Thermo Fisher Scientific Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended April 2, 2011; comparative period ended April 3, 2010. Interim financial statements are unaudited. Continuing operations comprise Analytical Technologies and Laboratory Products and Services; Athena Diagnostics and Lancaster Laboratories are presented as discontinued operations.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $2.721 billion | $2.627 billion |
| Operating income | $321.5 million; 11.8% margin | $284.6 million; 10.8% margin |
| Income from continuing operations | $247.2 million; diluted EPS $0.63 | $224.6 million; diluted EPS $0.54 |
| Net income | $252.2 million; diluted EPS $0.64 | $232.3 million; diluted EPS $0.56 |
| Operating cash flow | $338.6 million, including $325.9 million from continuing operations | $343.1 million |
| Capital expenditures | $63.7 million | $49.1 million |
- Revenue rose 4% reported; excluding currency and acquisitions net of divestitures, revenue increased $25 million, or 1%. Operating income grew 13%; continuing-operations income rose about 10%.
- Analytical Technologies revenue increased 9% to $1.178 billion and segment operating margin rose to 21.0% from 20.6%. Laboratory Products and Services revenue increased 1% to $1.685 billion; margin declined to 13.7% from 13.9%.
- Cash and cash equivalents were $2.789 billion at April 2, versus $917.1 million at year-end 2010. Working capital was $2.04 billion, down from $2.43 billion. Management attributed the cash increase primarily to debt issued for the planned Dionex acquisition.
- Outstanding debt was $4.30 billion, versus $2.14 billion at December 31, 2010. This included $2.499 billion classified as current, principally because the new notes are subject to mandatory redemption if the Dionex acquisition is not completed by September 30, 2011. The revolving credit facility had $953 million available.
- Operating cash flow was slightly lower year over year, mainly reflecting working-capital investment, particularly inventory. Cash taxes paid were $115 million versus $52 million.
Material developments and unusual items
- On February 22, 2011, the company issued $2.2 billion of senior notes: $300 million at 2.05% due 2014, $900 million at 3.20% due 2016, and $1.0 billion at 4.50% due 2021. If Dionex is not acquired by September 30, the notes must be redeemed at 101% of principal plus accrued interest.
- The pending Dionex tender offer was for $118.50 per share in cash, approximately $2.1 billion in total, subject to tender and regulatory conditions. The offer was scheduled to expire May 13, 2011, unless extended.
- On April 4, after quarter-end, Thermo Fisher sold Athena Diagnostics for $740 million cash and Lancaster Laboratories for $180 million cash plus $20 million escrowed until October 2012. Their combined 2010 revenue and operating income were approximately $225 million and $60 million. The quarter’s discontinued-operations results included $5.5 million of after-tax income.
- The company repurchased $537.5 million of stock during the quarter, buying 9.62 million shares at an average $55.87. At quarter-end, $700 million remained available under repurchase authorizations.
- Restructuring and other costs were $21 million, including approximately $15 million of cash costs. By May 6, management had identified about $35 million of additional 2011 charges; actions initiated in Q1 were expected to yield approximately $20 million in annual savings.
Outlook, commentary and risks
- Management expected a full-year 2011 effective tax rate of 15.5%–17.5%; Q1’s rate was 17.3%, including a $6.9 million unfavorable effect from deferred-tax adjustments.
- Management forecast 2011 capital expenditures of $285 million–$310 million and stated that cash, future operating cash flow and available credit were sufficient for the Dionex acquisition and business needs for at least 24 months.
- The termination of a healthcare-market supply contract reduced Q1 sales by a net $31 million year over year. Management expected a further approximately $25 million adverse revenue effect in Q2 2011. Recovery through an alternative supplier was underway.
- Management cited demand growth, productivity, global sourcing, restructuring benefits and lower amortization as factors supporting operating improvement; lower Japan stimulus-funded sales and supply-contract losses were offsets. No overall revenue or earnings guidance is provided in the supplied filing text.
- Key disclosed risks include technology and product-development execution, economic and customer-spending conditions, currency movements, regulation and healthcare reform, intellectual-property claims, acquisition integration and goodwill impairment, supplier/customer concentration, manufacturing or delivery disruption, environmental remediation, and leverage and covenant compliance.
- Management said pending litigation was not expected to have a material adverse effect based on current accruals, but outcomes and environmental-remediation costs remain uncertain and could vary materially. The company also noted potential future regulatory or cleanup costs.
Most important facts for investors to verify
- Whether Dionex closed within the offer and financing deadlines, and the resulting acquisition funding, debt and integration effects.
- Whether the supply-contract revenue shortfall was offset by the alternative supplier, particularly against the expected Q2 impact.
- Whether planned restructuring charges and approximately $20 million of annual savings were realized as expected.
- Whether operating cash generation improves as inventory and receivables support growth, and how cash is deployed among debt, acquisition costs and repurchases.
- Whether the Athena and Lancaster sale proceeds, including the Lancaster escrow, were received as expected and how the divestitures affect continuing results.
- Developments in litigation, environmental matters, goodwill impairment indicators, and compliance with debt covenants.