THERMO FISHER SCIENTIFIC Reference is made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations to Notes to the Consolidated Financial Statements , which begin on page F-1 of this report. Management's discussion and analysis of financial condition and results of operations for 2019 is included in Item 7 of the company's 2020 Annual Report on Form 10-K filed with theSecurities and Exchange Commission . The company refers to various amounts or measures not prepared in accordance with generally accepted accounting principles (non-GAAP measures). These non-GAAP measures are further described and reconciled to their most directly comparable amount or measure under the section " N on-GAAP
M easures " later in this "Management's Discussion and Analysis of Financial Condition and Results of Operations"
Overview
Thermo Fisher Scientific Inc. enables customers to make the world healthier, cleaner and safer by helping them accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics and therapies, and increase laboratory productivity. Markets served include pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics. The company's operations fall into four segments (Note 4): Life Sciences Solutions, Analytical Instruments,Specialty Diagnostics and Laboratory Products and Biopharma Services.
Financial Highlights - 2021 Compared With 2020
(Dollars in millions except per share amounts) 2021 2020 Change Revenues$ 39,211 $ 32,218 22 % GAAP operating income$ 10,028 $ 7,794 29 % GAAP operating income margin 25.6 % 24.2 % 1.4 pt Adjusted operating income (non-GAAP measure)$ 12,138 $ 9,556 27 % Adjusted operating income margin (non-GAAP measure) 31.0 % 29.7 % 1.3 pt
GAAP diluted earnings per share attributable to
$ 19.46 $ 15.96 22 % Adjusted earnings per share (non-GAAP measure)$ 25.13 $ 19.56 28 % Organic Revenue Growth Revenue growth 22 % Impact of acquisitions 3 % Impact of currency translation 2 %
Organic revenue growth* (non-GAAP measure) 17 %
* Results may not sum due to rounding.
The company mobilized in early 2020 to support the COVID-19 pandemic response with products and services that help analyze, diagnose and protect from the virus. However, as a result of the pandemic's impact on various markets, the company saw a significant reduction in customer activity in several businesses by lateMarch 2020 that materially adversely affected primarily the 2020 results of the Analytical Instruments segment and, to a lesser extent, some businesses within the company's other three segments. The negative impact significantly lessened in 2021, but could worsen in 2022 dependent on the success of global efforts to control and unwind from the pandemic and economic activity ramping up. During 2021, the Life Sciences Solutions andSpecialty Diagnostics segments as well as the laboratory products business continued to support COVID-19 diagnostic testing, scaling and evolving their molecular diagnostics solutions and plastic consumables businesses to respond to the on-going COVID-19 pandemic. The biosciences and bioproduction businesses also expanded their capacity to meet the needs of pharma and biotech customers as they rapidly expanded their own production volumes to meet global vaccine manufacturing requirements. Additionally, through our pharma services business, we provided our pharma and biotech customers with the services they needed to develop and produce vaccines and therapies globally. While these positive impacts are expected to continue through 2022, the duration and extent of future revenues from such sales are uncertain and dependent primarily on customer testing as well as therapy and vaccine demand. Sales of products related to COVID-19 response were$9.23 billion and$6.63 billion in 2021 and 2020, respectively. Conditions were strong in each of the company's end markets during 2021. Revenues were particularly strong in pharma and biotech driven by strong market dynamics and the company's role in supporting customers across a wide range of therapeutic areas, including our role in supporting COVID-19 vaccines and therapies. Customers in the academic and 26 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (continued)
government market increased demand as a result of positive funding trends around the globe and a return to pre-pandemic levels of activity. Customer activity in the industrial and applied market returned to pre-pandemic levels in 2021. Revenues from customers in the diagnostics and healthcare market were driven by growth in COVID-19 testing-related products as the company continued to support the societal response to the pandemic. Sales growth was strong across all geographic regions during 2021. The company continues to execute its proven growth strategy which consists of three pillars:
•Developing high-impact, innovative new products,
•Leveraging our scale in high-growth and emerging markets, and
•Delivering a unique value proposition to our customers.
