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(Parenthetical)
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(Exact name of Registrant as specified in its charter)
iDelaware
i04-2209186
(State
of incorporation)
(I.R.S. Employer Identification No.)
i168 Third Avenue
iWaltham, iMassachusettsi02451
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (i781) i622-1000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $1.00 par value
iTMO
iNew York Stock Exchange
i0.750%
Notes due 2024
iTMO 24A
iNew York Stock Exchange
i0.125%
Notes due 2025
iTMO 25B
iNew York Stock Exchange
i2.000%
Notes due 2025
iTMO 25
iNew York Stock Exchange
i1.400%
Notes due 2026
iTMO 26A
iNew York Stock Exchange
i1.450%
Notes due 2027
iTMO 27
iNew York Stock Exchange
i1.750%
Notes due 2027
iTMO 27B
iNew York Stock Exchange
i0.500%
Notes due 2028
iTMO 28A
iNew York Stock Exchange
i1.375%
Notes due 2028
iTMO 28
iNew York Stock Exchange
i1.950%
Notes due 2029
iTMO 29
iNew York Stock Exchange
i0.875%
Notes due 2031
iTMO 31
iNew York Stock Exchange
i2.375%
Notes due 2032
iTMO 32
iNew York Stock Exchange
i2.875%
Notes due 2037
iTMO 37
iNew York Stock Exchange
i1.500%
Notes due 2039
iTMO 39
iNew York Stock Exchange
i1.875%
Notes due 2049
iTMO 49
iNew York Stock Exchange
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller
reporting company i☐ Emerging growth company i☐
If an emerging growth company, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Thermo
Fisher Scientific Inc. shareholders’ equity:
Preferred stock, $ii100/
par value, ii50,000/ shares authorized;
iinone/ issued
i—
i—
Common
stock, $ii1/ par value, ii1,200,000,000/
shares authorized; i439,863,357 and i439,154,741 shares issued
i440
i439
Capital
in excess of par value
i16,467
i16,174
Retained
earnings
i39,074
i35,431
Treasury
stock at cost, i48,074,395 and i44,720,112 shares
(i10,964)
(i8,922)
Accumulated
other comprehensive items
(i2,724)
(i2,329)
Total
Thermo Fisher Scientific Inc. shareholders’ equity
i42,293
i40,793
Noncontrolling
interests
i61
i62
Total equity
i42,354
i40,855
Total
liabilities, redeemable noncontrolling interest and equity
$
i90,579
$
i95,123
The
accompanying notes are an integral part of these condensed consolidated financial statements.
3
THERMO FISHER SCIENTIFIC INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(In millions except per share amounts)
2022
2021
2022
2021
Revenues
Product
revenues
$
i7,003
$
i7,214
$
i15,020
$
i15,070
Service
revenues
i3,967
i2,059
i7,768
i4,109
Total
revenues
i10,970
i9,273
i22,788
i19,179
Costs
and operating expenses:
Cost of product revenues
i3,516
i3,352
i7,071
i6,679
Cost
of service revenues
i2,855
i1,397
i5,654
i2,767
Selling,
general and administrative expenses
i2,209
i1,899
i4,486
i3,725
Research
and development expenses
i365
i343
i729
i663
Restructuring
and other costs
i24
i119
i26
i133
Total
costs and operating expenses
i8,969
i7,110
i17,966
i13,967
Operating
income
i2,001
i2,163
i4,822
i5,212
Interest
income
i36
i11
i54
i23
Interest
expense
(i148)
(i122)
(i284)
(i247)
Other
income/(expense)
i28
(i3)
(i135)
(i186)
Income
before income taxes
i1,917
i2,049
i4,457
i4,802
Provision
for income taxes
(i198)
(i219)
(i499)
(i635)
Equity
in earnings/(losses) of unconsolidated entities
(i51)
(i1)
(i70)
(i1)
Net
income
i1,668
i1,829
i3,888
i4,166
Less:
net income attributable to noncontrolling interests and redeemable noncontrolling interest
i4
i1
i9
i1
Net
income attributable to Thermo Fisher Scientific Inc.
$
i1,664
$
i1,828
$
i3,879
$
i4,165
Earnings
per share attributable to Thermo Fisher Scientific Inc.
Basic
$
i4.25
$
i4.65
$
i9.90
$
i10.58
Diluted
$
i4.22
$
i4.61
$
i9.83
$
i10.50
Weighted
average shares
Basic
i392
i393
i392
i394
Diluted
i394
i396
i394
i397
The
accompanying notes are an integral part of these condensed consolidated financial statements.
4
THERMO FISHER SCIENTIFIC INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(In millions)
2022
2021
2022
2021
Comprehensive
income
Net income
$
i1,668
$
i1,829
$
i3,888
$
i4,166
Other
comprehensive items:
Currency translation adjustment:
Currency translation adjustment (net of tax provision (benefit) of $i173,
$(i23), $i262
and $i95)
(i386)
(i71)
(i416)
i153
Unrealized
gains and losses on hedging instruments:
Reclassification adjustment for losses included in net income (net of tax benefit of $i1,
$i1, $i1
and $i5)
i—
i1
i1
i14
Pension
and other postretirement benefit liability adjustments:
Pension and other postretirement benefit liability adjustments arising during the period (net of tax (provision) benefit of $(i2),
$i0, $(i3)
and $(i2))
i6
(i2)
i9
i4
Amortization
of net loss included in net periodic pension cost (net of tax benefit of $i1, $i1,
$i2 and $i2)
i2
i4
i4
i6
Total
other comprehensive items
(i378)
(i68)
(i402)
i177
Comprehensive
income
i1,290
i1,761
i3,486
i4,343
Less:
comprehensive income/(loss) attributable to noncontrolling interests and redeemable noncontrolling interest
i7
i1
i2
i1
Comprehensive
income attributable to Thermo Fisher Scientific Inc.
$
i1,283
$
i1,760
$
i3,484
$
i4,342
The
accompanying notes are an integral part of these condensed consolidated financial statements.
5
THERMO FISHER SCIENTIFIC INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six
months ended
July 2,
July 3,
(In millions)
2022
2021
Operating activities
Net income
$
i3,888
$
i4,166
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
i486
i409
Amortization
of acquisition-related intangible assets
i1,209
i872
Change
in deferred income taxes
(i601)
(i307)
Loss
on early extinguishment of debt
i26
i197
Stock-based
compensation
i155
i102
Other
non-cash expenses, net
i291
i213
Changes
in assets and liabilities, excluding the effects of acquisitions
(i1,724)
(i1,447)
Net
cash provided by operating activities
i3,730
i4,205
Investing
activities
Acquisitions, net of cash acquired
(i40)
(i1,425)
Purchase
of property, plant and equipment
(i1,146)
(i1,168)
Proceeds
from sale of property, plant and equipment
i14
i5
Other
investing activities, net
i83
(i36)
Net
cash used in investing activities
(i1,089)
(i2,624)
Financing
activities
Repayment of debt
(i375)
(i2,803)
Proceeds
from issuance of commercial paper
i1,032
i—
Repayments
of commercial paper
(i3,490)
i—
Purchases
of company common stock
(i2,000)
(i2,000)
Dividends
paid
(i220)
(i190)
Net
proceeds from issuance of company common stock under employee stock plans
i51
i72
Other
financing activities, net
(i48)
(i5)
Net
cash used in financing activities
(i5,050)
(i4,926)
Exchange
rate effect on cash
(i177)
i44
Decrease
in cash, cash equivalents and restricted cash
(i2,586)
(i3,301)
Cash,
cash equivalents and restricted cash at beginning of period
i4,491
i10,336
Cash,
cash equivalents and restricted cash at end of period
$
i1,905
$
i7,035
The
accompanying notes are an integral part of these condensed consolidated financial statements.
