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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 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 during the preceding 12 months. 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.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
7
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, improve patient diagnostics and therapies, and increase laboratory productivity. 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 3, 2021, the results of operations for the three- and six-month periods ended July 3, 2021 and June 27, 2020, and the cash flows for the six-month periods ended July 3, 2021 and June 27, 2020. Interim results are not necessarily indicative of results for a full year.
The condensed consolidated balance sheet presented as of December 31, 2020, 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 2020 financial statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
Note 1 to the consolidated financial statements for 2020 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 3, 2021.
i
Inventories
The components of inventories are as follows:
July
3,
December 31,
(In millions)
2021
2020
Raw Materials
$
i1,622
$
i1,305
Work
in Process
i652
i540
Finished
Goods
i2,351
i2,184
Inventories
$
i4,625
$
i4,029
/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. Risks and uncertainties associated with the ongoing COVID-19 global pandemic materially adversely affected certain of the
company’s businesses in 2020, particularly in the Analytical Instruments segment and, to a lesser extent, some businesses within the other three segments. The negative impacts have significantly lessened so far in 2021. The extent and duration of negative impacts in the future are uncertain and may require changes to estimates. Actual results could differ from those estimates.
i
Recent Accounting Pronouncements
In July 2021, the FASB amended guidance to require
lessors to classify leases as operating leases if they have certain variable lease payment structures and would have selling losses if they were classified as sales-type or direct financing leases. The company expects to adopt the guidance in the third quarter of 2021 using a prospective method. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
/
8
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. Among other things, the new guidance requires the effects of enacted changes in tax laws or rates to be reflected in the annual effective tax rate computation in the interim period that includes the enactment date. The company adopted this guidance in 2021 using a prospective method. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements; however, the impact in future periods will be dependent on the extent of future events or
conditions that would be affected such as enacted changes in tax laws or rates.
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. 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 use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
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.
Pending
Acquisition
On April 15, 2021, the company entered into a definitive agreement under which it will acquire PPD, Inc. for $i47.50 per share for a total cash purchase price of $i17.4 billion
plus the assumption of approximately $i3.5 billion of net debt. PPD provides a broad range of clinical research and specialized laboratory services to enable customers to accelerate innovation and increase drug development productivity. Upon close of the transaction, PPD will become part of the Laboratory Products and Services Segment. Shareholders holding in aggregate approximately i60%
of the issued and outstanding shares of common stock of PPD on April 15, 2021, have approved the transaction by written consent. No further action by other PPD shareholders is required to approve the transaction. The transaction is subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals. On July 16, 2021, the company and PPD each received a request for additional information and documentary materials (collectively, the “Second Request”) from the U.S. Federal Trade Commission (“FTC”), in connection with the FTC’s review of the proposed merger. The effect of the Second Request is to extend the waiting period imposed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), until
the 30th day after substantial compliance by the company and PPD with the Second Request, unless the waiting period is terminated earlier by the FTC. Subject to the satisfaction of the required closing conditions, we continue to expect the merger to be completed by the end of 2021.
2021
On January 15, 2021, the company acquired, within the Laboratory Products and Services segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS for approximately $i834
million 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. The goodwill recorded as a result of the acquisition is not tax deductible.
On February 25, 2021, the company acquired, within the Life Sciences Solutions segment, Mesa Biotech, Inc., a U.S.-based molecular diagnostic company, for approximately $i406
million in net cash consideration and contingent consideration with an initial fair value of $i65 million due upon the completion of certain milestones. Mesa Biotech has developed and commercialized a polymerase chain reaction (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. The goodwill recorded as a result of the acquisition is not tax deductible.
In addition, in the first six months of 2021 the company acquired, within the Life Sciences Solutions segment, cell sorting technology assets, an Ireland-based life sciences distributor and a developer of a digital PCR platform.
/
9
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
iThe
components of the purchase prices and the allocations to the net assets acquired for 2021 acquisitions are as follows:
The
weighted-average amortization periods for definite-lived intangible assets acquired in 2021 are i14 years for customer relationships, i7 years for product
technology and i3 years for tradenames. The weighted average amortization period for all definite-lived intangible assets acquired in 2021 is i9 years.
The
preliminary allocation of the purchase price for the acquisition of the European viral vectors business was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization, largely with respect to acquired intangible assets and the related deferred taxes. Measurements of these items inherently require significant estimates and assumptions.
10
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues
by geographic region based on customer location are as follows:
Three Months Ended
Six Months Ended
July 3,
June
27,
July 3,
June 27,
(In millions)
2021
2020
2021
2020
Revenues
North
America
$
i4,529
$
i3,544
$
i9,630
$
i6,831
Europe
i2,695
i1,783
i5,480
i3,432
Asia-Pacific
i1,749
i1,329
i3,458
i2,447
Other
regions
i300
i261
i611
i437
Consolidated
revenues
$
i9,273
$
i6,917
$
i19,179
$
i13,147
/
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.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the remaining performance obligations for all open customer contracts as of July 3, 2021 was $i13.56
billion. The company will recognize revenues for these performance obligations as they are satisfied, approximately i74% of which is expected to occur within the next itwelve
months.
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 3, 2021, the company recognized revenues of $i365 million and $i931
million, respectively, that were included in the contract liabilities balance at December 31, 2020. In the three and six months ended June 27, 2020, the company recognized revenues of $i226 million and $i631
million, respectively, that were included in the contract liabilities balance at December 31, 2019.
