Thermo Fisher Scientific Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparative period ended March 30, 2013. Results are unaudited. Thermo Fisher provides instruments, products, reagents, software and services to research, healthcare, industrial and other markets. Life Technologies was acquired on February 3, 2014, and its results are included from that date.
Financial performance and liquidity
- Revenue: $3.904 billion, up $712 million (22%) year over year. Acquisitions contributed $647 million, currency translation $6 million, and existing operations increased revenue by $59 million (2%). Management cited strong biopharma demand; academic and government sales were weaker, partly attributed to inclement weather.
- Profit: Operating income was $875.5 million versus $387.1 million; GAAP operating margin was 22.4% versus 12.1%. Net income was $543.1 million versus $336.2 million. Diluted EPS was $1.36 versus $0.93. The current-period operating result included a $757 million pretax gain on a business sale, so reported growth is not solely reflective of ongoing operations.
- Segment results: Segment income, as defined by management before specified acquisition, restructuring and amortization items, was $830.5 million, up 35%. Revenue and segment income were: Life Sciences Solutions $835.5 million and $244.6 million; Analytical Instruments $769.9 million and $130.9 million; Specialty Diagnostics $813.7 million and $221.0 million; Laboratory Products and Services $1.591 billion and $234.0 million. Segment comparisons are affected by the acquisition and revised segment structure.
- Taxes and interest: The effective tax rate was 29.9%, compared with 0.6% in Q1 2013; the 2014 provision included $252 million related to the business-sale gain. Other expense was $101.1 million versus $44.2 million, including interest expense of $117.8 million versus $64.4 million, primarily reflecting acquisition-related debt.
- Cash flow: Operating cash flow was $101.2 million versus $298.3 million. Investing activities used $12.068 billion, principally for acquisitions; financing activities provided $7.635 billion, including $5.0 billion of term-loan proceeds and $2.942 billion net proceeds from share issuance. Capital expenditures were $104.7 million. Cash and cash equivalents ended the quarter at $1.497 billion, down from $5.826 billion at year-end.
- Liquidity and debt: Working capital was $1.91 billion versus $6.75 billion at December 31, 2013; cash and short-term investments totaled $1.52 billion. Debt carrying value was $17.363 billion, versus $10.487 billion at year-end. Short-term debt and current maturities were $2.166 billion. The company had no borrowings under its $1.50 billion revolving facility, with capacity reduced by $53 million for letters of credit. It reported nearly $1 billion of debt repayment in April 2014 and said available liquidity and expected operating cash flow should cover existing-business needs for at least 24 months.
Material changes and unusual items
- Thermo Fisher acquired Life Technologies for $15.30 billion net of cash acquired, including $2.28 billion of debt assumed. The acquisition added substantial goodwill and intangible assets and was partly funded through debt and equity issuance.
- On March 21, 2014, it sold its sera and media, gene modulation and magnetic beads businesses to GE Healthcare for approximately $1.05 billion net of cash divested, subject to a post-closing adjustment. The sale, required for antitrust approval of the acquisition, generated a pretax gain of approximately $757 million.
- Acquisition-related and other charges included $147.6 million for acquired inventory sold after revaluation, $66.6 million of transaction costs, $91.7 million of cash compensation to monetize acquired employee equity awards, and other integration and restructuring costs. Higher acquisition-related amortization also reduced earnings.
- The company established a Life Sciences Solutions segment and reorganized other businesses into four reporting segments. Life Technologies contributed only from February 3, making reported year-over-year comparisons non-comparable without pro forma context.
Outlook, risks and contingencies
- Management expected 2014 capital expenditures, net of disposals, of $470 million to $490 million. As of May 2, 2014, it had identified approximately $65 million of additional restructuring charges, primarily for the remainder of 2014, and expected an approximately $150 million noncash charge to cost of revenues in Q2 from sales of acquired inventory revalued at acquisition.
- Management said it expected sufficient liquidity for at least the next 24 months. The company had substantial leverage and term-loan payments of $500 million in 2014, $1.0 billion in 2015 and $1.0 billion in 2016; the remaining term-loan balance was due in February 2017. Credit agreements impose leverage and interest-coverage covenants.
- Key risks include integrating Life Technologies and realizing expected synergies; servicing debt and complying with covenants; exposure to customer spending and government funding; competition and rapid technology changes; foreign-exchange movements; and intellectual-property claims. The filing describes multiple acquired Life Technologies patent disputes, including a $60.9 million judgment accrued and under appeal and another $52 million award accrued after a verdict was overturned in favor of Life Technologies and appealed. An unfavorable outcome materially above reserves could adversely affect results, financial position or cash flows.
- The filing also notes environmental remediation and other legal claims; environmental expenses were not material in the periods presented. Management reported disclosure controls were effective and continued integrating Life Technologies into internal financial-control processes.
Most important facts for investors to verify
- Underlying revenue, margins and cash generation excluding Life Technologies, the divested businesses, and the $757 million sale gain; review the filing’s pro forma figures and their stated limitations.
- Progress on Life Technologies integration, expected synergies, and the timing and amount of remaining acquisition and restructuring costs, including the anticipated Q2 inventory charge.
- Debt repayment, cash conversion, covenant headroom and the company’s ability to manage near-term maturities after the April repayment.
- Final proceeds and any post-closing adjustment for the GE Healthcare divestiture, and developments in acquired intellectual-property litigation and related reserves.
- Whether academic and government demand, customer funding conditions and the unusually low prior-year tax rate distort comparisons of future growth and earnings.