6
THERMO FISHER SCIENTIFIC INC.
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
(Unaudited)
Redeemable
Noncontrolling Interest
Common Stock
Capital in Excess of Par Value
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Items
Total Thermo Fisher Scientific Inc. Shareholders’ Equity
The
accompanying notes are an integral part of these condensed consolidated financial statements.
8
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
Note
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fisher Scientific Inc. (the company or Thermo Fisher) 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 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.
Interim Financial Statements
The interim condensed consolidated financial statements presented herein have been prepared by the
company, are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at July 2, 2022, the results of operations for the three- and six-month periods ended July 2, 2022 and July 3, 2021, and the cash flows for the six-month periods ended July 2, 2022 and July 3, 2021. Interim results are not necessarily indicative of results for a full year.
The condensed consolidated balance sheet presented as of December 31, 2021, has been derived from the audited consolidated financial statements as of that date. The condensed consolidated financial
statements and notes are presented as permitted by Form 10-Q and do not contain all information that is included in the annual financial statements and notes thereto of the company. The condensed consolidated financial statements and notes included in this report should be read in conjunction with the 2021 financial statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Note 1 to the consolidated financial statements for 2021 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes
in the company’s significant accounting policies during the six months ended July 2, 2022.
i
Inventories
The components of inventories are as follows:
July
2,
December 31,
(In millions)
2022
2021
Raw materials
$
i2,335
$
i1,922
Work
in process
i699
i676
Finished
goods
i2,634
i2,453
Inventories
$
i5,668
$
i5,051
/i
Use
of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The company’s estimates include, among others, asset reserve requirements as well as the amounts of future cash flows associated with certain assets and businesses that are used in assessing the risk of impairment. The negative impacts associated with the ongoing COVID-19 global pandemic significantly lessened in 2021 and 2022. The extent and duration of negative impacts in the future, which may include inflationary
pressures and supply chain disruptions, are uncertain and may require changes to estimates. Actual results could differ from those estimates.
i
Recent Accounting Pronouncements
In November 2021, the FASB issued new guidance to require entities to disclose information about certain types of government assistance they receive, including cash grants and tax credits. Among other things, the new guidance requires expanded disclosure regarding the qualitative and quantitative characteristics of the nature, amount, timing, and
significant terms and conditions of transactions with a government arising from a grant or other forms of assistance accounted for under a contribution model. The company will adopt this guidance in the fourth quarter of 2022 using a prospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures; however, the impact in future periods will be dependent on the extent of transactions of this nature entered into by the company.
/
9
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 2. Acquisitions
iThe
company’s acquisitions have historically been made at prices above the determined fair value of the acquired identifiable net assets, resulting in goodwill, primarily due to expectations of the synergies that will be realized by combining the businesses and the benefits that will be gained from the assembled workforces. These synergies include the elimination of redundant facilities, functions and staffing; use of the company’s existing commercial infrastructure to expand sales of the acquired businesses’ products and services; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products and services.
Acquisitions have been accounted for using the acquisition method of accounting, and the acquired companies’ results have been included in the accompanying financial statements
from their respective dates of acquisition.
2022
In 2022, the company acquired, within the Analytical Instruments segment, a U.S.-based developer of Fourier-transform infrared gas analysis technologies.
2021
The preliminary allocations of the purchase price for the acquisitions of the Lengnau biologics manufacturing facility, PPD, Inc. and PeproTech, Inc. were based on estimates of the fair values of the net assets acquired and are subject to adjustment upon finalization, largely with respect to acquired intangible assets, lease assets and liabilities, and the related deferred taxes. Measurements of these items inherently require significant estimates and assumptions. During the first six months of 2022, the
company adjusted the preliminary allocations of PPD and PeproTech, which among others increased goodwill ($i95 million) and other liabilities assumed ($i22 million),
and decreased definite-lived intangible assets ($i43 million), other current assets ($i34 million),
contract liabilities ($i29 million), equity method investments ($i23 million),
and the fair value of assumed contingent consideration ($i18 million). The adjustment to amortization expense recorded during the first six months of 2022 was not material.
Revenues
by geographic region based on customer location are as follows:
Three months ended
Six months ended
July 2,
July
3,
July 2,
July 3,
(In millions)
2022
2021
2022
2021
Revenues
North
America
$
i6,032
$
i4,529
$
i12,355
$
i9,630
Europe
i2,551
i2,695
i5,601
i5,480
Asia-Pacific
i2,042
i1,749
i4,106
i3,458
Other
regions
i345
i300
i726
i611
Consolidated
revenues
$
i10,970
$
i9,273
$
i22,788
$
i19,179
/
Each
reportable segment earns revenues from consumables, instruments and services in North America, Europe, Asia-Pacific and other regions. See Note 4 for revenues by reportable segment and other geographic data.
/
10
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the remaining performance obligations
for all open customer contracts as of July 2, 2022 was $i27.70 billion. The company will recognize revenues for these performance obligations as they are satisfied, approximately i58%
of which is expected to occur within the next itwelve months. Amounts expected to occur thereafter generally relate to contract manufacturing, clinical research and extended warranty service agreements, which typically have durations of three to five years.
iNoncurrent
contract assets are included within other assets in the accompanying balance sheet. Noncurrent contract liabilities are included within other long-term liabilities in the accompanying balance sheet. Contract asset and liability balances are as follows:
In
the three and six months ended July 2, 2022, the company recognized revenues of $i0.71 billion and $i1.99
billion, respectively, that were included in the contract liabilities balance at December 31, 2021. In the three and six months ended July 3, 2021, the company recognized revenues of $i0.37 billion and $i0.93
billion, respectively, that were included in the contract liabilities balance at December 31, 2020.
