Thermo Fisher Scientific Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Thermo Fisher supplies life-sciences, analytical, diagnostic, and laboratory products and services through four reportable segments. Financial statements are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $6.125 billion | $5.853 billion | +$272 million; +5% reported |
| Operating income | $920 million | $786 million | +17% |
| Operating margin | 15.0% | 13.4% | +1.6 percentage points |
| Net income | $815 million | $579 million | +41% |
| Diluted EPS | $2.02 | $1.43 | +$0.59 |
| Cash from operations | $649 million | $78 million | +$571 million |
| Capital expenditures | $201 million | $118 million | +$83 million |
Excluding acquisition and currency effects, revenue increased $421 million, or 7%; acquisitions added $31 million and unfavorable currency translation reduced revenue by $180 million. Management attributed growth primarily to higher demand, with growth across primary end markets and particularly strong geographic growth in Asia. Segment revenue was $1.607 billion in Life Sciences Solutions (+7%), $1.322 billion in Analytical Instruments (+5%), $957 million in Specialty Diagnostics (+1%), and $2.513 billion in Laboratory Products and Services (+4%).
Segment operating income totaled $1.370 billion (+7%); segment operating margin was 22.4%, versus 22.0%. Analytical Instruments’ margin rose to 21.3% from 19.6%; Life Sciences Solutions rose to 34.9% from 34.5%. Specialty Diagnostics’ margin declined to 25.3% from 25.6%, and Laboratory Products and Services’ declined to 11.3% from 11.6%.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $1.106 billion at March 30, down from $2.103 billion at December 31, 2018. Current assets were $9.939 billion and current liabilities $5.898 billion; working capital was $4.04 billion, versus $4.48 billion at year-end.
- Total borrowings at carrying value were $18.148 billion, including $1.336 billion of short-term obligations and current maturities; long-term obligations were $16.812 billion. Commercial paper borrowings were zero at quarter-end.
- The company had a $2.50 billion revolving credit facility with no borrowings outstanding; availability was reduced by $87 million for letters of credit. Management said cash, operating cash flow, and available borrowing capacity should cover existing-business needs for at least 24 months.
- Financing activities used $1.425 billion, including $750 million of share repurchases and $68 million of cash dividends. Cash declined by $989 million during the quarter.
Changes, outlook, and material items
- Operating income increased on higher sales, productivity improvements net of inflation, and lower restructuring costs. These benefits were partly offset by strategic growth investment, unfavorable currency, and unfavorable sales mix. Restructuring and other costs were $28 million, compared with $56 million in the prior-year quarter.
- The income tax provision was $2 million, compared with $55 million. Q1 2019 included a $62 million tax benefit related to foreign-exchange losses on intercompany financing and a net $27 million benefit to adjust U.S. tax-reform impacts. Management forecast a 2019 effective tax rate of 6%–9% and cash income-tax payments of $725–$775 million.
- Management forecast 2019 capital expenditures, net of disposals, of approximately $925–$975 million. It identified about $65 million of additional restructuring charges expected primarily in 2019 and 2020, with further actions possible.
- After quarter-end, Thermo Fisher completed the Brammer Bio acquisition on April 30 for approximately $1.7 billion in cash, funded with existing cash and short-term borrowings. Brammer Bio generated approximately $140 million in 2018 revenue. The company had also agreed to acquire Gatan for approximately $925 million in cash, subject to customary closing conditions and regulatory approval.
- The company agreed to sell its Anatomical Pathology business for approximately $1.14 billion; closing was expected in Q2 2019 and remained subject to customary conditions. The business generated about $85 million of Q1 2019 revenue and $344 million in 2018.
- Adoption of lease accounting guidance beginning January 1, 2019 added $641 million to other assets and $637 million to lease liabilities, with a $4 million retained-earnings adjustment; prior-year periods were not restated. Operating lease liabilities were $643 million at quarter-end.
Risks and contingencies
Risks highlighted include foreign-exchange and international trade exposure, economic and customer-spending uncertainty, product development and competition, regulatory and quality requirements (particularly in pharma services), cybersecurity and data privacy, acquisition execution and integration, debt and covenant obligations, and litigation or product-liability claims. The company reported $66 million of environmental liabilities; it warned that additional remediation costs are possible. It also disclosed approximately $1.432 billion of unrecognized tax benefits. Management said no material litigation losses were deemed probable for matters beyond disclosed accruals, but adverse outcomes could materially affect results, financial position, or cash flows.
Investor verification priorities
- Confirm the drivers and sustainability of the 7% revenue growth excluding acquisitions and currency, and the reported margin improvement.
- Track operating cash conversion and working-capital movements; Q1 cash flow benefited from year-over-year comparisons in income and working capital.
- Verify the final funding and balance-sheet impact of Brammer Bio, the proposed Gatan acquisition, and the Anatomical Pathology divestiture.
- Monitor the 2019 tax-rate and cash-tax forecasts, including the effect of discrete tax benefits and foreign tax credits.
- Assess near-term debt maturities, leverage and facility covenant headroom, planned capital spending, and the remaining $1.25 billion share-repurchase authorization.
- Follow restructuring charges, environmental remediation, and the outcome of disclosed legal matters.