Thermo Fisher Scientific Inc. — Q3 2009 Form 10-Q
Business context and reporting period. Thermo Fisher develops, manufactures and sells scientific and laboratory products and services. This unaudited report covers the quarter ended September 26, 2009, and the nine months then ended; comparisons are with the corresponding 2008 periods. Continuing operations comprise Analytical Technologies and Laboratory Products and Services.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $2.531bn | $2.588bn | $7.270bn | $7.852bn |
| Operating income | $275.5m | $286.3m | $724.6m | $906.9m |
| Operating margin | 10.9% | 11.1% | 10.0% | 11.6% |
| Income from continuing operations | $221.2m | $214.9m | $577.0m | $687.9m |
| Net income | $221.2m | $218.1m | $577.0m | $693.9m |
| Diluted EPS | $0.53 | $0.50 | $1.36 | $1.58 |
- Cash flow: Nine-month operating cash flow was $1.121bn, up from $959.9m. Investing activities used $276.8m and financing activities used $405.1m, including $414.6m for share repurchases. Capital expenditures were $125.8m.
- Liquidity and debt: At September 26, cash and cash equivalents were $1.746bn and short-term investments were $10.6m. Working capital was $3.20bn, versus $2.81bn at year-end 2008. Reported outstanding debt was $2.02bn; $640m of convertible debt was then convertible. The revolving credit facility had $946m available and expires in 2012.
- Balance sheet: Total assets were $21.419bn; goodwill was $8.789bn and acquisition-related intangible assets were $6.144bn.
Changes versus the prior comparable period
- Q3 revenue declined 2%; excluding currency and net acquisitions/divestitures, it declined $49m, or 2%, principally from weaker demand. Nine-month revenue fell 7%, including a $299m adverse currency effect; excluding currency and net acquisitions/divestitures, revenue decreased $377m, or 5%.
- Q3 operating income fell 4%, while continuing-operations income rose to $221.2m, mainly because the effective tax rate declined to 10.4% from 16.9%. Nine-month operating income decreased 20% and continuing-operations income decreased 16%.
- Q3 Analytical Technologies revenue declined 6% and segment income declined 11%; its operating margin fell to 19.9% from 21.1%. Laboratory Products and Services revenue increased 1% and segment income increased 4%; its operating margin rose to 14.4% from 14.0%.
- For the first nine months, Analytical Technologies revenue decreased 11% and segment income 18%; Laboratory Products and Services revenue decreased 4% and segment income 7%.
- Operating performance reflected lower demand, particularly for equipment and industrial instruments, partly offset by pricing and productivity improvements. Consumables were comparatively resilient. Currency translation reduced Q3 revenue by $47m.
Outlook, management commentary, risks and unusual items
- Management expected a full-year 2009 effective tax rate of approximately 10%–12%, cash taxes of $275m–$300m, and capital expenditures of $175m–$200m. It stated that cash, future operating cash flow and available credit were expected to meet business cash requirements for at least the next 24 months.
- As of October 30, 2009, the company identified approximately $43m of additional restructuring charges, primarily for the remainder of 2009 and first-half 2010. Annual savings from actions initiated in late 2008 through October 30, 2009 were expected to total approximately $117m, primarily beginning in 2009.
- The company expected supplier-sourced product revenue to decline approximately $60m–$62m in 2009 versus 2008 under an amended supply agreement, including an expected $8m–$10m decrease in Q4.
- On October 1, 2009, after quarter-end, the company acquired B.R.A.H.M.S. AG for €330m (approximately $480m, including assumed debt of $30m). The acquisition expanded its specialty diagnostics portfolio.
- Management warned that a prolonged or worsening downturn could further reduce demand and potentially trigger impairment of goodwill and acquisition-related intangible assets. Other risks include currency movements, customer capital-spending and funding decisions, technology and product development, acquisition integration, regulation, supply/manufacturing disruptions, and debt covenant compliance. The revolving facility requires a consolidated leverage ratio no greater than 3.0 to 1.0.
- Potentially material contingency: management estimated $93m due from insurers for certain claims; adverse resolution of disputes over insurance coverage could require a material adjustment. Environmental remediation costs were described as uncertain, though management considered reserves adequate. The Applera/MDS patent disputes were settled in 2009 on terms not material to the company, with no payment by either party.
- Other items affecting comparability include increased restructuring costs in 2009 versus the prior-year period, partly reflecting a pension curtailment gain in 2008, and adoption of convertible-debt accounting, which increased reported interest expense without changing cash interest payments.
Most important facts for investors to verify
- Whether demand, especially for equipment and industrial instruments, stabilized or continued to weaken after the reporting date.
- Whether the expected $117m annual restructuring savings are realized and how the additional approximately $43m of charges affect results and cash flow.
- Whether cash generation and liquidity remain sufficient after the B.R.A.H.M.S. acquisition and any convertible-debt conversions.
- Whether the insurer receivable estimate of $93m remains recoverable and whether goodwill or intangible-asset impairment indicators emerge.
- How the supplier agreement’s expected revenue reduction, currency effects and the 10%–12% tax-rate outlook compare with subsequent results.