i
Note 4. Business Segment and Geographical Information
iiBusiness
Segment Information
Three months ended
Six months ended
July 2,
July
3,
July 2,
July 3,
(In millions)
2022
2021
2022
2021
Revenues
Life
Sciences Solutions
$
i3,292
$
i3,557
$
i7,523
$
i7,760
Analytical
Instruments
i1,607
i1,481
i3,125
i2,868
Specialty
Diagnostics
i1,101
i1,235
i2,583
i2,850
Laboratory
Products and Biopharma Services
i5,537
i3,583
i10,979
i7,180
Eliminations
(i567)
(i583)
(i1,422)
(i1,479)
Consolidated
revenues
i10,970
i9,273
i22,788
i19,179
Segment
Income
Life Sciences Solutions
i1,327
i1,718
i3,503
i3,997
Analytical
Instruments
i344
i280
i645
i552
Specialty
Diagnostics
i243
i245
i596
i673
Laboratory
Products and Biopharma Services
i691
i446
i1,311
i977
Subtotal
reportable segments
i2,605
i2,689
i6,055
i6,199
Cost
of revenues adjustments
(i8)
i—
(i19)
(i8)
Selling,
general and administrative expenses adjustments
i28
i42
i21
i26
Restructuring
and other costs
(i24)
(i119)
(i26)
(i133)
Amortization
of acquisition-related intangible assets
(i600)
(i449)
(i1,209)
(i872)
Consolidated
operating income
i2,001
i2,163
i4,822
i5,212
Interest
income
i36
i11
i54
i23
Interest
expense
(i148)
(i122)
(i284)
(i247)
Other
income/(expense)
i28
(i3)
(i135)
(i186)
Income
before income taxes
$
i1,917
$
i2,049
$
i4,457
$
i4,802
//
/
11
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cost of revenues adjustments included in the above table consist of charges for the sale of inventories revalued at the date of acquisition. Selling, general and administrative expenses adjustments included in the above table consist of third-party transaction/integration costs related to recent acquisitions, and charges/credits for changes in estimates of contingent acquisition consideration.
Geographical Information
Revenues by country based on customer location are as follows: i
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(In millions)
2022
2021
2022
2021
Revenues
United
States
$
i5,846
$
i4,355
$
i11,943
$
i9,247
China
i1,001
i794
i1,911
i1,569
Other
i4,123
i4,124
i8,934
i8,363
Consolidated
revenues
$
i10,970
$
i9,273
$
i22,788
$
i19,179
/
i
Note
5. Income Taxes
iThe provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate to income before provision for income taxes due to the following:
Six
months ended
July 2,
July 3,
(In millions)
2022
2021
Statutory federal income tax rate
i21
%
i21
%
Provision
for income taxes at statutory rate
$
i936
$
i1,008
Increases
(decreases) resulting from:
Foreign rate differential
(i138)
(i73)
Income
tax credits
(i117)
(i173)
Global
intangible low-taxed income
i46
i50
Foreign-derived
intangible income
(i71)
(i89)
Excess
tax benefits from stock options and restricted stock units
(i31)
(i47)
Intra-entity
transfers
(i18)
(i162)
Valuation
allowances
(i175)
i29
Withholding
taxes
i33
i28
State
income taxes, net of federal tax
i67
i78
Other,
net
(i33)
(i14)
Provision
for income taxes
$
i499
$
i635
/
The
company has operations and a taxable presence in approximately 70 countries outside the U.S. The company's effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate.
Unrecognized Tax Benefits
As of July 2, 2022the company had $i1.10
billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
i
(In millions)
2022
Balance
at beginning of year
$
i1,124
Additions for tax positions of current year
i13
Closure
of tax years
(i2)
Settlements
(i32)
Balance
at end of period
$
i1,103
/
/
12
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 6. Earnings per Share
i
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(In millions except per share amounts)
2022
2021
2022
2021
Net
income attributable to Thermo Fisher Scientific Inc.
$
i1,664
$
i1,828
$
i3,879
$
i4,165
Basic
weighted average shares
i392
i393
i392
i394
Plus
effect of: stock options and restricted stock units
i2
i3
i2
i3
Diluted
weighted average shares
i394
i396
i394
i397
Basic
earnings per share
$
i4.25
$
i4.65
$
i9.90
$
i10.58
Diluted
earnings per share
$
i4.22
$
i4.61
$
i9.83
$
i10.50
Antidilutive
stock options excluded from diluted weighted average shares
i2
i1
i2
i1
/
/
i
Note
7. Debt and Other Financing Arrangements
i
Effective
interest rate at July 2,
July 2,
December 31,
(Dollars in millions)
2022
2022
2021
Commercial Paper
$
—
$
i2,522
Floating
Rate (SOFR + i0.35%) i1.5-Year Senior Notes, Due i4/18/2023
i1,000
i1,000
Floating
Rate (SOFR + i0.39%) i2-Year Senior Notes, Due i10/18/2023
i0.000%
i2-Year Senior Notes Due i11/18/2023 (euro-denominated)
i0.06
%
i573
i625
i0.75%
i8-Year Senior Notes, Due i9/12/2024 (euro-denominated)
i0.93
%
i1,041
i1,137
i1.215%
i3-Year Senior Notes, Due i10/18/2024
i1.42
%
i2,500
i2,500
Floating
Rate (SOFR + i0.53%) i3-Year Senior Notes, Due i10/18/2024
i500
i500
i0.125%
i5.5-Year Senior Notes, Due i3/1/2025 (euro-denominated)
i0.40
%
i833
i910
i2.00%
i10-Year Senior Notes, Due i4/15/2025 (euro-denominated)
i2.09
%
i666
i728
i0.000%
i4-Year Senior Notes, Due i11/18/2025 (euro-denominated)
i0.15
%
i573
i625
i3.65%
i10-Year Senior Notes, Due i12/15/2025
—
i350
i1.40%
i8.5-Year Senior Notes, Due i1/23/2026 (euro-denominated)
i1.52
%
i729
i796
i1.45%
i10-Year Senior Notes, Due i3/16/2027 (euro-denominated)
i1.65
%
i521
i568
i1.75%
i7-Year Senior Notes, Due i4/15/2027 (euro-denominated)
i1.96
%
i625
i682
i0.50%
i8.5-Year Senior Notes, Due i3/1/2028 (euro-denominated)
i0.76
%
i833
i910
i1.375%
i12-Year Senior Notes, Due i9/12/2028 (euro-denominated)
i1.46
%
i625
i682
i1.750%
i7-Year Senior Notes, Due i10/15/2028
i1.89
%
i700
i700
i1.95%
i12-Year Senior Notes, Due i7/24/2029 (euro-denominated)
i2.07
%
i729
i796
i2.60%
i10-Year Senior Notes, Due i10/1/2029
i2.74
%
i900
i900
i0.80%
i9-Year Senior Notes, Due i10/18/2030 (euro-denominated)
i0.88
%
i1,822
i1,990
i0.875%
i12-Year Senior Notes, Due i10/1/2031 (euro-denominated)
i1.13
%
i937
i1,023
i2.00%
i10-Year Senior Notes, Due i10/15/2031
i2.23
%
i1,200
i1,200
i2.375%
i12-Year Senior Notes, Due i4/15/2032 (euro-denominated)
i2.54
%
i625
i682
i1.125%
i12-Year Senior Notes, Due i10/18/2033 (euro-denominated)
i1.20
%
i1,562
i1,706
i2.875%
i20-Year Senior Notes, Due i7/24/2037 (euro-denominated)
i2.94
%
i729
i796
i1.50%
i20-Year Senior Notes, Due i10/1/2039 (euro-denominated)
i1.73
%
i937
i1,023
i2.80%
i20-Year Senior Notes, Due i10/15/2041
i2.90
%
i1,200
i1,200
/
/
13
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Effective interest rate at July 2,
July 2,
December 31,
(Dollars
in millions)
2022
2022
2021
i1.625% i20-Year
Senior Notes, Due i10/18/2041 (euro-denominated)
i1.76
%
i1,302
i1,421
i5.30%
i30-Year Senior Notes, Due i2/1/2044
i5.37
%
i400
i400
i4.10%
i30-Year Senior Notes, Due i8/15/2047
i4.23
%
i750
i750
i1.875%
i30-Year Senior Notes, Due i10/1/2049 (euro-denominated)
i1.98
%
i1,041
i1,137
i2.00%
i30-Year Senior Notes, Due i10/18/2051 (euro-denominated)
i2.06
%
i781
i853
Other
i74
i76
Total
borrowings at par value
i30,328
i34,971
Unamortized
discount
(i107)
(i117)
Unamortized
debt issuance costs
(i161)
(i184)
Total
borrowings at carrying value
i30,060
i34,670
Finance
lease liabilities
i200
i200
Less:
Short-term obligations and current maturities
i1,010
i2,537
Long-term
obligations
$
i29,250
$
i32,333
SOFR
- Secured Overnight Financing Rate
EURIBOR - Euro Interbank Offered Rate
The effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discounts/premiums and the amortization of any debt issuance costs.
