Thermo Fisher Scientific Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Financial statement amounts are in U.S. dollars; dollar figures below are in millions unless otherwise noted.
Business context
Thermo Fisher develops, manufactures and sells products and services for life sciences, diagnostics, healthcare, pharma and biotech, industrial and other markets. Its four segments are Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $6,230 | $6,125 | +2% |
| Operating income | $906 | $920 | -2% |
| Operating margin | 14.5% | 15.0% | -0.5 percentage points |
| Net income | $788 | $815 | -3% |
| Diluted EPS | $1.97 | $2.02 | -2% |
| Cash from operations | $356 | $649 | -$293 |
| Capital expenditures | $253 | $201 | +$52 |
Revenue excluding acquisition/divestiture and currency effects rose $135, or 2%. Currency translation reduced revenue by $65; acquisitions net of a divestiture added $35. Product revenue was $4,630 versus $4,720, while service revenue increased to $1,600 from $1,405. The filing attributes the operating-income decline primarily to strategic growth investment, with some effect from sales mix and the 2019 Anatomical Pathology divestiture; productivity improvements and higher sales partly offset these pressures.
Segment revenue and income were mixed: Life Sciences Solutions revenue rose 10% and segment income rose 20%; Analytical Instruments revenue fell 17% and segment income fell 39%; Specialty Diagnostics revenue was essentially flat and segment income fell 2%; Laboratory Products and Services revenue rose 9% and segment income rose 4%. Segment income is a non-GAAP-style measure before specified charges and acquisition-related intangible amortization.
Liquidity, cash flow and debt
- Cash and cash equivalents were $2,981 at March 28, 2020, compared with $2,399 at December 31, 2019. Working capital was $7,238, up from $5,696.
- Operating cash flow fell to $356, mainly due to working-capital investment, including $218 used by receivables and $141 by inventories. Cash flow less capital expenditures was approximately $103, versus approximately $448 in Q1 2019.
- Total borrowings at carrying value were $19,969, compared with $17,752 at year-end 2019; long-term obligations were $19,231. Short-term obligations and current maturities were $738, principally notes due August 2020.
- The company issued $2,185 of senior notes during Q1. It had $66 of commercial paper outstanding and no borrowings on its $2.50 billion revolving credit facility; availability was reduced by $71 for letters of credit.
- Financing activities included $1,500 of share repurchases and $76 of dividends paid. At May 1, $1.00 billion remained under the repurchase authorization.
COVID-19, outlook and other material items
- Demand effects were uneven: diagnostic and healthcare sales benefited in part from COVID-19-related products, while academic lab closures and weaker industrial demand, particularly in China, weighed on sales. The company reported significant declines in customer activity by late March and into Q2, expected to materially adversely affect results at least through Q2; duration and magnitude were uncertain.
- The company gave no specific revenue or earnings forecast in this filing. It expected a 2020 effective tax rate of 7%–9%, cash tax payments of $450–$500, and capital expenditures net of disposals of $900–$1,000.
- Management said existing cash, April debt proceeds of $1.3 billion, future operating cash flow and available credit were expected to cover business needs and QIAGEN acquisition funding for at least the next 24 months. It also identified approximately $65 of additional restructuring charges, primarily in 2020.
- The proposed QIAGEN acquisition, announced March 3, was valued at approximately $11.5 billion, including assumption of approximately $1.4 billion of net debt. Closing was expected in the first half of 2021, subject to customary conditions and approvals. The company intended to use cash and debt proceeds; it had up to €9.25 billion of committed financing available but said it did not then expect to use it.
- Other notable items include $46 of Q1 restructuring and other costs, a $40 income-tax provision (4.8% effective rate), and $409 of other comprehensive losses, mainly currency translation. Environmental liabilities were approximately $70. The company disclosed various litigation matters but no material accruals for other pending claims and no material losses deemed probable; unfavorable outcomes beyond estimates could still have a material effect.
Most important facts for investors to verify
- How COVID-19-related demand, customer closures and supply-chain conditions affected results after March 28, especially through Q2 and thereafter.
- Whether working-capital use and operating cash flow normalize, and whether planned capital spending and cash tax payments match expectations.
- Debt, refinancing and covenant capacity as the company funds the QIAGEN transaction; the transaction’s approvals, timing, financing cost and integration risks.
- Whether the expected 2020 tax rate, restructuring charges and cost reductions align with subsequent results.
- Potential changes in environmental, product-liability, intellectual-property and other contingencies, and the impact of foreign-exchange movements.