THERMO FISHER SCIENTIFIC Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, including without limitation statements regarding: projections of revenues, expenses, earnings, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position; cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions or divestitures; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; the expected impact of the COVID-19 pandemic on the company's business; and any other statements that address events or developments thatThermo Fisher intends or believes will or may occur in the future. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. While the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company's estimates change, and readers should not rely on those forward-looking statements as representing the company's views as of any date subsequent to the date of the filing of this Quarterly Report. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth under the caption "Risk Factors" in the company's Annual Report on Form 10-K for the year endedDecember 31, 2019 (which is on file with theSEC ), as updated i) by the company's Quarterly Report on Form 10-Q for the quarter ended June 27, 2020 (which is on file with theSEC ), and ii) under the heading "Risk Factors" in Part II, Item 1A of this report on Form 10-Q. Important factors that could cause actual results to differ materially from those indicated by forward-looking statements include risks and uncertainties relating to: the duration and severity of the COVID-19 pandemic; the need to develop new products and adapt to significant technological change; implementation of strategies for improving growth; general economic conditions and related uncertainties, dependence on customers' capital spending policies and government funding policies; the effect of economic and political conditions and exchange rate fluctuations on international operations; use and protection of intellectual property; the effect of changes in governmental regulations; and the effect of laws and regulations governing government contracts, as well as the possibility that expected benefits related to recent or pending acquisitions may not materialize as expected.
Overview
The company develops, manufactures and sells a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own technologies and by making strategic acquisitions of complementary businesses. The company's operations fall into four segments (Note 4): Life Sciences Solutions, Analytical Instruments,Specialty Diagnostics and Laboratory Products and Services. The company has mobilized to support the global novel strain of coronavirus (COVID-19) response with products and services that help analyze, diagnose and protect from the virus. However, as the pandemic spread fromChina to countries worldwide, the company saw a significant reduction in customer activity in several businesses by late March and continuing into the fourth quarter of 2020 that will materially adversely affect primarily the results of the Analytical Instruments segment and, to a lesser extent, some businesses within the company's other three segments, at least through the fourth quarter of 2020. The extent and duration of the negative impacts are uncertain and dependent in part on customers continuing to return to work and economic activity ramping up. The company believes the impacted businesses' long-term prospects remain excellent given the company's attractive markets served, its industry-leading position and proven growth strategy. Several of the company's businesses have had a significant increase in revenues due to sales of product and services addressing diagnosis and treatment of COVID-19, including test kits and, to a lesser extent, products and services for therapy and vaccine development and manufacturing. While these positive impacts are expected to continue into the fourth quarter of 2020, the duration and extent of future revenues from such sales are uncertain and dependent primarily on customer testing demand. 25 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Acquisitions and Divestitures The company's strategy is to augment internal growth at existing businesses with complementary acquisitions. The company's principal recent acquisitions and divestitures are described below. OnApril 30, 2019 , the company acquired, within the Laboratory Products and Services segment,Brammer Bio for approximately$1.67 billion in cash.Brammer Bio is a leading viral vector contract development and manufacturing organization for gene and cell therapies. The acquisition expands the segment's contract manufacturing capabilities.Brammer Bio reported revenues of approximately$140 million in 2018. OnJune 28, 2019 , the company sold its Anatomical Pathology business toPHC Holdings Corporation for$1.13 billion , net of cash divested. The business was part of theSpecialty Diagnostics segment. Revenues in 2019, through the date of sale, and the full year 2018 of the business sold were approximately$115 million and$238 million , respectively, net of retained sales through the company's healthcare market and research and safety market channel businesses.
