What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-01 compared with 2024-08-02 · 105 added, 87 removed, 290 unchanged (40% of the section changed)

37 unchanged sentences

Consolidated Results

Three months ended Six months ended

June 29, July 1, June 29, July 1,

Three months ended Nine months ended

September 28, September 30, September 28, September 30,

(Dollars in millions except per share amounts) 2024 2023 Change 2024 2023 Change

12 unchanged sentences

Organic Revenue Growth

Three months ended Six months ended

June 29, 2024 June 29, 2024

Three months ended Nine months ended

September 28, 2024 September 28, 2024

Revenue growth 0 % (2) %

6 unchanged sentences

These positive impacts are expected to continue at much lower levels in 2024 as customer testing as well as therapy and vaccine demand declines.

Sales of products related to COVID-19 testing were $0.02 billion and $0.08 billion in the second quarter of 2024 and 2023, respectively, and $0.05 billion and $0.22 billion in the first six months of 2024 and 2023, respectively.

During the second quarter of 2024, revenues from pharma and biotech customers declined due to reduced demand for our products and services that support COVID-19 vaccines and therapies as well as a more muted macroeconomic environment, partially offset through strong commercial execution.

Revenues in the academic and government as well as the industrial and applied markets grew due to demand for analytical instruments.

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

During the second quarter of 2024, sales growth was strong in Asia-Pacific, including China.

Sales in Europe grew slightly and in North America declined due to decreased demand for COVID-19 related products, as well as a challenging macroeconomic environment.

Contributions to organic revenue during the second quarter of 2024 from the Analytical Instruments and Specialty Diagnostics segments were more than offset by declines in the Laboratory Products and Biopharma Services and Life Sciences Solutions segments.

During the first six months of 2024, all of our end markets were negatively impacted by a more muted macroeconomic environment and moderate economic activity in China.

Sales of products related to COVID-19 testing were $0.03 billion and $0.05 billion in the third quarter of 2024 and 2023, respectively, and $0.08 billion and $0.27 billion in the first nine months of 2024 and 2023, respectively.

During the third quarter of 2024, revenues from pharma and biotech customers declined due to reduced demand for our products and services that support COVID-19 vaccines and therapies as well as a more muted macroeconomic environment, partially offset through strong commercial execution.

Revenues in the academic and government market grew due to strong demand for electron microscopes and lab products.

Revenue from the industrial and applied customers grew due to demand for electron microscopes.

The diagnostics and healthcare market was flat.

During the third quarter of 2024, sales growth was flat in Europe and Asia-Pacific, including China.

Sales in North America declined.

Sales in every region were impacted from decreased demand for COVID-19 related products, as well as a challenging macroeconomic environment.

Contributions to organic revenue during the third quarter of 2024 from the Analytical Instruments and Specialty Diagnostics segments were offset by declines in the Life Sciences Solutions segment.

During the first nine months of 2024, all of our end markets were negatively impacted by a more muted macroeconomic environment and low economic activity in China.

Revenues from pharma and biotech and diagnostics and healthcare customers declined due to demand for COVID-19 related products and services.

Revenues in the academic and government as well as the industrial and applied markets were flat.

During the first six months of 2024, sales grew slightly in Asia-Pacific, including China.

Sales growth in Europe was flat and sales in North America declined due to decreased demand for COVID-19 related products.

Contributions to organic revenue during the first six months of 2024 from the Specialty Diagnostics and Analytical Instruments segments were more than offset by declines in the Life Sciences Solutions and Laboratory Products and Biopharma Services segments.

Revenues in the academic and government market were flat.

Revenues in the industrial and applied market increased slightly.

During the first nine months of 2024, sales were flat in Europe and Asia-Pacific, including China.

Sales in North America declined due to decreased demand for COVID-19 related products.

Contributions to organic revenue during the first nine months of 2024 from the Analytical Instruments and Specialty Diagnostics segments were more than offset by declines in the Life Sciences Solutions and Laboratory Products and Biopharma Services segments.

