Thermo Fisher Scientific Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; compared with the three months ended March 28, 2020. Thermo Fisher supplies products and services to life sciences, diagnostics, healthcare, industrial and other markets through four reportable segments. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Comparable 2020 period |
|---|---|---|
| Revenue | $9.91 billion | $6.23 billion |
| Operating income / margin | $3.05 billion / 30.8% | $906 million / 14.5% |
| Net income | $2.34 billion | $788 million |
| Diluted EPS | $5.88 | $1.97 |
| Operating cash flow | $1.98 billion | $356 million |
- Revenue increased 59% as reported and 53% excluding currency translation and acquisitions. Management attributed the increase primarily to stronger demand; the quarter also had three additional selling days versus the prior-year quarter.
- COVID-19-related product and service sales increased $2.68 billion to $2.85 billion. Management cited demand for testing, diagnostics, treatment, vaccine and therapy development, and biopharma products and services.
- Operating income growth primarily reflected higher sales and, to a lesser extent, favorable sales mix; strategic growth investments partly offset the increase. Segment income margin was 35.4%, up from 22.1%.
- All four segments grew: Life Sciences Solutions revenue $4.20 billion (+137%); Analytical Instruments $1.39 billion (+26%); Specialty Diagnostics $1.62 billion (+69%); Laboratory Products and Services $3.60 billion (+32%). Growth was strongest in Life Sciences Solutions, including COVID-19 testing demand.
- Cash provided by operations rose to $1.98 billion. Investing activities used $2.00 billion, including $1.34 billion for acquisitions and $628 million for capital expenditures. Financing activities used $4.85 billion, including $2.80 billion of debt repayment and $2.00 billion of share repurchases.
- Cash and cash equivalents were $5.58 billion at April 3, 2021, versus $10.33 billion at year-end 2020. Working capital was $10.69 billion, down from $11.65 billion.
- Borrowings at carrying value totaled $18.65 billion, down from $21.74 billion at year-end; short-term obligations were $4 million. No borrowings were outstanding under the $3.0 billion revolving credit facility or commercial paper programs. The company reported compliance with debt covenants.
Material changes and notable items
- Net income increased substantially, primarily on higher operating income, partly offset by a higher tax provision and a $197 million loss on early extinguishment of debt. Other expense was $183 million, compared with other income of $12 million in the prior-year quarter.
- The effective tax rate was 15.1%, versus 4.8% in Q1 2020. Cash income-tax payments were $542 million, compared with $100 million.
- Q1 acquisitions included the European viral vector manufacturing business of Groupe Novasep for approximately $834 million net cash consideration and Mesa Biotech for approximately $406 million net cash consideration plus contingent consideration. Other smaller acquisitions were also completed.
- After quarter-end, on April 15, 2021, Thermo Fisher agreed to acquire PPD for $17.4 billion in cash plus assumption of approximately $3.5 billion of net debt. Closing was expected by year-end 2021, subject to customary conditions and regulatory approvals. The company planned to fund the purchase with cash and debt proceeds and had up to $9.5 billion of committed financing available, which it did not then expect to use.
- The company repurchased $2.00 billion of stock in the quarter; $500 million remained under its repurchase authorization at May 7, 2021. It declared dividends of $0.26 per share.
Outlook, risks and contingencies
- Management expected the effective tax rate for full-year 2021 to be 11%–13%, based on current estimates, and cash tax payments of approximately $1.5 billion. Expected 2021 capital expenditures, net of disposals, were $2.5–$2.7 billion.
- The filing provides no specific full-year revenue or earnings guidance. Management said COVID-19-related demand was expected to continue through 2021, but the duration and scale were uncertain and dependent on testing, therapy and vaccine demand. The duration of pandemic-related disruption to other businesses was also uncertain.
- Management stated that cash, operating cash flow and available borrowing capacity should meet existing-business needs for at least the next 24 months and fund the pending PPD acquisition.
- Risks include pandemic duration and effects, changes in customer activity and funding, foreign exchange and economic conditions, regulatory changes, and whether acquisition benefits are realized. PPD-specific risks include delayed or unavailable approvals, integration challenges, employee or customer retention, and increased debt and leverage. The company reported approximately $18.65 billion of debt before financing the PPD transaction.
- Environmental remediation and ordinary-course litigation matters remained outstanding. The company said related accruals had not materially changed; unfavorable outcomes or future remediation requirements could nevertheless materially affect results, financial position or cash flows. Management identified approximately $40 million of additional restructuring charges, primarily in 2021.
Important facts for investors to verify
- How much of the exceptional revenue and margin growth reflects recurring, non-pandemic demand versus COVID-19-related sales, and how quickly pandemic-related demand may normalize.
- Final PPD transaction terms, required approvals, expected financing mix, resulting leverage and integration costs or benefits.
- Whether the projected 2021 tax rate, cash tax payments and capital expenditures remain on track.
- Working-capital and cash-flow trends, including inventory investment and timing of compensation-related payments.
- Potential exposure from environmental matters, litigation, restructuring and other contingencies, for which the filing does not provide a clear estimate of all possible losses.