Overview of Results of Operations and Liquidity
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
(Dollars in millions) 2020 2019 2020 2019
Revenues
Life Sciences Solutions $ 3,424 40.2 % $ 1,701 27.1 % $ 7,800 36.0 % $ 5,018 26.8 %
Analytical Instruments 1,336 15.7 % 1,358 21.7 % 3,488 16.1 % 4,004 21.4 %
Specialty Diagnostics 1,430 16.8 % 879 14.0 % 3,376 15.6 % 2,779 14.9 %
Laboratory Products and
Services 3,112 36.5 % 2,619 41.8 % 8,629 39.8 % 7,765 41.5 %
Eliminations (781) (9.2) % (285) (4.6) % (1,625) (7.5) % (853) (4.6) %
$ 8,521 100 % $ 6,272 100 % $ 21,668 100 % $ 18,713 100 %
Sales in the third quarter of 2020 were $8.52 billion , an increase of $2.25
billion from 2019. The favorable effects of currency translation resulted in an
increase in revenues of $80 million in the third quarter of 2020. Sales
increased $32 million due to an acquisition. Aside from the effects of currency
translation and acquisitions, revenues increased $2.14 billion (34%) primarily
due to increased demand in the quarter compared to the 2019 quarter. Sales were
particularly strong in diagnostic and healthcare markets, primarily due to
demand for products supporting customers diagnosing the COVID-19 virus, as well
as to customers in pharma and biotech markets where demand was strong for
products and services and pandemic-related demand for therapies and vaccines
also contributed to growth. Sales to academic and government customers grew
modestly. Sales to customers in industrial markets decreased primarily due to
lower demand from weakened economic conditions related to COVID-19. Sales growth
was strong in each of the company's primary geographic areas during the third
quarter of 2020.
In the third quarter of 2020, total company operating income and operating
income margin were $2.43 billion and 28.5%, respectively, compared with $0.95
billion and 15.1%, respectively, in 2019. The increase in operating income was
primarily due to profit on higher sales and, to a lesser extent, sales mix,
offset in part by strategic growth investments in 2020. 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, focused research 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, reduced costs resulting
from 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.
The company's effective tax rate was 14.2% for the third quarter of 2020. The
company expects its effective tax rate for all of 2020 will be between 10% and
12% based on currently forecasted rates of profitability in the countries in
which the company conducts business and expected generation of foreign tax
credits. Due primarily to the non-deductibility of intangible asset amortization
for tax purposes, the company's cash payments for income taxes are higher than
its income tax expense for
26
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview of Results of Operations and Liquidity (continued)
financial reporting purposes and are expected to total $1.20 to $1.23 billion in
2020. In the third quarter of 2019, the company's effective tax rate was 7.6%.
Net income increased to $1.93 billion in the third quarter of 2020 from $0.76
billion in the third quarter of 2019, primarily due to the increase in operating
income in the 2020 period (discussed above), offset in part by the increase in
the income tax provision.
During the first nine months of 2020, the company's cash flow from operations
totaled $4.95 billion compared with $3.06 billion for 2019. The increase
primarily resulted from higher cash provided by income and, to a lesser extent,
lower investment in working capital in 2020.
As of September 26, 2020 , the company's short-term debt totaled $2 million . The
company has a revolving credit facility with a bank group that provides up to
$2.5 billion of unsecured multi-currency revolving credit (Note 7). 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 September 26, 2020 ,
no borrowings were outstanding under the company's revolving credit facility,
although available capacity was reduced by approximately $66 million as a result
of outstanding letters of credit.
The company believes that its existing cash and cash equivalents of $7.54
billion as of September 26, 2020 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.
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 in the 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 intangible assets and goodwill, income taxes and contingencies
and litigation. 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. Management's
Discussion and Analysis and Note 1 to the Consolidated Financial Statements of
the company's Form 10-K for 2019, describe the significant accounting estimates
and policies used in preparation of the consolidated financial statements. There
have been no significant changes in the company's critical accounting policies
during the first nine months of 2020.
