Thermo Fisher Scientific Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 27, 2014; financial statements are unaudited. Thermo Fisher supplies instruments, equipment, reagents, consumables, software and services to research, healthcare, industrial and related markets. Results include four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.
The February 3, 2014 acquisition of Life Technologies for $15.30 billion, including $2.28 billion of assumed debt, materially changed the company’s scale and segment mix. Life Technologies contributed approximately $940 million of third-quarter revenue and $2.56 billion for the first nine months.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4,171.4 | $3,191.8 | $12,396.8 | $9,623.4 |
| Operating income | $640.3 | $392.1 | $1,863.9 | $1,154.6 |
| Operating margin | 15.3% | 12.3% | 15.0% | 12.0% |
| Income from continuing operations | $469.9 | $317.7 | $1,291.5 | $936.1 |
| Net income | $471.6 | $317.6 | $1,293.2 | $931.2 |
| Diluted EPS | $1.17 | $0.86 | $3.22 | $2.56 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1,665.9 | $1,282.2 |
For the first nine months, investing activities used $11,656.7 million, principally reflecting $13,056.1 million of acquisition spending, partly offset by $1,520.0 million of business-sale proceeds. Financing activities provided $4,706.8 million. Cash and cash equivalents were $534.3 million at quarter-end, versus $5,826.0 million at December 31, 2013; cash and short-term investments totaled approximately $544 million.
At September 27, 2014, total borrowings at carrying value were $14,477.1 million: $3,088.5 million classified as short-term and $11,388.6 million long-term. Working capital was negative $0.50 billion, compared with positive $6.75 billion at year-end 2013. The company had a $1.50 billion revolving credit facility with no borrowings outstanding; letters of credit reduced availability by approximately $59 million.
Material changes versus prior comparable periods
- Q3 revenue rose 31% year over year; the filing attributes $854 million of the increase to acquisitions, net of dispositions, and $122 million (4%) to underlying operations, with a $4 million favorable currency effect. Nine-month revenue rose 29%, including $2.39 billion from acquisitions, net of dispositions, $336 million (4%) from operations and $43 million from currency translation.
- Reported operating income increased 63% in Q3 and 61% for the first nine months. The increase reflected Life Technologies’ inclusion, productivity gains and divestiture gains, partly offset by higher acquisition-related amortization and costs.
- First-nine-month operating cash flow increased to $1.67 billion from $1.28 billion, supported by acquired operations and lower working-capital investment; acquisition-related cash payments of $309 million partly offset the increase.
- Debt increased substantially following the acquisition. Cash declined mainly because cash funded the acquisition, while short-term debt increased $2.1 billion from year-end.
Outlook, management commentary, risks and unusual items
- Management said demand was strong in most primary end markets, while academic and government growth remained modest; North American improvement was offset by weakness in China. For the first nine months, management cited strong biopharma demand and some academic/government weakness associated partly with first-quarter weather.
- No full-year revenue or earnings guidance is stated in the provided filing text. Management estimated 2014 cash income-tax payments of $540–$560 million and capital expenditures, net of disposals, of approximately $420–$440 million. It said available cash, operating cash flow and revolving-credit capacity should cover existing-business requirements for at least the next 24 months.
- Business sales generated approximately $894 million of net gains in the first nine months: about $761 million pre-tax from the divestiture of businesses sold to GE Healthcare, required for antitrust approval of the Life Technologies acquisition, and about $133 million pre-tax from the Cole-Parmer sale. The Cole-Parmer sale nevertheless produced a $4 million after-tax loss because its tax provision slightly exceeded its book gain.
- Acquisition-related and restructuring items were significant. The company reported $631.9 million of net restructuring and other income for the first nine months, largely reflecting divestiture gains, partly offset by inventory revaluation charges, integration and transaction costs, employee-related costs, and facility actions. Management identified approximately $50 million of additional restructuring charges, primarily in the remainder of 2014, subject to specified criteria being met.
- Tax expense and effective tax rates were unusually affected by divestiture gains and other discrete items: the nine-month provision was $258.6 million and the effective rate 16.7%, compared with $5.8 million and 0.6% in 2013. Q3 effective rates were 12.9% and 0.4%, respectively. The filing says the tax on the Cole-Parmer gain exceeded its pre-tax book gain.
- Key risks include integrating Life Technologies and realizing expected synergies; substantial leverage, near-term debt maturities and compliance with leverage and interest-coverage covenants; intellectual-property litigation inherited with Life Technologies; exposure to foreign exchange, customer funding and economic conditions; and potential impairment of substantial goodwill and intangible assets. The company disclosed that an unfavorable legal outcome materially different from reserves could adversely affect results, financial position or cash flows.
- Management reported disclosure controls were effective as of September 27, 2014. Integration of Life Technologies into internal-control processes was ongoing.
Important facts for investors to verify
- How much of future revenue and operating-profit growth is organic, rather than acquisition-related or driven by asset-sale gains?
- Whether Life Technologies integration, synergies and acquired-asset amortization develop as expected, and whether goodwill or intangible-asset impairment indicators emerge.
- How the company will meet the $1.61 billion of senior notes due in 2014 and early 2015 and the $1.00 billion of term-loan minimum payments due over the next 12 months, while maintaining covenant compliance.
- Whether working-capital requirements, cash taxes and restructuring outlays remain consistent with management’s liquidity assessment and stated tax and capital-spending estimates.
- Developments in the disclosed intellectual-property matters, tax reserves, and other legal or environmental contingencies that could change recorded liabilities or cash needs.