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, 2020 (which is on file with theSEC ) as updated 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; any natural disaster, public health crisis or other catastrophic event; and the effect of laws and regulations governing government contracts, as well as the possibility that expected benefits related to recent or pending acquisitions, including our pending acquisition of PPD, Inc., 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 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, 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 extent and duration of the negative impacts continuing into the remainder of 2021 are uncertain and dependent in part on the success of global efforts to control the pandemic 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 through 2021, 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 in the first quarter of 2021 were$9.91 billion , an increase of$3.68 billion from the first quarter of 2020. Excluding the effects of currency translation and acquisitions, revenues increased$3.31 billion (53%). In the first quarter of 2021, total company operating income and operating income margin were$3.05 billion and 30.8%, respectively, compared with$0.91 billion and 14.5%, respectively, in 2020. 22 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview (continued) Net income increased to$2.34 billion in the first quarter of 2021 from$0.79 billion in the first quarter of 2020, primarily due to an increase in operating income, offset in part by an increase in the income tax provision and$197 million of losses on the early extinguishment of debt. During the first three months of 2021, the company's cash flow from operations totaled$1.98 billion compared with$0.36 billion for 2020. OnJanuary 15, 2021 , the company acquired, within the Laboratory Products and Services segment, theBelgium -based European viral vector manufacturing business of Groupe Novasep SAS for approximately$834 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 approximately$406 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. OnApril 15, 2021 , the company entered into a definitive agreement under which it will acquire PPD, Inc. for$47.50 per share for a total cash purchase price of$17.4 billion plus the assumption of approximately$3.5 billion of net debt. PPD provides a broad range of clinical research and specialized laboratory services to enable customers to accelerate innovation and increase drug development productivity. In 2020, PPD generated revenue of$4.7 billion .. Upon close of the transaction, PPD will become part of the Laboratory Products and Services Segment. The transaction, which is expected to be completed by the end of 2021, is subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals. Shareholders holding in aggregate approximately 60% of the issued and outstanding shares of common stock of PPD have approved the transaction by written consent. No further action by other PPD shareholders is required to approve the transaction. The company intends to finance the purchase price with cash on hand and the net proceeds from issuance of debt. The company is currently evaluating future debt financings and the timing of such transactions is subject to market and other conditions. The company also has available, but it does not currently expect to utilize, up to$9.5 billion of committed bridge financing. Critical Accounting Policies and Estimates Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company's Annual Report on Form 10-K for 2020, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no significant changes in the company's critical accounting policies during the first three months of 2021. Results of Operations First Quarter 2021 Compared With First Quarter 2020 Three Months Ended April 3, March 28, Total Currency Acquisitions/ (In millions) 2021 2020 Change Translation Divestitures Operations Revenues Life Sciences Solutions$ 4,203 $ 1,774 $ 2,429 $ 101 $ 32$ 2,296 Analytical Instruments 1,387 1,101 286 46 - 240 Specialty Diagnostics 1,615 958 657 32 - 625 Laboratory Products and Services 3,597 2,730 867 92 76 699 Eliminations (896) (333) (563) (8) - (555) Consolidated Revenues$ 9,906 $ 6,230 $ 3,676 $ 263 $ 108$ 3,305 23
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Sales in the first quarter of 2021 increased $3.68 billion from the first
quarter of 2020. Aside from the effects of currency translation and
acquisitions, revenues increased $3.31 billion (53%) primarily due to increased
demand. The first quarter of 2021 had three extra selling days in the quarter
compared to the 2020 quarter. The company's fourth quarter of 2021 will have
four fewer selling days than the corresponding 2020 quarter. Sales of products
that address COVID-19 testing and treatment increased $2.68 billion to $2.85
billion in the first quarter of 2021. 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 vaccines and therapies also contributed to growth.
Sales to academic and government customers and customers in industrial markets
were strong primarily due to robust customer activity. Sales growth was strong
in each of the company's primary geographic areas during the first quarter of
2021.
In the first quarter of 2021, total company operating income and operating
income margin were $3.05 billion and 30.8%, respectively, compared with $0.91
billion and 14.5%, respectively, in 2020. 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 2021 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, focused 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 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.
