Business context and reporting period
Thermo Fisher Scientific Inc. filed this unaudited Form 10-Q for the quarter ended July 3, 2010. The company operates through Analytical Technologies and Laboratory Products and Services, serving global scientific, healthcare, research and industrial markets. Comparisons are with the quarter ended June 27, 2009, and the six-month period ended June 27, 2009.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | First six months 2010 | First six months 2009 |
|---|---|---|---|---|
| Revenue | $2,649 million | $2,484 million | $5,324 million | $4,739 million |
| Operating income | $312 million | $259 million | $605 million | $449 million |
| Operating margin | 11.8% | 10.4% | 11.4% | 9.5% |
| Income from continuing operations | $237 million | $207 million | $467 million | $356 million |
| Net income | $237 million | $207 million | $470 million | $356 million |
| Diluted EPS | $0.57 | $0.49 | $1.13 | $0.84 |
| Cash from operations | Not separately reported for the quarter | Not separately reported for the quarter | $627 million | $734 million |
Q2 revenue rose 7%; excluding currency and acquisitions/divestitures, it increased 5%. First-half revenue rose 12%, including 8% growth excluding currency and acquisitions/divestitures. Segment income, a management measure before specified charges, was $466 million in Q2 (+11%) and $933 million in the first half (+22%).
At July 3, 2010, cash and cash equivalents were $1,307 million and short-term investments were $9 million. Working capital was $2.73 billion. Outstanding debt was $2.13 billion, including approximately $324 million carrying value of convertible obligations. The revolving credit facility had $952 million available capacity and expires in 2012.
Material changes versus prior comparable periods
- Profitability improved: Q2 operating income increased 20% and first-half operating income increased 35%. Management attributed margin gains mainly to higher revenue, with contributions from pricing, productivity, restructuring and global sourcing.
- Both segments grew. Q2 Analytical Technologies revenue increased 10% and Laboratory Products and Services increased 5%; first-half increases were 14% and 12%, respectively.
- First-half operating cash flow fell to $627 million from $734 million, primarily as receivables and inventories absorbed $101 million and $51 million, respectively, to support sales growth.
- Cash and short-term investments declined to $1.32 billion from $1.57 billion at year-end 2009. First-half financing included issuing $750 million of senior notes, redeeming $500 million of subordinated notes and cash settlement of convertible debt conversions. The company recorded $16 million of early-extinguishment charges.
- Currency translation reduced Q2 revenue by $19 million but added $46 million to first-half revenue. First-half results also benefited from four additional selling days; management estimated this lifted first-half revenue growth by about 2 percentage points.
Outlook, management commentary, risks and unusual items
- Management expected full-year 2010 effective tax rate of 14.5%–16.5%, income-tax cash payments of approximately $375–$425 million, and capital expenditures of approximately $275–$300 million.
- Management identified approximately $23 million of additional restructuring charges expected primarily in the remainder of 2010. Restructuring actions initiated in 2009 and the first half of 2010 were expected to produce approximately $118 million in annual savings. The filing also describes an expected 4–5 percentage-point adverse effect on Q4 revenue growth from four fewer selling days versus Q4 2009.
- A supplier’s termination of a healthcare-channel supply arrangement reduced related Q2 sales by $22 million. The company expected a net revenue reduction of approximately $55 million in the second half of 2010 versus the prior-year period, partly offset by products from an alternative supplier. Lower flu-related demand was another headwind.
- Management stated that cash, future operating cash flow and available revolving-credit capacity should meet existing-business cash requirements for at least the next 24 months. This is a forward-looking assessment, not a guarantee.
- On July 16, 2010, after quarter-end, the company acquired Fermentas International for $260 million, net of cash acquired and subject to a post-closing adjustment; its 2009 revenue was approximately $55 million.
- Material risks include economic weakness and customer funding or capital-spending changes; product and technology competition; acquisition integration and impairment risk (goodwill was $9.10 billion); foreign-exchange exposure; debt and covenant compliance; regulation and intellectual-property disputes; and litigation, product-liability and environmental matters.
- Management said an unfavorable resolution of insurer litigation concerning coverage could require a material adjustment to the estimated $92 million due from insurers. The company considered its litigation and environmental reserves adequate, but noted that estimates and recoveries involve uncertainty.
Important facts for investors to verify
- Whether revenue and margin growth persists after adjusting for acquisitions, currency, extra selling days and stimulus-funded customer spending.
- Whether working-capital investment converts to cash as sales grow, given lower first-half operating cash flow and higher tax payments.
- The realized revenue impact of the terminated supply contract and the extent to which the alternative supplier offsets it.
- Convertible-debt settlement and refinancing obligations, revolving-facility availability, and compliance with debt covenants.
- Restructuring charges and savings versus management’s estimates, and integration and valuation risks from recent and subsequent acquisitions.
- Developments in insurer recovery litigation, other contingencies and environmental matters, including any material change to the estimated $92 million insurance receivable.