GAAP operating income margin and adjusted operating income margin increased in 2021 due primarily to profit on higher sales and sales mix, offset in part by strategic growth investments to support the company's near and long-term growth. The company's references to strategic growth investments generally refer to targeted spending for enhancing commercial capabilities, including expansion of geographic sales reach and e-commerce platforms, marketing initiatives, expanded service and operational infrastructure, research and development projects and other expenditures to enhance the customer experience, as well as incentive compensation and recognition for employees. The company's references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system including reduced costs resulting from implementing continuous improvement methodologies, global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, and low cost region manufacturing. Productivity improvements are calculated net of inflationary cost increases.
Notable Recent Acquisitions
OnJanuary 15, 2021 , the company acquired, within the Laboratory Products and Biopharma Services segment, theBelgium -based European viral vector manufacturing business of Groupe Novasep SAS for$830 million in net cash consideration. The European viral vector manufacturing business provides manufacturing services for vaccines and therapies to biotechnology companies and large biopharma customers. The acquisition expands the segment's capabilities for cell and gene vaccines and therapies. OnFebruary 25, 2021 , the company acquired, within the Life Sciences Solutions segment,Mesa Biotech, Inc. , aU.S. -based molecular diagnostic company, for$407 million in net cash consideration and contingent consideration with an initial fair value of$65 million due upon the completion of certain milestones. Mesa Biotech has developed and commercialized a PCR based rapid point-of-care testing platform available for detecting infectious diseases including COVID-19. The acquisition enables the company to accelerate the availability of reliable and accurate advanced molecular diagnostics at the point of care. OnSeptember 30, 2021 , the company assumed operating responsibility, within the Laboratory Products and Biopharma Services segment, of a new state-of-the-art biologics manufacturing facility in Lengnau,Switzerland from CSL Limited to perform pharma services for CSL with capacity to serve other customers as well. The company expects to make fixed lease payments aggregating to$555 million (excluding renewals) from 2021 to 2041, with additional amounts dependent on the extent of revenues from customers of the facility other than CSL. OnDecember 8, 2021 , the company acquired, within the Laboratory Products and Biopharma Services segment,PPD, Inc. , aU.S. -based global provider of clinical research services to the pharma and biotech industry, for$15.99 billion in net cash consideration and$43 million of equity awards exchanged. The addition of PPD's clinical research services enhances our offering to biotech and pharma customers by enabling them to accelerate innovation and increase their productivity within the drug development process. In 2020, PPD generated revenues of$4.68 billion . OnDecember 30, 2021 , the company acquired, within the Life Sciences Solutions segment,PeproTech, Inc. , aU.S. based developer and manufacturer of recombinant proteins, for$1.86 billion in net cash consideration.PeproTech provides bioscience reagents known as recombinant proteins, including cytokines and growth factors. The acquisition expands the segment's bioscience offerings.
Results of Operations
The company's management evaluates segment operating performance using operating
income before certain charges/credits as defined in Note 4. Accordingly, the
following segment data are reported on this basis.
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSResults of Operations (continued)
(Dollars in millions) 2021 2020 Revenues Life Sciences Solutions$ 15,631 $ 12,168 Analytical Instruments 6,069 5,124 Specialty Diagnostics 5,659 5,343 Laboratory Products and Biopharma Services 14,862 12,245 Eliminations (3,010) (2,662) Consolidated revenues$ 39,211 $ 32,218 Life Sciences Solutions Organic* Total Currency Acquisitions/ (non-GAAP (Dollars in millions) 2021 2020 Change Translation Divestitures measure) Revenues$ 15,631 $ 12,168 28 % 2 % 3 % 23 % Segment income$ 7,817 $ 6,109 28 % Segment income margin 50.0 % 50.2 % -0.2 pt
* Results may not sum due to rounding
The increase in segment revenues at existing businesses in 2021 was driven by a
combination of increased demand for testing to diagnose COVID-19 with higher
sales of biosciences products and strong demand in each of the segment's
businesses. The decrease in segment income margin resulted primarily from
strategic growth investments, offset in part by profit on higher sales.
