Business context and reporting period
Thermo Fisher Scientific Inc. filed this unaudited Form 10-Q for the quarter ended October 1, 2022. It serves life sciences, analytical instruments, diagnostics, laboratory products and biopharma services markets. Comparisons below are with the quarter ended October 2, 2021, or the corresponding nine-month period, as indicated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $10.68B | $9.33B | $33.47B | $28.51B |
| GAAP operating income | $1.71B | $2.28B | $6.53B | $7.49B |
| GAAP operating margin | 16.0% | 24.4% | 19.5% | 26.3% |
| Adjusted operating margin (non-GAAP) | 22.2% | 29.8% | 25.2% | 31.5% |
| Net income attributable to Thermo Fisher | $1.50B | $1.90B | $5.37B | $6.07B |
| Diluted EPS, GAAP | $3.79 | $4.79 | $13.62 | $15.29 |
| Adjusted EPS (non-GAAP) | $5.08 | $5.77 | $17.84 | $18.58 |
Cash flow (nine months): Operating cash flow was $5.67B, versus $6.86B; capital expenditures were $1.69B, and reported free cash flow (non-GAAP) was $3.99B, versus $5.17B. Working-capital changes used $2.09B of cash, including a $1.12B inventory increase, which management primarily attributed to supporting sales growth.
Liquidity and debt: Cash and cash equivalents were $2.92B at October 1, 2022, down from $4.48B at December 31, 2021. Total debt was $29.16B, compared with $34.87B at year-end; short-term debt and current maturities were $1.01B. The company reported no borrowings under its $5.00B revolving credit facility and said available cash, operating cash flow and borrowing capacity should cover requirements for at least the next 24 months.
Material changes versus comparable periods
- Revenue grew 14% in Q3 and 17% for the first nine months, but organic revenue declined 1% in Q3 and grew 1% year to date. Acquisitions added 20 percentage points to Q3 reported growth, while currency translation reduced it by 5 points.
- Growth was concentrated in Laboratory Products and Biopharma Services, whose revenue rose 60% in Q3, including $1.82B from acquired PPD. Analytical Instruments revenue increased 10%. Life Sciences Solutions and Specialty Diagnostics revenue fell 20% and 22%, respectively, as COVID-19 testing demand declined.
- COVID-19 testing product revenue declined to $0.44B in Q3 from $1.57B, and to $2.75B for the first nine months from $5.44B.
- Operating income and EPS declined despite higher reported revenue. Management attributed margin pressure mainly to lower COVID-19 testing volumes, strategic growth investments, acquisition impacts and higher acquisition-related amortization; pricing and productivity partly offset these factors.
- PPD and other acquisitions materially affected comparisons. For the first nine months, PPD contributed $5.20B of revenue to Laboratory Products and Biopharma Services.
Outlook, commentary, risks and unusual items
- The filing provides no full-year revenue or EPS guidance. Management expected 2022 GAAP effective tax rate of 8%–10%, adjusted tax rate of 13%–13.5%, cash income-tax payments of approximately $1.35B, and capital expenditures of $2.3B–$2.5B.
- Management described pharma and biotech demand as very strong, with growth in academic and government markets and robust analytical-instrument demand. Diagnostics and healthcare weakened as COVID-19 testing demand declined. The company cautioned that future COVID-related revenue depends on testing, therapy and vaccine demand.
- Q3 included a $208M net tax benefit primarily related to settlement of an IRS audit, alongside a $395M valuation allowance charge for certain U.S. foreign tax credits management expects will more likely than not expire unused. The filing also reports other tax-audit and deferred-tax effects; the unusually low GAAP tax rate should be assessed in that context.
- Restructuring and other costs were $59M for the first nine months. As of November 4, 2022, the company identified additional restructuring actions expected to incur approximately $85M, primarily in 2022 and 2023.
- The company agreed to acquire The Binding Site Group, subject to customary closing conditions and regulatory approvals. The filing states consideration of £2.25B, payable as €2.59B. Separately, it reports yen-denominated senior-note issuances in October 2022 and $1.00B of share repurchases in Q4 2022; neither occurred in the reported quarter.
- Risks include uncertain COVID-19-related demand, inflation and supply-chain disruption, foreign-exchange and economic conditions, customer and government spending, acquisition execution, and environmental, product-liability and other litigation contingencies. Management said environmental remediation expenses were not material in the periods presented, but future costs remain uncertain.
Most important facts for investors to verify
- How much reported growth and future performance depend on acquisitions, particularly PPD, versus organic demand.
- The pace of COVID-19 testing revenue declines and the strength of non-COVID businesses that offset them.
- Whether margins and cash generation recover as acquisition costs, growth investments and working-capital demands evolve.
- The sustainability of the low 2022 GAAP tax rate, considering the audit settlement, valuation allowance and tax-credit assumptions.
- Closing, financing and integration terms for The Binding Site acquisition, and the effect of additional restructuring costs and subsequent debt and repurchase activity.