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

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• Our unparalleled commercial engine.

GAAP operating income margin and adjusted operating income margin increased in the second quarter of 2024 due primarily to strong productivity improvements, partially offset by unfavorable business mix.

GAAP operating income margin in the second quarter of 2024 was also impacted by net credits for changes in estimates of contingent acquisition consideration, lower levels of restructuring and other charges incurred for headcount reductions and facility consolidations in an effort to streamline operations (Note 12), and, to a lesser extent, lower amortization expense.

GAAP operating income margin and adjusted operating income margin increased in the first six months of 2024 due primarily to strong productivity improvements, partially offset by unfavorable business mix.

GAAP operating income margin during the first six months of 2024 was also impacted by lower levels of restructuring and other charges incurred for headcount reductions and facility consolidations in an effort to streamline operations (Note 12).

GAAP operating income margin and adjusted operating income margin decreased in the third quarter of 2024 due primarily to unfavorable business mix and strategic investments, partially offset by productivity improvements.

GAAP operating income margin in the third quarter of 2024 also benefited from lower amortization expense.

GAAP operating income margin and adjusted operating income margin decreased in the first nine months of 2024 due primarily to unfavorable business mix, partially offset by productivity improvements.

The decreases in GAAP operating income margin during the first nine months of 2024 were more than offset by lower levels of restructuring and other charges incurred for headcount reductions and facility consolidations in an effort to streamline operations (Note 12) and lower levels of amortization expense.

The company’s references to strategic 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 to address inflation, 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.

THERMO FISHER SCIENTIFIC INC.

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

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

Three months ended Six months ended

June 29, July 1, June 29, July 1,

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(Dollars in millions) 2024 2023 2024 2023

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Three months ended Organic (non-GAAP measure)

(Dollars in millions) June 29,

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Segment income margin 35.4 % 35.9 % (0.5) pt

The decrease in organic revenues in the second quarter of 2024 was primarily due to moderation in COVID-19 related revenue, partially offset by growth in the biosciences business.

The increase in segment income margin resulted primarily from exceptionally strong productivity improvements, partially offset by unfavorable volume pull-through.

Six months ended Organic (non-GAAP measure)

(Dollars in millions) June 29,

The decrease in organic revenues in the third quarter of 2024 was primarily due to moderation in COVID-19 related revenue.

The decrease in segment income margin resulted primarily from unfavorable volume mix, partially offset by strong productivity improvements.

Nine months ended Organic (non-GAAP measure)

(Dollars in millions) September 28,

2024 September 30,

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Segment income margin 36.3 % 33.6 % 2.7 pt

The decrease in organic revenues in the first six months of 2024 was primarily due to moderation in COVID-19 related revenue.

The increase in segment income margin resulted primarily from exceptionally strong productivity improvements, partially offset by unfavorable volume pull-through.

The decrease in organic revenues in the first nine months of 2024 was primarily due to moderation in COVID-19 related revenue.

The increase in segment income margin resulted primarily from exceptionally strong productivity improvements, partially offset by unfavorable volume mix.

THERMO FISHER SCIENTIFIC INC.

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Three months ended Organic (non-GAAP measure)

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Segment income margin 24.9 % 26.7 % (1.8) pt

The increase in organic revenues in the second quarter of 2024 was primarily due to very strong growth in the electron microscopy business, partially offset by declines in the other instrumentation businesses.

The increase in organic revenues in the third quarter of 2024 was primarily due to growth in the electron microscopy business.

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

Six months ended Organic (non-GAAP measure)

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Nine months ended Organic (non-GAAP measure)

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Segment income margin 24.4 % 25.3 % (0.9) pt

The increase in organic revenues in the first six months of 2024 was primarily due to very strong growth in the electron microscopy business, partially offset by declines in the other instrumentation businesses.

The increase in organic revenues in the first nine months of 2024 was primarily due to very strong growth in the electron microscopy business, largely offset by declines in the other instrumentation businesses.