Analytical Instruments Organic*
Total Currency Acquisitions/ (non-GAAP
(Dollars in millions) 2021 2020 Change Translation Divestitures measure)
Revenues $ 6,069 $ 5,124 18 % 2 % - % 17 %
Segment income 1,197 808 48 %
Segment income margin 19.7 % 15.8 % 3.9 pt
* Results may not sum due to rounding
The increase in segment revenues at existing businesses in 2021 was due to increased demand for products sold by each of the segment's primary businesses with particular strength in electron microscopy instruments as well as chromatography and mass spectrometry instruments. The increase in segment income margin was primarily due to profit on higher sales and, to a lesser extent, a$108 million charge in 2020 related to a long-term supply contract (discussed in Note 12), offset in part by strategic growth investments. Specialty Diagnostics Organic* Total Currency Acquisitions/ (non-GAAP (Dollars in millions) 2021 2020 Change Translation Divestitures measure) Revenues$ 5,659 $ 5,343 6 % 1 % - % 5 % Segment income 1,280 1,368 (6) % Segment income margin 22.6 % 25.6 % -3.0 pt
* Results may not sum due to rounding
The increase in segment revenues at existing businesses in 2021 was due to higher demand primarily driven by products addressing treatment of COVID-19, with particular strength in sales of products sold through the segment's healthcare market channel, immunodiagnostics and clinical diagnostics products. The decrease in segment income margin was primarily due to sales mix and strategic investments, offset in part by profit on higher sales and, to a lesser extent, a$13 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1). 28 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Laboratory Products and Biopharma Services Organic*
Total Currency Acquisitions/ (non-GAAP
(Dollars in millions) 2021 2020 Change Translation Divestitures measure)
Revenues $ 14,862 $ 12,245 21 % 2 % 5 % 15 %
Segment income 1,844 1,271 45 %
Segment income margin 12.4 % 10.4 % 2.0 pt
* Results may not sum due to rounding
The increase in segment revenues at existing businesses in 2021 was primarily due to increased demand in each of the segment's principal businesses with particular strength in products sold through its pharma services business and research and safety market channel and, to a lesser extent, laboratory products businesses. The increase in segment income margin was primarily due to profit on higher sales and sales mix, and, to a lesser extent, acquisitions and a$20 million credit to cost of product revenue as a result of changing the method of accounting for inventories (discussed in Note 1), offset in part by strategic growth investments. Non-operating Items (Dollars in millions) 2021 2020 Net interest expense$ 493 $ 488 GAAP other income/(expense) (694) (76)
Adjusted other income/(expense) (non-GAAP measure) 38 45 GAAP tax rate
12.5 % 11.8 %
Adjusted tax rate (non-GAAP measure) 14.6 % 14.3 %
Net interest expense (interest expense less interest income) increased due primarily to the increase in debt to finance the acquisition of PPD and for general corporate purposes, offset in part by lower average interest rates. See additional discussion under the caption "Liquidity and Capital Resources" below.
GAAP other income/(expense) and adjusted other income/(expense) includes currency transaction gains and losses on non-operating monetary assets and liabilities and net periodic pension benefit cost/income, excluding the service cost component. GAAP other income/(expense) in 2021 also includes$767 million of losses on the early extinguishment of debt (Note 10) and$36 million of financing costs associated with obtaining bridge financing commitments in connection with the agreement to acquire PPD (Note 2), offset in part by$66 million of net gains on investments. GAAP other income/(expense) in 2020 includes$81 million of financing costs for a terminated acquisition, primarily for loan commitment fees and entering into hedging contracts and$42 million of expense reclassified from accumulated other comprehensive items related to a hedge arrangement (Note 14), offset in part by$10 million of net gains on investments. The company's GAAP and adjusted tax rates increased in 2021 compared to 2020, primarily due to higher profits at different marginal rates, offset in part by the benefits of our tax planning initiatives. The company's 2021 GAAP and adjusted tax rates were also impacted by income tax benefits on intra-entity transactions totaling$284 million . In 2020, the company's GAAP and adjusted tax rates were impacted by foreign tax credit planning inSweden which resulted in$96 million of foreign tax credits, with no related incrementalU.S. income tax expense; a net income tax benefit of$51 million from a domestication transaction involving the transfer of non-U.S. subsidiaries to theU.S. ; and a$47 million income tax benefit related to a foreign exchange loss for tax purposes on certain intercompany financing arrangements. Additionally, the 2020 GAAP tax rate included a$27 million tax benefit from tax audit settlements. The effective tax rate in both 2021 and 2020 was also affected by relatively significant earnings in lower tax jurisdictions. Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company's cash payments for income taxes were higher than its income tax expense for financial reporting purposes and totaled$2.18 billion and$1.32 billion in 2021 and 2020, respectively. The company expects its GAAP effective tax rate in 2022 will be between 9% and 11% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits. The effective tax rate can vary significantly from period to period as a result of discrete income tax factors and events. The company expects its adjusted tax rate will be approximately 13% in 2022. 29 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
The company has operations and a taxable presence in approximately 50 countries outside theU.S. Some of these countries have lower tax rates than theU.S. The company's ability to obtain a benefit from lower tax rates outside theU.S. is dependent on its relative levels of income in countries outside theU.S. and on the statutory tax rates in those countries. Based on the dispersion of the company's non-U.S. income tax provision among many countries, the company believes that a change in the statutory tax rate in any individual country is not likely to materially affect the company's income tax provision or net income, aside from any resulting one-time adjustment to the company's deferred tax balances to reflect a new rate.