27
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter 2020 Compared With Third Quarter 2019
Three Months Ended
September 26, September 28, Total Currency Acquisitions/
(In millions) 2020 2019 Change Translation Divestitures Operations
Revenues
Life Sciences Solutions $ 3,424 $ 1,701 $ 1,723 $ 20 $ - $ 1,703
Analytical Instruments 1,336 1,358 (22) 19 - (41)
Specialty Diagnostics 1,430 879 551 10 - 541
Laboratory Products and
Services 3,112 2,619 493 33 32 428
Eliminations (781) (285) (496) (2) - (494)
Consolidated Revenues $ 8,521 $ 6,272 $ 2,249 $ 80 $ 32 $ 2,137
Sales in the third quarter of 2020 were $8.52 billion , an increase of $2.25
billion from the third quarter of 2019. The favorable effects of currency
translation resulted in an increase in revenues of $80 million in 2020. Sales
increased $32 million due to an acquisition. Aside from the effects of currency
translation and acquisitions, revenues increased $2.14 billion (34%) primarily
due to increased demand in the quarter compared to the 2019 quarter. Sales were
particularly strong in diagnostic and healthcare markets, primarily due to
demand for products supporting customers diagnosing the COVID-19 virus, as well
as to customers in pharma and biotech markets where demand was strong for
products and services and pandemic-related demand for therapies and vaccines
also contributed to growth. Sales to academic and government customers grew
modestly. Sales to customers in industrial markets decreased primarily due to
lower demand from weakened economic conditions related to COVID-19. Sales growth
was strong in each of the company's primary geographic areas during the third
quarter of 2020.
In the third quarter of 2020, total company operating income and operating
income margin were $2.43 billion and 28.5%, respectively, compared with $0.95
billion and 15.1%, respectively, in 2019. The increase in operating income was
primarily due to profit on higher sales and, to a lesser extent, sales mix,
offset in part by strategic growth investments in 2020.
In the third quarter of 2020, the company recorded restructuring and other
income, net, of $37 million , including $55 million of net credits to selling,
general and administrative expenses, principally third-party transaction and
integration-related costs (including reimbursement thereof) for recent and
terminated acquisitions and changes in estimates of contingent acquisition
consideration. In addition, the company recorded $17 million of restructuring
and other charges, net, for impairment of acquired technology in development,
and, to a lesser extent, employee severance and other costs associated with
facility consolidations/abandonments in efforts to streamline operations. See
Note 12 for restructuring charges expected in future periods.
In the third quarter of 2019, the company recorded restructuring and other
costs, net, of $43 million , including $19 million of net charges associated with
sales of businesses in prior periods, including post-closing adjustments. The
company recorded $5 million of charges to cost of revenues for the sale of
inventories revalued at the date of acquisition. The company also recorded $7
million of charges to selling, general and administrative expenses, principally
transaction and integration-related costs for recent acquisitions. In addition,
the company recorded $12 million of cash restructuring charges, primarily for
employee severance and abandoned facilities costs associated with the closure
and consolidation of facilities in the U.S. and Europe .
Segment Results
The company's management evaluates segment operating performance using operating
income before certain charges/credits to cost of revenues and selling, general
and administrative expenses, principally associated with acquisition-related
activities; restructuring and other costs/income including costs arising from
facility consolidations such as severance and abandoned lease expense and gains
and losses from the sale of real estate and product lines; and amortization of
acquisition-related intangible assets. The company uses this measure because it
helps management understand and evaluate the segments' core operating results
and facilitate comparison of performance for determining compensation (Note 4).
Accordingly, the following segment data is reported on this basis.