/
11
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
4. Business Segment and Geographical Information
iiBusiness Segment Information
Three
Months Ended
Six Months Ended
July 3,
June 27,
July 3,
June 27,
(In millions)
2021
2020
2021
2020
Revenues
Life
Sciences Solutions
$
i3,557
$
i2,602
$
i7,760
$
i4,376
Analytical
Instruments
i1,481
i1,051
i2,868
i2,152
Specialty
Diagnostics
i1,235
i988
i2,850
i1,946
Laboratory
Products and Services
i3,583
i2,787
i7,180
i5,517
Eliminations
(i583)
(i511)
(i1,479)
(i844)
Consolidated
revenues
i9,273
i6,917
i19,179
i13,147
Segment
Income
Life Sciences Solutions
i1,718
i1,234
i3,997
i1,909
Analytical
Instruments
i280
i135
i552
i306
Specialty
Diagnostics
i245
i214
i673
i450
Laboratory
Products and Services
i446
i281
i977
i576
Subtotal
reportable segments
i2,689
i1,864
i6,199
i3,241
Cost
of revenues charges
i—
(i2)
(i8)
(i4)
Selling,
general and administrative credits (charges)
i42
(i42)
i26
(i48)
Restructuring
and other costs
(i119)
(i12)
(i133)
(i50)
Amortization
of acquisition-related intangible assets
(i449)
(i417)
(i872)
(i842)
Consolidated
operating income
i2,163
i1,391
i5,212
i2,297
Interest
income
i11
i8
i23
i44
Interest
expense
(i122)
(i137)
(i247)
(i263)
Other
(expense) income
(i5)
(i9)
(i188)
i3
Income
before income taxes
$
i2,047
$
i1,253
$
i4,800
$
i2,081
//
i
Geographical
Information
Three Months Ended
Six Months Ended
July 3,
June
27,
July 3,
June 27,
(In millions)
2021
2020
2021
2020
Revenues (a)
United
States
$
i4,355
$
i3,414
$
i9,247
$
i6,553
China
i794
i594
i1,569
i1,058
Other
i4,124
i2,909
i8,363
i5,536
Consolidated
revenues
$
i9,273
$
i6,917
$
i19,179
$
i13,147
(a)
Revenues are attributed to countries based on customer location.
//
12
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 3,
June 27,
(In millions)
2021
2020
Statutory Federal Income Tax Rate
i21
%
i21
%
Provision
for Income Taxes at Statutory Rate
$
i1,008
$
i437
Increases
(Decreases) Resulting From:
Foreign rate differential
(i73)
(i110)
Income
tax credits
(i173)
(i157)
Global
intangible low-taxed income
i50
i35
Foreign-derived
intangible income
(i89)
(i29)
Excess
tax benefits from stock options and restricted stock units
(i47)
(i50)
Intra-entity
transfers
(i162)
—
State
income taxes, net of federal tax
i78
i14
Other,
net
i43
(i3)
Provision
for Income Taxes
$
i635
$
i137
/
The
company has operations and a taxable presence in approximately 50 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 3, 2021, the company had $i1.13
billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate.
iA reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(In millions)
2021
Balance
at Beginning of Year
$
i1,091
Additions for tax positions of current year
i30
Additions
for tax positions of prior years
i15
Settlements
(i3)
Balance
at End of Period
$
i1,133
/
/
13
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 3,
June 27,
July 3,
June 27,
(In millions except per share amounts)
2021
2020
2021
2020
Net
Income
$
i1,828
$
i1,156
$
i4,165
$
i1,944
Basic
Weighted Average Shares
i393
i395
i394
i396
Plus
Effect of: Stock options and restricted stock units
i3
i3
i3
i3
Diluted
Weighted Average Shares
i396
i398
i397
i399
Basic
Earnings per Share
$
i4.65
$
i2.92
$
i10.58
$
i4.91
Diluted
Earnings per Share
$
i4.61
$
i2.90
$
i10.50
$
i4.87
Antidilutive
Stock Options Excluded from Diluted Weighted Average Shares
i1
i1
i1
i1
/
/
14
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 7. Debt and Other Financing Arrangements
i
Effective
Interest Rate at July 3,
July 3,
December 31,
(Dollars in millions)
2021
2021
2020
i2.15%
i7-Year Senior Notes, Due i7/21/2022 (euro-denominated)
$
—
$
i611
i3.00%
i7-Year Senior Notes, Due i4/15/2023
—
i1,000
i4.15%
i10-Year Senior Notes, Due i2/1/2024
—
i1,000
i0.75%
i8-Year Senior Notes, Due i9/12/2024 (euro-denominated)
i0.94
%
i1,186
i1,222
i0.125%
i5.5-Year Senior Notes, Due i3/1/2025 (euro-denominated)
i0.42
%
i949
i977
i4.133%
i5-Year Senior Notes, Due i3/25/2025
i4.32
%
i1,100
i1,100
i2.00%
i10-Year Senior Notes, Due i4/15/2025 (euro-denominated)
i2.10
%
i759
i782
i3.65%
i10-Year Senior Notes, Due i12/15/2025
i3.77
%
i350
i350
i1.40%
i8.5-Year Senior Notes, Due i1/23/2026 (euro-denominated)
i1.53
%
i831
i855
i2.95%
i10-Year Senior Notes, Due i9/19/2026
i3.19
%
i1,200
i1,200
i1.45%
i10-Year Senior Notes, Due i3/16/2027 (euro-denominated)
i1.66
%
i593
i611
i1.75%
i7-Year Senior Notes, Due i4/15/2027 (euro-denominated)
i1.98
%
i712
i733
i3.20%
i10-Year Senior Notes, Due i8/15/2027
i3.39
%
i750
i750
i0.50%
i8.5-Year Senior Notes, Due i3/1/2028 (euro-denominated)
i0.78
%
i949
i977
i1.375%
i12-Year Senior Notes, Due i9/12/2028 (euro-denominated)
i1.46
%
i712
i733
i1.95%
i12-Year Senior Notes, Due i7/24/2029 (euro-denominated)
i2.08
%
i831
i855
i2.60%
i10-Year Senior Notes, Due i10/1/2029
i2.74
%
i900
i900
i4.497%
i10-Year Senior Notes, Due i3/25/2030
i5.31
%
i1,100
i1,100
i0.875%
i12-Year Senior Notes, Due i10/1/2031 (euro-denominated)
i1.14
%
i1,068
i1,099
i2.375%
i12-Year Senior Notes, Due i4/15/2032 (euro-denominated)
i2.55
%
i712
i733
i2.875%
i20-Year Senior Notes, Due i7/24/2037 (euro-denominated)
i2.94
%
i831
i855
i1.50%
i20-Year Senior Notes, Due i10/1/2039 (euro-denominated)
i1.73
%
i1,068
i1,099
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)
i1.99
%
i1,186
i1,222
Other
i33
i12
Total
Borrowings at Par Value
i18,970
i21,926
Fair
Value Hedge Accounting Adjustments
—
i25
Unamortized Discount
(i91)
(i102)
Unamortized
Debt Issuance Costs
(i102)
(i114)
Total
Borrowings at Carrying Value
i18,777
i21,735
Less:
Short-term Obligations and Current Maturities
i4
i2,628
Long-term
Obligations
$
i18,773
$
i19,107
/
The
effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discount and the amortization of any debt issuance costs.