In the first quarter of 2021, the company recorded restructuring and other costs
of $38 million . In the first quarter of 2020, the company recorded restructuring
and other costs of $46 million . See Note 12 for restructuring charges expected
in future periods.
Segment Results
Note 4 to the Consolidated Financial Statements of the company's Annual Report
on Form 10-K for 2020, describes the company's measurement of segment income.
There have been no significant changes in measurement methods used to determine
segment income.
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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
April 3, March 28,
(Dollars in millions) 2021 2020 Change
Revenues
Life Sciences Solutions $ 4,203 $ 1,774 137 %
Analytical Instruments 1,387 1,101 26 %
Specialty Diagnostics 1,615 958 69 %
Laboratory Products and Services 3,597 2,730 32 %
Eliminations (896) (333) 169 %
Consolidated Revenues $ 9,906 $ 6,230 59 %
Segment Income
Life Sciences Solutions $ 2,279 $ 675 238 %
Analytical Instruments 272 171 59 %
Specialty Diagnostics 428 236 81 %
Laboratory Products and Services 531 295 80 %
Subtotal Reportable Segments 3,510 1,377 155 %
Cost of Revenues Charges (8) (2)
Selling, General and Administrative Charges (16) (6)
Restructuring and Other Costs (14)
(38)
Amortization of Acquisition-related Intangible Assets (423)
(425)
Consolidated Operating Income$ 3,049
Reportable Segments Income Margin 35.4 % 22.1 % Consolidated Operating Income Margin 30.8 %
14.5 %
Income from the company's reportable segments increased 155% to$3.51 billion in the first quarter of 2021 due primarily to profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments. Life Sciences Solutions Three Months Ended April 3, March 28, (Dollars in millions) 2021 2020 Change Revenues$ 4,203 $ 1,774 137 % Operating Income Margin 54.2 % 38.0 % 16.2 pt Sales in the Life Sciences Solutions segment increased$2.43 billion in the first quarter of 2021. Sales increased$2.30 billion (129%) due to higher revenues at existing businesses and$32 million due to acquisitions. The favorable effects of currency translation resulted in an increase in revenues of$101 million . The increase in revenues at existing businesses was primarily driven by demand for testing to diagnose COVID-19 with higher sales of genetic sciences products and, to a lesser extent, biosciences products. Sales also grew due to higher demand for bioproduction products. The increase in operating income margin for the segment resulted primarily from profit on higher sales and, to a lesser extent, sales mix, offset in part by strategic growth investments. 25 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (continued) Analytical Instruments Three Months Ended April 3, March 28, (Dollars in millions) 2021 2020 Change Revenues$ 1,387 $ 1,101 26 % Operating Income Margin 19.6 % 15.5 % 4.1 pt Sales in the Analytical Instruments segment increased$286 million in the first quarter of 2021. Sales increased$240 million (22%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of$46 million . The increase in revenues at existing businesses was due to increased demand for products sold by each of the segment's primary businesses with particular strength in chromatography and mass spectrometry instruments. The increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, offset in part by sales mix and strategic growth investments.Specialty Diagnostics Three Months Ended April 3, March 28, (Dollars in millions) 2021 2020 Change Revenues$ 1,615 $ 958 69 % Operating Income Margin 26.5 % 24.7 % 1.8 pt Sales in theSpecialty Diagnostics segment increased$657 million in the first quarter of 2021. Sales increased$625 million (65%) due to higher revenues at existing businesses. The favorable effects of currency translation resulted in an increase in revenues of$32 million . The increase in revenues at existing businesses was due to higher demand primarily driven by products addressing treatment of COVID-19, with particular strength in sales of products sold through the segment's healthcare market channel business, and to a lesser extent, microbiology and clinical diagnostics products. The increase in operating income margin for the segment was primarily due to profit on higher sales, offset in part by sales mix and, to a lesser extent, strategic growth investments. Laboratory Products and Services Three Months Ended April 3, March 28, (Dollars in millions) 2021 2020 Change Revenues$ 3,597 $ 2,730 32 % Operating Income Margin 14.8 % 10.8 % 4.0 pt Sales in the Laboratory Products and Services segment increased$867 million in the first quarter of 2021. Sales increased$699 million (26%) due to higher revenues at existing businesses and$76 million due to an acquisition. The favorable effects of currency translation resulted in an increase in revenues of$92 million . The increase in revenues at existing businesses was primarily due to increased demand in each of the segment's principal businesses. The increase in operating income margin for the segment was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, offset in part by strategic growth investments and, to a lesser extent, sales mix. Other Income/Expense The company reported other expense of$183 million in the first quarter of 2021 compared to other income of$12 million in the first quarter of 2020. In 2021, other expense includes$197 million of losses on the early extinguishment of debt. Provision for Income Taxes The company's effective tax rate was 15.1% for the first quarter of 2021. The company expects its effective tax rate for all of 2021 will be between 11% and 13% based on currently forecasted rates of profitability in the countries in which the company 26 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (continued) 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 approximately$1.5 billion in 2021. In the first quarter of 2020, the company's effective tax rate was 4.8%. 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.
