Thermo Fisher Scientific Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; comparisons are to the quarter and nine months ended October 1, 2022. Thermo Fisher serves life sciences, pharmaceutical and biotech, academic and government, industrial, healthcare and diagnostics markets through four operating segments.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $10.574bn | $10.677bn | $31.971bn | $33.465bn |
| GAAP operating income | $1.864bn | $1.710bn | $5.005bn | $6.532bn |
| GAAP operating margin | 17.6% | 16.0% | 15.7% | 19.5% |
| Adjusted operating margin (non-GAAP) | 24.2% | 22.2% | 22.7% | 25.2% |
| Net income attributable to Thermo Fisher | $1.715bn | $1.495bn | $4.365bn | $5.374bn |
| GAAP diluted EPS | $4.42 | $3.79 | $11.25 | $13.62 |
| Adjusted EPS (non-GAAP) | $5.69 | $5.08 | $15.87 | $17.84 |
Cash flow, nine months: Operating cash flow was $4.683bn (down from $5.667bn); capital expenditures, net of asset-sale proceeds, were approximately $998m; reported free cash flow was $3.685bn (down from $3.992bn). Investing activities used $4.766bn, including $3.660bn for acquisitions. Financing activities used $2.194bn.
Liquidity and debt: Cash and cash equivalents were $6.151bn at September 30, 2023, versus $8.524bn at year-end 2022. Total debt was $35.284bn, compared with $34.488bn; short-term debt was $4.795bn. The $5bn revolving credit facility had no borrowings outstanding, and the company reported covenant compliance. Management expects cash, operating cash flow and available borrowing capacity to cover existing business needs for at least the next 24 months.
Material changes and business trends
- Q3 revenue fell 1% year over year; organic revenue declined 3%. Nine-month revenue fell 4%; organic revenue declined 5%.
- Product revenue declined to $6.157bn in Q3, while service revenue increased to $4.417bn. Lower COVID-related demand weighed on products and diagnostics; reported COVID-testing product sales were $50m in Q3 2023 versus $440m a year earlier.
- Q3 segment revenue was lower in Life Sciences Solutions (down 18% reported) and higher in Analytical Instruments (up 8%), Specialty Diagnostics (up 2%) and Laboratory Products and Biopharma Services (up 3%). Segment income and margins improved year over year across all four segments in the quarter.
- For the first nine months, Life Sciences Solutions revenue fell 28% and Specialty Diagnostics fell 10%; Analytical Instruments grew 10% and Laboratory Products and Biopharma Services grew 5%.
- Nine-month GAAP operating income, adjusted operating income and diluted EPS declined despite Q3 growth. Higher interest expense and lower COVID-related revenue contributed to the year-to-date comparison; reduced share count from repurchases supported per-share results.
Outlook, management commentary and risks
- Management cited a challenging macroeconomic environment and low economic activity in China, alongside waning COVID-related demand. Academic and government demand was strong; Q3 pharma and biotech demand softened, and industrial and applied markets were flat.
- Management attributed higher Q3 operating margins primarily to strong productivity improvements and pricing, partly offset by lower COVID-related revenue. Year-to-date margins were lower, primarily reflecting reduced COVID-related revenue.
- 2023 outlook disclosed in this filing: capital expenditures, net of disposals, expected at $1.3bn–$1.5bn; GAAP effective tax rate expected at 3%–5%; adjusted tax rate expected at approximately 10%; cash income-tax payments expected to total approximately $1.40bn. No full-year revenue or EPS guidance is provided in the supplied filing text.
- Restructuring and other costs were $379m for the first nine months, including asset impairments and facility-consolidation costs. Actions affected approximately 4% of the workforce; the company identified about $65m of additional charges, primarily in 2023.
- After quarter-end, Thermo Fisher agreed to acquire Olink for approximately $3.1bn, subject to customary conditions and tender-offer completion; closing was expected by mid-2024. The company planned to fund the purchase with cash and debt proceeds.
- Risks include continued demand normalization, macroeconomic and China weakness, customer capital-spending and government-funding trends, acquisition execution and benefits, foreign exchange, and litigation or environmental matters. The company said pending environmental and litigation matters had no material changes in accruals; unfavorable outcomes could nevertheless have a material adverse effect.
Important facts for investors to verify
- Whether COVID-related declines and weakness in China persist, and how they affect organic growth and segment mix.
- Whether productivity, pricing and restructuring actions can sustain margins as revenue trends evolve.
- Cash conversion and working-capital trends, capital spending, debt maturities and funding for the Olink transaction.
- The assumptions behind unusually low 2023 GAAP tax guidance, including tax benefits from valuation allowance releases and tax-planning transactions.
- Progress and closing conditions for Olink, as well as the realization of expected acquisition benefits and any material developments in contingencies.