Thermo Fisher Scientific Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2019. Unaudited results; comparisons are with the quarter and six months ended June 30, 2018. Thermo Fisher supplies products and services to life sciences, analytical, diagnostics, and laboratory markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $6.316B | $6.078B | $12.441B | $11.931B |
| Operating income | $1.496B | $937M | $2.416B | $1.723B |
| Operating margin | 23.7% | 15.4% | 19.4% | 14.4% |
| Net income | $1.119B | $752M | $1.934B | $1.331B |
| Diluted EPS | $2.77 | $1.85 | $4.80 | $3.28 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.943B | $1.522B |
- Q2 revenue rose 4%; management attributed $54M of the increase to acquisitions and a $132M decline to unfavorable currency translation. Excluding those effects, revenue grew 5% on increased demand. For the first six months, revenue increased 4% reported and 6% excluding acquisitions and currency effects.
- Q2 reported operating income includes a $505M pretax gain on the Anatomical Pathology divestiture. Excluding the gain, reported margin growth is not directly comparable to underlying operating performance; reportable-segment income grew 6% in Q2 and 6% for the first six months.
- Q2 segment revenue and income: Life Sciences Solutions $1.710B / $609M; Analytical Instruments $1.324B / $286M; Specialty Diagnostics $943M / $242M; Laboratory Products and Services $2.633B / $345M. Segment income is before specified acquisition-related charges, restructuring items, and intangible amortization.
- Cash and cash equivalents were $2.288B at June 29, versus $2.103B at year-end 2018. Current assets were $11.223B and current liabilities $7.509B; working capital was $3.71B, down from $4.48B at year-end, primarily due to higher short-term debt.
- Six-month investing cash outflow was $950M, including $1.686B for acquisitions, offset by $1.126B of net proceeds from the Anatomical Pathology sale; capital expenditures were $421M. Financing cash outflow was $735M, including $750M of share repurchases and $144M of dividends.
- Total borrowings at carrying value were $19.040B, including $2.377B classified as short-term (about $1.63B of senior notes due within twelve months and $737M of commercial paper). The $2.50B revolving facility had no borrowings outstanding; capacity was reduced by $86M for letters of credit.
Material changes and notable items
- Revenue growth was strongest in Life Sciences Solutions; management cited particularly strong biotech and pharmaceutical demand. Academic and government sales were flat in Q2. Currency translation reduced first-half revenue by $312M.
- On April 30, Thermo Fisher acquired Brammer Bio for approximately $1.673B net of cash acquired, expanding viral-vector contract manufacturing for gene and cell therapies. Preliminary purchase accounting allocated $952M to goodwill.
- On June 28, the company sold its Anatomical Pathology business for $1.13B net of cash divested, recording an approximately $505M pretax gain. The business generated about $115M of 2019 revenue through sale and $238M in full-year 2018 revenue.
- The proposed Gatan acquisition was withdrawn by both parties in June. Related transaction costs contributed to segment charges.
- Operating cash flow improved from $1.522B to $1.943B, primarily reflecting lower working-capital investment. Inventory increases used $273M of cash; other liabilities provided $319M, primarily from customer advance payments.
- Operating leases were brought onto the balance sheet beginning in 2019. At June 29, operating lease liabilities totaled $674M, with $633M of right-of-use assets.
Outlook, risks, and contingencies
- Management expected a 2019 effective tax rate of 8%–11% and cash income-tax payments of $725M–$775M. It expected 2019 capital expenditures, net of disposals, of approximately $925M–$975M.
- Management stated that cash, expected operating cash flow, and available revolving-credit capacity should meet existing-business cash requirements for at least the next 24 months. A €500M floating-rate note was repaid on July 24, 2019.
- As of August 2, 2019, the company had identified additional restructuring actions expected to result in approximately $75M of charges, primarily in 2019 and 2020, and expected to identify further actions during 2019.
- Key disclosed risks include foreign exchange and trade/tariff uncertainty, economic and customer-budget weakness, competition and technology change, product quality and regulatory compliance in pharma services, acquisition integration and impairment risk, cybersecurity and data privacy, supply or site disruption, litigation, and debt-service and covenant risks.
- Environmental remediation liabilities were approximately $65M. The company disclosed various lawsuits and claims; it said no material losses were deemed probable for matters without disclosed material accruals, while noting an unfavorable outcome could materially affect results, financial position, or cash flows.
- The company reported $1.496B of unrecognized tax benefits at June 29, substantially all of which would reduce the effective tax rate if recognized. The tax rate and cash-tax outlook depend on geographic earnings mix and expected foreign tax credits.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $505M Anatomical Pathology gain and related tax effects.
- Whether organic demand and segment profitability persist, particularly given weaker Q2 margin trends in Analytical Instruments and Specialty Diagnostics.
- Integration, growth, and returns from the Brammer Bio acquisition, and final purchase-price allocation.
- Execution of the tax-rate and cash-tax forecasts, including the effect of foreign tax credits and tax positions.
- Debt maturities, commercial-paper refinancing access, and liquidity after the July note repayment, alongside planned capital spending and buybacks.
- Potential cash or earnings effects from restructuring, environmental remediation, litigation, and other disclosed contingencies.