28
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSResults of Operations (continued)
Three Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues
Life Sciences Solutions $ 3,424 $ 1,701 101 %
Analytical Instruments 1,336 1,358 (2) %
Specialty Diagnostics 1,430 879 63 %
Laboratory Products and Services 3,112 2,619 19 %
Eliminations (781) (285) 174 %
Consolidated Revenues $ 8,521 $ 6,272 36 %
Segment Income
Life Sciences Solutions $ 1,879 $ 586 221 %
Analytical Instruments 171 311 (45) %
Specialty Diagnostics 398 223 78 %
Laboratory Products and Services 355 303 17 %
Subtotal Reportable Segments 2,803 1,423 97 %
Cost of Revenues Charges, Net (1) (5)
Selling, General and Administrative (Credits) Charges, Net 55 (7)
Restructuring and Other Costs, Net (17) (31)
Amortization of Acquisition-related Intangible Assets (414) (434)
Consolidated Operating Income $ 2,426 $ 946 156 %
Reportable Segments Income Margin 32.9 % 22.7 %
Consolidated Operating Income Margin 28.5 % 15.1 %
Income from the company's reportable segments increased 97% to $2.80 billion in
the third quarter of 2020 due primarily to profit on higher sales and, to a
lesser extent, sales mix, offset in part by strategic growth investments.
Life Sciences Solutions
Three Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 3,424 $ 1,701 101 %
Operating Income Margin 54.9 % 34.5 % 20.4 pt
Sales in the Life Sciences Solutions segment increased $1.72 billion to $3.42
billion in the third quarter of 2020. Sales increased $1.70 billion (100%) due
to higher revenues at existing businesses. The favorable effects of currency
translation resulted in an increase in revenues of $20 million . The increase in
revenues at existing businesses was primarily driven by demand for testing to
diagnose COVID-19 with higher sales of genetic sciences products and, to a
lesser extent, bioscience products. Sales also grew due to higher demand for
bioproduction products.
Operating income margin was 54.9% in the third quarter of 2020 compared to 34.5%
in the third quarter of 2019. The increase resulted primarily from profit on
higher sales and, to a lesser extent, sales mix, offset in part by strategic
growth investments.
29
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Analytical Instruments
Three Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 1,336 $ 1,358 (2) %
Operating Income Margin 12.8 % 23.0 % -10.2 pt
Sales in the Analytical Instruments segment decreased $22 million to $1.34
billion in the third quarter of 2020. Sales decreased $41 million (-3%) due to
lower revenues at existing businesses. The favorable effects of currency
translation resulted in an increase in revenues of $19 million . The decrease in
revenues at existing businesses was primarily the result of weakened economic
conditions due to COVID-19 and lower sales to academic customers due to
pandemic-related conditions. The contraction in sales to these customers
improved significantly from the decrease reported in the second quarter of 2020.
Operating income margin was 12.8% in the third quarter of 2020 compared to 23.0%
in the third quarter of 2019. The decrease was primarily due to a $108 million
charge related to a long-term supply contract (discussed in Note 8) and, to a
lesser extent, sales mix and strategic growth investments, offset in part by
productivity improvements.
Specialty Diagnostics
Three Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 1,430 $ 879 63 %
Operating Income Margin 27.9 % 25.3 % 2.6 pt
Sales in the Specialty Diagnostics segment increased $551 million to $1.43
billion in the third quarter of 2020. Sales increased $541 million (62%) due to
higher revenues at existing businesses. The favorable effects of currency
translation resulted in an increase in revenues of $10 million . The increase in
revenues at existing businesses 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 business, and to a
lesser extent, microbiology and clinical diagnostics products.
Operating income margin was 27.9% in the third quarter of 2020 and 25.3% in the
third quarter of 2019. The increase was primarily due to profit on higher sales,
offset in part by sales mix and, to a lesser extent, strategic growth
investments.
Laboratory Products and Services
Three Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 3,112 $ 2,619 19 %
Operating Income Margin 11.4 % 11.6 % -0.2 pt
Sales in the Laboratory Products and Services segment increased $493 million to
$3.11 billion in the third quarter of 2020. Sales increased $428 million (16%)
due to higher revenues at existing businesses and $32 million due to an
acquisition. The favorable effects of currency translation resulted in an
increase in revenues of $33 million . The increase in revenues at existing
businesses was primarily due to increased sales in the segment's research and
safety market channel business, pharma services business and laboratory products
business.
