and administrative expenses adjustments (b)

6 (28) 14 (21)

Restructuring and other costs (c)

183 24 295 26

Amortization of acquisition-related intangible assets 585 600 1,191 1,209

1 unchanged sentence

$ 2,370 $ 2,605 $ 4,700 $ 6,055

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Reconciliation of adjusted operating income margin

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

$ (1) $ 10 $ (1) $ 14

Reconciliation of adjusted tax rate

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$ 5.15 $ 5.51 $ 10.18 $ 12.76

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Reconciliation of free cash flow

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(a) Adjusted results in 2023 and in 2022 exclude charges for the sale of inventories revalued at the date of acquisition.

Adjusted results in 2023 also exclude $31 million of inventory write-downs associated with large-scale abandonment of product lines.

Adjusted results in the second quarter and first six months of 2023 also exclude $2 million and $33 million, respectively, of inventory write-downs associated with large-scale abandonment of product lines.

Adjusted results in the second quarter of 2023 also excludes $5 million of accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations.

(b) Adjusted results in 2023 and 2022 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 2023 and 2022 exclude restructuring and other costs consisting principally of severance, impairments of long-lived assets, abandoned facility and other expenses of headcount reductions and real estate consolidations.

Adjusted results in 2023 also exclude $18 million of net charges for pre-acquisition litigation and other matters.

Adjusted results in the second quarter of 2023 also exclude $26 million of contract termination costs associated with facility closures.

Adjusted results in the first six months of 2023 also exclude $18 million of net charges for pre-acquisition litigation and other matters.

(d) Adjusted results in 2023 and 2022 exclude net gains/losses on investments.

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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 2022 describe the significant accounting estimates and policies used in preparation of the consolidated

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financial statements.

There have been no significant changes in the company’s critical accounting policies during the first three months of 2023.

There have been no significant changes in the company’s critical accounting policies during the first six months of 2023.

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