Thermo Fisher Scientific Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2011; comparisons are with the periods ended July 3, 2010. The company reports continuing operations in Analytical Technologies and Laboratory Products and Services. Athena Diagnostics and Lancaster Laboratories, sold in April 2011, are presented as discontinued operations.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $2.897bn | $2.596bn | $5.619bn | $5.223bn |
| Operating income | $265.8m | $297.9m | $587.3m | $582.5m |
| Operating margin | 9.2% | 11.5% | 10.5% | 11.2% |
| Continuing-operations income | $217.6m | $228.7m | $464.8m | $453.3m |
| Net income | $523.4m | $237.3m | $775.6m | $469.6m |
| Diluted EPS, continuing operations | $0.56 | $0.55 | $1.19 | $1.09 |
- Revenue growth: Q2 revenue increased 12%; six-month revenue increased 8%. Management attributed growth to acquisitions, favorable foreign exchange and higher demand at existing businesses. Pro forma existing-business revenue growth was 4% in Q2 and 2% for six months, after currency and acquisition/divestiture effects.
- Segment performance, Q2: Analytical Technologies revenue rose 19% to $1.282bn and segment operating margin improved to 21.1% from 19.9%. Laboratory Products and Services revenue rose 6% to $1.757bn, while its margin fell to 13.6% from 14.1%.
- Cash flow: Six-month operating cash flow was $693.3m, including $13.1m from discontinued operations, versus $626.8m. Continuing-operations operating cash flow was $680.2m. Investing activities used $1.366bn, including $2.091bn for acquisitions and $122.9m for capital spending; financing activities provided $1.126bn.
- Liquidity and debt: Cash and short-term investments were $1.364bn at July 2, 2011, versus $926.0m at year-end 2010. Working capital was $3.19bn, versus $2.43bn. Outstanding debt was $4.03bn, compared with $2.14bn at year-end. Available revolving-credit capacity was $952m; separate short-term commitments of up to $3bn were arranged for the pending Phadia deal.
Material changes and unusual items
- Q2 net income included a $305.8m after-tax gain on the Athena and Lancaster disposals; the combined sales generated approximately $304m after tax, or $0.78 per diluted share. Continuing-operations income declined despite higher revenue.
- Q2 operating income and margin were lower principally because of $75m in acquisition-related charges and $13m higher amortization following the Dionex acquisition. Reportable-segment income, before specified charges, rose 14% to $510.3m.
- Dionex was acquired in May for approximately $2.03bn net of cash acquired. The company issued $2.2bn of senior notes in February, primarily to fund the acquisition, and repurchased $762.5m of its shares during the first six months.
- Phadia acquisition was pending at quarter-end, subject to conditions including regulatory approvals. The announced total purchase price was approximately $3.51bn, including repayment of Phadia debt. Thermo Fisher expected to replace short-term financing with long-term debt.
- Q2 other expense included a $33m gain on currency contracts tied to the planned Phadia acquisition, partly offset by $10m of financing commitment fees. These contracts were not designated as hedges, so fair-value changes flowed through income.
- Restructuring and other costs were $93m in Q2 and $115m for six months. Management identified further actions expected to add about $40m of charges, primarily during the remainder of 2011; actions initiated in the first half were expected to yield approximately $40m in annual savings.
Outlook, risks and contingencies
- Management expected a 2011 effective tax rate of 15%–16% and capital expenditures of approximately $290m–$310m. It stated that cash, future operating cash flow and available borrowing capacity were sufficient to fund Phadia and operating needs for at least the next 24 months. No full-year revenue or earnings guidance is stated in the provided filing text.
- Management cited demand and operating risks including economic uncertainty, customer capital-spending and government-funding changes, foreign exchange, raw-material inflation, technology and product-development execution, acquisition integration, and competitive or supply-relationship changes. The cessation of a supply contract reduced Q2 sales by $23m and six-month sales by $54m.
- Debt covenants include a maximum consolidated leverage ratio of 3.0 to 1.0 under the revolving facility. The filing warns that covenant noncompliance could trigger default and accelerated repayment.
- Various product-liability, contract, commercial and other claims are pending; management did not expect them to materially affect the company based on established accruals. Environmental remediation estimates are uncertain and could be affected by regulatory or other changes, although recorded expenses were not material in the periods presented.
Important facts for investors to verify
- Whether Phadia closed on anticipated terms and how its financing affected debt, interest expense and leverage.
- How much of reported sales growth reflects organic demand versus acquisitions and currency, especially after the supply-contract loss.
- Whether restructuring charges and the expected annual savings materialized, including the additional approximately $40m of planned charges.
- Cash-flow conversion and working-capital needs, particularly receivables and inventory, as the business grew.
- Exposure to acquisition-related goodwill and intangible assets, covenant headroom, litigation and environmental contingencies.