Business context and reporting period
Thermo Fisher Scientific Inc. reported unaudited results for the quarter ended June 29, 2013, and the six months then ended. The company supplies analytical instruments, diagnostics, laboratory products and services. Continuing operations are reported in Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3.240 billion | $3.108 billion | $6.432 billion | $6.165 billion |
| Operating income | $375 million | $368 million | $763 million | $729 million |
| Operating margin | 11.6% | 11.8% | 11.9% | 11.8% |
| Income from continuing operations | $278 million | $292 million | $618 million | $573 million |
| Net income | $277 million | $234 million | $614 million | $511 million |
| Diluted EPS from continuing operations | $0.76 | $0.79 | $1.71 | $1.55 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $777 million | $900 million |
Second-quarter revenue rose 4%; excluding acquisitions and currency translation, it increased 2%. Six-month revenue also rose 4%, or 3% excluding those effects. For Q2, Specialty Diagnostics revenue grew 8%, Analytical Technologies 4%, and Laboratory Products and Services 3%. Segment income increased 6% in both the quarter and first half. Cash flow from continuing operations was $778 million in the first half, versus $909 million a year earlier; working-capital increases and acquisition-related financing and transaction costs contributed to the decline.
At June 29, 2013, cash and cash equivalents were $1.409 billion, working capital was $3.28 billion, and total debt obligations were approximately $7.11 billion, including $393 million of short-term obligations. Long-term obligations were $6.721 billion. The company reported no borrowings under its prior revolving facility, although letters of credit reduced availability by about $49 million.
Material changes and unusual items
- Q2 continuing-operations income fell from $292 million to $278 million, despite higher operating income, primarily because of $41 million in bridge-financing fee amortization and higher interest expense. Q2 net income increased partly because the 2012 comparison included a $51 million after-tax disposal loss from discontinued operations.
- Q2 restructuring and other costs were $57 million, versus $39 million a year earlier; first-half costs were $93 million, versus $70 million. The charges included restructuring, acquisition-related items, inventory revaluation, contingent-consideration revisions, and Life Technologies transaction costs.
- Currency translation reduced first-half revenue by $32 million and contributed to a $315 million first-half currency translation loss in other comprehensive income.
- The company recorded unusually low effective tax rates: 0.9% in Q2 and 0.7% for the first half, including discrete tax benefits. It reported that these rates reflected tax planning, foreign tax credits, renewed R&D credits, financing costs, and income earned in lower-tax jurisdictions.
Outlook, financing, and risks
Thermo Fisher agreed to acquire Life Technologies for approximately $13.6 billion in cash, plus assumption of net debt. Closing was expected in early 2014, subject to shareholder approval and regulatory approvals. The company planned to fund the purchase with up to $3.25 billion of equity or equity-linked financing—including approximately $2.5 billion under equity forward agreements—plus a $5 billion term loan facility, other debt, and cash. The forward agreements had not yet provided proceeds at quarter-end. The company also had a $3.56 billion bridge facility commitment and expected to replace bridge borrowing with long-term debt.
Management expected 2013 effective tax rate of 3%–5%, cash income-tax payments of $200–$250 million, capital expenditures of $300–$315 million, and about $20 million of 2013 cost from the medical-device excise tax. It identified approximately $60 million of additional restructuring charges, primarily in the remainder of 2013, and estimated about $50 million of annual savings from actions charged in the first half. Management said existing liquidity and operating cash flow were expected to cover existing-business needs for at least 24 months, while noting that the acquisition would materially increase debt and require equity financing.
Management cited near-term weakness in academic and government markets, partly due to U.S. funding uncertainty, and continued industrial-market softness from macroeconomic conditions. Principal risks include completion, regulatory approval and integration of Life Technologies; acquisition financing, leverage and covenant compliance; uncertain demand and foreign exchange; product and technology competition; and legal, regulatory, environmental, intellectual-property, and supply-chain exposures. Management did not expect pending legal matters or current environmental reserves to have a material adverse effect, but outcomes and remediation costs could differ from estimates.
Important facts for investors to verify
- Progress on Life Technologies approvals, closing conditions, financing, and settlement of the equity forward agreements.
- Whether reported growth and segment margins persist after separating acquisition, currency, restructuring, and other transaction effects.
- Working-capital trends and the causes of lower first-half operating cash flow.
- Actual restructuring charges and realized savings compared with management’s estimates.
- Tax rate and cash-tax outcomes versus the stated 2013 ranges, and the effect of added acquisition debt on leverage and covenants.