See Note 10 for fair value information pertaining to the company’s long-term borrowings.
Credit Facilities
The company has a revolving credit facility (the Facility) with a bank group that provides for up to $i5.00
billion of unsecured multi-currency revolving credit. The Facility expires on January 7, 2027. The revolving credit agreement calls for interest at either a Term SOFR, a EURIBOR-based rate (for funds drawn in euro) or a rate based on the prime lending rate of the agent bank, at the company’s option. The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type. The covenants in the Facility include a Consolidated Net Interest Coverage Ratio (Consolidated EBITDA to Consolidated Net Interest Expense), as such terms are defined in the Facility. Specifically, the company has agreed that, so long as any lender has any commitment under the Facility, any letter of credit is outstanding under the
Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a minimum Consolidated Interest Coverage Ratio of i3.5:1.0 as of the last day of any fiscal quarter. As of July 2, 2022, ino
borrowings were outstanding under the Facility, although available capacity was reduced by immaterial outstanding letters of credit.
Commercial Paper Programs
The company has commercial paper programs pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Under the U.S. program, a) maturities may not exceed i397 days from the date of issue and b) the CP Notes are issued on a private placement basis under
customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. Under the euro program, maturities may not exceed i183 days and may be denominated in euro, U.S. dollars, Japanese yen, British pounds sterling, Swiss franc, Canadian dollars or other currencies. Under both programs, the CP Notes are issued at a discount from par (or premium to par, in the case of negative interest rates), or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of July 2, 2022,
there were no outstanding borrowings under these programs.
Senior Notes
Interest is payable quarterly on the floating rate senior notes, annually on the euro-denominated fixed rate senior notes and semi-annually on all other senior notes. iEach of the fixed rate senior notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest. Except for the euro-denominated floating rate senior notes, which may not be redeemed early, the floating rate senior notes may be redeemed in whole or in part on or after their applicable call dates
at a redemption price of 100% of the principal amount plus accrued interest.The company is subject to certain affirmative and negative covenants under the indentures governing the senior notes, the most restrictive of which
14
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
limits the ability of the company to pledge
principal properties as security under borrowing arrangements. The company was in compliance with all covenants at July 2, 2022.
In the first quarter of 2022, the company redeemed all of its 3.650% Senior Notes due 2025. In connection with the redemption, the company incurred $i26
million of losses on the early extinguishment of debt included in other income/(expense) on the accompanying statement of income.
Thermo Fisher Scientific (Finance I) B.V. (Thermo Fisher International), a wholly-owned finance subsidiary of the company, issued each of the Floating Rate Senior Notes due 2023, the 0.00% Senior Notes due 2023, the 0.00% Senior Notes due 2025, the 0.80% Senior Notes due 2030, the 1.125% Senior Notes due 2033, the 1.625% Senior Notes due 2041, and the 2.00% Senior Notes due 2051 included in the table above (collectively, the “Euronotes”) in registered public offerings. The company has fully and unconditionally guaranteed all of Thermo Fisher International’s obligations under the Euronotes and all of Thermo Fisher International’s
other debt securities, and no other subsidiary of the company will guarantee these obligations. Thermo Fisher International is a “finance subsidiary” as defined in Rule 13-01(a)(4)(vi) of the Exchange Act, with no assets or operations other than those related to the issuance, administration and repayment of the Euronotes and other debt securities issued by Thermo Fisher International from time to time. The financial condition, results of operations and cash flows of Thermo Fisher International are consolidated in the financial statements of the company.
i
Note
8. Commitments and Contingencies
Environmental Matters
The company is currently involved in various stages of investigation and remediation related to environmental matters. The company cannot predict all potential costs related to environmental remediation matters and the possible impact on future operations given the uncertainties regarding the extent of the required cleanup, the complexity and interpretation of applicable laws and regulations, the varying costs of alternative cleanup methods and the extent of the company’s responsibility. Expenses for environmental remediation matters related to the costs of installing, operating
and maintaining groundwater-treatment systems and other remedial activities related to historical environmental contamination at the company’s domestic and international facilities were not material in any period presented. At July 2, 2022, there have been no material changes to the accruals for pending environmental-related matters disclosed in the company’s 2021 financial statements and notes included in the company’s Annual Report on Form 10-K. While management believes the accruals for environmental remediation are adequate based on current estimates of remediation costs, the company may
be subject to additional remedial or compliance costs due to future events such as changes in existing laws and regulations, changes in agency direction or enforcement policies, developments in remediation technologies or changes in the conduct of the company’s operations, which could have a material adverse effect on the company’s financial position, results of operations and cash flows.
Litigation and Related Contingencies
The company is involved in various disputes, governmental and/or regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business.
The disputes and litigation matters include product liability, intellectual property, employment and commercial issues. Due to the inherent uncertainties associated with pending litigation or claims, the company cannot predict the outcome, nor, with respect to certain pending litigation or claims where no liability has been accrued, make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. The company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed in the company’s 2021 financial statements and notes included in the company’s
Annual Report on Form 10-K, nor are material losses deemed probable for such matters. It is reasonably possible, however, that an unfavorable outcome that exceeds the company’s current accrual estimate, if any, for one or more of the matters described below could have a material adverse effect on the company’s results of operations, financial position and cash flows.
