Business context and reporting period
Thermo Fisher Scientific Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. It supplies analytical instruments, laboratory products, consumables, diagnostics, software and services worldwide through its Analytical Technologies and Laboratory Products and Services segments. The filing also reports fourth-quarter results; it is an annual filing, not a standalone Q4 report.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $10.789 billion | $10.110 billion |
| Operating income / margin | $1.265 billion / 11.7% | $1.049 billion / 10.4% |
| Income from continuing operations | $1.033 billion | $851 million |
| Net income | $1.036 billion | $850 million |
| Diluted EPS | $2.53 | $2.01 |
| Cash from operations | $1.498 billion | $1.659 billion |
| Working capital | $2.425 billion | $2.892 billion |
| Cash and short-term investments | $926 million | $1.571 billion |
| Debt outstanding | $2.137 billion | $2.182 billion |
Revenue increased 7% year over year. Product revenue was $9.135 billion and service revenue was $1.654 billion. Fourth-quarter revenue was $2.781 billion versus $2.839 billion a year earlier; quarterly continuing-operations income was $298 million versus $274 million, and diluted EPS was $0.75 versus $0.65. Segment income is a management-defined measure excluding specified acquisition-related charges, restructuring and amortization: it was $1.916 billion in 2010, up 12%, with a 17.8% margin versus 17.0%.
Operating cash flow declined primarily because receivables and inventories increased to support sales growth. Investing cash outflow was $859 million, including $606 million for acquisitions and $266 million for capital expenditures. Financing cash outflow was $1.295 billion, including $1.013 billion of share repurchases. The company had $952 million available under its revolving credit facility at year-end. It reported no cash dividends and said it did not expect to pay them in the foreseeable future.
Material changes versus prior periods
- Revenue rebounded from the 2009 downturn: excluding currency and net acquisitions/divestitures, 2010 revenue grew 4%, reflecting stronger demand and, to a lesser extent, stimulus-funded spending and pricing.
- Analytical Technologies revenue rose 11% to $4.612 billion; Laboratory Products and Services revenue rose 4% to $6.693 billion. Both segments improved margins.
- Operating income rose 21%, supported by incremental sales, productivity, sourcing and restructuring savings, and $25 million lower amortization expense.
- Cash from operations fell from $1.659 billion to $1.498 billion. Cash and short-term investments declined by approximately $645 million, largely reflecting repurchases, acquisitions and debt transactions.
- Reported net income included a $2.5 million after-tax gain from a previously divested business. Restructuring and other costs were $79 million in 2010 versus $69 million in 2009; these included impairment and other specified items.
Outlook, commentary, risks and contingencies
- Management expected 2011 effective tax rate of 15.5%–17.5%, capital expenditures of $285–$310 million, and approximately $35 million of additional restructuring charges. Actions begun in 2010 were expected to yield about $50 million in annual savings, primarily beginning in 2011.
- The termination of a significant healthcare-channel supply arrangement reduced 2010 revenue by a net $102 million; management expected a further approximately $55 million adverse effect on revenue growth in the first half of 2011. A milder flu season also weighed on sales. The company estimated stimulus-funded spending added about one percentage point to 2010 revenue growth.
- The company agreed to acquire Dionex for approximately $2.1 billion, subject to tender and regulatory conditions. It issued $2.2 billion of senior notes in February 2011 primarily to fund the transaction; if the acquisition was not completed by September 30, 2011, the notes were subject to mandatory redemption at 101% plus accrued interest.
- In February 2011, it agreed to sell Athena Diagnostics and Lancaster Laboratories for aggregate cash consideration of $940 million, subject to closing conditions. Their 2010 revenue and operating income totaled approximately $225 million and $60 million, respectively.
- Management said existing cash, operating cash flow and available revolver capacity should cover existing-business needs for at least 24 months. The company also disclosed $2.14 billion of debt, a leverage covenant limiting consolidated leverage to 3.0 times EBITDA, and potential convertible-debt payments around the March 2011 put date.
- Key risks include weak economic conditions and customer capital spending, currency and commodity-price movements, regulatory and healthcare-reform changes, product liability, intellectual-property claims, acquisition integration and impairment, manufacturing or delivery disruption, information-system implementation, and debt covenant compliance. Goodwill was $9.271 billion and indefinite-lived intangible assets were $1.327 billion; management reported no impairment at year-end but warned that weaker performance or market conditions could require charges.
- Contingencies include product-liability and other claims, environmental remediation and tax matters. Environmental liabilities were approximately $22 million. The company’s product-liability, workers’ compensation and other personal-injury reserve was $156 million, with estimated insurer recoveries of $99 million; management cautioned that ultimate amounts could differ materially. Management did not expect current legal matters to have a material effect, while acknowledging an unfavorable outcome could be material.
Most important facts for investors to verify
- Whether the Dionex acquisition closed by the stated deadline, and the resulting purchase price, financing, debt and integration impact.
- Whether the Athena and Lancaster divestitures closed, and how proceeds and lost earnings affected results and leverage.
- Whether the supply-contract revenue headwind, underlying demand recovery and restructuring savings tracked management’s stated expectations.
- Whether operating cash flow and liquidity recovered after working-capital use and major capital-allocation outflows.
- Whether goodwill, intangible assets, litigation and environmental reserves, and tax estimates remain supportable as conditions change.