Thermo Fisher Scientific Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with the three months ended April 1, 2017. Unaudited interim results. Thermo Fisher supplies instruments, reagents, consumables, software and services across life sciences, analytical instruments, diagnostics, and laboratory products and services.
Financial highlights
| Metric | Q1 2018 | Comparable period | Change |
|---|---|---|---|
| Revenue | $5.853 billion | $4.765 billion | +23% |
| Operating income | $786 million | $620 million | +27% |
| Operating margin | 13.4% | 13.0% | +0.4 percentage points |
| Net income | $579 million | $551 million | +5% |
| Diluted EPS | $1.43 | $1.40 | +2% |
| Cash from operating activities | $78 million | $361 million | Down $283 million |
Revenue increased $1.088 billion: $565 million from acquisitions, $209 million from favorable currency translation, and $314 million (7%) from operations, primarily higher demand. Management reported moderate sales growth in North America, strong growth in Europe, and particularly strong growth in Asia. Product revenue was $4.528 billion; service revenue was $1.325 billion. The prior-year comparison for services includes the effect of Patheon, acquired in August 2017.
Segment revenue and income rose across all four segments. Life Sciences Solutions revenue was $1.499 billion (+10%) and segment income $517 million (+19%); Analytical Instruments revenue was $1.257 billion (+19%) and income $246 million (+28%); Specialty Diagnostics revenue was $947 million (+9%) and income $243 million (+4%); Laboratory Products and Services revenue was $2.413 billion (+42%) and income $280 million (+30%). The Laboratory Products and Services increase included $554 million of acquisition-related revenue. Specialty Diagnostics and Laboratory Products and Services margins declined, while the other two segment margins improved. Reportable-segment margin overall was 22.0%, versus 22.5%.
Cash flow, liquidity and debt
- Operating cash flow fell to $78 million, primarily due to higher working-capital investment and timing of income-tax refunds, customer billings, and payments for incentive compensation and taxes. Accounts receivable and inventory used $71 million and $124 million, respectively; other liabilities decreased $520 million.
- Investing activities used $179 million, including $57 million for acquisitions and $118 million for capital expenditures. Financing activities used $342 million. Cash, cash equivalents and restricted cash ended at $975 million; balance-sheet cash and equivalents were $950 million.
- Working capital was $2.52 billion. Total borrowings at carrying value were $20.936 billion, including $2.814 billion of short-term obligations and current maturities; long-term obligations were $18.122 billion. Commercial paper outstanding was $1.171 billion.
- The company had a $2.50 billion revolving credit facility with no borrowings outstanding; availability was reduced by about $75 million for letters of credit. Management said cash, expected operating cash flow and available credit should meet existing-business needs for at least the next 24 months.
Outlook, commentary and unusual items
- Management forecast a 2018 effective tax rate of 6%–9%, cash income-tax payments of $525–$575 million, and capital expenditures net of disposals of approximately $700–$730 million. The filing text provides no clear full-year revenue or earnings guidance.
- Q1 tax expense was $55 million, versus a $48 million tax benefit in the prior-year quarter. The 2018 provision included a net $21 million adjustment to estimated U.S. tax-reform impacts following new Treasury guidance. The prior-year benefit included a favorable $65 million adjustment to deferred taxes related to Singapore’s tax holiday.
- Operating income benefited from higher sales, acquisitions and productivity improvements, partly offset by acquisition-related amortization, inflationary costs and strategic growth investments. Interest expense increased $28 million, primarily due to higher outstanding debt.
- The company recorded $56 million of restructuring and other costs in Q1, including facility consolidation, severance, Patheon integration costs, litigation-related matters and hurricane response costs. It identified approximately $105 million of additional restructuring charges, primarily in 2018 and 2019.
- Revenue-recognition guidance adopted January 1, 2018 changed balance-sheet presentation, particularly for pharmaceutical development and manufacturing services. Management said it had no material impact on Q1 income or cash-flow statements; compared with prior guidance, March 31 inventory would have been $280 million higher and other current assets $344 million lower.
- Environmental remediation liabilities were approximately $61 million. A $52 million accrual remained for the Promega patent dispute despite a favorable appellate decision; Promega had a period to seek Supreme Court review. The company said other pending matters did not have material accruals or losses deemed probable, but unfavorable outcomes exceeding estimates could be material.
Key investor verification points
- Assess whether operating cash flow recovers as working-capital outflows and tax-payment timing normalize.
- Track debt maturities and refinancing, commercial-paper access, and compliance with revolving-credit covenants; the leverage-ratio limit steps down to 3.5:1.0 beginning in Q3 2018.
- Separate underlying growth from acquisition and currency effects, particularly Patheon’s contribution and Laboratory Products and Services margin performance.
- Monitor the 6%–9% tax-rate outlook, expected tax cash payments, and any further U.S. tax-reform measurement-period adjustments.
- Verify the timing and amount of the approximately $105 million planned restructuring charges, and developments in the Promega matter and environmental remediation.