Thermo Fisher Scientific Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative quarter ended April 2, 2011. The interim financial statements are unaudited. Thermo Fisher supplies analytical instruments, diagnostics, laboratory products and services to healthcare, research, industrial and government customers.
Financial performance and position
Amounts are in millions of dollars unless otherwise noted.
| Metric | Q1 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $3,100.3 | $2,721.4 | +13.9% |
| Operating income | $354.9 | $321.5 | +10.4% |
| Operating margin | 11.4% | 11.8% | Down 0.4 percentage points |
| Income from continuing operations | $277.0 | $247.2 | +12.1% |
| Net income | $277.3 | $252.2 | +10.0% |
| Diluted EPS | $0.75 | $0.64 | +17.2% |
| Cash from operating activities | $392.0 | $338.6 | +$53.4 |
- Product revenue was $2,668.5 million and service revenue was $431.8 million. Management said pro forma revenue growth, treating Phadia and Dionex as acquired at the start of 2011, was 4%; existing-business growth was offset in part by unfavorable currency translation.
- Segment revenue: Analytical Technologies $1,006.2 million (+21%); Specialty Diagnostics $729.4 million (+27%); Laboratory Products and Services $1,506.7 million (+4%). Reported growth includes acquisitions. Adjusted segment income totaled $573.0 million, up 20%; this measure excludes specified acquisition-related charges, restructuring items and acquired-intangible amortization.
- Operating margin declined despite higher operating income. Management attributed the decrease primarily to $26 million of acquisition-related charges and $49 million of additional amortization, partly offset by productivity gains and higher sales.
- Other expense was $49.9 million versus $22.5 million, mainly reflecting approximately $30 million more interest expense associated with debt used to fund the Phadia and Dionex acquisitions. The effective tax rate fell to 9.2% from 17.3%, primarily due to a greater contribution from lower-tax jurisdictions.
- Cash and cash equivalents were $788.3 million at quarter-end, with $4.3 million of short-term investments. Working capital was $1.92 billion; current assets of $4.77 billion compared with current liabilities of $2.85 billion.
- Total debt obligations were approximately $6.68 billion, including $924 million of short-term obligations; this short-term amount included $550 million of commercial paper and $354 million of senior notes due December 2012. Cash and short-term investments totaled about $793 million.
- Investing cash outflow was $66.2 million, including $69.4 million of capital spending. Financing cash outflow was $585.0 million, including $349.6 million of commercial-paper repayment and $300 million of share repurchases. The company declared a $0.13-per-share quarterly dividend, totaling $48 million, paid in April.
Material changes, outlook and management commentary
- Q1 sales benefited principally from the 2011 Phadia and Dionex acquisitions and, to a lesser extent, higher sales at existing businesses. Management cited strong growth in Asia, more moderate growth in North America, and lower sales to academic and government markets amid funding uncertainty in the U.S. and Europe; it expected that weakness to persist in the near term.
- Segment margins were mixed: Analytical Technologies 18.4% versus 16.5%; Specialty Diagnostics 25.5% versus 24.6%; Laboratory Products and Services 13.4% versus 13.8%. The latter faced inflation in costs, particularly petroleum-based raw materials, and weaker laboratory-equipment sales.
- Management forecast a 2012 effective tax rate of 9%–11% and capital expenditures of approximately $300–$325 million. It said existing cash, operating cash flow and available credit were sufficient for existing business needs for at least the next 24 months. The filing provides no company-wide revenue or EPS guidance.
- On April 11, 2012, the company entered into new unsecured revolving credit facilities totaling up to $2.0 billion. No borrowings were outstanding on that date; availability was reduced by about $47 million for letters of credit. The facilities include a covenant limiting the consolidated leverage ratio to 3.5-to-1.0.
- Restructuring and other costs were $34 million in Q1, including $14 million of cash costs; the reported income-statement restructuring line was $15.1 million, with other restructuring-related charges and credits recorded in other expense categories. The company identified approximately $70 million of additional restructuring charges for 2012 and expected about $25 million of annual savings from actions initiated in the quarter.
- Management estimated that the U.S. medical-device excise tax, effective in 2013, could cost $20–$30 million annually. On May 1, 2012, the company acquired Doe & Ingalls for approximately $175 million, net of cash acquired, plus up to $3 million contingent consideration.
- Legal claims and environmental remediation matters are disclosed. Management did not expect them to have a material adverse effect based on current accruals and information, while noting that actual outcomes and remediation costs could differ. Key risks also include economic and academic/government funding weakness, currency movements, acquisition integration and impairment of goodwill or intangibles, regulation, product liability, commodity costs, and debt and covenant exposure.
Most important facts for investors to verify
- How much of reported revenue growth reflects acquired businesses versus comparable existing-business growth, and whether academic/government weakness persists.
- Whether productivity and restructuring savings offset acquisition-related amortization, cost inflation and other pressures on consolidated margins.
- The refinancing or repayment plan for the $354 million of senior notes due December 2012, commercial-paper funding access, and compliance with the 3.5-to-1.0 leverage covenant.
- Actual restructuring charges, cash payments and realized savings versus the estimated $70 million of additional 2012 charges and $25 million of annual savings.
- The realized impact of the 2013 medical-device tax, the Doe & Ingalls acquisition, and any material changes in legal or environmental contingencies.