Thermo Fisher Scientific Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Thermo Fisher supplies instruments, laboratory products, diagnostics, consumables, software and services through three segments: Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $11.726 billion | $10.570 billion |
| Operating income | $1.245 billion | $1.206 billion |
| Operating margin | 10.6% | 11.4% |
| Income from continuing operations | $1.020 billion | $997 million |
| Net income | $1.330 billion | $1.036 billion |
| Diluted EPS | $3.46 | $2.53 |
| Cash from operating activities | $1.691 billion | $1.498 billion |
| Capital expenditures | $267 million | $258 million |
FY 2011 net income included a $305 million after-tax gain on the sale of Athena Diagnostics and Lancaster Laboratories; diluted EPS from continuing operations was $2.65. Revenue rose 11% as reported, primarily from the Phadia and Dionex acquisitions, with favorable currency translation also contributing. On a pro forma basis including Phadia and Dionex from the beginning of 2010, revenue increased 7%; growth at existing businesses was 3%.
By segment, revenue was $3.845 billion in Analytical Technologies (+19%), $2.466 billion in Specialty Diagnostics (+15%), and $5.935 billion in Laboratory Products and Services (+5%). Segment operating margins, as defined by management’s adjusted measure, were 18.7%, 24.2%, and 13.7%, respectively. Consolidated gross margin or gross profit for the full year is not clearly stated in the provided filing text.
For Q4 2011, revenue was $3.134 billion, gross profit $1.302 billion, income from continuing operations $290 million, net income $289 million, and diluted EPS $0.77. Q4 2010 revenue was $2.719 billion, gross profit $1.120 billion, continuing income $285 million, net income $298 million, and diluted EPS $0.75.
Liquidity, debt and capital allocation
- Cash and short-term investments totaled $1.021 billion at year-end; working capital was $1.709 billion, down from $2.425 billion.
- Debt carrying value was $7.028 billion, including $1.273 billion of short-term obligations and current maturities. Commercial paper outstanding was $900 million. Long-term obligations were $5.755 billion.
- Operating cash flow increased to $1.691 billion. Investing used $5.142 billion net, including $5.699 billion for acquisitions, partly offset by $760 million of proceeds from discontinued-operation sales. Financing provided $3.551 billion, including substantial debt issuance; share repurchases used $1.338 billion.
- Management said cash, expected operating cash flow, and available or expected-renewal credit facilities should fund existing business needs for at least 24 months. The company had $951 million available under its principal revolver and $100 million under the commercial-paper backstop at year-end; facilities were scheduled to expire in 2012 and management expected to renew them.
- The company announced a quarterly dividend of $0.13 per share on February 29, 2012, with the first payment scheduled for April 16, 2012.
Changes, outlook and notable items
- Phadia was acquired in August 2011 for approximately $3.54 billion net of cash acquired; Dionex was acquired in May for approximately $2.03 billion. Together, these acquisitions materially expanded diagnostics and chromatography businesses and increased debt, goodwill and acquired intangible assets.
- Operating income increased 3%, but consolidated operating margin declined from 11.4% to 10.6%. Management attributed the margin decline mainly to $124 million of higher acquisition-related charges and $93 million of additional amortization, partly offset by productivity gains and incremental sales.
- FY 2011 restructuring and other costs were approximately $235 million. The company identified about $60 million of additional restructuring charges for 2012, and expected annual savings of approximately $85 million from 2011 actions plus $30 million from additional actions commencing in 2012.
- Management expected continued weakness in academic and government markets in 2012, following softer second-half 2011 demand in the U.S. and Europe. These markets accounted for about one-quarter of revenue. The decline moderated in Q4.
- Management forecast a 2012 effective tax rate of 11.5%–13.5% and 2012 capital expenditures of approximately $300–$325 million. The company estimated the medical-device excise tax would cost $20–$30 million annually beginning in 2013.
- Other headwinds included the end of a supplier arrangement, which reduced first-half 2011 sales by $54 million net, lower Japan stimulus-funded sales, and inflation in costs such as oil-based plastic resins. Currency translation added $266 million to 2011 revenue.
- Goodwill was $11.988 billion and indefinite-lived intangible assets were $1.348 billion at year-end. No impairment was identified in the 2011 annual test, but management cautioned that weaker performance or market valuations could require future impairment charges.
Risks and contingencies
- Key risks include economic and funding uncertainty, foreign exchange movements, customer capital-spending cycles, competition and the need for continued product innovation.
- Debt and refinancing risk increased after acquisition financing. Debt agreements include covenants, including a maximum consolidated leverage ratio of 3.5 to 1.0; noncompliance could trigger default or acceleration.
- Product liability, environmental remediation, regulatory compliance, intellectual property, acquisition integration, information systems, suppliers and third-party delivery services are additional disclosed risks.
- Environmental liabilities were approximately $22 million. The company reported product liability, workers’ compensation and other personal injury reserves of $159 million on a discounted basis, with estimated insurance recoveries; actual claims and recoveries could differ.
- Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2011. The auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Separate recurring earnings from the $305 million after-tax divestiture gain; compare continuing-operations EPS with reported net income and EPS.
- Assess whether underlying growth, excluding acquisitions and currency, can offset expected academic and government market weakness and the supply-contract loss.
- Review acquisition integration, purchase accounting, amortization, and the sensitivity of the substantial goodwill and intangible-asset balances to lower forecasts.
- Track leverage, near-term maturities, commercial-paper access, and renewal of credit facilities due to expire in 2012.
- Monitor restructuring charges against expected savings, the 2012 tax-rate outlook, and the forecast 2013 medical-device excise tax.
- Evaluate the sustainability of operating cash flow and capital returns alongside acquisition spending, debt service, repurchases, and the new dividend.