See Note 10 for fair value information pertaining to the company’s long-term obligations.
In connection with the agreement to acquire PPD (Note 2), the company has available, but does not currently expect to utilize, up to $i6.5 billion
of committed bridge financing. The company intends to finance the purchase price with cash on hand and the net proceeds from issuance of debt. The company is currently evaluating future debt financings and the timing of such transactions is subject to market and other conditions. The company had a cash outlay of $i29 million
in 2021 associated with obtaining the bridge commitment included in other financing activities, net, in the accompanying statement of cash flows.
/
15
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Credit Facilities
The company has a revolving credit facility (the Facility) with a bank group that provides for up to $i3.00
billion of unsecured multi-currency revolving credit. The Facility expires on December 4, 2025. The revolving credit agreement calls for interest at either a LIBOR-based rate (or LIBOR successor rate), 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 3, 2021, ino
borrowings were outstanding under the Facility, although available capacity was reduced by approximately $i4 million as a result of 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 3, 2021, there were ino outstanding borrowings under these programs.
Senior Notes
Interest is payable annually on the euro-denominated senior notes and semi-annually on all other senior notes. iEach
of the notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest.The company is subject to certain affirmative and negative covenants under the indentures governing the senior notes, the most restrictive of which 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 3, 2021.
In the first quarter of 2021, the
company redeemed some of its existing senior notes. In connection with these redemptions, the company incurred $i197 million of losses on the early extinguishment of debt included in Other (Expense) Income on the accompanying statement of income. Upon redemption of the senior notes, the company terminated the related fixed to floating rate interest rate swap arrangements
and received $i22 million, included in other financing activities, net, in the accompanying statement of cash flows.
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 3, 2021, there have been no material changes to the accruals for pending environmental-related matters disclosed in the company’s 2020 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 or cash flows.
16
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 2020 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 3, 2021, 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 2020 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 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.
Strategic Partnership and Long-term Lease
In May 2020, the company entered a strategic partnership with CSL Limited (CSL). Through a long-term lease agreement with CSL, the company will operate a new state-of-the-art biologics manufacturing facility in Lengnau, Switzerland, when construction is completed in the second half of 2021, to perform pharma services for CSL with capacity to serve other customers as well. The company made an initial lease payment of $i50 million
in the second quarter of 2020 (included within other assets in the accompanying balance sheet) and expects to make additional fixed lease payments aggregating to $i555 million (excluding renewals) from 2021 to 2041, with additional amounts dependent on the extent of revenues from customers of the facility other than CSL.
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 10. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
The following tables present information about the company’s financial assets and
liabilities measured at fair value on a recurring basis as of iJuly 3, 2021 and December 31, 2020:
July
3,
Quoted Prices in Active Markets
Significant Other Observable Inputs
Significant Unobservable Inputs
(In millions)
2021
(Level 1)
(Level 2)
(Level 3)
Assets
Cash
equivalents
$
i5,481
$
i5,481
$
—
$
—
Investments
in common stock, mutual funds and other similar instruments
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. iThe following table provides a rollforward of the fair value, as determined by level 3 inputs (such as likelihood of achieving production or revenue
/
18
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 values of the interest rate swaps and cross-currency interest rate swaps are 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.
19
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following amounts related to cumulative
basis adjustments for fair value hedges were included in the accompanying balance sheet under the caption long-term obligations:
Carrying Amount of the Hedged Liability
Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included
in Carrying Amount of Liability
July 3,
December 31,
July 3,
December 31,
(In millions)
2021
2020
2021
2020
Long-term Obligations
$
—
$
i1,020
$
—
$
i25
i
Gain
(Loss) Recognized
Three Months Ended
Six Months Ended
July 3,
June 27,
July 3,
June 27,
(In millions)
2021
2020
2021
2020
Fair
Value Hedging Relationships
Interest rate swaps
Hedged long-term obligations - included in other income (expense)
$
—
$
(i7)
$
i25
$
(i43)
Derivatives
designated as hedging instruments - included in other income (expense)
—
i7
(i3)
i43
Derivatives
Designated as Cash Flow Hedges
Interest rate swaps
Included in unrealized losses on hedging instruments within other comprehensive items
—
(i4)
—
(i85)
Amount
reclassified from accumulated other comprehensive items to other expense
(i2)
(i4)
(i19)
(i6)
Financial
Instruments Designated as Net Investment Hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items
(i90)
(i64)
i376
i19
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 and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The majority of the company’s euro-denominated senior notes 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 contract fair value changes on the cross-currency interest rate swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’ equity.
