Thermo Fisher Scientific Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; comparative period ended March 31, 2012. Unaudited interim results. Thermo Fisher supplies instruments, products, diagnostics, software and services to scientific, healthcare and industrial customers.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $3,191.5 million | $3,056.8 million | +4% |
| Operating income | $387.1 million | $361.5 million | +7% |
| Operating margin | 12.1% | 11.8% | +0.3 percentage points |
| Income from continuing operations | $340.8 million | $280.8 million | +21% |
| Net income | $336.2 million | $277.3 million | +21% |
| Diluted EPS | $0.93 | $0.75 | +24% |
| Cash from operating activities | $298.3 million | $392.0 million | Down $93.7 million |
Revenue growth included $76.9 million from acquisitions and was reduced by $22.2 million from currency translation; organic revenue increased $80 million, or 3%. Segment revenue was $977.8 million in Analytical Technologies (flat), $805.6 million in Specialty Diagnostics (+10%), and $1,544.3 million in Laboratory Products and Services (+5%). Segment operating income increased 19% in Specialty Diagnostics and 3% in Laboratory Products and Services, but declined 2% in Analytical Technologies.
Management attributed improved operating income and margin mainly to productivity gains and, to a lesser extent, acquisition contributions and lower acquisition-related charges. These benefits were partly offset by commercial investment, higher amortization and the medical-device excise tax. Restructuring and other costs were $21.5 million on the income statement; related charges across cost of revenues, SG&A and restructuring lines totaled $36 million.
Cash, debt and liquidity
- Cash and cash equivalents were $1,004.1 million at March 30, 2013, versus $851.0 million at year-end 2012; cash plus short-term investments was approximately $1.01 billion.
- Working capital was $2.83 billion, compared with $2.74 billion at December 31, 2012.
- Total debt obligations were approximately $7.12 billion, including $394 million of short-term obligations and current maturities. This included $50 million of commercial paper and $303 million of senior notes due February 2014.
- No borrowings were outstanding under the $1.5 billion revolving credit facility; availability was reduced by approximately $53 million for letters of credit. The facility includes a maximum consolidated leverage ratio of 3.5 to 1.0.
- Operating cash flow fell year over year, principally reflecting increased working-capital use. Accounts receivable used $131 million and inventories used $68 million. Capital expenditures were $66 million. Financing activities included $90 million of share repurchases and $54 million of dividends paid.
Outlook, developments and risks
- Management expected near-term weakness in academic and government markets, partly due to uncertainty about U.S. and European funding, and continued industrial-market softness related to macroeconomic conditions. Pharma and biotech demand was strong; sales growth was strong in Asia, moderate in North America and slightly negative in Europe.
- Management forecast a 2013 effective tax rate of 5%–7% and capital expenditures of $300–$325 million. The Q1 effective tax rate was 0.6%, benefiting from a $15 million discrete foreign tax credit and a $7.5 million research and development credit; these make the quarter’s tax rate unusually low.
- As of May 3, the company had identified further restructuring actions expected to result in approximately $70 million of additional charges, primarily during the remainder of 2013. Actions charged in Q1 were expected to generate approximately $30 million in annual savings.
- On April 14, 2013, after the quarter-end, Thermo Fisher agreed to acquire Life Technologies for approximately $13.6 billion in cash, plus assumed net debt. Closing was expected in early 2014, subject to shareholder approval, regulatory approvals and other conditions. The company expected to finance the purchase using $9.5–$10.0 billion of cash and new debt and up to $4.0 billion of equity; it had arranged a $12.5 billion, 364-day unsecured bridge commitment. The acquisition is not conditioned on obtaining financing. Share repurchases were suspended following the announcement.
- Key risks include acquisition approval, financing, dilution and integration; exposure to economic conditions, customer and government funding, currencies, regulation, competition and intellectual property claims; and the ability to service debt and comply with covenants. The company reported various legal claims and environmental remediation matters, but management did not expect currently accrued matters to have a material adverse effect; outcomes and estimates remain uncertain.
- Q1 included an after-tax $4.2 million charge for estimated costs to raze abandoned facilities associated with the previously sold laboratory workstations business. Currency translation reduced other comprehensive income by $179.3 million, contributing to comprehensive income of $157.3 million versus $525.9 million a year earlier.
Most important facts to verify
- Whether the Life Technologies acquisition received required approvals, closed on expected terms and achieved anticipated benefits; also verify final financing mix, debt burden and shareholder dilution.
- Whether cash conversion improves after Q1’s working-capital outflow and whether the company can meet upcoming maturities while funding its existing operations and acquisition plans.
- Whether the unusually low Q1 tax rate and management’s 5%–7% full-year tax-rate outlook are sustained.
- Whether the additional restructuring charges and expected savings materialize, and whether demand weakness in academic, government and industrial markets persists.
- Whether legal, environmental, goodwill and intangible-asset estimates or other contingencies change materially.