Product Liability, Workers Compensation and Other Personal Injury Matters
The company is involved in various proceedings and litigation that arise from time to time in connection with product liability, workers compensation and other personal injury matters. At July 2,
2022, there have been no material changes to the accruals for pending product liability, workers compensation, and other personal injury matters disclosed in the company’s 2021 financial statements and notes included in the company’s Annual Report on Form 10-K. Although the company believes that the amounts accrued and estimated insurance recoveries are probable and appropriate based on available information, including actuarial studies of loss estimates, the process of estimating losses and insurance recoveries involves a considerable degree of judgment by management and the ultimate amounts could vary, which could have a material adverse effect on the
company’s results of operations, financial position, and cash flows. Insurance contracts do not relieve the company of its primary obligation with respect to any losses incurred. The collectability of amounts due from its insurers is subject to the
15
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
solvency and willingness of the insurer to pay, as well as the legal sufficiency of the insurance
claims. Management monitors the payment history as well as the financial condition and ratings of its insurers on an ongoing basis.
i
Note 9. Comprehensive Income
iChanges
in each component of accumulated other comprehensive items, net of tax, are as follows:
(In millions)
Currency translation adjustment
Unrealized losses on hedging instruments
Pension
and other postretirement benefit liability adjustment
The
company uses the Black-Scholes model to value its warrants. The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The
company initially measures the fair value of acquisition-related contingent consideration based on amounts expected to be transferred (probability-weighted) discounted to present value. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense.
In the three and six months ended July 2, 2022, the company recorded $i17 million and $(i122) million,
respectively, of net gains (losses) on investments which are included in other income/(expense) in the accompanying statement of income. In the three and six months ended July 3, 2021, the company recorded $i1 million and $i2 million,
respectively, of net losses on investments which are included in other income/(expense) in the accompanying statement of income.
iThe following table provides a rollforward of the fair value, as determined by level 3 inputs (such as likelihood of achieving production or revenue milestones, as well as changes in the fair values of the investments underlying a recapitalization investment portfolio), of the contingent consideration.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the balance sheet. The following tables present the fair value of derivative instruments in the accompanying balance sheet and statement of income. i
(a) The
fair value of the cross-currency interest rate swaps is included in the accompanying balance sheet under the caption other assets or other long-term liabilities.
(b) The fair value of the currency exchange contracts is included in the accompanying balance sheet under the captions other current assets or other accrued expenses.
i
Gain
(loss) recognized
Three months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(In millions)
2022
2021
2022
2021
Fair
value hedging relationships
Interest rate swaps
Hedged long-term obligations - included in other income/(expense)
$
—
$
—
$
—
$
i25
Derivatives
designated as hedging instruments - included in other income/(expense)
—
—
—
(i3)
Derivatives
designated as cash flow hedges
Interest rate swaps
Amount reclassified
from accumulated other comprehensive items to other income/(expense)
(i1)
(i2)
(i2)
(i19)
Financial
instruments designated as net investment hedges
Foreign currency-denominated debt and other payables
Included in currency translation adjustment within other comprehensive items
i671
(i90)
i1,033
i376
Cross-currency
interest rate swaps
Included in currency translation adjustment within other comprehensive items
Gains
and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the accompanying statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.
The company uses foreign currency-denominated debt, certain foreign-denominated payables, and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. A portion of the company’s euro-denominated senior notes, certain foreign-denominated payables, and its cross-currency interest rate swaps have been designated as, and are effective
as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments and certain foreign-denominated payables, and contract fair value changes on the cross-currency interest rate
18
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’
equity.
See Note 1 to the consolidated financial statements for 2021 included in the company’s Annual Report on Form 10-K for additional information on the company’s risk management objectives and strategies.
Fair Value of Other Financial Instruments
ii
The
carrying value and fair value of the company’s debt instruments are as follows:
The
fair value of debt instruments was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends, which represent level 2 measurements.
//
i
Note
11. Supplemental Cash Flow Information
i
Six months ended
July
2,
July 3,
(In millions)
2022
2021
Non-cash investing and financing activities
Acquired but unpaid property, plant and equipment
$
i234
$
i225
Fair
value of acquisition contingent consideration
—
i179
Declared but unpaid dividends
i119
i104
Issuance
of stock upon vesting of restricted stock units
i107
i97
/
iCash,
cash equivalents and restricted cash is included in the accompanying balance sheet as follows:
July 2,
December 31,
(In millions)
2022
2021
Cash and cash equivalents
$
i1,888
$
i4,477
Restricted
cash included in other current assets
i16
i13
Restricted
cash included in other assets
i1
i1
Cash,
cash equivalents and restricted cash
$
i1,905
$
i4,491
/
Amounts
included in restricted cash represent funds held as collateral for bank guarantees and incoming cash in China awaiting government administrative clearance.
/
19
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
12. Restructuring and Other Costs
In the first six months of 2022, restructuring and other costs primarily included continuing charges for headcount reductions and facility consolidations in an effort to streamline operations. In 2022, severance actions associated with facility consolidations and cost reduction measures affected less than i0.5% of the company’s workforce.
As
of August 5, 2022, the company has identified restructuring actions that will result in additional charges of approximately $i20 million, primarily in 2022, and expects to identify additional actions in future periods which will be recorded when specified criteria are met, such as communication of benefit arrangements or when the costs have been incurred.
i
Restructuring
and other costs by segment are as follows:
Three months ended
Six months ended
July 2,
July
2,
(In millions)
2022
2022
Life Sciences Solutions
$
i5
$
i6
Analytical
Instruments
i2
i4
Specialty
Diagnostics
i2
i3
Laboratory
Products and Biopharma Services
i15
i13
$
i24
$
i26
/i
The
following table summarizes the changes in the company’s accrued restructuring balance. Other amounts reported as restructuring and other costs in the accompanying statement of income have been summarized in the notes to the table. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
(a)The movements in the restructuring liability principally consist of severance and other costs such as relocation and moving expenses associated with facility consolidations,
as well as employee retention costs which are accrued ratably over the period through which employees must work to qualify for a payment.
/
(b)Excludes $i4 million of net non-cash charges.
The company
expects to pay accrued restructuring costs primarily through i2022.
/
20
THERMO FISHER SCIENTIFIC INC.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, including without limitation statements regarding: projections of revenues, expenses, earnings, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, and our liquidity position; cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions or divestitures; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting
pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; the expected impact of the COVID-19 pandemic on the company’s business; and any other statements that address events or developments that Thermo Fisher intends or believes will or may occur in the future. Without limiting the foregoing, the words “believes,”“anticipates,”“plans,”“expects,”“seeks,”“estimates,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. While the
company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company’s estimates change, and readers should not rely on those forward-looking statements as representing the company’s views as of any date subsequent to the date of the filing of this report.
