Business context and reporting period
Thermo Fisher Scientific Inc. (TMO) filed this unaudited Form 10-Q for the quarter ended July 3, 2021. Comparisons are with the quarter ended June 27, 2020, and, where noted, the six months ended those dates. The company serves life sciences, analytical instruments, specialty diagnostics, and laboratory products and services markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $9.273B | $6.917B | $19.179B | $13.147B |
| Operating income | $2.163B | $1.391B | $5.212B | $2.297B |
| Operating margin | 23.3% | 20.1% | 27.2% | 17.5% |
| Net income | $1.828B | $1.156B | $4.165B | $1.944B |
| Diluted EPS | $4.61 | $2.90 | $10.50 | $4.87 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $4.205B | $2.242B |
Q2 revenue rose 34%; excluding currency translation and acquisitions, it increased 28%. Operating income rose 55% and net income rose 58%. First-half revenue increased 46% (40% excluding currency and acquisitions), operating income increased 127%, and net income increased 114%.
Q2 operating margin improved by 3.2 percentage points year over year; first-half margin improved by 9.7 points. Q2 segment revenue growth was broad-based: Life Sciences Solutions 37%, Analytical Instruments 41%, Specialty Diagnostics 25%, and Laboratory Products and Services 29%.
Cash, debt and liquidity
- Cash and cash equivalents were $7.023B at July 3, 2021, down from $10.325B at year-end 2020. Working capital was $12.34B, versus $11.65B.
- Debt carrying value was $18.777B, down from $21.735B at year-end; calculated net debt was approximately $11.75B, compared with $11.41B. The company repaid $2.805B of debt in the first half.
- First-half investing cash outflow was $2.624B, including $1.425B for acquisitions and $1.168B of capital expenditures. Operating cash flow less capital expenditures was approximately $3.04B, a derived measure.
- First-half financing cash outflow was $4.926B, including $2.0B of share repurchases and $190M of dividends. The company reported no second-quarter share repurchases.
- No borrowings were outstanding on the $3.0B revolving credit facility or under commercial paper programs. The company reported $4M of short-term debt and said existing cash, operating cash flow, and available facilities should cover requirements, including the planned PPD acquisition.
Material changes, outlook and risks
- Management attributed strong results to higher demand, including recovering end markets and pandemic-related products. COVID-19 testing and treatment sales were $1.87B in Q2, up $0.58B year over year; first-half sales were $4.72B, up $3.26B. Management said the duration of pandemic-related demand is uncertain and that pandemic effects on some businesses could worsen.
- The company agreed to acquire PPD for $17.4B in cash plus assumption of approximately $3.5B of net debt. It continued to expect completion by year-end 2021, subject to conditions. On July 16, after quarter-end, the FTC issued a Second Request for information, extending the regulatory review period. Financing was expected from cash and new debt; up to $6.5B of bridge financing was available but not expected to be used.
- Management expected a 2021 effective tax rate of 11%–13%, cash income tax payments of approximately $1.7B, and capital expenditures of $2.5B–$2.7B. No full-year revenue or earnings guidance is stated in the supplied filing text. The fourth quarter of 2021 was expected to have four fewer selling days than the corresponding 2020 quarter.
- Unusual items included a $197M first-half loss on early debt extinguishment and a $162M Q2 tax benefit from an intra-entity asset transfer. First-half restructuring and other costs were reported as $115M net in management’s discussion; the income statement separately reports $133M in restructuring and other costs, alongside other expense classifications and credits. The filing also identifies approximately $45M of additional restructuring charges expected, primarily in 2021.
- Risks include uncertainty around COVID-19 demand and economic conditions; PPD regulatory approval, closing delays and integration; increased leverage to fund PPD; and litigation and environmental remediation exposure. Management said no material changes had occurred in other previously reported risk factors.
Important facts for investors to verify
- Whether pandemic-related sales and recovering non-COVID markets can sustain current growth and margins.
- PPD closing timing, FTC review outcome, financing terms, and expected effect on leverage and integration.
- Whether full-year tax, cash-tax, capital-expenditure, and restructuring expectations remain on track.
- Cash conversion and working-capital needs, particularly inventory growth and the decline in cash balances.
- Potential outcomes and financial exposure from litigation, environmental matters, and other contingencies.