Thermo Fisher Scientific Inc. — 2010 Q3 Form 10-Q
Reporting period: Quarter ended October 2, 2010; year-to-date results cover the first nine months of 2010. Comparisons are with the quarter ended September 26, 2009, and the corresponding nine-month period. Amounts are in U.S. dollars.
Business context and reporting period
Thermo Fisher develops, manufactures and sells products and services worldwide through its Analytical Technologies and Laboratory Products and Services segments. Growth combines internal product development with acquisitions. The company reported a recovery in customer demand from a weak 2009 comparison period; acquisitions also contributed to reported growth.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Revenue | $2,683.5 million | $2,531.1 million | $8,007.6 million | $7,270.3 million |
| Operating income | $318.6 million | $275.5 million | $923.6 million | $724.6 million |
| Operating margin | 11.9% | 10.9% | 11.5% | 10.0% |
| Income from continuing operations | $268.5 million | $221.2 million | $735.6 million | $577.0 million |
| Net income | $268.5 million | $221.2 million | $738.1 million | $577.0 million |
| Diluted EPS | $0.66 | $0.53 | $1.79 | $1.36 |
| Operating cash flow | Not separately stated | Not separately stated | $1,059.6 million | $1,120.6 million |
Revenue growth: Q3 revenue increased 6% year over year. Excluding currency and acquisitions net of divestitures, revenue rose $106.4 million, or about 4%. Nine-month revenue increased 10%; excluding those effects, it rose $507.1 million, or about 7%.
Segments: Q3 Analytical Technologies revenue was $1,163.0 million, up 14%, with segment income of $249.9 million, up 23%; its operating margin rose to 21.5% from 19.9%. Laboratory Products and Services revenue was $1,650.8 million, up 1%, while segment income fell to $221.4 million from $234.8 million and margin declined to 13.4% from 14.4%. For the first nine months, the segments’ revenues rose 14% and 8%, respectively, and their operating margins were 21.0% and 13.8%.
Cash, working capital and debt: Cash and cash equivalents were $930.2 million at October 2, 2010, versus $1,564.1 million at December 31, 2009; cash plus short-term investments was $939 million. Working capital was $2.40 billion, down from $2.89 billion. Nine-month operating cash flow declined from $1.12 billion, primarily as accounts receivable and inventory increased to support sales. Investing used $706.6 million, including $545.4 million for acquisitions and $173.6 million for capital expenditures. Financing used $973.1 million, including $662.5 million for share repurchases.
Outstanding debt was approximately $2.16 billion, including about $326 million of convertible obligations. Long-term obligations were $2,057.6 million and current debt obligations were $104.4 million. The revolving credit facility had $952 million available and expires in 2012. Management said cash, operating cash flow and available borrowing capacity were sufficient for existing-business cash needs for at least the next 24 months.
Material changes versus prior comparable periods
- Profitability improved: Q3 operating income rose 16% and nine-month operating income rose 27%, with higher margins. Management attributed the gains mainly to incremental sales and, to a lesser extent, productivity, restructuring savings and global sourcing.
- Analytical Technologies led Q3 segment growth. Laboratory Products and Services faced margin pressure from strategic investments and lost supply-contract revenue.
- Working-capital cash use increased: accounts receivable used $133.9 million and inventories used $62.2 million in the first nine months, versus cash sources from both in the prior-year period.
- Acquisition spending rose to $545.4 million from $155.5 million. The company acquired Ahura Scientific, Finnzymes and Fermentas, among other smaller businesses; these transactions expanded analytical, spectroscopy and molecular-biology offerings.
- Debt and capital allocation changed materially. The company issued $750 million of senior notes, redeemed $500 million of 6⅛% senior subordinated notes and paid $573 million to settle conversions of floating-rate convertible debentures. It repurchased $662.5 million of common stock.
Outlook, management commentary, risks and unusual items
- Outlook: Management forecast a 2010 effective tax rate of 13.5%–15.5%, cash tax payments of approximately $375–$425 million, and capital expenditures of approximately $275–$300 million. It expected four fewer selling days in Q4 versus Q4 2009 to reduce Q4 revenue growth by an estimated 4 percentage points.
- Supply contract and flu-related sales: Contract termination reduced Q3 Laboratory Products and Services revenue by a net $41 million. Management expected an additional net revenue reduction of about $33 million in the remainder of 2010 versus Q4 2009, and said the contract cessation would continue to weigh on growth through the first half of 2011. Milder flu conditions also reduced related product sales.
- Restructuring: The company recorded $48.6 million of restructuring and related charges in the first nine months. As of November 5, 2010, it identified approximately $28 million of additional charges, primarily in the remainder of 2010 and 2011. Actions initiated in 2009 and the first nine months of 2010 were expected to generate approximately $136 million of annual savings when completed.
- Debt and financing: Convertible debentures had a $40.20 conversion price and could be put to the company beginning in March 2011. The company intended to use its revolver for principal payments above $100 million if holders converted or put the debt. Debt covenants include a maximum consolidated leverage ratio of 3.0 to 1.0.
- Unusual items: Nine-month other expense included a $17 million early debt-extinguishment loss. Q3 tax expense benefited by $6.7 million from a tax-audit settlement and newly enacted U.K. tax rates. Q3 comprehensive income was $498 million, including a favorable $228 million currency-translation adjustment in equity; this was not operating earnings.
- Risks and contingencies: Risks include economic weakness and customer capital-spending changes, competition and rapid technological change, acquisition integration and impairment of goodwill or intangibles, currency and tax-rate fluctuations, supply/customer relationships, regulatory and product-liability exposure, environmental remediation, and debt covenant compliance. The company reported pending litigation and environmental matters; management did not expect currently reserved matters to have a material adverse effect, but estimates and ultimate outcomes may vary.
Important facts for investors to verify
- Whether demand and underlying organic growth persist after the weak 2009 comparison, and how Q4’s fewer selling days affect reported growth.
- How much revenue and margin pressure remains from the terminated supply contract and milder flu-related demand.
- Whether acquired businesses deliver expected growth and synergies, given acquisition spending and substantial goodwill and intangible assets.
- Whether working-capital needs normalize and operating cash flow supports acquisitions, capital spending, debt obligations and share repurchases.
- How convertible debt puts or conversions beginning in March 2011 affect liquidity and revolver usage, and whether debt covenants remain comfortably satisfied.
- Whether restructuring charges, projected savings and additional identified actions track management’s estimates.
- Potential effects of changing tax rules, litigation, environmental obligations and other contingencies; the filing does not quantify all possible future exposure.