A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Risk Factors” in the company’s Annual
Report on Form 10-K for the year ended December 31, 2021 (which is on file with the SEC). Important factors that could cause actual results to differ materially from those indicated by forward-looking statements include risks and uncertainties relating to: the duration and severity of the COVID-19 pandemic; the need to develop new products and adapt to significant technological change; implementation of strategies for improving growth; general economic conditions and related uncertainties; dependence on customers’ capital spending policies and government funding policies; the effect of economic and political conditions and exchange rate fluctuations on international operations; use and protection of intellectual property; the effect of changes in governmental regulations; any natural disaster, public health crisis or other catastrophic event; and the effect of laws and regulations governing
government contracts, as well as the possibility that expected benefits related to recent or pending acquisitions may not materialize as expected.
The company refers to various amounts or measures not prepared in accordance with generally accepted accounting principles (non-GAAP measures). These non-GAAP measures are further described and reconciled to their most directly comparable amount or measure under the section “Non-GAAP Measures” later in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 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.
21
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (continued)
Financial Highlights
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(Dollars in millions except per share amounts)
2022
2021
Change
2022
2021
Change
Revenues
$
10,970
$
9,273
18
%
$
22,788
$
19,179
19
%
GAAP
operating income
2,001
2,163
(7)
%
4,822
5,212
(7)
%
GAAP operating income margin
18.2
%
23.3
%
(5.1)
pt
21.2
%
27.2
%
(6.0)
pt
Adjusted
operating income (non-GAAP measure)
2,605
2,689
(3)
%
6,055
6,199
(2)
%
Adjusted operating income margin (non-GAAP measure)
23.7
%
29.0
%
(5.3)
pt
26.6
%
32.3
%
(5.7)
pt
GAAP
diluted earnings per share attributable to Thermo Fisher Scientific Inc.
Since 2020, the Life Sciences Solutions and Specialty Diagnostics segments as well as the laboratory products business have supported COVID-19 diagnostic testing, scaling and evolving their molecular diagnostics solutions and plastic consumables businesses to respond to the ongoing COVID-19 pandemic. The biosciences and bioproduction businesses have expanded their capacity to meet the needs of pharma and biotech customers as they have expanded their own production volumes to meet global vaccine manufacturing requirements. Additionally, our pharma services business has provided our pharma and biotech customers with the services they needed to develop and produce vaccines and therapies globally. While these positive impacts are expected to continue through 2022, the duration and extent of future revenues from such sales are uncertain and dependent primarily on customer testing as well as therapy and
vaccine demand. Sales of products related to COVID-19 testing were $0.63 billion and $1.42 billion in the second quarter of 2022 and 2021, respectively, and $2.31 billion and $3.87 billion in the first six months of 2022 and 2021, respectively.
During the second quarter and first six months of 2022, demand from biotech and pharma customers was very strong, driven by our unique value proposition and trusted partner status. We saw growth in the academic and government market as we remain well positioned to meet customer needs. The industrial and applied market was strong, led by robust demand from semiconductor and materials sciences customers. The diagnostics and healthcare market declined due to decreased demand for COVID-19 testing products. During the second quarter and first six months of 2022, sales growth was strong in the Asia Pacific region, particularly China, and in North America. Sales declined in Europe during the
second quarter and first six months of 2022 due to lower COVID-19 testing demand. 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 second quarter and first six months of 2022 due primarily to the expected impact of incorporating recent acquisitions, lower COVID-19 testing volumes, and strategic growth investments. This was partially offset by strong pricing
realization across all segments to address higher inflation. GAAP operating income margin in 2022 was also impacted by higher amortization expense as a result of 2021 acquisitions. In the second quarter of 2021, GAAP operating income margin was impacted by an impairment of acquired technology.
22
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (continued)
The company’s references to strategic growth investments generally refer
to targeted spending for enhancing commercial capabilities, including expansion of geographic sales reach and e-commerce platforms, marketing initiatives, expanded service and operational infrastructure, research and development projects and other expenditures to enhance the customer experience, as well as incentive compensation and recognition for employees. The company’s references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system including reduced costs resulting from implementing continuous improvement methodologies, global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, and low cost region manufacturing.
Notable Recent Acquisitions
On
January 15, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS for $0.83 billion in net cash consideration. 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, for $0.41 billion in net cash
consideration and contingent consideration with an initial fair value of $0.06 billion due upon the completion of certain milestones. 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. The company expects to make fixed lease payments aggregating to $0.56 billion (excluding renewals) from 2021 to 2041, with additional amounts dependent on the extent of revenues from customers of the facility other than CSL.
On December 8, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, PPD, Inc., a U.S.-based global provider of clinical research services to the pharma and biotech industry, for $15.99 billion in net cash consideration and $0.04 billion of equity awards exchanged. The addition of PPD’s clinical research services enhances our offering to biotech and pharma customers by enabling them to accelerate innovation and increase their
productivity within the drug development process. In 2020, PPD generated revenues of $4.68 billion.
On December 30, 2021, the company acquired, within the Life Sciences Solutions segment, PeproTech, Inc., a U.S. based developer and manufacturer of recombinant proteins, for $1.86 billion in net cash consideration. PeproTech provides bioscience reagents known as recombinant proteins, including cytokines and growth factors. The acquisition expands the segment’s bioscience offerings.
Results of Operations
The company’s
management evaluates segment operating performance using operating income before certain charges/credits as defined in Note 4 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2021. Accordingly, the following segment data are reported on this basis.
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(Dollars in millions)
2022
2021
2022
2021
Revenues
Life
Sciences Solutions
$
3,292
$
3,557
$
7,523
$
7,760
Analytical Instruments
1,607
1,481
3,125
2,868
Specialty
Diagnostics
1,101
1,235
2,583
2,850
Laboratory Products and Biopharma Services
5,537
3,583
10,979
7,180
Eliminations
(567)
(583)
(1,422)
(1,479)
Consolidated
revenues
$
10,970
$
9,273
$
22,788
$
19,179
23
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The
decrease in organic revenues in the second quarter of 2022 was primarily due to lower revenue in the genetic sciences business, driven by moderation in testing demand to diagnose COVID-19, partially offset by strong growth in the bioproduction business. The decrease in segment income margin resulted primarily from unfavorable business mix and strategic growth investments, partially offset by productivity improvements.
The decrease in organic revenues in the first six months of 2022 was driven by a combination of moderation in testing demand to diagnose COVID-19 with lower sales of genetic sciences products, largely offset by strong demand in the bioproduction and biosciences businesses. The decrease in segment income margin resulted primarily from business mix and strategic growth investments, partially offset by productivity improvements.
The
increase in organic revenues in the second quarter of 2022 was due to increased demand in the electron microscopy and chromatography and mass spectrometry businesses. The increase in segment income margin resulted primarily from strong volume pull through and productivity improvements, offset in part by strategic growth investments.
The
increase in organic revenues in the first six months of 2022 was due to increased demand in the electron microscopy and chromatography and mass spectrometry businesses. The increase in segment income margin resulted primarily from strong volume pull through, productivity improvements and business mix, offset in part by strategic growth investments.