20
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
See Note 1 to the consolidated financial statements for 2020 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 obligations are as follows:
The
fair value of debt obligations 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
3,
June 27,
(In millions)
2021
2020
Non-cash Investing and Financing Activities
Acquired but unpaid property, plant and equipment
$
i225
$
i107
Fair
value of acquisition contingent consideration
i179
—
Declared but unpaid dividends
i104
i89
Issuance
of stock upon vesting of restricted stock units
i97
i81
/
iCash,
cash equivalents and restricted cash is included in the accompanying balance sheet as follows:
July 3,
December 31,
(In millions)
2021
2020
Cash and Cash Equivalents
$
i7,023
$
i10,325
Restricted
Cash Included in Other Current Assets
i11
i10
Restricted
Cash Included in Other Assets
i1
i1
Cash,
Cash Equivalents and Restricted Cash
$
i7,035
$
i10,336
/
Amounts
included in restricted cash represent funds held as collateral for bank guarantees and incoming cash in China awaiting government administrative clearance.
/
21
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 2021 the company recorded restructuring and other costs primarily associated with charges for impairment of acquired technology and third-party transaction/integration costs related to recent acquisitions, partially offset by credits for changes in estimates of contingent acquisition consideration. In the first six months of 2021, severance actions associated with facility consolidations and cost reduction measures affected less than i0.5%
of the company’s workforce.
As of August 6, 2021, the company has identified restructuring actions that will result in additional charges of approximately $i45 million, primarily in 2021, and expects to identify additional actions during 2021 which will be recorded when specified criteria are
met, such as communication of benefit arrangements or when the costs have been incurred.
i
During the second quarter of 2021, the company recorded net restructuring and other costs (income) by segment as follows:
(In
millions)
Cost of Revenues
Selling, General and Administrative Expenses
Restructuring and Other Costs
Total
Life Sciences Solutions
$
—
$
(i57)
$
i115
$
i58
Specialty
Diagnostics
—
—
i3
i3
Laboratory
Products and Services
—
i15
i1
i16
$
—
$
(i42)
$
i119
$
i77
During
the first six months of 2021, the company recorded net restructuring and other costs (income) by segment as follows:
(In millions)
Cost of Revenues
Selling, General
and Administrative Expenses
Restructuring and Other Costs
Total
Life Sciences Solutions
$
i8
$
(i47)
$
i128
$
i89
Analytical
Instruments
—
—
i3
i3
Specialty
Diagnostics
—
(i2)
i3
i1
Laboratory
Products and Services
—
i23
(i2)
i21
Corporate
—
—
i1
i1
$
i8
$
(i26)
$
i133
$
i115
/
The
principal components of net restructuring and other costs (income) by segment are as follows:
Life Sciences Solutions
In the first six months of 2021, the Life Sciences Solutions segment recorded $i128 million of restructuring and other costs, primarily charges of $i110 million
for impairment of acquired technology resulting from a reduction in expected cash flows, and compensation contractually due to employees of acquired businesses at the date of acquisition. The segment recorded $i47 million of credits to selling, general, and administrative expense, principally credits for changes in estimates of contingent acquisition consideration, partially offset by third-party transaction costs related to recent acquisitions. The segment also recorded $i8
million of charges to cost of revenues for the sale of inventories revalued at the date of acquisition.
Laboratory Products and Services
In the first six months of 2021, the Laboratory Products and Services segment recorded $i21 million of net restructuring and other charges, primarily for third-party transaction/integration costs related to recent acquisitions.
/
22
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 $i121 million of net charges, principally for impairment of acquired technology and compensation contractually due and paid to employees of acquired businesses at the date
of acquisition.
The company expects to pay accrued restructuring costs primarily through i2021.
23
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 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, 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; any potential 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 Quarterly Report.
Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth under the caption “Risk Factors” in the company’s Annual Report on Form 10-K
for the year ended December 31, 2020 (which is on file with the SEC) as updated under the heading “Risk Factors” in Part II, Item 1A of this report on Form 10-Q. 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, including our pending acquisition of PPD, Inc., may not materialize as expected.
Overview
The company develops, manufactures and sells a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own technologies and by making
strategic acquisitions of complementary businesses. The company’s operations fall into four segments (Note 4): Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Services.
The company mobilized in early 2020 to support the COVID-19 pandemic response with products and services that help analyze, diagnose and protect from the virus. However, the company saw a significant reduction in customer activity in several businesses by late March 2020 that materially adversely affected primarily the 2020 results of the Analytical Instruments segment and, to a lesser extent, some businesses within the
company’s other three segments. The negative impact has significantly lessened so far in 2021, but could worsen later in the year dependent on the success of global efforts to control the pandemic and economic activity ramping up. The company believes the impacted businesses’ long-term prospects remain excellent given the company’s attractive markets served, its industry-leading position and proven growth strategy. Several of the company’s businesses have had a significant increase in revenues due to sales of products and services addressing diagnosis and treatment of COVID-19, including test kits and, to a lesser extent, products and services for therapy and vaccine development and manufacturing. While these positive
impacts are expected to continue through 2021, 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 in the second quarter of 2021 were $9.27 billion, an increase of $2.36 billion from the second quarter of 2020. Excluding the effects of currency translation and acquisitions, revenues increased $1.92 billion (28%).
In the second quarter of 2021, total company operating income and operating income margin were $2.16 billion and 23.3%, respectively, compared with $1.39 billion and 20.1%, respectively, in 2020.
