Business context and reporting period
Thermo Fisher Scientific Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2017. The company supplies scientific instruments, products, software and services across life sciences, analytical instruments, specialty diagnostics, and laboratory products and services. Comparisons are with the quarter ended October 1, 2016, and the corresponding nine-month periods.
Financial results and key metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5,116 | $4,491 | $14,871 | $13,321 |
| Operating income | $636 | $541 | $2,010 | $1,697 |
| Operating margin | 12.4% | 12.0% | 13.5% | 12.7% |
| Income from continuing operations | $534 | $474 | $1,698 | $1,393 |
| Net income | $534 | $474 | $1,697 | $1,392 |
| Diluted EPS | $1.34 | $1.19 | $4.29 | $3.50 |
| Operating cash flow | Not reported separately | Not reported separately | $2,139 | $2,053 |
- Q3 revenue rose 14%; excluding acquisitions and currency effects, it increased 5% from operations. Acquisitions added $378 million and favorable currency translation added $44 million.
- For the first nine months, revenue rose 12%; acquisitions added $1,070 million, while operations contributed $545 million (4%) and currency translation reduced revenue by $65 million.
- Nine-month investing cash outflow was $7,446 million, including $7,160 million for acquisitions and $293 million in capital expenditures. Financing activities provided $4,998 million. Cash, cash equivalents and restricted cash ended at $758 million.
- At September 30, total borrowings at carrying value were $21,993 million; cash and cash equivalents were $741 million. Current liabilities were $7,031 million and current assets $8,844 million. Working capital was $1,810 million, versus $2,160 million at December 31, 2016.
- Q3 income tax benefit was $53 million; the nine-month tax benefit was $88 million. These benefits include significant discrete tax items described below.
Material changes versus the prior comparable period
- Q3 net income increased 13% and diluted EPS increased from $1.19 to $1.34. Nine-month net income increased 22% and diluted EPS rose from $3.50 to $4.29.
- Higher operating income reflected acquisitions, higher sales in local currencies and productivity improvements, partly offset by increased amortization of acquisition-related intangibles and strategic growth investment. Interest expense increased $43 million in Q3 and $87 million for the nine-month period, primarily due to higher debt.
- Segment revenue growth in Q3 ranged from 5% in Life Sciences Solutions to 32% in Analytical Instruments, with acquisitions a major contributor to Analytical Instruments and Laboratory Products and Services. Laboratory Products and Services’ Q3 segment income margin declined to 12.6% from 14.3%; Specialty Diagnostics’ declined to 25.9% from 26.8%. Life Sciences Solutions improved to 32.8% from 29.6%.
- Patheon was acquired on August 28, 2017, for $7.36 billion including assumed net debt, expanding the company into contract development and manufacturing. Patheon contributed $190 million of post-acquisition revenue and a $53 million operating loss during 2017, primarily from acquisition-related and restructuring charges.
Outlook, commentary, risks and unusual items
- Management expected a 2017 effective tax rate below 3% and cash income-tax payments of $530 million to $560 million. It expected 2017 capital expenditures, net of disposals, of approximately $500 million. No full-year revenue or earnings guidance is provided in the filing text.
- Management stated that cash, operating cash flow and available revolving-credit capacity were expected to meet existing business needs for at least the next 24 months. The $2.50 billion revolving facility had no borrowings at quarter-end, with approximately $73 million of capacity reserved for letters of credit. In October, the company repaid the $750 million term-loan balance using commercial paper proceeds and cash.
- Q3 tax benefits included $237 million related to a tax-recognized foreign-exchange loss from refinancing intercompany debt and $16 million from tax accounting for equity awards. The nine-month period also included a $65 million benefit from extending a Singapore tax holiday and $51 million from equity-award tax benefits. Management noted the foreign-exchange tax benefit reduced forecast foreign tax credits by $100 million.
- Q3 restructuring and other costs totaled $131 million, including Patheon policy-conformity and acquired-inventory charges, acquisition transaction costs, facility and synergy actions, and litigation-related items. The company identified approximately $85 million of additional restructuring charges expected primarily in 2017 and 2018.
- Environmental remediation liabilities were approximately $46 million. Significant legal matters include intellectual-property and commercial claims; the company said an unfavorable outcome exceeding existing estimates could materially affect results, financial position or cash flows. It maintained $61 million and $52 million accruals for two patent cases despite favorable or partially favorable procedural developments.
- Key risks include acquisition integration and impairment of substantial goodwill and intangible assets, debt servicing and covenant compliance, product quality and regulatory requirements—particularly in pharma services—technology and cybersecurity, foreign exchange, customer and government spending, litigation, and environmental obligations.
Important facts for investors to verify
- How much future growth and profitability will come from acquired businesses, especially Patheon, versus organic demand—and whether Patheon can improve on its reported post-acquisition operating loss.
- Debt reduction plans, refinancing needs, commercial-paper access, and compliance with leverage and interest-coverage covenants as covenant limits tighten in 2018.
- The sustainability of the unusually low expected 2017 tax rate, the related cash-tax outlook, and the effects of foreign tax credits and tax-planning items.
- Whether acquisition-related charges, restructuring costs and integration spending decline as planned, and whether the additional estimated $85 million of restructuring charges materialize.
- Developments in disclosed patent and commercial litigation, environmental remediation, and quality or regulatory risks associated with pharma services.