Liquidity and Capital Resources
The company's proven growth strategy has enabled it to generate free cash flow
as well as access the capital markets. The company deploys its capital primarily
via mergers and acquisitions and secondarily via share buybacks and dividends.
December 31, December 31,
(In millions) 2021 2020
Cash and cash equivalents $ 4,477 $ 10,325
Total debt 34,870 21,735
Approximately half of the company's cash balances and cash flows from operations
are from outside the U.S. The company uses its non-U.S. cash for needs outside
of the U.S. including acquisitions, capacity expansion, and repayment of
third-party foreign debt by foreign subsidiaries. In addition, the company also
transfers cash to the U.S. using non-taxable returns of capital as well as
dividends where the related U.S. dividend received deduction or foreign tax
credit equals any tax cost arising from the dividends. As a result of using such
means of transferring cash to the U.S. , the company does not expect any material
adverse liquidity effects from its significant non-U.S. cash balances for the
foreseeable future.
The company believes that its existing cash and cash equivalents and its future
cash flow from operations together with available borrowing capacity under its
revolving credit agreement will be sufficient to meet the cash requirements of
its existing businesses for the foreseeable future, including at least the next
24 months.
As of December 31, 2021 , the company's short-term debt totaled $2.54 billion . On
January 7, 2022 , the company replaced its prior credit facility with a new
revolving credit facility with a bank group that provides up to $5.00 billion of
unsecured multi-currency revolving credit (Note 10). If the company borrows
under this facility, it intends to leave undrawn an amount equivalent to
outstanding commercial paper to provide a source of funds in the event that
commercial paper markets are not available. As of December 31, 2021 , no
borrowings were outstanding under the company's revolving credit facility,
although available capacity was reduced by approximately $4 million as a result
of outstanding letters of credit.
(In millions) 2021 2020
Net cash provided by operating activities
(21,932) (1,510)
Net cash provided by financing activities 6,581 959 Free cash flow (non-GAAP measure)
6,809 6,823
During 2021, cash provided by income was offset in part by investments in
working capital. Increases in accounts receivable and inventories used cash of
$204 million and $1.07 billion , respectively, primarily to support growth in
sales. An increase in accounts payable provided cash of $479 million . Changes in
other assets and other liabilities used cash of $724 million primarily due to
the timing of tax and incentive compensation payments. Cash payments for income
taxes were $2.18 billion during 2021.
During 2020, cash provided by income was offset in part by investments in
working capital. Increases in accounts receivable and inventories used cash of
$1.30 billion and $508 million , respectively, primarily to support growth in
sales. Changes in other assets and other liabilities provided cash of $1.45
billion primarily due to the timing of incentive compensation payments and, to a
lesser extent, customer billings. Cash payments for income taxes were $1.32
billion during 2020.
During 2021, acquisitions used cash of $19.40 billion . The company's investing
activities also included the purchase of $2.52 billion of property, plant and
equipment for capacity and capability investments. During 2020, the company's
investing activities were principally for the purchase of property, plant and
equipment.
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSLiquidity and Capital Resources (continued)
During 2021, issuance of senior notes provided$18.14 billion of cash. A net increase in commercial paper obligations provided cash of$2.51 billion . Repayment of debt used cash of$11.74 billion , including$4.30 billion to repay the debt assumed in the acquisition of PPD. The company's financing activities also included the repurchase of$2.00 billion of the company's common stock (4.1 million shares) and the payment of$395 million in cash dividends. OnSeptember 23, 2021 , the Board of Directors authorized the repurchase of up to$3.00 billion of the company's common stock. Early in the first quarter of 2022, the company repurchased$2.00 billion of the company's common stock (3.3 million shares). AtFebruary 24, 2022 , authorization remained for$1.00 billion of future repurchases of the company's common stock. As discussed in Note 10, in the first quarter of 2022 the company redeemed its 3.650% Senior Notes due 2025 for a total cash outlay of$375 million . During 2020, issuance of senior notes provided cash of$3.46 billion . Repayment of senior notes used cash of$710 million . The company's financing activities also included the repurchase of$1.50 billion of the company's common stock (4.5 million shares) and the payment of$337 million in cash dividends.