Operating income margin was 11.4% in the third quarter of 2020 and 11.6% in the
third quarter of 2019. The decrease was primarily due to sales mix and strategic
growth investments, offset in part by profit on higher sales and, to a lesser
extent, productivity improvements.
30
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Other Expense, Net
The company reported other expense, net of $39 million in the third quarter of
2020 compared to $12 million in the third quarter of 2019. In 2020, other
expense, net includes $37 million of costs for the terminated QIAGEN
acquisition, primarily for amortization of loan commitment fees. In 2019, other
expense, net includes $42 million of losses on the early extinguishment of debt.
Provision for Income Taxes
The company's effective tax rate was 14.2% for the third quarter of 2020. The
company expects its effective tax rate for all of 2020 will be between 10% and
12% based on currently forecasted rates of profitability in the countries in
which the company conducts business and expected generation of foreign tax
credits. Due primarily to the non-deductibility of intangible asset amortization
for tax purposes, the company's cash payments for income taxes are higher than
its income tax expense for financial reporting purposes and are expected to
total $1.20 to $1.23 billion in 2020. In the third quarter of 2019, the
company's effective tax rate was 7.6%.
The company has operations and a taxable presence in approximately 50 countries
outside the U.S. Some of these countries have lower tax rates than the U.S. The
company's ability to obtain a benefit from lower tax rates outside the U.S. is
dependent on its relative levels of income in countries outside the U.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.
31
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
First Nine Months of 2020 Compared With First Nine Months of 2019
Nine Months Ended
September 26, September 28, Total Currency Acquisitions/
(In millions) 2020 2019 Change Translation Divestitures Operations
Revenues
Life Sciences Solutions $ 7,800 $ 5,018 $ 2,782 $ (44) $ - $ 2,826
Analytical Instruments 3,488 4,004 (516) (5) - (511)
Specialty Diagnostics 3,376 2,779 597 (6) (121) 724
Laboratory Products and
Services 8,629 7,765 864 (14) 179 699
Eliminations (1,625) (853) (772) 2 15 (789)
Consolidated Revenues $ 21,668 $ 18,713 $ 2,955 $ (67) $ 73 $ 2,949
Sales in the first nine months of 2020 were $21.67 billion , an increase of $2.96
billion from the first nine months of 2019. Sales increased $73 million due to
acquisitions, net of a divestiture. The unfavorable effects of currency
translation resulted in a decrease in revenues of $67 million in 2020. Aside
from the effects of currency translation and acquisitions/divestiture, revenues
increased $2.95 billion (16%) primarily due to increased demand. Sales were
particularly strong in diagnostic and healthcare markets, primarily due to
demand for products supporting customers diagnosing the COVID-19 virus, as well
as to customers in pharma and biotech markets where demand was strong for
products and services and pandemic-related demand for therapies and vaccines
also contributed to growth. Sales to academic and government customers decreased
due primarily to closure of academic labs during the global pandemic. Sales to
customers in industrial markets decreased primarily due to lower demand from
weakened economic conditions related to COVID-19. Sales growth was particularly
strong in North America and Europe while sales grew modestly in the Asia-Pacific
region .
In the first nine months of 2020, total company operating income and operating
income margin were $4.72 billion and 21.8%, respectively, compared with $3.36
billion and 18.0%, respectively, in the first nine months of 2019. The increase
in operating income was primarily due to profit on higher sales and, to a lesser
extent, sales mix, offset in part by the gain on the sale of the Anatomical
Pathology business included in the 2019 period and, to a lesser extent,
strategic growth investments in 2020.
