Thermo Fisher Scientific Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended October 1, 2011; comparisons are with the periods ended October 2, 2010, unless noted. The company reports three continuing segments: Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. Results are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,973.5 million | $2,628.7 million | $8,592.3 million | $7,851.3 million |
| Operating income | $315.0 million | $302.7 million | $902.3 million | $885.2 million |
| Operating margin | 10.6% | 11.5% | 10.5% | 11.3% |
| Income from continuing operations | $265.3 million | $258.8 million | $730.1 million | $712.1 million |
| Net income | $265.4 million | $268.5 million | $1,041.0 million | $738.1 million |
| Diluted EPS | $0.69 | $0.66 | $2.68 | $1.79 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,054.0 million | $1,059.6 million |
Q3 revenue rose 13% and nine-month revenue rose 9%. Management attributed growth primarily to the Phadia and Dionex acquisitions, with favorable currency translation and higher sales at existing businesses also contributing. On a pro forma basis including Phadia and Dionex from the start of 2010, revenue increased 7% in both periods; underlying growth at existing businesses, excluding currency and other acquisitions net of divestitures, was 3% in each period.
Q3 continuing-operations income increased modestly despite lower consolidated margin. Margin pressure reflected $45 million of acquisition-related charges and $40 million of additional amortization expense, mainly related to Phadia and Dionex. Productivity, sourcing initiatives and lower post-restructuring costs partly offset these items. Nine-month net income includes a $305.4 million after-tax gain on the sale of discontinued operations; continuing-operations income is a more comparable measure of ongoing earnings.
Segment revenue and segment operating income (the company’s adjusted measure, before specified charges and acquisition-related amortization) were:
| Segment | Q3 revenue, year-over-year | Q3 segment income, year-over-year | Q3 margin |
|---|---|---|---|
| Analytical Technologies | $1,006.5 million; +22% | $195.9 million; +37% | 19.5%, up from 17.3% |
| Specialty Diagnostics | $614.7 million; +20% | $150.1 million; +27% | 24.4%, up from 23.0% |
| Laboratory Products and Services | $1,483.3 million; +5% | $200.8 million; +6% | 13.5%, unchanged |
Liquidity, debt and capital resources
- Cash and cash equivalents were $890.3 million at October 1, 2011; short-term investments were $8.0 million. Working capital was $1.94 billion, down from $2.43 billion at December 31, 2010, primarily reflecting commercial paper used to help fund Phadia.
- Cash from operating activities was $1.054 billion for the first nine months, versus $1.060 billion a year earlier. Continuing-operations operating cash flow was $1.041 billion versus $1.027 billion. Investing activities used $5.069 billion, including $5.699 billion for acquisitions; financing activities provided $3.997 billion.
- Total debt obligations were approximately $7.134 billion, comprising $1.019 billion of short-term obligations and $6.115 billion of long-term obligations. Debt increased substantially following acquisition financing. The company had $1.0 billion of commercial paper outstanding and reported $951 million available under its principal revolving credit agreement; a separate $1.0 billion short-term revolver was available as a backup to commercial paper access, with no borrowings reported under that facility.
- Management said cash, operating cash flow and borrowing capacity were sufficient for existing-business requirements for at least the next 24 months. It expected to renew its credit facilities before expiration.
- The company repurchased $987.5 million of shares in the first nine months; $250 million remained under the then-current $750 million authorization. Planned 2011 capital expenditures were approximately $280–$300 million; $185.5 million had been spent through October 1.
Material changes, outlook and risks
- Acquisitions and divestitures: Phadia was acquired in August for $3.54 billion, net of cash acquired, and Dionex in May for $2.03 billion, net of cash acquired. The acquisitions added substantial goodwill and intangible assets. Athena Diagnostics and Lancaster Laboratories were sold in April for cash and escrowed proceeds totaling up to $940 million; the sales generated an after-tax gain of approximately $304 million, or $0.78 per diluted share.
- Tax: The company recorded a Q3 income-tax benefit and revised its estimated full-year 2011 effective tax rate to approximately 11%, citing Phadia’s lower tax rate and the geographic mix of earnings. The nine-month effective tax rate was 10.9%, versus 11.9%.
- Restructuring: Nine-month restructuring and other costs were $171.8 million, including acquisition-related charges, inventory revaluation, transaction costs and restructuring. Management expected approximately $40 million of additional charges, primarily in the remainder of 2011 and early 2012, and estimated the 2011 actions would yield about $60 million in annual savings.
- Demand and operating conditions: Management cited lower academic and government-market sales, potentially due to uncertainty around U.S. and European funding. Nine-month results also reflected approximately $54 million of adverse sales impact from the cessation of a supplier arrangement and lower Japan stimulus-funded sales. Raw-material inflation and commercial investment pressured Laboratory Products and Services margins.
- Contingencies and balance-sheet exposure: Management did not expect pending litigation or environmental matters to materially affect results, but noted outcomes and remediation costs remain uncertain. Goodwill was $12.0 billion at October 1; impairment could result if acquired businesses do not deliver expected cash flows. The company also identified leverage, covenant compliance, refinancing and acquisition-integration risks; its revolving credit covenant limits the consolidated leverage ratio to 3.5:1.
- Other risks: The filing highlights dependence on new-product development, economic and customer funding conditions, foreign-exchange movements, regulation, intellectual-property claims, supply and operational continuity, and potential changes in healthcare policy. Management provided no specific revenue or earnings guidance in the supplied filing text beyond the tax, restructuring-savings and capital-expenditure expectations above.
Most important facts for investors to verify
- How much of reported growth and future earnings is attributable to Phadia and Dionex versus organic growth, and whether expected acquisition synergies are realized.
- Whether operating margins recover as acquisition charges and amortization effects evolve, and whether the stated restructuring savings are achieved.
- Debt maturities, commercial-paper access, facility renewals and leverage-covenant headroom following the acquisition-related increase in borrowing.
- The sustainability of continuing-operations earnings after excluding the discontinued-business sale gain, and the assumptions underlying the approximately 11% full-year tax-rate estimate.
- Whether academic and government demand, the discontinued supply arrangement’s effects, currency movements and raw-material costs develop as management expects.