24
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (continued)
Net income increased to $1.83 billion in the second quarter of 2021 from $1.16 billion in the second quarter of 2020, primarily due to an increase in operating income, offset in part by an increase in the income tax provision.
During the first six months of 2021, the company’s cash flow from operations totaled $4.21 billion compared with $2.24 billion for 2020.
On January 15, 2021, the company acquired, within the Laboratory Products and Services
segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS for approximately $834 million 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 approximately $406 million in net cash consideration and contingent consideration with an initial fair value of $65 million 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 April 15, 2021, the company entered into a definitive agreement under which it will acquire PPD, Inc. for $47.50 per share for a total cash purchase price of $17.4 billion plus the assumption of approximately $3.5 billion of net debt. PPD provides a broad range of clinical research and specialized laboratory services to enable customers to accelerate innovation and increase drug development productivity. In 2020, PPD generated revenue of $4.7 billion. Upon close of the transaction, PPD will
become part of the Laboratory Products and Services Segment. Shareholders holding in aggregate approximately 60% of the issued and outstanding shares of common stock of PPD on April 15, 2021, have approved the transaction by written consent. No further action by other PPD shareholders is required to approve the transaction. The transaction is subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals. On July 16, 2021, the company and PPD each received a request for additional information and documentary materials from the FTC, in connection with the FTC’s review of the proposed merger. The effect of the Second Request is to extend the waiting period imposed under the HSR Act until the 30th day after substantial compliance by the
company and PPD with the Second Request, unless the waiting period is terminated earlier by the FTC. Subject to the satisfaction of the required closing conditions, we continue to expect the merger to be completed by the end of 2021. The company intends to finance the purchase price with cash on hand and the net proceeds from issuance of debt. The company is currently evaluating future debt financings and the timing of such transactions is subject to market and other conditions. The company also has available, but it does not currently expect to utilize, up to $6.5 billion of committed bridge financing.
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 2020, 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 2021.
25
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Second Quarter 2021 Compared With Second Quarter 2020
Sales in the second quarter of 2021 increased $2.36
billion from the second quarter of 2020. Aside from the effects of currency translation and acquisitions, revenues increased $1.92 billion (28%) primarily due to increased demand. Sales of products that address COVID-19 testing and treatment increased $0.58 billion to $1.87 billion in the second quarter of 2021. Conditions were very robust in each of the company’s end markets during the second quarter of 2021 driven by three factors: strong fundamentals in the life sciences, strong economic activity globally and the role the industry is playing in the pandemic response. Sales were particularly strong to academic and government, as well as industrial and applied customers, which were most affected in the second quarter of 2020 due to business disruptions related to the pandemic. Sales to customers in pharma and biotech markets were very strong driven by underlying market dynamics and the
company’s role in supporting customers across a wide range of therapeutic areas. Sales to customers in diagnostics and healthcare markets were strong as customer demand for non-COVID-19 response products and services was approaching pre-pandemic levels. Sales growth was strong in each of the company’s primary geographic areas during the second quarter of 2021.
In the second quarter of 2021, total company operating income and operating income margin were $2.16 billion and 23.3%, respectively, compared with $1.39 billion and 20.1%, respectively, in 2020. The increase in operating income was primarily due to profit on higher sales and, to a lesser extent, favorable foreign currency exchange and sales mix, offset in part by strategic growth investments in 2021 to support the
company’s near and long-term growth. 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. Productivity improvements are calculated net of inflationary cost increases.
In the second quarter of 2021, the company recorded restructuring and other costs of $77 million. In the second quarter of 2020, the company recorded restructuring and other costs of $56 million. See Note 12 for restructuring charges expected in future periods.
Segment Results
Note 4 to the Consolidated Financial Statements of the company’s Annual
Report on Form 10-K for 2020, describes the company’s measurement of segment income. There have been no significant changes in measurement methods used to determine segment income.
26
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Three
Months Ended
July 3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
Life
Sciences Solutions
$
3,557
$
2,602
37
%
Analytical Instruments
1,481
1,051
41
%
Specialty
Diagnostics
1,235
988
25
%
Laboratory Products and Services
3,583
2,787
29
%
Eliminations
(583)
(511)
14
%
Consolidated
Revenues
$
9,273
$
6,917
34
%
Segment Income
Life
Sciences Solutions
$
1,718
$
1,234
39
%
Analytical Instruments
280
135
107
%
Specialty Diagnostics
245
214
14
%
Laboratory
Products and Services
446
281
59
%
Subtotal Reportable Segments
2,689
1,864
44
%
Cost
of Revenues Charges
—
(2)
Selling, General and Administrative (Credits) Charges
42
(42)
Restructuring and Other Costs
(119)
(12)
Amortization
of Acquisition-related Intangible Assets
(449)
(417)
Consolidated Operating Income
$
2,163
$
1,391
55
%
Reportable
Segments Income Margin
29.0
%
27.0
%
Consolidated Operating Income Margin
23.3
%
20.1
%
Income from the company’s reportable segments
increased 44% to $2.69 billion in the second quarter of 2021 due primarily to profit on higher sales and, to a lesser extent, favorable foreign currency exchange and sales mix, offset in part by strategic growth investments.
Life Sciences Solutions
Three Months Ended
July 3,
June
27,
(Dollars in millions)
2021
2020
Change
Revenues
$
3,557
$
2,602
37
%
Operating
Income Margin
48.3
%
47.4
%
0.9 pt
Sales in the Life Sciences Solutions segment increased $955 million in the second quarter of 2021. Sales increased $752 million (29%) due to higher revenues at existing businesses and $64 million due to acquisitions. The favorable effects of currency translation resulted in an increase in revenues of $139 million. The increase in revenues at existing businesses was primarily driven by demand for biosciences products and bioproduction products.