In the first nine months of 2020, the company recorded restructuring and other
costs, net, of $65 million (Note 12). The company recorded $5 million of charges
to cost of revenues for accelerated depreciation on fixed assets to be disposed
of in connection with the consolidation of commercial production operations in
the U.S. , as well as charges to conform the accounting policies of a recently
acquired business with the company's accounting policies. The company recorded
$7 million of net credits to selling, general and administrative expenses,
principally transaction and integration-related costs (and reimbursement
thereof) for recent and terminated acquisitions, as well as income for changes
in estimates of contingent acquisition consideration. In addition, the company
recorded $43 million of cash restructuring charges, net, primarily for employee
severance and abandoned facilities costs associated with the closure and
consolidation of facilities in Europe , and the U.S. The company also recorded
$24 million of charges for impairment of acquired technology in development,
writedowns of fixed assets to estimated disposal value in connection with the
consolidation of commercial production operations in the U.S. and, to a lesser
extent, environmental remediation charges for abandoned and previously owned
facilities.
In the first nine months of 2019, the company recorded restructuring and other
income, net, of $372 million , including $482 million of net gains on the sale of
businesses, principally the Anatomical Pathology business. The company also
recorded $16 million of charges to cost of revenues for the sale of inventories
revalued at the date of acquisition, and $54 million of net charges to selling,
general and administrative expenses, principally transaction and
integration-related costs related to acquisitions and a divestiture. In
addition, the company recorded $33 million of cash restructuring charges, net,
primarily for employee severance and abandoned facilities costs associated with
the closure and consolidation of facilities in the U.S. and Europe .
32
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Segment Results
Nine Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues
Life Sciences Solutions $ 7,800 $ 5,018 55 %
Analytical Instruments 3,488 4,004 (13) %
Specialty Diagnostics 3,376 2,779 21 %
Laboratory Products and Services 8,629 7,765 11 %
Eliminations (1,625) (853) 91 %
Consolidated Revenues $ 21,668 $ 18,713 16 %
Segment Income
Life Sciences Solutions $ 3,788 $ 1,756 116 %
Analytical Instruments 477 879 (46) %
Specialty Diagnostics 848 707 20 %
Laboratory Products and Services 931 933 - %
Subtotal Reportable Segments 6,044 4,275 41 %
Cost of Revenues Charges (5) (16)
Selling, General and Administrative Charges, Net 7 (54)
Restructuring and Other Income (Costs), Net (67) 442
Amortization of Acquisition-related Intangible Assets (1,256) (1,285)
Consolidated Operating Income $ 4,723 $ 3,362 40 %
Reportable Segments Income Margin 27.9 % 22.8 %
Consolidated Operating Income Margin 21.8 % 18.0 %
Income from the company's reportable segments increased 41% to $6.04 billion in
the first nine months of 2020 due primarily to profit on higher sales and, to a
lesser extent, sales mix, offset in part by strategic growth investments.
Life Sciences Solutions
Nine Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 7,800 $ 5,018 55 %
Operating Income Margin 48.6 % 35.0 % 13.6 pt
Sales in the Life Sciences Solutions segment increased $2.78 billion to $7.80
billion in the first nine months of 2020. Sales increased $2.83 billion (56%)
due to higher revenues at existing businesses. The unfavorable effects of
currency translation resulted in a decrease in revenues of $44 million . The
increase in revenues at existing businesses was primarily driven by
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
demand for testing to diagnose COVID-19 with higher sales of genetic sciences
products and, to a lesser extent, bioscience products. Sales also grew due to
higher demand for bioproduction products.
Operating income margin was 48.6% in the first nine months of 2020 compared to
35.0% in the first nine months of 2019. The increase resulted primarily from
profit on higher sales and, to a lesser extent, sales mix, offset in part by
strategic growth investments.
