Thermo Fisher Scientific Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014; filed August 1, 2014. Thermo Fisher supplies scientific instruments, products, reagents, software and services. Comparisons are with the corresponding 2013 periods unless stated otherwise. Results include Life Technologies from its February 3, 2014 acquisition date.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.322 billion | $3.240 billion | $8.225 billion | $6.432 billion |
| Operating income | $348 million | $375 million | $1.224 billion | $763 million |
| Operating margin | 8.1% | 11.6% | 14.9% | 11.9% |
| Net income | $279 million | $277 million | $822 million | $614 million |
| Diluted EPS | $0.69 | $0.76 | $2.05 | $1.69 |
| Cash from operating activities | Not separately provided | Not separately provided | $990 million | $777 million |
- Q2 revenue grew 33%; excluding acquisitions, divestitures and currency effects, it increased 5%, mainly on stronger demand. Management cited strong biopharma sales, with strength also in diagnostics and healthcare. Six-month underlying revenue growth was 3%.
- Q2 operating income fell 7%. The company attributed the decline mainly to $170 million of Life Technologies-related charges and $152 million of higher amortization, largely acquisition-related. For the first half, operating income rose substantially, but included a $762 million gain on the GE Healthcare divestiture.
- Other expense was $112 million in Q2 and $213 million for the first half; higher interest expense reflected debt issued or assumed for the acquisition. Q2 income taxes included a $42 million benefit; first-half tax provision was $189 million, including $253 million related to the divestiture gain.
- First-half investing activities used $12.074 billion, principally including $13.055 billion for acquisitions, partly offset by $1.049 billion in business-sale proceeds. Capital expenditures were $180 million. Cash and cash equivalents ended at $585 million; cash plus short-term investments was approximately $606 million.
- At June 28, 2014, borrowings at carrying value totaled $15.577 billion, including $3.075 billion classified as short-term obligations and current maturities. The company had $556 million of commercial paper and $2.850 billion outstanding on its term loan. Its $1.50 billion revolving facility had no borrowings; availability was reduced by about $58 million for letters of credit.
- Working capital was negative $290 million, versus positive $6.75 billion at year-end 2013, primarily reflecting acquisition funding and higher short-term debt. Total assets were $44.313 billion and shareholders’ equity was $20.659 billion.
Material changes and transactions
- Thermo Fisher acquired Life Technologies for $15.30 billion net of cash acquired, including $2.28 billion of assumed debt. The acquisition added $7.12 billion of goodwill; acquired Life Technologies revenue included in Q2 and first-half 2014 was approximately $960 million and $1.62 billion, respectively.
- On March 21, the company sold businesses to GE Healthcare for $1.05 billion net of cash divested, recognizing a pretax gain of approximately $762 million. The divestiture was a condition of antitrust approval for the Life Technologies acquisition.
- After quarter-end, the company announced an agreement to sell Cole-Parmer for $480 million cash, expected to close in Q3 2014 subject to customary conditions and regulatory approvals.
- Thermo Fisher issued 34.9 million shares for net proceeds of $2.94 billion and borrowed $5.00 billion under a term loan to help fund the acquisition. First-half cash dividends paid were $115 million.
Outlook, risks and unusual items
- Management said cash, expected operating cash flows, anticipated after-tax Cole-Parmer proceeds and available borrowing capacity should meet existing-business cash requirements for at least the next 24 months. It expected 2014 capital expenditures of $460 million to $480 million.
- Expected 2014 cash income-tax payments were $400 million to $425 million, plus approximately $130 million related to the expected Cole-Parmer divestiture. The company expected to use the sale’s after-tax proceeds primarily to pay down debt.
- As of August 1, the company had identified approximately $70 million of additional restructuring charges, primarily expected in the remainder of 2014. First-half restructuring and other items included acquisition-related inventory charges and the GE Healthcare divestiture gain.
- Debt facilities include leverage and interest-coverage covenants. The maximum consolidated leverage ratio was 5.5-to-1.0 until August 2014, stepping down over time to 3.5-to-1.0 by August 2015; minimum interest coverage is 3.0-to-1.0. Failure to comply could trigger default and acceleration provisions.
- Risks include integration challenges and achieving acquisition synergies; substantial debt and refinancing needs; intellectual-property litigation involving acquired Life Technologies; and exposure to economic conditions, customer funding, currency movements, regulation and product liability. The filing says an unfavorable outcome differing materially from reserves in certain legal matters could materially affect results, financial position or cash flows.
- The company reported disclosure controls were effective. It was integrating Life Technologies into its internal-control processes. No material change in market-risk exposure from year-end 2013 was reported.
Important facts for investors to verify
- Separate acquisition-driven revenue growth from comparable underlying growth, and assess Life Technologies’ post-acquisition performance and integration progress.
- Distinguish recurring operating performance from the $762 million divestiture gain, acquisition charges and higher acquisition-related amortization.
- Track debt maturities, term-loan repayments, covenant headroom, refinancing capacity and use of Cole-Parmer proceeds.
- Monitor operating cash flow, working-capital needs and the timing of expected tax payments and divestiture proceeds.
- Check Cole-Parmer transaction completion and final proceeds, restructuring costs, and developments in the disclosed intellectual-property and other legal matters.