Thermo Fisher Scientific Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; unaudited results compared with the periods ended June 29, 2019. Thermo Fisher supplies products and services to life sciences, diagnostics, healthcare, industrial and other markets.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $6.917B | $6.316B | $13.147B | $12.441B |
| Operating income | $1.391B | $1.496B | $2.297B | $2.416B |
| Operating margin | 20.1% | 23.7% | 17.5% | 19.4% |
| Net income | $1.156B | $1.119B | $1.944B | $1.934B |
| Diluted EPS | $2.90 | $2.77 | $4.87 | $4.80 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.242B | $1.943B |
- Q2 revenue rose 10% reported and 11% excluding currency and net acquisition/divestiture effects. Six-month revenue rose 6% reported and 7% on that adjusted basis.
- Q2 reportable-segment income increased 26% to $1.864B; six-month segment income rose 14% to $3.241B. These segment measures exclude specified charges and acquisition-related intangible amortization.
- Q2 operating income declined 7%, while net income increased 3%, mainly reflecting a lower tax provision and lower interest expense. Diluted EPS increased from $2.77 to $2.90.
- Cash and equivalents were $5.818B at June 27, versus $2.399B at December 31, 2019. Working capital was $9.762B. Operating cash flow increased year over year despite greater working-capital investment; receivables and inventory used $195M and $309M, respectively.
- Total borrowings at carrying value were $21.313B, including $675M of short-term obligations and current maturities; long-term obligations were $20.638B. Cash exceeded carrying-value borrowings by approximately $5.5B. The $2.5B revolving facility had no borrowings, with capacity reduced by $68M for letters of credit; commercial-paper programs also had no outstanding borrowings.
- Six-month investing activities used $519M, including $522M for property, plant and equipment. Financing activities provided $1.799B, including $3.464B of senior-note proceeds, offset in part by $1.5B of share repurchases and $163M of dividends.
Material changes and segment performance
- Life Sciences Solutions: Q2 revenue increased 52% to $2.602B; segment income more than doubled to $1.234B. COVID-19 diagnostic testing demand, alongside biosciences and bioproduction demand, drove growth.
- Analytical Instruments: Q2 revenue fell 21% to $1.051B and segment income fell 53% to $135M, as industrial and academic customer activity weakened amid pandemic-related slowdowns and closures.
- Specialty Diagnostics: Q2 revenue rose 5% to $988M, including COVID-19-related demand, but segment income declined 12% to $214M. The prior-year comparison included the Anatomical Pathology business, sold in June 2019.
- Laboratory Products and Services: Q2 revenue increased 6% to $2.787B, with pharma-services demand and acquisitions contributing; segment income declined 19% to $281M.
- Q2 operating margin was lower than the prior-year period in part because 2019 included a $505M pretax gain on the Anatomical Pathology sale. The company recorded $56M of Q2 restructuring and other costs, compared with $484M of restructuring and other income in Q2 2019. Six-month 2020 restructuring and other costs were $102M.
- Currency translation reduced revenue by $82M in Q2 and $147M in the first six months. China revenue fell to $594M from $724M in Q2 and to $1.058B from $1.378B for the six-month period.
Outlook, risks and unusual items
- Management said COVID-19-related declines in customer activity were expected to materially adversely affect Analytical Instruments and, to a lesser extent, other segments through at least Q3 2020. COVID-19 product sales were expected to support revenue into Q3, but their duration and scale depend chiefly on testing demand.
- No overall revenue or earnings guidance is provided in the supplied filing text. Management forecast a 2020 effective tax rate of 7%–9%, cash tax payments of $550M–$600M, and capital expenditures net of disposals of $1.3B–$1.4B.
- The Q2 effective tax rate was 7.8%, including $96M of Swedish foreign tax credits with no related incremental U.S. income tax expense. Tax benefits, including these credits, materially affect comparisons and the outlook.
- The proposed QIAGEN acquisition offer was amended July 16 to €43 per share, approximately $12.7B including assumption of about $1.2B net debt. Closing was expected in the first half of 2021, subject to tender-offer completion and regulatory and other customary conditions. Financing plans include cash and debt issuance; a €3.0B term loan would be drawn at closing, and up to €6.25B of bridge financing was available but not then expected to be used. In July, after quarter-end, $1.75B was transferred to a restricted account for the acquisition.
- Management believed cash, future operating cash flow and available facilities would meet business and acquisition needs for at least 24 months. Debt would increase to finance QIAGEN, and the filing identifies leverage, covenant compliance, financing-market conditions, integration and regulatory approval as risks.
- Other disclosed risks include pandemic-related supply-chain, workforce and demand disruption; litigation and product liability; regulatory and quality requirements; foreign exchange exposure; and potential additional environmental remediation costs. Environmental liabilities were approximately $71M. The company also expected approximately $60M of additional restructuring charges, primarily in 2020 and 2021.
- A May 2020 CSL partnership includes a long-term lease for a biologics manufacturing facility expected to be completed in mid-2021, with $555M of additional fixed lease payments expected from 2021 through 2040, excluding renewals and certain variable amounts.
Important facts for investors to verify
- Whether COVID-19 testing-related revenue persists, and whether recovery in academic, industrial and Analytical Instruments demand offsets any decline.
- QIAGEN tender-offer progress, regulatory approvals, final financing mix and impact on leverage, interest expense and liquidity.
- Execution against the 2020 tax-rate, cash-tax and capital-spending forecasts, including the sustainability of tax-credit benefits.
- Operating-margin trends excluding the prior-year Anatomical Pathology gain, and the effect of segment mix, strategic investment and restructuring costs.
- Working-capital conversion, acquisition-related cash requirements, debt maturities and compliance with facility covenants.
- Potential changes in litigation, environmental liabilities, restructuring charges and CSL lease commitments.