Analytical Instruments
Nine Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 3,488 $ 4,004 (13) %
Operating Income Margin 13.7 % 22.0 % -8.3 pt
Sales in the Analytical Instruments segment decreased $516 million to $3.49
billion in the first nine months of 2020. Sales decreased $511 million (-13%)
due to lower revenues at existing businesses. The unfavorable effects of
currency translation resulted in a decrease in revenues of $5 million . The
decrease in revenues at existing businesses was primarily the result of reduced
demand from industrial customers following business slowing and closures due to
COVID-19 and lower sales to academic customers due to pandemic-related closures.
Operating income margin was 13.7% in the first nine months of 2020 compared to
22.0% in the first nine months of 2019. The decrease was primarily due to the
decrease in sales, a $108 million charge related to a long-term supply contract
(discussed in Note 8), sales mix and, to a lesser extent, strategic growth
investments, offset in part by productivity improvements.
Specialty Diagnostics
Nine Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 3,376 $ 2,779 21 %
Operating Income Margin 25.1 % 25.5 % -0.4 pt
Sales in the Specialty Diagnostics segment increased $597 million to $3.38
billion in the first nine months of 2020. Sales increased $724 million (26%) due
to higher revenues at existing businesses. The unfavorable effects of currency
translation resulted in a decrease in revenues of $6 million and the divestiture
of the Anatomical Pathology business decreased revenues by $121 million . The
increase in revenues at existing businesses 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 business,
and to a lesser extent, microbiology and clinical diagnostics products.
Operating income margin was 25.1% in the first nine months of 2020 compared to
25.5% in the first nine months of 2019. The decrease was primarily due to sales
mix and, to a lesser extent, strategic growth investments, offset in part by
profit on higher sales.
34
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Laboratory Products and Services
Nine Months Ended
September 26, September 28,
(Dollars in millions) 2020 2019 Change
Revenues $ 8,629 $ 7,765 11 %
Operating Income Margin 10.8 % 12.0 % -1.2 pt
Sales in the Laboratory Products and Services segment increased $864 million to
$8.63 billion in 2020. Sales increased $699 million (9%) due to higher revenues
at existing businesses and $179 million due to acquisitions. The unfavorable
effects of currency translation resulted in a decrease in revenues of $14
million . The increase in revenues at existing businesses was primarily due to
increased demand for products sold through its research and safety market
channel business and, to a lesser extent, service offerings of the segment's
pharma services business.
Operating income margin was 10.8% in the first nine months of 2020 compared to
12.0% in the first nine months of 2019. The decrease was primarily due to sales
mix and strategic growth investments, offset in part by profit on higher sales
and, to a lesser extent, productivity improvements.
Other Income/Expense, Net
The company reported other (expense) income, net of $(36) million and $25
million in the first nine months of 2020 and 2019, respectively. In 2020, other
expense, net includes $81 million of costs for the terminated QIAGEN
acquisition, primarily for amortization of loan commitment fees and entering
into currency hedging contracts. In 2019, the company recorded $42 million of
losses on the early extinguishment of debt.
Provision for Income Taxes
The company recorded a $456 million provision for income taxes in the first nine
months of 2020. In the second quarter of 2020, the company implemented foreign
tax credit planning in Sweden which resulted in $96 million of foreign tax
credits, with no related incremental U.S. income tax expense. The company
recorded a $338 million provision for income taxes in the first nine months of
2019 including $191 million related to the gain on the sale of the Anatomical
Pathology business. In addition, in 2019, the company recorded a $62 million
income tax benefit related to a foreign exchange loss for tax purposes on
certain intercompany financing arrangements and implemented foreign tax credit
planning in Sweden which resulted in $75 million of foreign tax credits, with no
related incremental U.S. income tax expense.
Recent Accounting Pronouncements
A description of recently issued accounting standards is included under the
heading "Recent Accounting Pronouncements" in Note 1.
Contingent Liabilities
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 8 could have a material adverse effect on the company's
financial position as well as its results of operations and cash flows.