24
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The
decrease in organic revenues in the second quarter of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the immunodiagnostics and microbiology businesses, as well as our healthcare market channel. The impact of lower COVID-19 testing volume on segment income margin was more than offset by strong productivity improvements and positive business mix.
The
decrease in organic revenues in the first six months of 2022 was due to decreased demand, primarily driven by products addressing diagnosis of COVID-19, partially offset by growth in the immunodiagnostics and transplant diagnostics businesses. The decrease in segment income margin was primarily due to lower COVID-19 testing volume, largely offset by productivity improvements.
The
increase in organic revenues in the second quarter of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the research and safety market channel and pharma services business and, to a lesser extent, the laboratory products business. The acquisition of PPD, the company’s clinical research business, contributed $1.72 billion of revenue during the second quarter. The increase in segment income margin was primarily due to strong productivity and the benefit of recent acquisitions, largely offset by strategic growth investments and unfavorable business mix.
The
increase in organic revenues in the first six months of 2022 was primarily due to higher sales across each of the segment’s businesses, with particular strength in the research and safety market channel and pharma services business and, to a lesser extent, the laboratory products business. The acquisition of PPD, the company’s clinical research business, contributed $3.38 billion of revenue during the first six months of 2022. The decrease in segment income margin was primarily due to business mix and strategic growth investments, offset in part by the benefit of recent acquisitions.
* Results may not sum due to rounding
25
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Non-operating Items
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(Dollars in millions)
2022
2021
2022
2021
Net
interest expense
$
112
$
111
$
230
$
224
GAAP other income/(expense)
28
(3)
(135)
(186)
Adjusted
other income/(expense) (non-GAAP measure)
10
5
14
19
GAAP tax rate
10.4
%
10.7
%
11.2
%
13.2
%
Adjusted
tax rate (non-GAAP measure)
13.0
%
14.0
%
13.6
%
15.1
%
Net interest expense (interest expense less interest income) increased due primarily to the increase in debt to finance the acquisition of PPD and for general corporate purposes, largely offset by lower average interest rates. See additional discussion under the caption “Liquidity and Capital Resources” below.
GAAP
other income/(expense) and adjusted other income/(expense) includes currency transaction gains, losses on non-operating monetary assets and liabilities, and net periodic pension benefit cost/income, excluding the service cost component. GAAP other income/(expense) in the second quarter and first six months of 2022 includes $18 million of net gains and $123 million of net losses on investments, respectively. In the first six months of 2022 and 2021 GAAP other income/(expense) also includes $26 million and $197 million, respectively, of losses on the early extinguishment of debt (Note 7).
The company’s GAAP and adjusted tax rates decreased in 2022 compared to 2021 primarily due to releases of valuation allowances of $88 million and $175 million for the three and six months ended July 2, 2022, respectively,
in jurisdictions where the deferred tax assets are now expected to be realized. The company’s 2022 GAAP tax rate was also impacted by changes in tax rates and higher amortization expense as a result of 2021 acquisitions. In the second quarter of 2021 the company recorded a $162 million income tax benefit on an intra-entity transfer of fixed assets.
The effective tax rates in both 2022 and 2021 were also affected by relatively significant earnings in lower tax jurisdictions. Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company’s cash payments for income taxes are higher than its income tax expense for financial reporting purposes and
are expected to total approximately $1.35 billion in 2022.
The company expects its GAAP effective tax rate in 2022 will be between 10% and 12% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits. The effective tax rate can vary significantly from period to period as a result of discrete income tax factors and events. The company expects its adjusted tax rate will be between 13% and 13.5% in 2022.
The company has operations and a taxable presence in approximately
70 countries outside the U.S. 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.
July
2,
December 31,
(In millions)
2022
2021
Cash and cash equivalents
$
1,888
$
4,477
Total debt
30,260
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
26
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 July 2, 2022, the company’s short-term debt totaled $1.01 billion. The company has a revolving credit facility with a bank group that provides up to $5.00 billion of unsecured multi-currency revolving credit (Note 7). If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As of July 2, 2022, no borrowings
were outstanding under the company’s revolving credit facility, although available capacity was reduced by immaterial outstanding letters of credit.
Six months ended
July 2,
July 3,
(In
millions)
2022
2021
Net cash provided by operating activities
$
3,730
$
4,205
Net cash used in investing activities
(1,089)
(2,624)
Net cash
used in financing activities
(5,050)
(4,926)
Free cash flow (non-GAAP measure)
2,598
3,042
Operating Activities
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 $0.83 billion during the first six months of 2022.
During the first six months of 2021, cash provided by income was offset in part by investments in working capital. A decrease in accounts receivable provided $0.25 billion of cash. An increase in inventories used cash of $0.62 billion, primarily to support growth in sales. Changes in other assets and other liabilities used cash of $1.06 billion primarily due to the timing of payments for compensation and income taxes. Cash payments for income taxes were $1.27 billion during the first six months of 2021.
Investing Activities
During the first six months of 2022, acquisitions used cash of $0.04 billion. The
company’s investing activities also included the purchase of $1.15 billion of property, plant and equipment for capacity and capability investments.
During the first six months of 2021, acquisitions used cash of $1.43 billion. The company’s investing activities also included the purchase of $1.17 billion of property, plant and equipment for capacity and capability investments.
Financing Activities
During the first six months of 2022, repayment of senior notes and net commercial paper activity used cash of $0.38 billion and $2.46 billion, respectively. 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. On September 23, 2021, the Board of Directors authorized the repurchase of up to $3.00 billion of the company’s common stock. At August 5, 2022, authorization remained for $1.00 billion of future repurchases of the company’s common stock.
During the first six months of 2021 repayment of senior notes used cash of $2.80 billion. 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 $0.19 billion in cash dividends.
The company’s commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2021 and July 2, 2022. The company expects that for all of 2022, expenditures for property, plant and equipment, net of disposals, will be between $2.5 and $2.7 billion.
27
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-GAAP Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures such as organic revenue growth, which is reported revenue growth, excluding the impacts of revenues from acquired/divested businesses and the effects of currency translation. We report organic revenue growth because Thermo Fisher management believes that in order to understand the company’s short-term and long-term financial trends, investors may wish to consider the impact of acquisitions/divestitures and foreign currency translation
on revenues. Thermo Fisher management uses organic revenue growth to forecast and evaluate the operational performance of the company as well as to compare revenues of current periods to prior periods.
We report adjusted operating income, adjusted operating income margin, adjusted other income/(expense), adjusted tax rate, and adjusted EPS. We believe that the use of these non-GAAP financial measures, in addition to GAAP financial measures, helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company’s core operating performance, especially when comparing such results to previous periods, forecasts, and to the performance of our competitors. Such measures are
also used by management in their financial and operating decision-making and for compensation purposes. To calculate these measures we exclude, as applicable:
•Certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition, significant transaction/acquisition-related costs, including changes in estimates of contingent acquisition-related consideration, and other costs associated with obtaining short-term financing commitments for pending/recent acquisitions. We exclude these costs because we do not believe they are indicative of our normal operating costs.
