Thermo Fisher Scientific Inc. — Q2 2009 Form 10-Q
Business context and period: The unaudited quarter ended June 27, 2009; comparisons are with the quarter ended June 28, 2008. Thermo Fisher operates in Analytical Technologies and Laboratory Products and Services. The filing also reports six-month results. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2,484 | $2,710 | $4,739 | $5,264 |
| Operating income | $259 | $330 | $449 | $621 |
| Operating margin | 10.4% | 12.2% | 9.5% | 11.8% |
| Income from continuing operations | $207 | $243 | $356 | $473 |
| Net income | $207 | $246 | $356 | $476 |
| Diluted EPS | $0.49 | $0.56 | $0.84 | $1.09 |
| Cash from operations | Not separately reported | Not separately reported | $734 | $590 |
Reported revenue declined 8% in Q2 and 10% in the first half. Excluding currency effects and acquisitions net of divestitures, revenue declined 5% and 6%, respectively. Q2 operating income fell 22%; first-half operating income fell 28%. Lower income chiefly reflected reduced demand and operating leverage, partly offset by pricing and productivity actions. First-half capital spending was $83; operating cash flow less capital spending was approximately $651.
At June 27, cash and cash equivalents were $1,417, short-term investments were $9, and working capital was $2,940. Total debt was approximately $2,033, including about $900 of convertible debt. The company reported $947 of available capacity under its unsecured revolver, which expires in 2012. Long-term obligations had a reported carrying amount of $2,017; their disclosed fair value was $2,508. Management said cash, future operating cash flow and borrowing capacity should cover requirements for at least the next 24 months.
Changes, outlook and management commentary
- Q2 revenue fell $226 year over year: currency translation reduced revenue by $120, acquisitions net of divestitures added $39, and underlying revenue declined $145. Management attributed the underlying decline mainly to weaker demand amid the global downturn; equipment sales were especially affected, while consumables held up better.
- Analytical Technologies Q2 revenue declined 14% and segment operating income declined 18%; Laboratory Products and Services revenue declined 3% and segment operating income declined 6%. Both segment margins decreased. In the first half, revenue declined 14% and 6%, respectively.
- April’s Biolab acquisition cost approximately $130 net of acquired cash and added $61 of goodwill. First-half acquisition cash outflow was $146, versus $43 in the prior-year period.
- Restructuring and other costs were $13 in Q2 and $26 for the first half, versus a $5 benefit in Q2 2008 and approximately breakeven in the first half of 2008. Management identified about $34 of additional restructuring charges expected mainly in the remainder of 2009 and early 2010, and estimated approximately $85 of annual savings from actions initiated from late 2008 through July 31, 2009.
- Management expected a full-year 2009 effective tax rate of approximately 10%–12% and cash income-tax payments of approximately $275–$300. Full-year capital spending was expected to be approximately $230. These are management estimates, not a broader revenue or earnings forecast.
- The supplier agreement in Laboratory Products and Services was expected to reduce 2009 revenue by approximately $63 versus 2008. Management warned that a prolonged or worsening downturn could further reduce demand and could prompt impairment of goodwill and acquisition-related intangibles.
Risks, contingencies and unusual items
- A long-running patent lawsuit alleges infringement by certain mass spectrometer systems; management stated an adverse result could materially affect financial position, results and cash flows. Other litigation and environmental matters also remain, with outcomes uncertain.
- Insurer disputes could require adjustment of an estimated $82 due from insurers, potentially materially affecting results. The filing notes that insurance does not remove the company’s primary obligation for losses.
- Convertible debt carries conversion prices of $23.73–$40.20 per share; $640 was currently convertible as of July 31. Conversion could require cash repayment of principal, and the company expected to use its revolver for substantially all such principal payments.
- The company cited economic, customer capital-spending, foreign-exchange, technology and product-development, regulatory, intellectual-property, acquisition-integration, environmental, supply-chain and debt-covenant risks. Its leverage covenant limits the consolidated leverage ratio to 3.0 to 1.0.
- Reported 2008 comparisons were adjusted for new convertible-debt accounting, which increased reported interest expense without changing cash interest payments. A 2008 U.S. pension curtailment gain also made year-over-year restructuring comparisons less favorable in 2009.
Most important facts for investors to verify
- Whether demand and margins stabilize, particularly in equipment and industrial markets, and how much of reported revenue movement reflects currency versus underlying activity.
- Delivery and timing of the estimated $85 annual restructuring savings, alongside the additional estimated $34 of charges.
- Cash generation, working-capital trends, capital spending, and capacity to fund any convertible-debt conversions while maintaining covenant compliance.
- Progress and potential financial exposure from the mass-spectrometer patent litigation, insurer disputes, and environmental remediation.
- Whether the expected tax rate, tax payments and supplier-agreement revenue reduction track management’s estimates; the filing does not provide a clear full-year revenue or earnings guidance figure.