Liquidity and Capital Resources
Consolidated working capital (current assets less current liabilities) was
$12.01 billion at September 26, 2020 , compared with $5.70 billion at
December 31, 2019 . Included in working capital were cash and cash equivalents of
$7.54 billion at September 26, 2020 and $2.40 billion at December 31, 2019 . The
increase in cash was due in part to the issuance of long-term senior notes in
March and April 2020 .
35
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
First Nine Months of 2020
Cash provided by operating activities was $4.95 billion during the first nine
months of 2020. Cash provided by income was offset in part by investments in
working capital. Increases in accounts receivable and inventories used cash of
$858 million and $427 million , respectively, primarily to support growth in
sales. Changes in other assets and other liabilities provided cash of
$1.04 billion primarily due to the timing of payments for compensation and
income taxes. Cash payments for income taxes increased to $656 million during
the first nine months of 2020, compared with $589 million in the first nine
months of 2019. The company made cash contributions to its pension and
postretirement benefit plans totaling $45 million during the first nine months
of 2020. Payments for restructuring actions, principally severance costs and
expenses of real estate consolidation, used cash of $46 million during the first
nine months of 2020.
During the first nine months of 2020, the company's investing activities used
$884 million of cash, principally for the purchase of property, plant and
equipment.
The company's financing activities provided $1.01 billion of cash during the
first nine months of 2020. Issuance of senior notes provided cash of $3.46
billion . Repayment of senior notes used cash of $712 million . The company's
financing activities also included the repurchase of $1.50 billion of the
company's common stock and the payment of $250 million in cash dividends, offset
in part by $156 million of net proceeds from employee stock option exercises. On
November 8, 2019 , the Board of Directors authorized the repurchase of up to
$2.50 billion of the company's common stock. At October 30, 2020 , authorization
remained for $1.00 billion of future repurchases of the company's common stock.
The company's commitments for purchases of property, plant and equipment,
contractual obligations and other commercial commitments did not change
materially between December 31, 2019 and September 26, 2020 except for the
long-term lease with CSL Limited discussed in Note 8. The company expects that
for all of 2020, expenditures for property, plant and equipment, net of
disposals, will be approximately $1.5 billion .
As of September 26, 2020 , the company's short-term debt totaled $2 million . The
company has a revolving credit facility with a bank group that provides up to
$2.5 billion of unsecured multi-currency revolving credit (Note 7). 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 September 26, 2020 ,
no borrowings were outstanding under the company's revolving credit facility,
although available capacity was reduced by approximately $66 million as a result
of outstanding letters of credit.
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 and repayment of acquisition-related
intercompany debt to the U.S. 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 of $7.54
billion as of September 26, 2020 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.
First Nine Months of 2019
Cash provided by operating activities was $3.06 billion during the first nine
months of 2019. Cash provided by income was offset in part by investments in
working capital. Increases in accounts receivable and inventories used cash of
$321 million and $449 million , respectively, primarily to support growth in
sales. Changes in other assets and other liabilities used cash of $14 million
primarily due to the timing of customer billings. Cash payments for income taxes
totaled $589 million . The company made cash contributions to its pension and
postretirement benefit plans totaling $40 million during the first nine months
of 2019. Payments for restructuring actions, principally severance costs and
expenses of real estate consolidation, used cash of $45 million during the first
nine months of 2019.
During the first nine months of 2019, the company's investing activities used
$1.15 billion of cash. Acquisitions used cash of $1.69 billion . Proceeds from
the sale of the Anatomical Pathology business provided $1.13 billion . The
company's investing activities also included the purchase of $637 million of
property, plant and equipment.
The company's financing activities used $2.60 billion of cash during the first
nine months of 2019. Repayment of senior notes used cash of $1.70 billion . A net
increase in commercial paper obligations provided cash of $3 million . The
company's
36
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
financing activities also included the repurchase of $750 million of the
company's common stock and the payment of $221 million in cash dividends, offset
in part by $115 million of net proceeds from employee stock option exercises.
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