Thermo Fisher Scientific Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparisons are with the quarter ended September 28, 2019. Financial statements are unaudited. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $8.521B | $6.272B | $21.668B | $18.713B |
| Operating income | $2.426B | $946M | $4.723B | $3.362B |
| Operating margin | 28.5% | 15.1% | 21.8% | 18.0% |
| Net income | $1.933B | $760M | $3.877B | $2.694B |
| Diluted EPS | $4.84 | $1.88 | $9.71 | $6.68 |
| Cash from operating activities | — | $4.950B | $3.060B |
Q3 revenue rose 36% year over year; management attributed the increase primarily to higher demand, including COVID-19 testing and related healthcare, pharma and biotech demand. Excluding currency and acquisitions, Q3 revenue increased 34%. Q3 income growth was primarily driven by higher sales and, to a lesser extent, sales mix, partly offset by strategic growth investments.
At September 26, 2020, cash and cash equivalents were $7.540B, versus $2.399B at December 31, 2019. Working capital was $12.01B, compared with $5.70B. Long-term obligations were $21.091B, up from $17.076B at year-end 2019; short-term obligations and current maturities were $2M. The company had no borrowings under its $2.5B revolving facility or commercial paper programs; facility availability was reduced by $66M of letters of credit. Management said cash, operating cash flow and borrowing capacity would meet existing-business needs for at least the next 24 months.
Nine-month investing activities used $884M, principally for $888M of capital expenditures. Financing activities provided $1.008B, including $3.464B of net debt issuance, offset in part by $712M of debt repayment, $1.5B of share repurchases and $250M of dividends. The company expected full-year 2020 capital expenditures, net of disposals, of approximately $1.5B.
Material changes and segment results
- Life Sciences Solutions: Q3 revenue rose 101% to $3.424B; segment income was $1.879B versus $586M. Growth reflected COVID-19 diagnostic testing demand and bioproduction products.
- Analytical Instruments: Q3 revenue declined 2% to $1.336B and segment income fell to $171M from $311M. Weaker industrial and academic demand and a $108M supply-contract charge weighed on results.
- Specialty Diagnostics: Q3 revenue rose 63% to $1.430B and segment income increased to $398M from $223M, primarily on COVID-19-related healthcare and diagnostic demand.
- Laboratory Products and Services: Q3 revenue increased 19% to $3.112B and segment income rose to $355M from $303M, reflecting growth in research and safety channels, pharma services and laboratory products.
- For the first nine months, revenue increased 16% and operating income increased 40%. The 2019 comparison included a $482M gain on the sale of the Anatomical Pathology business; that gain makes the year-over-year restructuring and other income/expense comparison less representative of recurring performance.
Outlook, risks and unusual items
- Management said COVID-19-related sales strength was expected to continue into Q4 2020, but future duration and scale depended mainly on testing demand. Pandemic-related customer activity declines were expected to adversely affect Analytical Instruments and, to a lesser extent, other segments through at least Q4 2020. Industrial demand and academic activity were affected by economic weakness and lab closures.
- Management forecast a 2020 effective tax rate of 10%–12% and cash income-tax payments of $1.20B–$1.23B. Q3 effective tax rate was 14.2%.
- The company terminated its proposed QIAGEN acquisition after the minimum tender condition was not met. QIAGEN paid a $95M expense reimbursement recorded as a reduction of SG&A; nine-month other expense included $81M of related costs. The company also terminated associated financing commitments and certain currency swaps.
- A $108M Q3 charge in Analytical Instruments reflected expected losses on minimum purchases under a supply agreement through 2025, as the company expected not to use all required third-party components after launching an alternative product.
- Additional restructuring charges of approximately $45M were identified, primarily for 2020 and 2021. A long-term lease for a CSL biologics facility includes expected fixed payments of $555M from 2021 to 2041, excluding renewals and variable amounts.
- Environmental remediation liabilities were approximately $70M. The company disclosed various lawsuits and claims; it said an unfavorable outcome exceeding current accruals could materially affect results, financial position or cash flows. COVID-19 duration and severity, customer spending, regulatory changes, currency movements and execution of growth strategies remain risks.
Important facts for investors to verify
- How durable COVID-19 testing and related product demand will be, and how quickly industrial and academic customer activity recovers.
- Whether the $108M supply-contract charge captures the expected exposure through 2025 and how the alternative product affects future segment margins.
- Debt levels, cash deployment and liquidity needs following 2020 debt issuance, share repurchases and the terminated QIAGEN transaction.
- Progress and costs of identified restructuring actions, the CSL facility commitment and environmental remediation.
- Whether the projected 2020 tax rate and tax payments are achieved, including the effects of foreign tax credits and geographic income mix.