Thermo Fisher Scientific Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2017; comparative periods ended July 2, 2016. Amounts are U.S. dollars. The filing was signed August 4, 2017.
Business context and reporting period
Thermo Fisher supplies instruments, equipment, reagents, consumables, software and services to life sciences, diagnostics, healthcare, industrial and research markets. It reports four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services. Segment product-line transfers in January 2017 were reflected retrospectively in prior-period segment data.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $4.990B | $4.535B | $9.755B | $8.830B |
| Operating income | $751.5M | $637.6M | $1.374B | $1.156B |
| Operating margin | 15.1% | 14.1% | 14.1% | 13.1% |
| Income from continuing operations | $612.2M | $516.8M | $1.164B | $919.1M |
| Net income | $611.6M | $516.6M | $1.163B | $918.8M |
| Diluted EPS | $1.56 | $1.30 | $2.95 total; $2.96 continuing operations | $2.31 |
| Operating cash flow | Not stated separately | Not stated separately | $1.210B | $1.248B |
- Q2 revenue rose 10%; excluding acquisitions and currency effects, revenue grew 4%. Acquisitions added $346M and currency translation reduced revenue by $52M. For the first half, organic/operational growth was 4%, acquisitions added $692M and currency reduced revenue by $109M.
- Q2 segment income was $1.162B, up 13%; segment operating margin was 23.3% versus 22.8%. Analytical Instruments had the strongest reported growth, substantially reflecting acquisitions; Specialty Diagnostics and Laboratory Products and Services had lower segment margins.
- First-half operating cash flow fell to $1.210B from $1.248B, primarily due to higher working-capital investment. First-half capital spending was $181M; management expected approximately $500M for full-year 2017.
- At July 1, cash and equivalents were $611M, working capital $2.38B, and total borrowings at carrying value $16.80B, including $1.54B of short-term commercial paper. Long-term obligations were $15.26B. The $2.50B revolving facility had no borrowings and about $73M of capacity was reserved for letters of credit.
- Cash, cash equivalents and restricted cash declined $181.5M during the first half to $629.3M. The company repurchased $750M of stock and paid $118M in dividends during the period.
Material changes versus the prior comparable period
- Revenue and operating income increased, supported by acquisitions, higher sales in local currencies and productivity improvements. Acquisition-related intangible amortization rose to $381M in Q2 from $338M.
- Analytical Instruments revenue increased 47% in Q2, mainly due to FEI; Life Sciences Solutions grew 3%, Specialty Diagnostics 1%, and Laboratory Products and Services 4%.
- Interest expense rose $15M in Q2 and $44M in the first half, primarily reflecting higher debt. First-half acquisitions used $307M of cash, compared with $1.033B in the prior-year period.
- First-half restructuring and other costs were $116M versus $147M. The company identified approximately $80M of additional restructuring charges, primarily in 2017 and 2018.
Outlook, commentary, risks and unusual items
- Management cited particularly strong pharmaceutical and biotech demand, moderate sales growth in North America, modest growth in Europe and strong growth in Asia. It expected the stronger U.S. dollar to continue adversely affecting reported revenue and operating income in 2017.
- Management forecast a 2017 effective tax rate below 3% and cash income-tax payments of $600M–$625M. The unusually low first-half tax burden included a $65M benefit from extending the Singapore tax holiday, $35M of stock-award tax benefits, and foreign tax credits. The Singapore tax incentive runs through 2026.
- The pending Patheon acquisition was priced at $35 per share, approximately $5.2B cash plus assumption of about $2.0B net debt (approximately $7.2B total consideration). Completion was expected by year-end 2017, subject to tender-offer completion and regulatory and other customary conditions. Funding plans included debt and up to $2.0B of future equity; a $4.3B bridge facility was available but management did not expect to use it.
- In July 2017, after quarter-end, Thermo Fisher issued €2.6B of senior notes to partially fund Patheon. If the acquisition is not completed by February 15, 2018, or the agreement is terminated earlier, the notes must be redeemed at 101% of principal plus accrued interest.
- Key risks include acquisition completion, financing and integration; substantial debt and covenant compliance; foreign-exchange exposure; product development and competitive pressures; regulatory and government-funding changes; cybersecurity and operational disruptions; and litigation. Environmental liabilities were approximately $49M. The company retained $61M and $52M accruals for two patent matters while proceedings continued; in August 2017, the Federal Circuit affirmed the company’s favorable judgment in the Enzo matter, but the accrual remained pending further appeals.
- Management said existing cash, operating cash flow and available revolving-credit capacity should fund existing businesses for at least 24 months, apart from the Patheon funding requirement. No broader revenue or earnings guidance is stated in the provided filing text.
Important facts for investors to verify
- Patheon tender-offer and regulatory status, final purchase price and integration prospects, plus the timing and terms of planned equity and debt financing.
- Post-acquisition leverage, covenant headroom and refinancing needs, particularly given $16.80B of borrowings and short-term commercial paper.
- Whether underlying growth and margin trends persist after separating acquisition, currency, tax and restructuring effects; monitor weaker segment margins in Laboratory Products and Services.
- Cash-tax and effective-tax-rate assumptions, including the availability and repeatability of foreign tax credits and other tax benefits.
- Potential outcomes of disclosed litigation and environmental matters, and the execution and cash costs of the additional restructuring actions.