The increase in operating income margin for the segment resulted
primarily from profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.
27
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Analytical Instruments
Three
Months Ended
July 3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
$
1,481
$
1,051
41
%
Operating
Income Margin
18.9
%
12.9
%
6.0 pt
Sales in the Analytical Instruments segment increased $430 million in the second quarter of 2021. Sales increased $379 million (36%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of $51 million. The increase in revenues at existing businesses was due to increased demand for products sold by each of the segment’s primary businesses with particular strength in chromatography and mass spectrometry instruments as well as materials and structural analysis instruments.
The
increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, offset in part by strategic growth investments and, to a lesser extent, sales mix.
Specialty Diagnostics
Three Months Ended
July
3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
$
1,235
$
988
25
%
Operating
Income Margin
19.9
%
21.6
%
-1.7 pt
Sales in the Specialty Diagnostics segment increased $247 million in the second quarter of 2021. Sales increased $210 million (21%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of $37 million. The increase in revenues at existing businesses was due to higher demand in each of the segment’s primary businesses with particular strength in sales of immunodiagnostics products and products sold through the segment's healthcare market channel business.
The
decrease in operating income margin for the segment was primarily due to inflationary cost increases, net of productivity improvements, and strategic growth investments, offset in part by profit on higher sales and sales mix.
Laboratory Products and Services
Three Months Ended
July
3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
$
3,583
$
2,787
29
%
Operating
Income Margin
12.4
%
10.1
%
2.3 pt
Sales in the Laboratory Products and Services segment increased $796 million in the second quarter of 2021. Sales increased $636 million (23%) due to higher revenues at existing businesses and $53 million due to an acquisition. The favorable effects of currency translation resulted in an increase in revenues of $107 million. The increase in revenues at existing businesses was primarily due to increased demand in each of the segment’s principal businesses with particular strength in products sold through its research and safety market channel business.
The
increase in operating income margin for the segment was primarily due to profit on higher sales and sales mix, offset in part by strategic growth investments.
Other Expense
The company reported other expense of $5 million in the second quarter of 2021 compared to other expense of $9 million in the second quarter of 2020. In 2021, other expense includes $6 million for amortization of bridge loan commitment fees related to the pending acquisition of PPD. In 2020, other expense includes $27 million of costs for a subsequently terminated acquisition, primarily for amortization of bridge loan commitment fees and entering into currency hedging contracts.
28
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Provision for Income Taxes
The company's effective tax rate was 10.7% for the second quarter of 2021. During the quarter, the company recorded a $162 million income tax benefit on an intra-entity transfer of assets. The company expects its effective tax rate for all of 2021 will be between 11% and 13% based on currently forecasted rates of profitability in the
countries in which the company conducts business and expected generation of foreign tax credits. 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 $1.7 billion in 2021. In the second quarter of 2020, the company’s effective tax rate was 7.8%. In 2020, the company implemented foreign tax credit planning in Sweden which resulted in $96 million of foreign tax credits, with no related incremental U.S. income tax expense.
The
company has operations and a taxable presence in approximately 50 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.
First Six Months of 2021 Compared With First Six Months of 2020
Sales in the first six months of 2021 increased $6.03
billion from the first six months of 2020. Aside from the effects of currency translation and acquisitions, revenues increased $5.22 billion (40%) primarily due to increased demand. The first quarter of 2021 had three extra selling days compared to the first quarter of 2020. The company's fourth quarter of 2021 will have four fewer selling days than the corresponding 2020 quarter. Sales of products that address COVID-19 testing and treatment increased $3.26 billion to $4.72 billion in the first six months of 2021. Sales to customers in each of the company’s primary end markets grew with particular strength in the diagnostics and healthcare industry. Sales growth was strong in each of the company’s primary geographic areas.
In
the first six months of 2021, total company operating income and operating income margin were $5.21 billion and 27.2%, respectively, compared with $2.30 billion and 17.5%, respectively, in the first six months of 2020. The increase in operating income was primarily due to profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.
In the first six months of 2021, the company recorded restructuring and other costs of $115 million (Note 12). In the first six months of 2020, the company recorded restructuring and other costs of $102 million.
29
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Segment Results
Six Months Ended
July
3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
Life Sciences Solutions
$
7,760
$
4,376
77
%
Analytical
Instruments
2,868
2,152
33
%
Specialty Diagnostics
2,850
1,946
46
%
Laboratory Products and Services
7,180
5,517
30
%
Eliminations
(1,479)
(844)
75
%
Consolidated
Revenues
$
19,179
$
13,147
46
%
Segment Income
Life
Sciences Solutions
$
3,997
$
1,909
109
%
Analytical Instruments
552
306
80
%
Specialty Diagnostics
673
450
50
%
Laboratory
Products and Services
977
576
70
%
Subtotal Reportable Segments
6,199
3,241
91
%
Cost
of Revenues Charges
(8)
(4)
Selling, General and Administrative Charges
26
(48)
Restructuring and Other Costs
(133)
(50)
Amortization
of Acquisition-related Intangible Assets
(872)
(842)
Consolidated Operating Income
$
5,212
$
2,297
127
%
Reportable
Segments Income Margin
32.3
%
24.7
%
Consolidated Operating Income Margin
27.2
%
17.5
%
Income from the company’s reportable segments
increased 91% to $6.20 billion in the first six months of 2021 due primarily to profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.
