Thermo Fisher Scientific Inc. — 2012 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012; fourth-quarter figures are also disclosed. Thermo Fisher provides scientific instruments, laboratory products and services, and diagnostic products through three segments: Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services. The company reported approximately 38,900 employees and served more than 350,000 customers.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $12.510 billion | $11.559 billion |
| Operating income | $1.482 billion | $1.251 billion |
| Operating margin | 11.8% | 10.8% |
| Income from continuing operations | $1.258 billion | $1.023 billion |
| Net income | $1.178 billion | $1.330 billion |
| Diluted EPS, continuing operations | $3.43 | $2.66 |
| Total diluted EPS | $3.21 | $3.46 |
| Cash from operating activities | $2.040 billion | $1.691 billion |
Fourth-quarter 2012 revenue was $3.259 billion, gross profit $1.386 billion, income from continuing operations $385.8 million, and net income $376.4 million. Diluted EPS was $1.07 from continuing operations and $1.04 overall. Fourth-quarter 2011 revenue was $3.089 billion, continuing-operations income $292.5 million, net income $288.9 million, and diluted EPS $0.78 from continuing operations and $0.77 overall.
Year-end working capital was $2.742 billion, versus $1.709 billion in 2011. Cash and short-term investments totaled $855 million. Borrowings at carrying value were $7.124 billion, including $93 million of short-term obligations; the company reported $7.031 billion of long-term obligations. It had $2.0 billion in revolving credit facilities, with no borrowings outstanding and approximately $50 million of capacity tied to letters of credit. Management said available liquidity and expected operating cash flow should cover existing-business needs for at least 24 months.
Material changes versus the prior comparable period
- Revenue rose 8% year over year. On a pro forma basis including Phadia and Dionex, revenue increased 3%; excluding currency effects and acquisitions net of divestitures, revenue increased 4%.
- Operating income rose 18% and operating margin increased 1.0 percentage point. Drivers included incremental profits from acquisitions and existing businesses, productivity gains, and $84 million of lower acquisition-related charges; higher commercial spending and $100 million more amortization expense partly offset the improvement.
- Segment revenue increased 7% in Analytical Technologies, 20% in Specialty Diagnostics, and 4% in Laboratory Products and Services. Segment operating margins were 18.7%, 25.7%, and 14.1%, respectively; Specialty Diagnostics improved from 24.2%, while the other two were unchanged.
- Net income and total EPS fell despite higher continuing-operations income, chiefly because 2011 included an after-tax gain of about $305 million on the sale of Athena Diagnostics and Lancaster Laboratories. 2012 also included an after-tax loss of $63 million on the sale of the laboratory workstations business.
- Operating cash flow increased by about $349 million. Acquisition spending declined to $1.083 billion from $5.690 billion in 2011; 2012 capital expenditures were $315 million.
Outlook, management commentary, risks, and unusual items
- Management expected near-term weakness in academic and government markets, reflecting uncertainty in U.S. and European funding, and continued industrial-market slowness amid global economic uncertainty. Growth was strong in Asia and moderate in North America and Europe.
- The filing does not provide a clear 2013 revenue or earnings forecast. Management expected a 2013 effective tax rate of 5%–7%, capital expenditures of approximately $300–$325 million, and pension-plan contributions of $60–$70 million.
- Management identified approximately $80 million of additional restructuring charges in 2013, primarily in the first half. 2012 restructuring actions were expected to generate approximately $85 million of annual savings, with greater benefits in 2013.
- A U.S. medical-device excise tax was expected to increase product costs by approximately $20–$25 million annually beginning in 2013.
- Key risks include economic and customer-budget volatility, foreign-exchange exposure, competition and rapid technology change, acquisition integration and impairment risk, regulatory compliance, product liability, supply-chain and delivery disruptions, information-system implementation, and leverage. Debt agreements include a maximum consolidated leverage ratio of 3.5 to 1.0.
- Goodwill was $12.475 billion and indefinite-lived intangible assets were $1.341 billion at year-end. No impairment was identified in the 2012 annual test, but the ImmunoDiagnostics reporting unit had only a 9% fair-value cushion over carrying value, making it sensitive to weaker cash flows or changes in assumptions.
- Contingencies included $23 million of environmental liabilities and a $166 million reserve for product liability, workers’ compensation, and other personal-injury matters, net of the relevant reserve methodology; estimated insurance receivables were $91 million. Management did not expect these matters to have a material adverse effect, while noting outcomes could differ from estimates.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable without acquisitions, restructuring benefits, and unusually low tax expense?
- Whether academic/government and industrial demand weakened further, and how currency movements affected subsequent results.
- Debt maturities, interest costs, covenant headroom, and the effect of continued share repurchases and dividends on leverage and liquidity.
- Whether One Lambda and other acquisitions achieve expected growth and synergies, and whether the ImmunoDiagnostics goodwill cushion remains adequate.
- Actual 2013 restructuring charges and savings, medical-device tax costs, capital expenditures, and effective tax rate compared with management’s estimates.
- Changes in product-liability and environmental reserves, insurance recoverability, and other legal or regulatory contingencies.