Business context and reporting period
PerkinElmer, Inc. (now known as Revvity, Inc.) filed this unaudited Form 10-Q for the quarter ended October 4, 2020. It operates through Discovery & Analytical Solutions, serving life sciences and applied markets, and Diagnostics. Fiscal 2020 is a 53-week year. Comparisons below are against the quarter ended September 29, 2019, or the corresponding nine-month period.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $964.0m | $706.9m | $2,428.1m | $2,078.2m |
| Operating income | $248.0m | $78.7m | $468.3m | $223.7m |
| Income from continuing operations | $176.7m | $58.6m | $347.7m | $163.2m |
| Net income | $176.7m | $58.6m | $347.5m | $163.1m |
| Diluted EPS | $1.57 | $0.52 | $3.10 | $1.46 |
- Q3 gross margin rose to 54.7% from 48.4% (630 basis points); operating margin rose to 25.7% from 11.1% (1,460 basis points). For the nine months, gross margin was 52.8% versus 48.0%.
- Q3 Diagnostics revenue increased 93% to $540.4m, while Discovery & Analytical Solutions revenue declined 1% to $423.6m. Diagnostics operating income was $223.8m versus $47.4m; Discovery & Analytical Solutions operating income was $42.7m versus $52.3m.
- For the nine months, Diagnostics revenue grew 47% to $1,215.1m and operating income grew to $413.7m from $128.2m. Discovery & Analytical Solutions revenue fell 3% to $1,213.0m and operating income fell to $110.6m from $147.0m.
- Q3 product revenue was $736.8m and service revenue was $227.2m. Management attributed improved margins chiefly to higher volume, product mix, service productivity and pricing initiatives, partly offset by amortization and growth investments.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $410.1m, up from $148.3m. Capital expenditures were $57.4m; investing cash outflow was $68.1m. Financing cash outflow was $276.3m, including $515.2m of debt repayments partly offset by $257.0m of borrowings.
- Cash and equivalents were $258.3m at October 4, 2020, versus $191.9m at year-end 2019. The company reported $922.6m of available capacity on its $1.0bn revolving facility and compliance with debt covenants.
- Balance-sheet debt totaled approximately $1.85bn ($360.2m current and $1,492.6m long-term), compared with approximately $2.07bn at December 29, 2019. The €300m 0.6% notes, carried at $351.0m, mature in April 2021 and were classified as current debt.
- Accounts receivable rose to $797.9m from $725.2m and inventory to $486.6m from $356.9m. Management said inventory increased to support COVID-19 product ramp-up and seasonal builds, as well as lower-than-expected sales in Discovery & Analytical Solutions.
- Quarterly dividends remained $0.07 per share; a fourth-quarter $0.07 dividend was announced after quarter-end. A new $250m share repurchase authorization was approved, but no open-market program repurchases were made in the first nine months.
Material changes, outlook and risks
- COVID-19-related demand for immunodiagnostics and applied genomics offerings drove Diagnostics growth. Lower demand in industrial, environmental and food markets weighed on Discovery & Analytical Solutions; life-sciences growth partly offset that weakness. Management expected elevated COVID-19 product demand to continue into Q4, but said its durability depended on testing demand. No numerical full-year guidance is provided in the supplied filing text.
- Effective tax rates from continuing operations were 24.4% for Q3 and 19.8% for the first nine months, up from 7.3% and 5.0%. The 2020 nine-month tax provision included a $15.2m foreign tax assessment relating to a tax-filing position; the company appealed but recorded the full charge and said a favorable outcome was not assured.
- After quarter-end, the company agreed to acquire Horizon Discovery for approximately $383m in cash, subject to customary closing conditions, with closing anticipated in late Q4 2020 or Q1 2021.
- Environmental remediation accruals were $12.7m, up from $7.7m at year-end; management did not expect known environmental matters to have a material adverse effect, while noting actual losses could exceed recorded amounts. Other ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- Key disclosed risks include the uncertain duration and effects of COVID-19, supply-chain and operating disruptions, possible waning demand for COVID-19 products, foreign exchange and interest-rate exposure, substantial debt and the 2021 note maturity, regulatory and product-liability risks, and acquisition integration and impairment risk.
Important facts for investors to verify
- How much of the exceptional Diagnostics growth and margin improvement reflects recurring demand versus COVID-19 testing products, and whether that demand persisted after Q3.
- The cash conversion and working-capital trajectory, especially the $120.9m cash use from inventory and $67.7m from receivables in the first nine months.
- The funding and refinancing plan for the $351.0m carrying value of notes maturing in April 2021, and the effect of the Horizon acquisition on debt and liquidity.
- The status and potential recovery from the $15.2m foreign tax assessment, along with changes in the effective tax rate.
- Whether Discovery & Analytical Solutions demand recovers and whether the company’s environmental accruals or other contingencies require material revisions.