Life Sciences Solutions
Six Months Ended
July 3,
June
27,
(Dollars in millions)
2021
2020
Change
Revenues
$
7,760
$
4,376
77
%
Operating
Income Margin
51.5
%
43.6
%
7.9 pt
Sales in the Life Sciences Solutions segment increased $3.38 billion in the first six months of 2021. Sales increased $3.05 billion (70%) due to higher revenues at existing businesses and $96 million due to acquisitions. The favorable effects of currency translation resulted in an increase in revenues of $241 million. The increase in revenues at existing businesses was driven by a combination of increased demand for testing to diagnose COVID-19 with higher sales of genetic sciences products and biosciences products and strong demand in each of the
segment’s businesses.
The increase in operating income margin for the segment resulted primarily from profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments.
30
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Analytical Instruments
Six
Months Ended
July 3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
$
2,868
$
2,152
33
%
Operating
Income Margin
19.3
%
14.2
%
5.1 pt
Sales in the Analytical Instruments segment increased $716 million in the first six months of 2021. Sales increased $620 million (29%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of $96 million. The increase in revenues at existing businesses was due to increased demand for products sold by each of the segment’s primary businesses with particular strength in chromatography and mass spectrometry instruments as well as materials and structural analysis instruments.
The
increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, offset in part by strategic growth investments and sales mix.
Specialty Diagnostics
Six Months Ended
July 3,
June
27,
(Dollars in millions)
2021
2020
Change
Revenues
$
2,850
$
1,946
46
%
Operating
Income Margin
23.6
%
23.1
%
0.5 pt
Sales in the Specialty Diagnostics segment increased $904 million in the first six months of 2021. Sales increased $835 million (43%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of $69 million. The increase in revenues at existing businesses was due to higher demand primarily driven by products addressing treatment of COVID-19, with particular strength in sales of products sold through the segment's healthcare market channel business, and to a lesser extent, microbiology
products.
The increase in operating income margin for the segment was primarily due to profit on higher sales, offset in part by inflationary cost increases, net of productivity improvements and sales mix.
Laboratory Products and Services
Six Months Ended
July
3,
June 27,
(Dollars in millions)
2021
2020
Change
Revenues
$
7,180
$
5,517
30
%
Operating
Income Margin
13.6
%
10.4
%
3.2 pt
Sales in the Laboratory Products and Services segment increased $1.66 billion to $7.18 billion in 2021. Sales increased $1.33 billion (24%) due to higher revenues at existing businesses and $130 million due to an acquisition. The favorable effects of currency translation resulted in an increase in revenues of $199 million. The increase in revenues at existing businesses was primarily due to increased demand in each of the segment’s principal businesses with particular strength in products sold through its research and safety market channel business
and, to a lesser extent, its laboratory products business.
The increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, acquisitions, offset in part by strategic growth investments.
Other Income/Expense
The company reported other (expense) income of $(188) million and $3 million in the first six months of 2021 and 2020, respectively. In 2021, other expense includes $197 million of losses on the early extinguishment of debt and $6 million for amortization of bridge loan commitment fees related to the pending acquisition of PPD. In 2020, other income was reduced by
31
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
$44 million of costs for a subsequently terminated acquisition, primarily for entering into currency hedging contracts and amortization of loan commitment fees.
Provision for Income Taxes
The company recorded a $635 million provision for income taxes in the first six months of 2021. During the second quarter of 2021, the
company recorded a $162 million income tax benefit on an intra-entity transfer of assets. The company recorded a $137 million provision for income taxes in the first six months of 2020. In the second quarter of 2020, the company implemented foreign tax credit planning in Sweden which resulted in $96 million of foreign tax credits, with no related incremental U.S. income tax expense.
Recent Accounting Pronouncements
A description of recently issued accounting standards is included under the heading “Recent Accounting Pronouncements”
in Note 1.
Liquidity and Capital Resources
Consolidated working capital (current assets less current liabilities) was $12.34 billion at July 3, 2021, compared with $11.65 billion at December 31, 2020. Included in working capital were cash and cash equivalents of $7.02 billion at July 3, 2021 and $10.33 billion at December 31, 2020.
First Six Months of 2021
Cash provided by operating activities during the first six months of 2021 was $4.21
billion. Cash provided by income was offset in part by investments in working capital. A decrease in accounts receivable provided $249 million of cash. An increase in inventories used cash of $621 million, 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 increased to $1.27 billion during the first six months of 2021, compared with $320 million in the first six months of 2020.
During the first six months of 2021, the company’s investing activities used $2.62 billion of cash. 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.
The company’s financing activities used $4.93 billion of cash during the first six months of 2021. Repayment of senior notes used cash of $2.81 billion. The company’s financing activities also included the repurchase of $2.00 billion of the company's common stock and the payment of $190 million in cash dividends. On November 5, 2020, the Board of Directors replaced the existing authorization to repurchase the company’s common stock with a new authorization to repurchase up to $2.50 billion
of the company’s common stock. At August 6, 2021, authorization remained for $500 million of future repurchases of the company’s common stock.
The company's commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2020 and July 3, 2021 except for the agreement to acquire PPD, discussed in Note 2. The company expects that for all of 2021, expenditures
for property, plant and equipment, net of disposals, will be between $2.5 and $2.7 billion.
As of July 3, 2021, the company’s short-term debt totaled $4 million. The company has a revolving credit facility with a bank group that provides up to $3.00 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 3, 2021, no borrowings were outstanding under the
company’s revolving credit facility, although available capacity was reduced by approximately $4 million as a result of outstanding letters of credit.
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 and repayment of acquisition-related intercompany debt to the U.S. In addition, the company also transfers cash to the U.S. using non-taxable returns of capital as well as dividends where the related U.S. dividend received deduction or foreign tax credit equals any tax cost arising from the dividends. As a result of using such means of
transferring cash to the U.S., the company does not expect any material adverse liquidity effects from its significant non-U.S. cash balances for the foreseeable future.
32
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 and bridge loan agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months and to fund the pending PPD acquisition.
