Thermo Fisher Scientific Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Thermo Fisher supplies products and services to life sciences, analytical, diagnostics, laboratory and healthcare markets. This unaudited report covers the quarter and nine months ended October 2, 2021; comparisons are with the corresponding 2020 periods.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $9.33B | $8.52B | $28.51B | $21.67B |
| Operating income | $2.28B | $2.43B | $7.49B | $4.72B |
| Operating margin | 24.4% | 28.5% | 26.3% | 21.8% |
| Net income | $1.90B | $1.93B | $6.07B | $3.88B |
| Diluted EPS | $4.79 | $4.84 | $15.29 | $9.71 |
| Operating cash flow | Not separately provided | Not separately provided | $6.86B | $4.95B |
Q3 revenue increased 9% year over year, or 7% excluding currency effects and acquisitions. Nine-month revenue increased 32%, or 27% excluding those effects. COVID-19 testing and treatment product sales were $2.05B in Q3 and $6.78B for the nine months. Q3 operating income fell 6%, with management citing sales mix and strategic growth investment; nine-month operating income rose 59%, principally on higher sales.
At October 2, cash and cash equivalents were $12.03B, working capital was $16.97B, and total obligations were approximately $21.71B, including $19M current and $21.69B long-term. The company had no borrowings under its $3.00B revolving facility. Nine-month capital expenditures were $1.69B; the company expected full-year 2021 capital expenditures, net of disposals, of $2.5B–$2.7B.
Material changes and segment trends
- Q3 revenue rose in Life Sciences Solutions (+9%), Analytical Instruments (+10%) and Laboratory Products and Services (+12%); Specialty Diagnostics declined 5%, mainly from lower COVID-19 testing demand.
- Q3 segment income margins were pressured by investment and mix in Life Sciences Solutions and Specialty Diagnostics; Analytical Instruments’ margin improved, in part because the comparable 2020 period included a $108M supply-contract charge.
- For the first nine months, each segment grew revenue. Life Sciences Solutions led growth (+47%); Analytical Instruments, Specialty Diagnostics and Laboratory Products and Services each grew 24%–25%.
- Cash from operations increased year over year, while inventory growth used $916M of cash. Investing activities used $3.24B, including $1.52B for acquisitions and $1.69B for property and equipment. Financing activities used $1.89B, including $2.00B in share repurchases and $292M in dividends.
Outlook, risks and unusual items
- Management expected a 2021 effective tax rate of 11%–13% and approximately $1.9B in 2021 cash tax payments. The filing provides no specific revenue or earnings guidance.
- The company continued to expect its proposed $17.4B cash acquisition of PPD, plus assumption of approximately $3.5B of net debt, to close by year-end 2021, subject to regulatory and customary conditions. Both parties certified substantial compliance with the FTC’s Second Request on October 22. October debt issuances generated $11.83B of net proceeds to help fund the transaction.
- Management said pandemic-related adverse effects had eased, but future COVID-19-related sales remained uncertain. Inflation and supply-chain disruptions could affect estimates and results. Other stated risks include regulatory approval and integration of PPD, leverage and debt-covenant compliance, litigation, environmental remediation, foreign exchange and economic conditions.
- A third-quarter inventory accounting change from LIFO to FIFO increased inventory and reduced product costs by $33M before tax; prior periods were not restated. Nine-month results included a $197M loss on early debt extinguishment and $192M of restructuring and other costs, compared with $65M in the prior-year period. The company identified approximately $25M of additional restructuring charges expected primarily in 2021 and 2022.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether PPD closed on the expected timetable, the final financing and leverage profile, and the transaction’s integration and benefits.
- How COVID-19-related demand, particularly testing, evolves and affects segment growth and margins.
- Whether investment, inflation and supply constraints continue to weigh on operating margins and working capital.
- Actual full-year tax rate, cash taxes, capital expenditures and restructuring costs versus management’s stated expectations.