Thermo Fisher Scientific Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 26, 2015. Financial statements are unaudited. Thermo Fisher supplies life sciences, analytical instruments, diagnostics, and laboratory products and services.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.123B | $4.171B | $12.313B | $12.397B |
| Operating income | $563M | $640M | $1.646B | $1.864B |
| Operating margin | 13.7% | 15.3% | 13.4% | 15.0% |
| Income from continuing operations | $477M | $470M | $1.374B | $1.292B |
| Net income | $476M | $472M | $1.373B | $1.293B |
| Diluted EPS | $1.18 | $1.17 | $3.42 | $3.22 |
- Revenue drivers: Reported revenue fell 1% in both the quarter and nine-month period. Excluding currency translation and acquisitions/dispositions, revenue increased 4% in each period, attributed mainly to demand growth; pharmaceutical and biotech demand was particularly strong. Currency reduced reported revenue by $240M in Q3 and $737M year to date.
- Cash flow: Nine-month operating cash flow was $1.589B, down from $1.666B. Investing used $576M, including $306M for acquisitions and $294M for capital expenditures. Financing used $1.747B, including $2.481B of debt repayments, $500M of share repurchases, and $181M of dividends.
- Liquidity and debt: At September 26, cash was $503M; current assets were $6.026B and current liabilities $5.735B, for working capital of about $291M. Borrowings at carrying value were $13.312B, including $3.034B classified as short-term; short-term debt included $2.30B of senior notes due within 12 months and $728M of commercial paper. The $2.0B revolver had no borrowings, with availability reduced by $62M of letters of credit.
- Shareholder returns: Dividends declared were $0.15 per share in Q3 and $0.45 per share year to date. The company repurchased $500M of shares during the first nine months; there was no Q3 repurchase activity.
Changes versus the prior comparable period
- Q3 operating income declined 12% and margin fell 1.6 percentage points. The main comparison factor was the $133M Cole-Parmer sale gain included in Q3 2014, alongside unfavorable currency effects in 2015; productivity improvements partly offset these pressures.
- Nine-month operating income declined 12%, while reportable-segment income, a company-defined measure before specified charges and amortization, increased 3% to $2.741B. The comparison reflects $894M of business-sale gains in 2014, partly offset by $421M of 2014 charges associated with the Life Technologies acquisition.
- Segment trends were mixed: Q3 revenue rose 1% in Life Sciences Solutions and Laboratory Products and Services, and fell 1% in Analytical Instruments and 4% in Specialty Diagnostics. Life Sciences Solutions led segment-income growth; Specialty Diagnostics segment income declined 9%.
- Nine-month operating cash flow decreased by $77M. Management cited higher incentive-compensation, interest, and tax payments, partly offset by acquisition-related cash payments incurred in 2014.
- Total borrowings at carrying value decreased from $14.564B at year-end 2014 to $13.312B, while cash declined from $1.344B to $503M. Short-term obligations increased by $822M.
Outlook, commentary, risks, and unusual items
- Management expected a significant adverse currency effect on reported revenue and operating income for the remainder of 2015. It expected 2015 cash income-tax payments of $550M–$575M and capital expenditures, net of disposals, of $395M–$410M.
- Management stated that cash, operating cash flow, and revolver capacity should meet existing-business cash requirements for at least the next 24 months. Alfa Aesar was acquired on September 30, 2015, after the quarter-end, for approximately $389M; the company said it principally funded the purchase with additional commercial paper.
- Restructuring and other costs were $15.5M in the income statement for Q3 and $67.9M for the first nine months. Separately, management described approximately $41M of total Q3 restructuring and other charges, including product-liability litigation costs. It identified approximately $65M of additional restructuring charges expected mainly in the remainder of 2015 and first half of 2016.
- Year-to-date income taxes included a $73M net benefit from tax-planning initiatives and $51M of discrete benefits; the company recorded an income-tax benefit for the nine-month period. Results are therefore affected by tax items that may not recur.
- Key risks include foreign-exchange exposure, substantial debt and refinancing needs, acquisition integration and impairment risk, product and intellectual-property litigation, dependence on customer and government funding, and regulatory, supply-chain, and technology risks. Environmental liabilities were approximately $35M. The filing cautions that unfavorable outcomes in certain legal matters could materially affect results, financial position, or cash flows.
- The filing reports pending intellectual-property disputes, including claims involving 454 Life Sciences, Enzo, Promega, and Illumina; the Enzo and Promega matters had prior judgments or awards that were vacated, remanded, or subject to further proceedings. Two Esoterix/JHU disputes settled in September 2015, with payment of previously accrued amounts. The filing does not provide a clear aggregate reasonably possible loss estimate for the remaining matters.
Important facts for investors to verify
- How much reported growth and future profitability are exposed to continued currency weakness, and whether underlying demand growth persists.
- The maturity and refinancing plan for $2.30B of senior notes due within 12 months, commercial-paper reliance, and compliance with credit-facility covenants.
- Whether the announced restructuring charges and integration initiatives deliver expected savings, and how the $65M anticipated additional charges evolve.
- The final purchase accounting, integration progress, and contribution from Alfa Aesar and Advanced Scientifics.
- Developments in intellectual-property and product-liability matters, including whether existing accruals remain adequate.
- The recurrence and cash impact of tax benefits, alongside management’s stated 2015 cash-tax and capital-spending estimates.