First Six Months of 2020
Cash provided by operating activities was $2.24 billion during the first six months of 2020. Cash provided by income was offset in part by investments in working capital. Increases in accounts receivable and inventories used cash of $195 million and $309 million, respectively, primarily to support growth in sales. Changes in other assets and other liabilities provided cash of $303 million primarily due to the timing of payments for compensation and income taxes. Cash payments for income taxes totaled $320 million.
During
the first six months of 2020, the company’s investing activities used $519 million of cash, principally for the purchase of property, plant and equipment.
The company’s financing activities provided $1.80 billion of cash during the first six months of 2020. Issuance of senior notes provided cash of $3.46 billion. The company’s financing activities also included the repurchase of $1.50 billion of the company’s common stock and the payment of $163 million in cash dividends.
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. 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 3, 2021, that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
33
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
1A. Risk Factors
The risks that we believe are material to our investors are discussed in the company’s Annual Report on Form 10-K for the year ended December 31, 2020 under the caption “Risk Factors,” which is on file with the SEC. Except as set forth herein, there have been no material changes during the six months ended July 3, 2021 to our previously reported Risk Factors.
Risks Relating to Our Proposed Acquisition of PPD
Regulatory approvals necessary for our acquisition
of PPD may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the PPD acquisition. Before the PPD acquisition may be completed, we must obtain certain required regulatory approvals, waivers or consents. These regulators may impose conditions on the completion of the transaction. Such conditions could have the effect of delaying or preventing completion of the transaction, causing us to incur additional costs or limiting the revenues of the combined company following the transaction, any of which might have an adverse effect on the combined company following the transaction. Additionally, any delay in closing may adversely affect the business of PPD and therefore the combined company following the transaction, including an adverse effect on PPD’s ability to retain employees during the pendency of the transaction or on PPD’s
relationships with its vendors, customers and other parties if such vendors, customers or other parties attempt to negotiate changes in existing business relationships, consider entering into business relationships with parties other than PPD or delay or defer decisions concerning their business with PPD during the pendency of the transaction. On July 16, 2021, we and PPD each received a request for additional information and documentary materials (collectively, the “Second Request”) from the U.S. Federal Trade Commission (“FTC”), in connection with the FTC’s review of the proposed merger. The effect of the Second Request is to extend the waiting period imposed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), until the 30th day after substantial compliance by the us and PPD with the Second Request, unless the waiting period is terminated earlier by the FTC.
Subject to the satisfaction of customary closing conditions, including the required regulatory approvals, waivers or consents, we continue to expect the merger to be completed by the end of 2021.
Combining PPD with us may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the transaction may not be fully realized. The success of the PPD acquisition, including the realization of anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine our and PPD’s businesses. The integration may be more difficult, costly or time consuming than expected. It is possible that the integration process could result in the loss of key employees or the disruption of each company’s ongoing businesses or that the alignment of standards, controls, procedures and policies may adversely affect the combined company’s ability to maintain
relationships with clients, customers, suppliers and employees or to fully achieve the anticipated benefits and cost savings of the transaction. The loss of key employees could adversely affect our ability to successfully conduct our business in the markets in which PPD now operates, which could have an adverse effect on our financial results. Other potential difficulties of combining our and PPD’s businesses include unanticipated issues in integrating logistics, information communications and other systems.
If we experience difficulties with the integration process, the anticipated benefits of the PPD acquisition may not be realized fully or at all, or may take longer to realize than expected. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each of us and PPD during this transition period and for an undetermined period
after completion of the PPD acquisition on the combined company.
Risks Relating to Financial Profile
We have outstanding debt, and our debt will increase as a result of additional debt we expect to incur to finance the PPD acquisition. Our existing and future indebtedness may restrict our investment opportunities or limit our activities and negatively impact our credit ratings. As of July 3, 2021, we had approximately $18.78 billion in outstanding indebtedness. In addition, we have availability to borrow under a revolving credit facility that provides for up to $3.00 billion of unsecured multi-currency revolving credit. We expect to incur additional indebtedness to fund a portion of the purchase price of the PPD acquisition. We may also obtain additional long-term debt and lines of credit to meet future financing
needs, which would have the effect of increasing our total leverage.
34
THERMO FISHER SCIENTIFIC INC.
Risk Factors (continued)
Our leverage could have negative consequences, including increasing our vulnerability to adverse economic and industry conditions, limiting our ability to obtain additional financing and limiting our ability to acquire new products and technologies through strategic acquisitions.
Our ability to make scheduled payments, refinance our obligations or obtain additional financing will depend on our future operating performance and on economic, financial, competitive and other
factors beyond our control. Our business may not generate sufficient cash flow to meet our obligations. If we are unable to service our debt, refinance our existing debt or obtain additional financing, we may be forced to delay strategic acquisitions, capital expenditures or research and development expenditures.
Additionally, the agreements governing our debt require that we maintain certain financial ratios, and contain affirmative and negative covenants that restrict our activities by, among other limitations, limiting our ability to incur additional indebtedness, merge or consolidate with other entities, make investments, create liens, sell assets and enter into transactions with affiliates. 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 3.5:1.0 as of the last day of any fiscal quarter.
Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as the impact of public health epidemics/pandemics like COVID-19, foreign exchange rates and interest rates. Our failure to comply with any of these restrictions or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date.
Also, an acceleration of the debt under certain of our debt instruments would trigger an event of default under other of our debt instruments.
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 2021. On November 5, 2020, the Board of Directors replaced the existing authorization to repurchase the
company’s common stock with a new authorization to repurchase up to $2.50 billion of the company’s common stock. At July 3, 2021, $500 million 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.
_______________________
* Indicates management contract or compensatory plan, contract
or arrangement.
** 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.
36
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.