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

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Three months ended Organic (non-GAAP measure)

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Segment income margin 25.9 % 26.1 % (0.2) pt

The increase in organic revenues in the second quarter of 2024 was primarily driven by underlying growth in the transplant diagnostics and immunodiagnostics businesses, as well as in the healthcare market channel, largely offset by decreased demand for products addressing diagnosis of COVID-19.

Segment income margin was flat in the second quarter of 2024 when compared to 2023 due to good productively improvements, offset by strategic investments.

Six months ended Organic (non-GAAP measure)

(Dollars in millions) June 29,

The increase in organic revenues in the third quarter of 2024 was primarily driven by growth in the healthcare market channel, as well as in the transplant diagnostics and immunodiagnostics businesses, partially offset by decreased demand for products addressing diagnosis of COVID-19.

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

Nine months ended Organic (non-GAAP measure)

(Dollars in millions) September 28,

2024 September 30,

Change Currency

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Segment income margin 26.4 % 26.1 % 0.3 pt

The increase in organic revenues in the first six months of 2024 was driven by underlying growth in the transplant diagnostics and immunodiagnostics businesses, as well as in the healthcare market channel, largely offset by decreased demand for products addressing diagnosis of COVID-19.

The increase in segment income margin was due to favorable business mix and productivity improvements, partially offset by strategic investments.

The increase in organic revenues in the first nine months of 2024 was driven by underlying growth in the immunodiagnostics and transplant diagnostics businesses, as well as in the healthcare market channel, partially offset by decreased demand for products addressing diagnosis of COVID-19.

The increase in segment income margin was due to productivity improvements, partially offset by strategic investments.

THERMO FISHER SCIENTIFIC INC.

1 unchanged sentence

Three months ended Organic (non-GAAP measure)

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Change Currency

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Segment income margin 13.5 % 16.4 % (2.9) pt

The decrease in organic revenues in the second quarter of 2024 was primarily due to decreased demand in COVID-19 vaccines and therapies, partially offset by growth in the clinical research business.

The decrease in segment income margin was primarily due to unfavorable business mix and strategic investments, partially offset by strong productivity improvements.

Six months ended Organic (non-GAAP measure)

(Dollars in millions) June 29,

Organic revenues were flat in the third quarter of 2024 due to decreased demand in COVID-19 vaccines and therapies, offset by growth in the research and safety market channel and underlying growth in the clinical research and pharma services businesses.

The decrease in segment income margin was primarily due to unfavorable business mix, partially offset by strong productivity improvements.

Nine months ended Organic (non-GAAP measure)

(Dollars in millions) September 28,

2024 September 30,

Change Currency

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Segment income margin 13.1 % 14.7 % (1.6) pt

The decrease in organic revenues in the first six months of 2024 was primarily due to decreased demand in COVID-19 vaccines and therapies, partially offset by growth in the clinical research business.

The decrease in organic revenues in the first nine months of 2024 was primarily due to decreased demand in COVID-19 vaccines and therapies, largely offset by underlying growth in the clinical research and pharma services businesses.

The decrease in segment income margin was primarily due to unfavorable business mix, partially offset by productivity improvements.

Non-operating Items

Three months ended Six months ended

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(Dollars and shares in millions) 2024 2023 2024 2023

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

(13) 5 (10) 4

GAAP tax rate 5.7 % 3.0 % 10.0 % 3.3 %

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Weighted average diluted shares 384 388 383 388

Net interest expense (interest expense less interest income) in the second quarter and first six months of 2024 decreased due primarily to higher cash, and cash equivalents and short-term investments balances, as well as higher interest rates on these balances when compared to the second quarter and first six months of 2023.

The company’s net interest expense was reduced by approximately $67 million and $132 million in the second quarter and first six months of 2024, respectively, as a result of its interest rate swap and cross-currency interest rate swap arrangements.