The company expects that for all of 2022, expenditures for property, plant and
equipment, net of disposals, will be between
In addition to the obligations on the balance sheet atDecember 31, 2021 , which include, but are not limited to, debt (Note 10), unrecognized tax benefits (Note 8), operating leases (Note 11) pension obligations (Note 7) and contingent consideration (Note 14), the company has entered into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods, services or fixed assets and to pay royalties (Note 12). The company is contingently liable with respect to certain legal proceedings and related matters. An unfavorable outcome that differs materially from current accrual estimates, if any, for one or more of the matters described under the heading "Product Liability, Workers Compensation and Other Personal Injury Matters," in Note 12 could have a material adverse effect on the company's financial position as well as its results of operations and cash flows.
Non-GAAP Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures such as organic revenue growth, which is reported revenue growth, excluding the impacts of revenues from acquired/divested businesses and the effects of currency translation. We report organic revenue growth becauseThermo Fisher management believes that in order to understand the company's short-term and long-term financial trends, investors may wish to consider the impact of acquisitions and foreign currency translation on revenues.Thermo Fisher management uses organic revenue growth to forecast and evaluate the operational performance of the company as well as to compare revenues of current periods to prior periods. We report adjusted operating income, adjusted operating income margin, adjusted other income/(expense), adjusted tax rate, and adjusted EPS. We believe that the use of these non-GAAP financial measures, in addition to GAAP financial measures, helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company's core operating performance, especially when comparing such results to previous periods, forecasts, and to the performance of our competitors. Such measures are also used by management in their financial and operating decision-making and for compensation purposes. To calculate these measures we exclude, as applicable: •Certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition, significant transaction/acquisition-related costs, including changes in estimates of contingent acquisition-related consideration, and other costs associated with obtaining short-term financing commitments for pending/recent acquisitions. We exclude these costs because we do not believe they are indicative of our normal operating costs. •Costs/income associated with restructuring activities, such as reducing overhead and consolidating facilities. We exclude these costs because we believe that the costs related to restructuring activities are not indicative of our normal operating costs. •Equity in earnings of unconsolidated entities; impairments of long-lived assets; and certain other gains and losses that are either isolated or cannot be expected to occur again with any predictability, including gains/losses on investments, the sale of businesses, product lines, and real estate, significant litigation-related matters, curtailments/settlements of pension plans, and the early retirement of debt. We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. •The expense associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of up to 20 years. Exclusion of 31
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSNon-GAAP Measures (continued)
the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.
•The tax impacts of the above items and the impact of significant tax audits or events (such as changes in deferred taxes from enacted tax rate changes), the latter of which we exclude because they are outside of our normal operations and difficult to forecast accurately for future periods. We report free cash flow, which is operating cash flow, excluding net capital expenditures to provide a view of the continuing operations' ability to generate cash for use in acquisitions and other investing and financing activities. The company uses this measure as an indication of the strength of the company and its ability to generate cash for use in acquisitions and other investing and financing activities. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt service that are not deducted from the measure. The non-GAAP financial measures ofThermo Fisher Scientific's results of operations and cash flows included in this Form 10-K are not meant to be considered superior to or a substitute forThermo Fisher Scientific's results of operations prepared in accordance with GAAP. Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth within the "Overview" and "Results of Operations" sections and below. (Dollars in millions except per share amounts) 2021 2020 Reconciliation of adjusted operating income and adjusted operating income margin GAAP operating income$ 10,028 25.6 %$ 7,794 24.2 % Cost of revenues charges (a) 8 0.0 % 6 0.0 %
