Thermo Fisher Scientific Inc. — Q1 2010 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended April 3, 2010, compared with the three months ended March 28, 2009. Continuing operations comprise Analytical Technologies and Laboratory Products and Services. Interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Revenue | $2.675 billion | $2.255 billion; up 19% reported |
| Operating income and margin | $293 million; 11.0% | $190 million; 8.4% |
| Income from continuing operations | $230 million | $149 million |
| Net income | $232 million | $149 million |
| Diluted EPS | $0.56 ($0.55 from continuing operations) | $0.35 from continuing operations |
| Operating cash flow | $343 million | $359 million |
| Capital expenditures | $51 million | $51 million |
| Cash and short-term investments | $1.440 billion at April 3 | $1.571 billion at December 31, 2009 |
| Total debt | $2.07 billion at April 3 | Not presented as a comparable total in the MD&A |
Operating cash flow less capital expenditures was approximately $293 million. Working capital was $2.75 billion, versus $2.89 billion at year-end 2009. Cash and cash equivalents ended the quarter at $1.432 billion, down $132 million during the quarter. The company reported available capacity of $944 million under its revolving credit facility, which expires in 2012.
Material changes and operating drivers
- Revenue increased $420 million: $283 million from operations excluding currency and net acquisitions/divestitures, $65 million from favorable currency translation, and $72 million from net acquisitions. The company attributed organic growth mainly to stronger demand, with contributions from four additional selling days, customer stimulus-funded spending and pricing.
- Management estimated the extra selling days added 4–5 percentage points to Q1 revenue growth, and expected four fewer selling days to reduce Q4 2010 growth by an estimated 4–5 percentage points.
- Both segments grew: Analytical Technologies revenue rose 18% to $1.107 billion and segment income rose 34% to $232 million; Laboratory Products and Services revenue rose 19% to $1.695 billion and segment income rose 34% to $235 million. Segment income is before specified charges and acquisition-related amortization.
- Operating margin improved on incremental revenue, pricing and productivity measures, including restructuring and global sourcing. Consolidated operating income also reflects $151 million of acquisition-related intangible amortization and $24 million of restructuring and other costs.
- Operating cash flow declined $16 million year over year, primarily from increased working-capital investment: accounts receivable used $102 million and inventories used $35 million, partly offset by $74 million provided by accounts payable.
Outlook, commentary, risks and unusual items
- Management expected a 2010 effective tax rate of 15%–17%; Q1 rate was 14.3%, versus 10.9% a year earlier. The Q1 provision benefited by $1.9 million from tax-audit resolutions.
- Management forecast 2010 capital expenditures of $275–$300 million and cash income-tax payments of $375–$425 million. Restructuring actions initiated in 2009 and Q1 2010 were expected to generate about $109 million of annual savings; approximately $27 million of additional charges were identified as of May 6, 2010.
- Management said cash, future operating cash flow and available credit were sufficient for existing-business needs for at least the next 24 months. This is management’s assessment, not a guarantee.
- In April 2010, the company issued $750 million of senior notes: $450 million of 3.20% notes due 2015 and $300 million of 4.70% notes due 2020. It intended to use proceeds to address convertible debentures and redeem $500 million of 6⅛% senior subordinated notes. These post-quarter transactions are not included in the April 3 balance sheet.
- The board authorized up to $750 million of common-stock repurchases through April 18, 2011. The filing does not state how much, if any, had been repurchased under this authorization.
- A supplier planned to end a healthcare-channel arrangement in mid-2010. The company expected related product sales of about $75 million in the first half and a nominal amount thereafter, partly offset by expected sales of about $40 million from an alternative supplier and other products.
- Q1 included a $2.5 million after-tax gain from additional proceeds on a business divested in 2003. Restructuring and other costs included a $6 million patent-infringement loss relating to a claim begun before a business-unit acquisition. In Q1 2010 the company also spent $207 million settling convertible debt.
- Key risks include economic weakness and customer spending, competition and technology changes, acquisition integration and impairment of substantial goodwill, foreign-exchange volatility, regulation, intellectual-property and product-liability claims, supplier relationships, and debt covenants. The company noted that an unfavorable resolution of insurer litigation could require a potentially material adjustment to its estimated $92 million insurance recovery. Environmental remediation costs and other legal outcomes remain uncertain.
Important facts for investors to verify
- Whether revenue and margin growth persisted after accounting for the unusually weak Q1 2009 comparison and the extra selling days in Q1 2010.
- Collections and inventory trends, and whether operating cash flow rebounds as working-capital investment normalizes.
- Completion, cash cost and financing effects of the planned convertible-debt conversions and subordinated-note redemption, including the April 2010 note issuance.
- Delivery of the projected $109 million annual restructuring savings against remaining charges and implementation costs.
- The impact of the supplier transition on Laboratory Products and Services revenue, and the extent to which alternative-supplier sales offset lost business.
- Developments in insurer litigation, the collectability of the $92 million estimated recovery, and any material changes in legal or environmental contingencies.
- Use of the $750 million share-repurchase authorization and compliance with debt covenants, including the 3.0-to-1.0 maximum consolidated leverage ratio in the revolving-credit agreement.