Recent Accounting Pronouncements A description of recently issued accounting standards is included under the heading "Recent Accounting Pronouncements" in Note 1.
Liquidity and Capital Resources Consolidated working capital (current assets less current liabilities) was$10.69 billion atApril 3, 2021 , compared with$11.65 billion atDecember 31, 2020 . Included in working capital were cash and cash equivalents of$5.58 billion atApril 3, 2021 and$10.33 billion atDecember 31, 2020 . First Three Months of 2021 Cash provided by operating activities during the first three months of 2021 was$1.98 billion . Cash provided by income was offset in part by investments in working capital. A decrease in accounts receivable provided$149 million of cash. An increase in inventories used cash of$352 million , primarily to support growth in sales. Changes in other assets and other liabilities used cash of$1.20 billion primarily due to the timing of payments for compensation. Cash payments for income taxes increased to$542 million during the first three months of 2021, compared with$100 million in the first three months of 2020. During the first three months of 2021, the company's investing activities used$2.00 billion of cash. Acquisitions used cash of$1.34 billion . The company's investing activities also included the purchase of$628 million of property, plant and equipment for capacity and capability investments. The company's financing activities used$4.85 billion of cash during the first three months of 2021. Repayment of senior notes used cash of$2.80 billion . The company's financing activities also included the repurchase of$2.00 billion of the company's common stock and the payment of$87 million in cash dividends. OnNovember 5, 2020 , the Board of Directors replaced the existing authorization to repurchase the company's common stock with a new authorization to repurchase up to$2.50 billion of the company's common stock. AtMay 7, 2021 , authorization remained for$500 million 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 betweenDecember 31, 2020 andApril 3, 2021 except for the agreement to acquire PPD, discussed in Note 2. The company expects that for all of 2021, expenditures for property, plant and equipment, net of disposals, will be between$2.5 and$2.7 billion . As ofApril 3, 2021 , the company's short-term debt totaled$4 million . The company has a revolving credit facility with a bank group that provides up to$3.00 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 ofApril 3, 2021 , no borrowings were outstanding under the company's revolving credit facility, although available capacity was reduced by approximately$31 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 theU.S. The company uses its non-U.S. cash for needs outside of theU.S. including acquisitions and repayment of acquisition-related intercompany debt to theU.S. In addition, the company also transfers cash to theU.S. using non-taxable returns of capital as well as dividends where the relatedU.S. dividend received deduction or foreign tax credit equals any tax cost arising from the 27 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (continued) dividends. As a result of using such means of transferring cash to theU.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 and bridge loan agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months and to fund the pending PPD acquisition. First Three Months of 2020 Cash provided by operating activities was$356 million during the first three 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$218 million and$141 million , respectively, primarily to support growth in sales. Changes in other assets and other liabilities used cash of$443 million primarily due to the timing of customer billings. Cash payments for income taxes totaled$100 million . During the first three months of 2020, the company's investing activities used$260 million of cash, principally for the purchase of property, plant and equipment. The company's financing activities provided$619 million of cash during the first three months of 2020. Issuance of senior notes provided cash of$2.19 billion . The company's financing activities also included the repurchase of$1.50 billion of the company's common stock and the payment of$76 million in cash dividends.
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