Selling, general and administrative charges (credits) (b)
144 0.4 % (10) 0.0 %
Restructuring and other costs (c) 197 0.5 % 99 0.3 %
Amortization of acquisition-related intangible assets 1,761 4.5 % 1,667 5.2 %
Adjusted operating income (non-GAAP measure) $ 12,138 31.0 % $ 9,556 29.7 %
Reconciliation of adjusted other income/(expense)
GAAP other income/(expense) $ (694) $ (76)
Adjustments (d) 732 121
Adjusted other income/(expense) (non-GAAP measure) $ 38 $ 45
Reconciliation of adjusted tax rate
GAAP tax rate 12.5 % 11.8 %
Adjustments (e) 2.1 % 2.5 %
Adjusted tax rate (non-GAAP measure) 14.6 % 14.3 %
Reconciliation of adjusted earnings per share
GAAP diluted earnings per share (EPS) attributable to
$ 19.46 $ 15.96 Cost of revenues charges (a) 0.02 0.01
Selling, general and administrative charges (credits) (b)
0.36 (0.02)
Restructuring and other costs (c) 0.50 0.25
Amortization of acquisition-related intangible assets 4.43 4.17
Other income/expense adjustments (d) 1.84 0.30
Benefit from income taxes (e) (1.49) (1.12)
Equity in losses of unconsolidated entities 0.01 0.01
Adjusted EPS (non-GAAP measure) $ 25.13 $ 19.56
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSNon-GAAP Measures (continued)
(Dollars in millions except per share amounts) 2021
2020
Reconciliation of free cash flow GAAP net cash provided by operating activities$ 9,312 $ 8,289 Purchases of property, plant and equipment (2,523)
(1,474)
Proceeds from sale of property, plant and equipment 20
8
Free cash flow (non-GAAP measure)$ 6,809
(a) Adjusted results in 2021 exclude charges for the sale of inventories
revalued at the date of acquisition. Adjusted results in 2020 exclude
(b) Adjusted results in 2021 and 2020 exclude certain third-party expenses (credits), principally transaction/integration costs (including reimbursement thereof) related to recent/terminated acquisitions; credits from changes in estimates of contingent acquisition consideration; and charges associated with product liability litigation. (c) Adjusted results in 2021 and 2020 exclude restructuring and other costs consisting principally of severance, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations, and charges for impairment of acquired technology. Adjusted results in 2021 exclude$35 million of charges for compensation due to employees of recently acquired businesses at the date of acquisition. (d) Adjusted results in 2021 and 2020 exclude net gains on investments and charges for amortization of bridge loan commitment fees and entering hedging contracts for recent/terminated acquisitions. Adjusted results in 2021 exclude$767 million of losses on the early extinguishment of debt. Adjusted results in 2020 exclude$42 million of charges related to terminated interest rate swaps and$8 million of net charges for the settlement/curtailment of pension plans.
(e) Adjusted provision for income taxes in 2021 and 2020 excludes the
incremental tax benefit for the pre-tax reconciling items between GAAP and
adjusted net income, incremental tax impacts from audit settlements and
incremental tax impacts from adjusting the company's non-
Critical Accounting Policies and Estimates
The company's discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to acquisition-related measurements and income taxes. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The company believes the following represent its critical accounting policies and estimates used in the preparation of its financial statements:
Acquisition-related Measurements
Business Combinations
The company uses assumptions and estimates in determining the fair value of
assets acquired and liabilities assumed in a business combination. The
determination of the fair value of intangible assets, which represent a
significant portion of the purchase price in many of the company's acquisitions,
requires the use of significant judgment with regard to (i) the fair value and
(ii) whether such intangibles are amortizable or non-amortizable and, if the
former, the period and the method by which the intangible asset will be
amortized. The company estimates the fair value of acquisition-related
intangible assets principally based on projections of cash flows that will arise
from identifiable intangible assets of acquired businesses, which include
estimates of customer attrition and technology obsolesce rates. The projected
cash flows are discounted to determine the present value of the assets at the
dates of acquisition. See Note 2 for additional information about our recent
business combinations.
