Thermo Fisher Scientific Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; comparative quarter ended March 28, 2015. Unaudited interim results. Amounts are in U.S. dollars.
Business context and results
Thermo Fisher supplies instruments, products, reagents, software and services to life sciences, diagnostics, healthcare, industrial and research markets. It reports four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $4,294.8 million | $3,918.8 million | +9.6% |
| Operating income | $517.9 million | $487.3 million | +6.3% |
| Operating margin | 12.1% | 12.4% | -0.3 percentage points |
| Income from continuing operations | $402.3 million | $385.1 million | +4.5% |
| Net income | $402.2 million | $385.1 million | +4.4% |
| Diluted EPS | $1.01 | $0.96 | +$0.05 |
| Operating cash flow | $289.1 million | $80.0 million | +$209.1 million |
Revenue increased $376 million: acquisitions contributed $44.9 million, currency translation reduced revenue by $61 million, and operations contributed $392.1 million. The operational increase reflected demand growth and four extra days in the 2016 quarter. Management noted particularly strong pharmaceutical and biotech demand and growth across primary geographic regions.
Segments and margins
- Life Sciences Solutions: revenue $1,133.0 million, up 11%; segment operating margin 29.1%, versus 29.3%.
- Analytical Instruments: revenue $759.3 million, up 4%; margin 14.7%, versus 16.7%. Management cited softness in some commodity materials markets and unfavorable mix and investment costs.
- Specialty Diagnostics: revenue $854.6 million, up 9%; margin 26.9%, versus 27.3%.
- Laboratory Products and Services: revenue $1,724.6 million, up 14%; margin 15.0%, versus 14.7%.
Reportable-segment income rose 9% to $930 million. Management attributed the increase primarily to higher local-currency sales and productivity improvements, partly offset by strategic growth investments. Segment income and margins are management’s adjusted measures and exclude specified charges and acquisition-related intangible amortization.
Cash, debt and liquidity
- Cash and cash equivalents were $826.8 million at April 2, 2016, up from $452.1 million at December 31, 2015. Working capital was $216 million, down from $1.59 billion, primarily reflecting short-term borrowing to fund the Affymetrix acquisition and share repurchases.
- Operating cash flow was $289.1 million; investing activities used $1.139 billion, including $1.032 billion for acquisitions and $115.1 million for capital expenditures. Financing activities provided $1.188 billion.
- Total borrowings at carrying value were $15.036 billion, including $3.383 billion classified as short-term obligations and current maturities. Cash less carrying-value borrowings was approximately negative $14.2 billion.
- At quarter-end, commercial paper outstanding was $1.228 billion and a 364-day term loan had $1.0 billion outstanding. The $2.0 billion revolving facility had no borrowings; approximately $68 million of capacity was tied to letters of credit.
- In April, after quarter-end, the company issued $1.0 billion of 3.00% notes due 2023 and used the proceeds to repay the 2.25% notes due 2016. The company also reported post-quarter cash outlays and receipts related to termination of interest-rate hedge arrangements.
- Cash dividends declared were $0.15 per share. The company repurchased $1.0 billion of stock in the quarter; no amount remained under the authorization.
Management stated that cash, operating cash flow and available revolving-credit capacity should meet existing-business cash requirements for at least the next 24 months. Operating cash flow improved chiefly because of lower working-capital investment and payment timing; cash payments for income taxes were $223 million.
Outlook, unusual items and risks
- Outlook: Management expected a 2016 effective tax rate of 3%–5% and cash income-tax payments of $600–$650 million. Expected 2016 capital expenditures, net of disposals, were $435–$445 million. Approximately $45 million of additional restructuring charges were identified for 2016, with further actions possible.
- Acquisition: Affymetrix was acquired on March 31 for $1.342 billion, net of cash acquired and including $254 million of assumed debt. The company allocated $709 million to goodwill, none tax deductible; purchase-price allocation remained preliminary. Affymetrix reported 2015 revenue of $360 million.
- Taxes: The 4.9% Q1 effective tax rate included a $30 million net benefit from tax-planning distributions and foreign tax credits, reducing the rate by 7.1 percentage points. Management cautioned that future foreign tax-credit benefits would vary with earnings, cash flows and tax law.
- Restructuring and timing: Q1 restructuring and other costs were $50.6 million on the income statement; related charges across cost of revenues and SG&A brought total disclosed restructuring and other charges to $90.1 million. The quarter had four extra days versus the prior-year quarter, with four fewer days expected in Q4 2016.
- Contingencies: Environmental liabilities were approximately $46 million, versus $35 million at year-end. The filing describes multiple intellectual-property matters. The company maintained $61 million and $52 million accruals for two cases pending further proceedings or appeal. Management said an unfavorable outcome exceeding accrual estimates could materially affect results, financial position or cash flows; it did not provide a clear aggregate reasonably possible loss estimate.
- Other risks: Disclosed exposures include acquisition integration and impairment risk, substantial debt and covenant compliance, currency movements, economic and customer-spending conditions, product and intellectual-property claims, regulation, supply and operational disruptions, and tax-rate variability. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth persists after adjusting for the extra quarter days, acquisition contributions and currency effects.
- Whether segment and consolidated margins recover, particularly in Analytical Instruments, and how growth investments affect profitability.
- Affymetrix integration, final purchase-price allocation, realized synergies and the effect of added amortization and assumed debt.
- Debt maturities, commercial-paper funding, leverage and covenant headroom; also the completed April refinancing and related hedge cash flows.
- Whether the unusually low projected tax rate and associated foreign tax credits are sustained, and whether cash tax payments match the stated outlook.
- Restructuring spending and savings, environmental obligations, and the status and potential exposure of the disclosed intellectual-property cases.