Thermo Fisher Scientific Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to periods ended July 2, 2011. Unaudited consolidated results. Thermo Fisher supplies analytical instruments, diagnostics, laboratory products, and related services.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First six months 2012 | First six months 2011 |
|---|---|---|---|---|
| Revenue | $3.108 billion | $2.854 billion | $6.165 billion | $5.537 billion |
| Operating income | $367.8 million | $265.1 million | $729.3 million | $587.3 million |
| Operating margin | 11.8% | 9.3% | 11.8% | 10.6% |
| Income from continuing operations | $292.4 million | $217.1 million | $573.2 million | $464.6 million |
| Net income | $233.8 million | $523.4 million | $511.1 million | $775.6 million |
| Diluted EPS from continuing operations | $0.79 | $0.56 | $1.55 | $1.19 |
Revenue rose 9% in Q2 and 11% year to date, primarily reflecting acquisitions, especially Phadia and Dionex, and growth at existing businesses. On a pro forma basis including Phadia and Dionex in both periods, Q2 revenue increased 1% and first-half revenue increased 3%; currency translation reduced first-half revenue by $123 million on this basis. Reported net income comparisons are distorted by discontinued-operation items: Q2 2011 included a $305.8 million after-tax disposal gain, while 2012 included a $51.1 million after-tax estimated loss on the planned laboratory workstations divestiture.
Q2 segment revenue and adjusted segment income: Analytical Technologies $999.5 million and $174.9 million; Specialty Diagnostics $731.9 million and $199.3 million; Laboratory Products and Services $1.520 billion and $215.9 million. Specialty Diagnostics showed the strongest reported growth, partly from Phadia. Segment income excludes specified acquisition-related charges, restructuring items, and acquired-intangible amortization; it is not consolidated operating income.
Cash flow, balance sheet, debt, and liquidity
- First-half operating cash flow was $899.5 million, versus $693.3 million. Capital expenditures were $134.7 million; operating cash flow less capital expenditures was approximately $764.8 million, calculated from reported amounts.
- Cash and cash equivalents were $732.3 million at June 30, down from $1.016 billion at December 31, 2011; short-term investments were $4.3 million. Working capital was $1.96 billion, versus $1.71 billion at year-end.
- Total debt obligations were $6.532 billion, including $6.083 billion of senior notes and $400 million of commercial paper. Short-term obligations and current maturities totaled $786.2 million, including $352 million of senior notes due December 2012. Long-term obligations were $5.746 billion.
- New unsecured revolving credit facilities provide up to $2.0 billion; none was drawn at quarter-end, and letters of credit reduced capacity by approximately $49 million. The leverage covenant requires a consolidated leverage ratio below 3.5 to 1.0.
- First-half financing used $869 million, including $400 million of share repurchases, a $500 million reduction in commercial paper, and $47.7 million of dividends paid. The company initiated a quarterly dividend of $0.13 per share.
Changes, outlook, and notable items
- Q2 operating margin increased to 11.8% from 9.3%; management cited incremental profit from acquisitions and existing-business sales, productivity improvements, and $61 million lower acquisition-related charges, partly offset by $32 million higher amortization. First-half operating margin rose to 11.8% from 10.6%.
- Interest expense increased with debt used to fund Phadia and Dionex. Other expense, net, was $49.4 million in Q2 and $99.8 million for the first half, compared with $10.3 million and $33.0 million, respectively, in 2011.
- Management expected continued near-term weakness in academic and government markets amid funding uncertainty, while describing demand as strong in Asia, moderate in North America, and modest in Europe. It cited inflationary cost pressure, particularly in some raw materials, and unfavorable currency effects.
- Management expected a full-year 2012 effective tax rate of 8%–10% and 2012 capital expenditures of $300–$310 million. It identified approximately $60 million of additional restructuring charges, primarily in the remainder of 2012; first-half restructuring actions were expected to generate approximately $45 million of annual savings.
- The company planned to sell its laboratory workstations business, targeting completion by June 2013. The business generated $94.3 million of first-half 2012 revenue and a $18.5 million pretax loss; the estimated divestiture loss recorded in Q2 was $51 million after tax and may be revised.
- After quarter-end, Thermo Fisher agreed to acquire One Lambda for approximately $866 million in cash, with total potential outlay up to approximately $925 million including contingent consideration and retention obligations. Completion was expected in Q4 2012, subject to customary conditions and regulatory approvals; management expected to fund it with long-term debt and, if needed, revolving credit.
- The company estimated the U.S. medical-device excise tax would cost $20–$30 million annually beginning in 2013. It reported that litigation and environmental matters were not expected to have a material adverse effect based on current reserves, but outcomes and remediation costs remain uncertain.
- Principal disclosed risks include global economic and currency volatility, government and academic funding reductions, competition and product innovation, acquisition integration and impairment risk, regulation and intellectual property claims, supply and operational disruption, commodity costs, and leverage. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Separate continuing-operations earnings from discontinued operations and disposal gains when assessing year-over-year profitability.
- Check organic and pro forma growth against acquisition contributions, foreign-exchange effects, and segment-level trends.
- Track cash conversion, inventory growth, capital expenditure, and the decline in cash alongside buybacks, dividends, and debt repayments.
- Review refinancing of the $352 million December 2012 senior-note maturity, commercial-paper backstop capacity, leverage covenant headroom, and financing for One Lambda.
- Monitor the laboratory workstations sale proceeds and any change to the estimated $51 million after-tax loss, as well as restructuring costs and delivery of projected savings.
- Validate the tax-rate outlook, projected medical-device excise-tax burden, and exposure to academic/government funding weakness, currency changes, and litigation or environmental contingencies.