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSCritical Accounting Policies and Estimates (continued)
The company evaluates goodwill and indefinite-lived intangible assets for impairment annually and when events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts.Goodwill and indefinite-lived intangible assets totaled$41.92 billion and$1.24 billion , respectively, atDecember 31, 2021 (see Note 1 for additional information). Estimates of discounted future cash flows require assumptions related to revenue and operating income growth rates, discount rates and other factors. For the goodwill impairment tests, the company considers (i) peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the respective reporting units and (ii) estimated weighted average costs of capital. Different assumptions from those made in the company's analysis could materially affect projected cash flows and the company's evaluation of goodwill and indefinite-lived intangible assets for impairment. The company performed the quantitative goodwill impairment test for all of its reporting units and indefinite-lived intangible assets. Indications of fair value based on projections of cash flows, which increased over the prior year projections at higher rates than the increases in carrying values, and on peer revenues, earnings trading multiples and discount rates, which were relatively consistent with the prior year, were sufficient to conclude that no impairment of goodwill or indefinite-lived intangible assets existed at the end of the tenth fiscal month of 2021, the date of the company's annual impairment testing. There were no interim impairments of goodwill or indefinite-lived intangible assets in 2021. There can be no assurance, however, that an economic downturn will not materially adversely affect peer trading multiples and the company's businesses such that they do not achieve their forecasted profitability and these assets become impaired. Should the fair value of the company's goodwill or indefinite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rate, charges for impairment may be necessary.
Definite-lived Intangible Assets
Definite-lived intangible assets totaled$18.88 billion atDecember 31, 2021 (see Note 1 for additional information). The company reviews definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. The company recorded impairments of$0.12 billion in 2021 (see Note 16 for additional information).
Contingent Consideration
The fair value of contingent consideration liabilities, which were initially exchanged for control of businesses or assumed from acquired businesses, was$0.32 billion atDecember 31, 2021 . At each reporting period, the fair value of contingent consideration is determined using either discounted cash flow analyses,Monte Carlo simulations, or fair values of an underlying recapitalization investment portfolio. Changes in the fair value of contingent consideration liabilities can result from changes in estimates of revenue or operating results or in the timing or likelihood of achieving milestones, as well as changes in the fair values of the investments underlying the recapitalization investment portfolio. These changes resulted in (benefits)/charges of$(0.05) billion during 2021 (see Note 14 for additional information). Income Taxes Unrecognized Tax Benefits In the ordinary course of business there is inherent uncertainty in quantifying the company's income tax positions. The company assesses income tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the company has recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Should tax return positions that the company expects are sustainable not be sustained upon audit, the company could be required to record an incremental tax provision for such taxes. The company's liability for these unrecognized tax benefits totaled$1.12 billion atDecember 31, 2021 (see Note 8 for additional information). 34 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates (continued)
The company operates in numerous countries under many legal forms and, as a result, is subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the company to interpret the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, currency exchange restrictions or the company's level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and hence the company's net income.
Valuation Allowances
The company estimates the degree to which tax assets will result in a benefit, after consideration of all positive and negative evidence, and provides a valuation allowance for tax assets that it believes will more likely than not go unused. In situations in which the company has been able to determine that its deferred tax assets will be realized, that determination generally relies on future reversals of taxable temporary differences and expected future taxable income. If it becomes more likely than not that a tax asset will be used, the company reverses the related valuation allowance. Any such reversals are recorded as a reduction of the company's tax provision. The company's tax valuation allowance totaled$0.97 billion atDecember 31, 2021 (see Note 8 for additional information). Should the company's actual future taxable income by tax jurisdiction vary from estimates, additional allowances or reversals thereof may be necessary. Undistributed Earnings The company has not providedU.S. state income taxes or additional non-U.S. taxes on certain of its non-U.S. subsidiaries' undistributed earnings, as such amounts are intended to be reinvested outsidethe United States indefinitely in the respective jurisdictions based on specific business plans and tax strategies (see Note 8 for additional information). These business plans and tax strategies consider: short-term and long-term forecasts and budgets of theU.S. parent and non-U.S. subsidiaries; working capital and other needs in locations where earnings are generated; the company's past practices regarding non-U.S. subsidiary dividends; sources of financing by theU.S. parent, such as issuing debt or equity; and uses of cash by theU.S. parent that are more discretionary in nature, such as business combinations and share repurchase programs. However, should the company change its business plans and tax strategies in the future and decide to repatriate a portion of these earnings to one of itsU.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries, the company would recognize additional tax liabilities. It is not practicable to estimate the amount of additionalU.S. state income tax and non-U.S. tax liabilities that the company would incur. The company's intent is to only make distributions from non-U.S. subsidiaries in the future when they can be made at no net tax costs.
Recent Accounting Pronouncements
A description of recently issued accounting standards is included under the heading "Recent Accounting Pronouncements" in Note 1.
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