Thermo Fisher Scientific Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparisons are with the quarter ended June 28, 2014. Six-month results are also summarized. Amounts are in U.S. dollars.
Business context and financial results
Thermo Fisher supplies analytical instruments, laboratory products and services, diagnostic products, reagents, software and related services. It reports four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.271 billion | $4.322 billion | $8.190 billion | $8.225 billion |
| Operating income | $596 million | $348 million | $1.083 billion | $1.224 billion |
| Operating margin | 14.0% | 8.1% | 13.2% | 14.9% |
| Net income | $512 million | $279 million | $897 million | $822 million |
| Diluted EPS | $1.27 | $0.69 | $2.23 | $2.05 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $845 million | $990 million |
Q2 revenue declined 1% as reported, but increased $244 million, or 6%, excluding currency translation and net acquisition/disposition effects. Foreign exchange reduced Q2 revenue by $268 million and first-half revenue by $498 million. Management cited broad-based underlying demand, particularly from pharmaceutical and biotech customers.
For the first half, cash used in investing activities was $469 million, including $299 million for acquisitions and $193 million of capital expenditures. Cash used in financing was $929 million, including $1.555 billion of debt repayments, $500 million of share repurchases and $121 million of dividends; commercial paper issuance provided $1.122 billion. Cash and cash equivalents were $768 million at June 27, down from $1.344 billion at year-end.
Material changes and segment performance
- Q2 operating income rose 71%, principally because Q2 2014 included $170 million of Life Technologies acquisition-related charges. Q2 2015 also benefited from higher local-currency sales, productivity improvements and lower restructuring costs; currency headwinds partly offset these gains.
- First-half operating income fell 11% and margin declined to 13.2%. The 2014 period included $762 million of gains on business sales, partly offset by $421 million of Life Technologies acquisition-related charges. Currency headwinds and higher intangible amortization also weighed on 2015 results.
- Q2 segment revenue and operating margin: Life Sciences Solutions, $1.129 billion and 28.6%; Analytical Instruments, $777 million and 18.0%; Specialty Diagnostics, $817 million and 27.8%; Laboratory Products and Services, $1.693 billion and 15.4%. Underlying revenue increased in each segment after excluding currency and portfolio effects, though reported segment revenue was flat to down outside Life Sciences Solutions.
- Q2 segment income, before specified acquisition-related, restructuring and intangible amortization items, increased 3% to $950 million. Life Sciences Solutions led reported segment revenue growth for the first half, partly reflecting Life Technologies; the company also acquired Advanced Scientifics for approximately $289 million in February 2015.
Liquidity, debt and outlook
At June 27, 2015, total borrowings at carrying value were $14.024 billion, including $3.360 billion classified as short-term obligations and current maturities. Short-term debt included $1.31 billion of senior notes due within twelve months, $925 million under a term loan and $1.125 billion of commercial paper. The company had no borrowings under its $2.0 billion revolving credit facility; letters of credit reduced available capacity by approximately $59 million. The term loan was repaid in July 2015. Working capital was $140 million, down from $1.19 billion at year-end, mainly because short-term debt increased.
Management said cash, the July 2015 euro-denominated debt offering, expected operating cash flow and available revolving credit should cover existing-business cash needs for at least 24 months. The company issued €500 million of 2.15% senior notes due 2022 in July. It expected 2015 capital expenditures of $435–$450 million, cash income-tax payments of $550–$575 million, and an effective tax rate below 3% based on forecast profitability. It identified approximately $85 million of additional restructuring charges, primarily in the remainder of 2015 and first half of 2016. No specific revenue or EPS guidance is provided in the supplied filing text.
Unusual items, risks and contingencies
- Q2 2015 included an income-tax benefit; tax-planning initiatives generated a net $30 million discrete benefit in the quarter. First-half tax planning generated a net $80 million discrete benefit. These benefits materially affect reported earnings and effective tax rates.
- Currency translation is a significant headwind: management expected a significant adverse effect on reported revenue and operating income for the remainder of 2015 from the stronger U.S. dollar.
- In June 2015, the company agreed to acquire Alfa Aesar for approximately $400 million cash; closing was expected by year-end, subject to customary conditions including regulatory approval.
- Environmental liabilities were approximately $41 million, versus $32 million at year-end. The company cautioned that future remediation requirements could increase costs.
- Pending intellectual-property matters include claims involving acquired Life Technologies businesses. The company retained a $60.9 million accrual in the Enzo matter after a prior judgment was vacated and the case returned for further proceedings. Other cases remain pending; outcomes and potential losses may be uncertain. An unfavorable outcome exceeding accruals could materially affect results, financial position or cash flows.
- Other stated risks include acquisition integration and impairment of substantial goodwill and intangible assets, dependence on innovation and customer spending, foreign exchange, regulation, and debt/covenant compliance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth reflects underlying operations versus the discrete tax benefits and prior-year acquisition charges?
- Whether currency effects, customer demand and segment margins evolve as management anticipated for the rest of 2015.
- Debt maturities, commercial-paper refinancing needs, covenant headroom and the impact of the July term-loan repayment and euro-note issuance.
- Completion and integration of the Alfa Aesar acquisition, and realization of expected acquisition synergies.
- Progress and cash costs of announced restructuring actions, environmental remediation and material intellectual-property litigation.