In the second quarter and first six months of 2023, the company’s net interest expense was reduced by approximately $16 million and $33 million, respectively, as a result of these arrangements (Note 10).

Net interest expense (interest expense less interest income) in the third quarter and first nine months of 2024 decreased due primarily to higher cash, and cash equivalents and short-term investments balances, as well as higher interest rates on these balances when compared to the third quarter and first nine months of 2023.

The company’s net interest expense was reduced by approximately $66 million and $197 million in the third quarter and first nine months of 2024, respectively, as a result of its interest rate swap and cross-currency interest rate swap arrangements.

In the third quarter and first nine months of 2023, the company’s net interest expense was reduced by approximately $34 million and $62 million, respectively, as a result of these arrangements (Note 10).

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 six months of 2024 and 2023 also includes $10 million and $(43) million, respectively, of net gains/(losses) on investments.

The company’s GAAP tax rate increased in the first six months of 2024 compared to 2023 primarily due to $176 million of expense, net, for a provision associated with a tax audit recorded in the first quarter of 2024.

The company’s GAAP and adjusted tax rates in the first six months of 2024 were also impacted by a benefit of $183 million, primarily in jurisdictions where the deferred tax assets are now expected to be realized due to forecasted income.

The company’s GAAP and adjusted tax rates in the first six months of 2023 were impacted by 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.

The company’s GAAP and adjusted tax rates in the six-month periods ended June 29, 2024 and July 1, 2023 were also impacted by $102 million and $144 million, respectively, of tax benefits resulting from capital losses generated as part of intra-entity transactions (Note 5).

GAAP other income/(expense) in the third quarter and first nine months of 2024 also includes $(3) million and $7 million, respectively, of net gains/(losses) on investments.

GAAP other income/(expense) in the third quarter and first nine months of 2023 also includes $10 million and $(33) million, respectively, of net gains/(losses) on investments.

The company’s GAAP tax rate increased in the first nine months of 2024 compared to 2023 primarily due to $176 million of expense, net, for a provision associated with a tax audit recorded in the first quarter of 2024.

The company’s GAAP and adjusted tax rates in the first nine months of 2024 were also impacted by tax benefits of $183 million and $124 million in the second and third quarters of 2024, respectively, primarily in jurisdictions where the deferred tax assets are now expected to be realized due to forecasted income.

The company’s GAAP and adjusted tax rates in the first nine months of 2023 were impacted by the release of a valuation allowance of $183 million in the third quarter of 2023 in jurisdictions where the deferred tax assets are now expected to be realized, and a tax benefit of $91 million, net of related tax expenses, from a foreign exchange loss on an intercompany debt

THERMO FISHER SCIENTIFIC INC.

refinancing transaction in the second quarter of 2023.

The company’s GAAP and adjusted tax rates in the nine-month periods ended September 28, 2024, and September 30, 2023, were also impacted by $102 million and $144 million, respectively, of tax benefits resulting from capital losses generated as part of intra-entity transactions (Note 5).

The effective tax rates in both 2024 and 2023 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.

(In millions) June 29, 2024 December 31, 2023

(In millions) September 28, 2024 December 31, 2023

Cash and cash equivalents $ 4,645 $ 8,077

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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 June 29, 2024, the company’s short-term obligations and current maturities of long-term obligations totaled $5.12 billion.

As of September 28, 2024, the company’s short-term obligations and current maturities of long-term obligations totaled $4.12 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 June 29, 2024, 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

(In millions) June 29, 2024 July 1, 2023

As of September 28, 2024, 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) September 28, 2024 September 30, 2023

Net cash provided by operating activities

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Free cash flow (non-GAAP measure)

Operating Activities

During the first six months of 2024, cash provided by income was offset in part by investments in working capital.

Changes in other assets and other liabilities used cash of $0.57 billion primarily due to the timing of payments for compensation and income taxes.

Cash payments for income taxes were $1.13 billion during the first six months of 2024.

THERMO FISHER SCIENTIFIC INC.

