Thermo Fisher Scientific Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; comparisons are with the quarter ended October 1, 2011. Financial statements are unaudited. Thermo Fisher supplies analytical instruments, diagnostics, laboratory products and services, and related consumables and software.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Revenue | $3.086 billion | $2.933 billion | $9.251 billion | $8.470 billion |
| Operating income | $352 million | $316 million | $1.082 billion | $903 million |
| Operating margin | 11.4% | 10.8% | 11.7% | 10.7% |
| Income from continuing operations | $299 million | $266 million | $873 million | $731 million |
| Net income | $290 million | $265 million | $802 million | $1.041 billion |
| Diluted EPS | $0.79 | $0.69 | $2.18 | $2.68 |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $1.379 billion | $1.054 billion |
- Q3 revenue increased 5%; management attributed growth to existing businesses and acquisitions, partly offset by unfavorable currency translation. Pro forma revenue growth excluding currency and net acquisition/divestiture effects was 4%.
- For the first nine months, revenue rose 9% reported and 3% pro forma. Operating income grew 20%; management cited productivity gains, incremental sales and lower acquisition-related charges, partly offset by higher acquired-intangible amortization.
- Q3 continuing-operations diluted EPS increased to $0.82 from $0.70; nine-month continuing-operations diluted EPS was $2.37 versus $1.89. Reported net income and EPS for nine months fell from 2011, which included a $304 million after-tax gain on divestitures; 2012 included a $58 million after-tax estimated loss on the laboratory workstations sale.
- Q3 segment revenue: Analytical Technologies $1.012 billion (+1%), Specialty Diagnostics $707 million (+15%), and Laboratory Products and Services $1.510 billion (+5%). Nine-month segment revenue increased 9%, 23%, and 4%, respectively.
- Cash and short-term investments totaled $837 million at September 29, 2012, down from $1.021 billion at December 31, 2011. Working capital was $2.42 billion, up from $1.71 billion.
- Total debt obligations were $7.472 billion, including $435 million short-term and $7.038 billion long-term, compared with $7.028 billion at year-end 2011. The company issued $1.3 billion of senior notes in August. It had $2.0 billion of revolving credit facilities, with no borrowings outstanding and approximately $49 million of capacity used for letters of credit. The leverage covenant requires a ratio below 3.5 to 1.0.
- Cash used for acquisitions was $1.072 billion and capital expenditures were $211 million in the first nine months. The company repurchased $800 million of shares and paid $95 million in dividends; a quarterly dividend of $0.13 per share was initiated in 2012.
Material changes, outlook and management commentary
- One Lambda, a transplant-diagnostics company, was acquired in September for approximately $884 million net of cash, with up to $25 million of contingent consideration. Doe & Ingalls was acquired in May for $175 million plus possible contingent consideration. Acquisition activity increased goodwill and intangible assets.
- The laboratory workstations business was sold in October 2012 for nominal proceeds. The company recorded an estimated after-tax divestiture loss of $58 million in the first nine months, and disclosed that the estimate was revised in Q3.
- Management expected weakness in academic and government markets to continue in the near term, partly because of uncertainty about U.S. and European funding. Industrial-market sales were modestly lower after strong growth in the prior-year quarter. Sales growth was strong in Asia and moderate in Europe and North America.
- The company identified additional restructuring actions expected to generate approximately $60 million of charges, primarily in the remainder of 2012 and first half of 2013. Actions charged in the first nine months were expected to yield approximately $70 million in annual savings. Expected 2012 capital expenditures were $290–$300 million.
- Management estimated the U.S. medical-device excise tax, effective January 1, 2013, would cost approximately $25 million annually. It estimated the 2012 effective tax rate at 6%, citing a greater share of earnings in lower-tax jurisdictions.
- Management stated cash, operating cash flow and available credit should cover existing-business cash requirements for at least the next 24 months. It cautioned that actual results may differ from estimates and forward-looking statements.
Risks, contingencies and unusual items
- Key risks include economic and market weakness, reduced government and academic funding, currency movements, product and technology competition, acquisition integration and impairment risk, regulatory compliance, product liability, supply and operational disruptions, and the ability to service debt and meet covenants.
- The company reported lawsuits and claims, including product liability matters, and ongoing environmental investigations and remediation. Management did not expect these matters, based on recorded accruals, to have a material adverse effect, but noted estimates and outcomes could vary.
- Q3 included $37 million of restructuring and other charges, including One Lambda transaction costs and a product-liability litigation charge. Nine-month charges were $107 million, including acquisition inventory step-up charges and restructuring costs.
- Goodwill was $12.434 billion and acquisition-related intangible assets were $7.972 billion at quarter-end. Management’s impairment assessments depend on estimated future cash flows.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much reported growth and segment profitability reflects acquisitions, currency movements, and underlying demand—especially following the One Lambda acquisition.
- Whether the expected $70 million annual restructuring savings are realized, and whether the additional approximately $60 million of charges or further actions change the cost outlook.
- Whether the $58 million estimated laboratory-workstations divestiture loss and the expected $25 million annual medical-device tax cost prove accurate.
- Debt maturity and refinancing needs, covenant headroom, and the company’s capacity to fund acquisitions, repurchases, dividends and capital spending.
- Developments in academic and government funding, foreign exchange, litigation and environmental matters, and impairment risk for substantial goodwill and intangible assets.