•Costs/income associated with restructuring activities, such as reducing overhead and consolidating facilities. We exclude these costs because we believe that the costs related to restructuring activities are not indicative of our
normal operating costs.
•Equity in earnings/losses of unconsolidated entities; impairments of long-lived assets; and certain other gains and losses that are either isolated or cannot be expected to occur again with any predictability, including gains/losses on investments, the sale of businesses, product lines, and real estate, significant litigation-related matters, curtailments/settlements of pension plans, and the early retirement of debt. We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods.
•The expense associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of up to 20 years. Exclusion of
the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.
•The tax impacts of the above items and the impact of significant tax audits or events (such as changes in deferred taxes from enacted tax rate/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 Thermo Fisher Scientific’s results of operations and cash flows included in this Form 10-Q are not meant to be considered superior to or a substitute for Thermo Fisher Scientific’s results of operations prepared in accordance with GAAP. Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth within the “Overview” and “Results of Operations” sections and below.
28
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-GAAP Measures (Continued)
Three
months ended
Six months ended
July 2,
July 3,
July 2,
July 3,
(Dollars in millions except per share amounts)
2022
2021
2022
2021
Reconciliation
of adjusted operating income
GAAP operating income
$
2,001
$
2,163
$
4,822
$
5,212
Cost
of revenues adjustments (a)
8
—
19
8
Selling, general and administrative expenses adjustments (b)
(28)
(42)
(21)
(26)
Restructuring
and other costs (c)
24
119
26
133
Amortization of acquisition-related intangible assets
600
449
1,209
872
Adjusted
operating income (non-GAAP measure)
$
2,605
$
2,689
$
6,055
$
6,199
Reconciliation
of adjusted operating income margin
GAAP operating income margin
18.2
%
23.3
%
21.2
%
27.2
%
Cost of revenues adjustments
(a)
0.1
%
0.0
%
0.1
%
0.0
%
Selling, general and administrative expenses adjustments (b)
(0.3)
%
(0.4)
%
(0.1)
%
(0.1)
%
Restructuring
and other costs (c)
0.2
%
1.3
%
0.1
%
0.7
%
Amortization of acquisition-related intangible assets
5.5
%
4.8
%
5.3
%
4.5
%
Adjusted
operating income margin (non-GAAP measure)
23.7
%
29.0
%
26.6
%
32.3
%
Reconciliation of adjusted other
income/(expense)
GAAP other income/(expense)
$
28
$
(3)
$
(135)
$
(186)
Adjustments
(d)
(18)
8
149
205
Adjusted other income/(expense) (non-GAAP measure)
$
10
$
5
$
14
$
19
Reconciliation
of adjusted tax rate
GAAP tax rate
10.4
%
10.7
%
11.2
%
13.2
%
Adjustments (e)
2.6
%
3.3
%
2.4
%
1.9
%
Adjusted
tax rate (non-GAAP measure)
13.0
%
14.0
%
13.6
%
15.1
%
Reconciliation
of adjusted earnings per share
GAAP diluted earnings per share (EPS) attributable to Thermo Fisher Scientific Inc.
$
4.22
$
4.61
$
9.83
$
10.50
Cost
of revenues adjustments (a)
0.02
—
0.05
0.02
Selling, general and administrative expenses adjustments (b)
(0.07)
(0.10)
(0.05)
(0.07)
Restructuring
and other costs (c)
0.06
0.30
0.06
0.34
Amortization of acquisition-related intangible assets
1.52
1.13
3.06
2.20
Other
income/expense adjustments (d)
(0.05)
0.02
0.38
0.51
Provision for income taxes adjustments (e)
(0.32)
(0.36)
(0.75)
(0.69)
Equity
in earnings/losses of unconsolidated entities
0.13
—
0.18
—
Adjusted EPS (non-GAAP measure)
$
5.51
$
5.60
$
12.76
$
12.81
Reconciliation
of free cash flow
GAAP net cash provided by operating activities
$
1,528
$
2,227
$
3,730
$
4,205
Purchases
of property, plant and equipment
(506)
(540)
(1,146)
(1,168)
Proceeds from sale of property, plant and equipment
12
—
14
5
Free
cash flow (non-GAAP measure)
$
1,034
$
1,687
$
2,598
$
3,042
29
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Non-GAAP Measures (Continued)
(a) Adjusted results exclude charges for the sale of inventories revalued at the date of acquisition.
(b) Adjusted results exclude certain third-party expenses, principally transaction/integration costs related to recent acquisitions and charges/credits for changes in estimates of contingent acquisition consideration.
(c) Adjusted results exclude restructuring and other costs consisting principally of severance, abandoned facility and other expenses of headcount reductions within
several businesses and real estate consolidations. Adjusted results in Q1 2021 and Q2 2021 also exclude $13 million of charges for compensation due to employees at recently acquired businesses at the date of acquisition and $110 million of charges for impairment of acquired technology, respectively.
(d) Adjusted results exclude net gains/losses on investments and losses on the early extinguishment of debt. Adjusted results in Q2 2021 also exclude amortization of bridge loan commitment fees related to a pending acquisition.
(e) Adjusted provision for income taxes in 2022 and 2021 excludes incremental tax impacts for the pre-tax reconciling items and incremental tax impacts as a result of tax rate/law changes.
Critical
Accounting Policies and Estimates
Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Annual Report on Form 10-K for 2021 describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no significant changes in the company’s critical accounting policies during the first six months of 2022.
Recent Accounting
Pronouncements
A description of recently issued accounting standards is included under the heading “Recent Accounting Pronouncements” in Note 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management’s Evaluation of Disclosure Controls and Procedures
The company’s management, with the participation of the company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, the company’s chief executive officer and chief financial officer concluded that, as of the end of such period, the company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have
been no changes in the company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter ended July 2, 2022, that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
30
THERMO FISHER SCIENTIFIC INC.
PART II OTHER INFORMATION
Item
1. Legal Proceedings
There are various lawsuits and claims against the company involving product liability, intellectual property, employment and commercial issues. See “Note 8 to our Condensed Consolidated Financial Statements – Commitments and Contingencies.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
There was no share repurchase activity for the
company's second quarter of 2022. On September 23, 2021, the Board of Directors authorized the repurchase of up to $3.00 billion of the company’s common stock. At July 2, 2022, $1.00 billion was available for future repurchases of the company’s common stock under this authorization.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL
Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Definition Linkbase Document.
101.LAB
XBRL Taxonomy Label Linkbase Document.
101.PRE
XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive
Data File (formatted as Inline XBRL and contained in Exhibit 101).
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the Commission, upon request, a copy of each instrument with respect to long-term debt of the Registrant or its consolidated subsidiaries.
_______________________
** Certification is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such certification is not
deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