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

Operating Activities

During the first nine months of 2024, cash provided by income was offset in part by investments in working capital.

An increase in inventories used cash of $0.22 billion.

A decrease in accounts payable used cash of $0.24 billion.

Changes in other assets and liabilities used cash of $0.24 billion primarily due to the timing of payments for compensation and income taxes.

Cash payments for income taxes were $1.43 billion during the first nine months of 2024.

During the first nine 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 $1.36 billion primarily due to the timing of payments for compensation and income taxes.

A decrease in accounts payable used cash of $0.74 billion.

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

Cash payments for income taxes were $1.17 billion during the first nine months of 2023.

Investing Activities

During the first six months of 2024, purchases of short-term investments used cash of $1.78 billion.

The company’s investing activities also included purchases of $0.65 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.

During the first nine months of 2024, acquisitions used cash of $3.13 billion.

The company’s investing activities also included purchases of short-term investments of $2.07 billion, as well as $0.92 billion of purchases of property, plant and equipment for capacity and capability investments.

During the first nine months of 2023, acquisitions used cash of $3.66 billion.

The company’s investing activities also included purchases of $1.07 billion of property, plant and equipment for capacity and capability investments.

1 unchanged sentence

Financing Activities

During the first six months of 2024, issuance of debt provided $1.20 billion of cash.

During the first nine months of 2024, issuance of debt provided $1.20 billion of cash.

Repayment of senior notes used $1.11 billion.

The company’s financing activities also included the repurchase of $3.00 billion of the company’s common stock (5.5 million shares) and the payment of $0.43 billion in cash dividends.

1 unchanged sentence

All of the shares of common stock repurchased by the company during the first quarter of 2024 were under this program.

At August 2, 2024, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

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

At November 1, 2024, authorization remained for $1.00 billion of future repurchases of the company’s common stock.

During the first nine months of 2023, repayment of senior notes and net commercial paper activity used cash of $2.00 billion and $0.32 billion, respectively.

Issuance of debt provided $3.47 billion of cash.

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 $0.39 billion in cash dividends.

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

THERMO FISHER SCIENTIFIC INC.

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

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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.

THERMO FISHER SCIENTIFIC INC.

• 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.

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

Three months ended Six months ended

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September 28, September 30, September 28, September 30,

(Dollars in millions except per share amounts) 2024 2023 2024 2023

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THERMO FISHER SCIENTIFIC INC.

Three months ended Six months ended

June 29, July 1, June 29, July 1,

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(Dollars in millions except per share amounts) 2024 2023 2024 2023

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$ 1,915 $ 2,148 $ 4,498 $ 3,685

(a) Adjusted results exclude charges for inventory write-downs associated with large-scale abandonment of product lines and accelerated depreciation on fixed assets to be abandoned due to facility consolidations.

Adjusted results in the second quarter and first six months of 2023 exclude $11 million and $21 million, respectively, of charges for the sale of inventory 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, impairments of long-lived assets, net charges for pre-acquisition litigation and other matters, abandoned facilities, and other expenses of headcount reductions and real estate consolidations.

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

(a) Adjusted results exclude accelerated depreciation on fixed assets to be abandoned due to facility consolidations, charges for the sale of inventory revalued at the date of acquisition, and 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.

Adjusted results in the third quarter of 2024 also exclude $5 million of accelerated depreciation on fixed assets to be abandoned due to facility consolidations.

(c) Adjusted results exclude restructuring and other costs consisting principally of severance, impairments of long-lived assets, net charges for pre-acquisition litigation and other matters, abandoned facilities, net gains on the sale of real estate, and other expenses of headcount reductions and real estate consolidations.

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

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

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Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2023 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 2024.

There have been no significant changes in the company’s critical accounting policies during the first nine months of 2024.

Recent Accounting Pronouncements

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The company’s exposure to market risk from changes in interest rates and currency exchange rates has not changed materially from its exposure discussed in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

THERMO FISHER SCIENTIFIC INC.

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