Thermo Fisher Scientific Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015, compared with the three months ended March 29, 2014. Amounts are in U.S. dollars; financial statements are unaudited. Thermo Fisher supplies instruments, reagents, consumables, software and services to research, healthcare, diagnostics and industrial markets through four segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $3.919 billion | $3.904 billion | Up $15 million, about 0.4% |
| Operating income | $487.3 million | $875.5 million | Down 44% |
| Operating margin | 12.4% | 22.4% | Down 10.0 percentage points |
| Net income | $385.1 million | $543.1 million | Down 29% |
| Diluted EPS | $0.96 | $1.36 | Down 29% |
| Cash from operating activities | $80.0 million | $101.2 million | Down $21.2 million |
| Capital expenditures | $97.2 million | $104.7 million | Down $7.5 million |
Operating cash flow less capital expenditures was negative $17.2 million in Q1 2015, a calculation from reported figures. The company declared dividends of $0.15 per share, unchanged year over year.
Revenue drivers: Acquisitions, principally Life Technologies, added $179 million, while currency translation reduced reported revenue by $229 million. Excluding acquisitions, divestitures and currency, revenue increased $65 million, or 2%, primarily on higher demand. The quarter had one fewer selling day. Academic and government sales declined, particularly in Japan.
Segment performance: Life Sciences Solutions revenue rose 22% to $1.020 billion, largely reflecting Life Technologies; adjusted segment income rose 22% to $298.7 million, with a 29.3% margin. Analytical Instruments revenue fell 6% to $727.4 million and segment income fell 7% to $121.7 million. Specialty Diagnostics revenue fell 4% to $785.2 million and segment income fell 3% to $214.1 million. Laboratory Products and Services revenue fell 5% to $1.513 billion and segment income fell 5% to $222.1 million. Reportable-segment income increased 3% to $856.6 million; segment margins exclude specified acquisition-related charges, restructuring items and intangible amortization.
Profitability, cash flow and liquidity
- The operating-income comparison is heavily affected by unusual prior-year items: Q1 2014 included approximately $759 million of gains on business sales. Q1 2015 instead recorded $40 million of restructuring and other costs; acquisition-related intangible amortization increased $43 million year over year.
- Q1 2015 included an income tax benefit of $3.1 million on $382.0 million of pretax income, compared with a $231.3 million tax provision in Q1 2014. Tax-planning initiatives generated $77 million of foreign tax credits, partly offset by $27 million of additional U.S. tax.
- Cash and cash equivalents were $864.6 million, with short-term investments of $8.4 million, at March 28, 2015. Cash declined $478.9 million during the quarter. Operating cash flow was pressured by $395.4 million of cash use from other liabilities, principally timing of incentive-compensation, interest and tax payments, as well as working-capital investment.
- Total borrowings at carrying value were $14.86 billion; short-term obligations and current maturities were $4.16 billion, including $1.76 billion of senior notes due within 12 months, $1.18 billion of term loans and $1.22 billion of commercial paper. Cash and short-term investments less reported borrowings imply net debt of approximately $13.98 billion.
- Working capital was negative $0.68 billion, versus positive $1.19 billion at year-end 2014, primarily because short-term debt increased by $1.95 billion. The company had a $2.00 billion revolving facility with no borrowings outstanding; availability was reduced by about $59 million for letters of credit.
Material changes and notable items
- In February 2015, Thermo Fisher acquired Advanced Scientifics for approximately $289 million, expanding its bioprocessing offerings. The acquisition contributed $118 million of goodwill, reported as tax deductible. The company also acquired selected channel-partner assets for chromatography and mass spectrometry products.
- The company repaid $851.4 million of long-term obligations, increased commercial paper by $1.22 billion, repurchased $500 million of shares and paid $60.8 million in dividends during the quarter. About $410 million remained under its share-repurchase authorization at quarter-end.
- Foreign-currency translation reduced shareholders’ equity through a $563.1 million currency adjustment; total comprehensive loss was $176.5 million despite net income of $385.1 million.
- Thermo Fisher entered interest-rate swaps, including hedges on certain existing notes and a cash-flow hedge related to a planned 2016 debt offering. Swap-related costs included $7.5 million in Q1 expense.
Outlook, risks and contingencies
- Management expected the stronger U.S. dollar to have a significant adverse effect on reported revenue and operating income for the remainder of 2015. The filing gives no numerical full-year revenue or earnings guidance.
- Management forecast a 2015 effective tax rate below 3%, based on expected geographic profitability, but cash income-tax payments of $550 million to $575 million. Expected 2015 capital expenditures, net of disposals, were $435 million to $450 million.
- As of May 1, 2015, the company identified additional restructuring actions expected to result in approximately $70 million of charges, primarily during the rest of 2015. Q1 restructuring actions affected approximately 1% of the workforce. Management stated that available cash, operating cash flow and borrowing capacity should cover existing-business requirements for at least 24 months.
- Risks highlighted include foreign-exchange exposure, reliance on customer and government spending, competitive and technological change, acquisition integration and impairment risk, substantial debt and covenant compliance, regulatory requirements, supply and operational disruptions, and intellectual-property claims.
- Environmental liabilities were approximately $31 million. The company disclosed multiple lawsuits and stated that an adverse legal outcome exceeding current accrual estimates could materially affect results, financial position or cash flows. A $60.9 million accrual remained for the Enzo matter after an appellate court vacated the judgment and returned the case for further proceedings; the plaintiff sought rehearing. In the Promega matter, the appellate court found infringement of one remaining patent and ordered a new damages trial after invalidating four other patents.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported operating-income and EPS decline reflects the absence of Q1 2014 business-sale gains, versus underlying operating performance?
- Whether currency effects and the segment-level demand trends developed as management expected, particularly in academic and government markets.
- The timing and refinancing plan for $4.16 billion of short-term debt and near-term maturities, commercial-paper access, and compliance with leverage and interest-coverage covenants.
- Whether the unusually low forecast tax rate is sustainable, and how reported tax expense compares with forecast cash-tax payments.
- Progress and costs of restructuring and integration, including the additional approximately $70 million of identified charges and realization of expected synergies.
- Developments in the Enzo, Promega and other intellectual-property matters, environmental remediation estimates, and any changes to related accruals or potential exposure.