Thermo Fisher Scientific Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The unaudited quarter ended April 1, 2017; comparable quarter ended April 2, 2016. Thermo Fisher supplies instruments, equipment, reagents, consumables, software and services to research, industrial, healthcare and diagnostics markets through four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services. Segment results for prior periods were reclassified to reflect product-line transfers.
Financial performance and liquidity
- Revenue: $4.765 billion, up 11% from $4.295 billion. Acquisitions added $346 million; currency translation reduced revenue by $56 million; revenue excluding those effects rose $181 million, or 4%, primarily on higher demand. Pharmaceutical and biotech demand was particularly strong; sales growth was modest in North America, moderate in Europe and strong in Asia.
- Profit: Operating income was $622 million versus $518 million, and operating margin was 13.1% versus 12.1%. Net income was $551 million versus $402 million; diluted EPS was $1.40 versus $1.01. The 2017 tax benefit was $48.5 million, compared with a $20.7 million tax provision in 2016.
- Segment performance: Revenue and segment income were, respectively: Life Sciences Solutions, $1.364 billion and $434 million; Analytical Instruments, $1.052 billion and $192 million; Specialty Diagnostics, $866 million and $234 million; Laboratory Products and Services, $1.699 billion and $216 million. Laboratory Products and Services income fell 9%, and its margin declined to 12.7% from 14.4%; the other three segment margins were stable or higher.
- Cash flow and investment: Cash provided by operating activities was $362 million (continuing operations; $361.5 million including discontinued operations), versus $336 million ($334.7 million including discontinued operations) a year earlier. Investing activities used $382 million, including $301 million for acquisitions and $93 million for capital expenditures. Financing activities used $119 million. Cash and restricted cash ended at $737 million.
- Liquidity: Cash and cash equivalents were $713 million at April 1, versus $786 million at year-end 2016. Working capital was $1.95 billion, down from $2.16 billion, primarily because of increased commercial paper. Current assets were $7.248 billion and current liabilities $5.303 billion.
- Debt and shareholder returns: Borrowings at carrying value totaled $17.071 billion, including $1.882 billion short-term obligations; commercial paper outstanding was $1.530 billion. The $2.5 billion revolving facility had no borrowings, with approximately $73 million of capacity reserved for letters of credit. The company repurchased $500 million of stock and paid $59 million in dividends; quarterly dividends declared were $0.15 per share.
Material changes versus the prior comparable period
- Revenue growth was driven by acquisitions and 4% growth excluding acquisition and currency effects. Analytical Instruments’ reported revenue rose 39%, substantially reflecting acquisitions, including FEI.
- Operating income and margin improved, reflecting higher sales in local currencies, productivity improvements and acquisitions, partly offset by strategic growth investment and increased acquisition-related intangible amortization.
- Interest expense increased $29 million, primarily due to higher debt used to fund acquisitions; other expense, net rose to $120 million from $95 million.
- Cash spent on acquisitions was lower than in Q1 2016 ($301 million versus $1.032 billion). Stock repurchases were also lower ($500 million versus $1.0 billion).
- The company contributed $173 million to retirement plans, compared with $22 million in the prior-year quarter, and paid $32 million for restructuring actions.
Outlook, commentary, risks and unusual items
- Management expected the stronger U.S. dollar to continue adversely affecting reported 2017 revenue and operating income. It forecast a 2017 effective tax rate below 3%, cash income-tax payments of $600 million to $625 million, and capital expenditures net of disposals of approximately $500 million. No full-year revenue or EPS guidance is stated in the supplied filing text.
- Q1 income taxes included a $65 million benefit from extending Singapore’s tax holiday through 2026 and a $24 million benefit from new accounting for tax benefits on equity awards. The filing says the latter increased diluted EPS by $0.06; these items make the reported tax benefit an important factor when assessing earnings comparability.
- Management identified approximately $95 million of additional restructuring charges, primarily in 2017 and 2018. Q1 restructuring and other costs totaled $86 million, including inventory revaluation, acquisition-related items and restructuring costs.
- Q1 acquisitions included Finesse Solutions for approximately $220 million and Core Informatics for approximately $94 million, net of cash acquired. FEI contributed $265 million of revenue but had a $17 million operating loss, primarily from acquisition-related and restructuring costs.
- Key risks include foreign-exchange movements, economic and customer-spending conditions, competition and technology changes, acquisition integration and impairment of goodwill or intangibles, regulatory and product-liability matters, cybersecurity and operations disruption, and substantial debt and covenant compliance. The company reported approximately $21.56 billion of goodwill and $13.82 billion of acquisition-related intangible assets.
- Contingencies include environmental liabilities of approximately $43 million and ongoing litigation. The company settled a patent matter with 454 Life Sciences for $25 million in cash; other patent and commercial matters remain pending, and the filing notes that adverse outcomes exceeding accruals could materially affect results, financial position or cash flows.
- Management stated that existing cash, operating cash flow and available revolving-credit capacity should meet the needs of existing businesses for at least the next 24 months. The credit agreements include leverage and interest-coverage covenants.
Important facts for investors to verify
- How much of subsequent revenue and earnings growth is organic rather than acquisition-driven, and whether the strong pharmaceutical and biotech demand continues.
- Whether earnings comparisons account for the $65 million Singapore tax benefit and $24 million equity-award tax benefit, and how the forecast tax rate and cash tax payments develop.
- Debt maturities, commercial-paper refinancing needs, covenant headroom and the effect of interest rates or currency changes on debt and cash flow.
- Execution and costs of the announced restructuring actions, acquisition integration, and the performance of acquired businesses, particularly FEI.
- Developments in pending litigation and environmental matters, including whether any additional loss accruals or cash payments become necessary.