Thermo Fisher Scientific Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Thermo Fisher serves life sciences, analytical instruments, diagnostics, and laboratory products and services markets through four reportable segments. It reported revenue of $25.54 billion and employed more than 75,000 people. In 2019, it acquired viral-vector services provider Brammer Bio for approximately $1.67 billion and sold its Anatomical Pathology business for $1.13 billion, net of cash divested.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $25.54 billion | $24.36 billion |
| Operating income | $4.59 billion | $3.78 billion |
| Operating margin | 18.0% | 15.5% |
| Net income | $3.70 billion | $2.94 billion |
| Diluted EPS | $9.17 | $7.24 |
| Cash from operations | $4.97 billion | $4.54 billion |
| Capital expenditures | $926 million | $758 million |
| Cash and cash equivalents at year-end | $2.40 billion | $2.10 billion |
| Debt at carrying value | $17.75 billion | $18.99 billion |
| Working capital at year-end | $5.70 billion | $4.48 billion |
Revenue rose 5% as reported, including a $440 million adverse currency effect and $153 million of net acquisition/divestiture contribution; excluding those effects, revenue increased $1.47 billion, or 6%. Operating income growth reflected higher sales, productivity and the Anatomical Pathology sale gain, partly offset by growth investments, mix and currency. Cash from operations less capital expenditures was approximately $4.05 billion, compared with $3.79 billion in 2018.
Fourth-quarter revenue was $6.83 billion versus $6.51 billion a year earlier; net income was $1.00 billion versus $898 million; and diluted EPS was $2.49 versus $2.22. Fourth-quarter gross profit was $3.04 billion versus $2.92 billion.
Segments and material changes
- Life Sciences Solutions: Revenue $6.86 billion, up 9%; segment operating margin 35.7% versus 34.4%. Growth was particularly strong in bioproduction and biosciences.
- Analytical Instruments: Revenue $5.52 billion, up 1%; margin 23.1% versus 22.8%. Fourth-quarter sales declined amid weaker industrial conditions.
- Specialty Diagnostics: Revenue $3.72 billion, essentially flat; margin 25.0% versus 25.6%. Existing-business demand grew, but currency and the Anatomical Pathology divestiture weighed on reported revenue.
- Laboratory Products and Services: Revenue $10.60 billion, up 6%; margin 12.5%, unchanged. Pharma services and the research and safety channel were notable sources of growth; Brammer Bio contributed following its acquisition.
The Anatomical Pathology sale generated a reported pre-tax gain of approximately $478 million. FY2019 also included $184 million of losses on early debt extinguishment. Restructuring and other income was $334 million net, primarily reflecting the divestiture gain; the company separately reported $52 million of cash restructuring charges. The sale reduced Specialty Diagnostics revenue by $126 million in the year-over-year segment comparison.
Cash, debt and liquidity
Operating cash flow increased to $4.97 billion. Investing activities used $1.49 billion, including $1.84 billion for acquisitions, partly offset by $1.13 billion in proceeds from the Anatomical Pathology sale. Financing activities used $3.12 billion, including $1.50 billion of share repurchases and $297 million of dividends. Short-term obligations and current maturities were $676 million, including $672 million of senior notes due within twelve months. No borrowings were outstanding under the $2.50 billion revolving credit facility at year-end; letters of credit reduced available capacity by about $72 million. Management said cash, operating cash flow and available credit should meet existing-business cash needs for at least the next 24 months.
Outlook, commentary and risks
- Management expected a 2020 effective tax rate of 8%–10% and capital expenditures of $1.0–$1.1 billion.
- Several extended commercial licensing arrangements were expected to reduce 2020 Specialty Diagnostics revenue and operating income by approximately $30 million.
- Approximately $65 million of additional restructuring charges had been identified, primarily for 2020; further actions could follow. Projects charged in 2019 were expected to generate approximately $60 million in annual savings.
- The filing identifies the coronavirus outbreak reported in China in December 2019 as a potential business risk, with effects uncertain as of the filing date. Other risks include economic and customer-spending cycles, currency and trade changes, regulatory and product-quality requirements, acquisition integration, cybersecurity, litigation, and the company’s substantial debt and goodwill/intangible-asset balances.
- Environmental liabilities accrued were $66 million. Product liability, workers’ compensation and other personal injury accruals were $198 million; the filing notes that adverse outcomes beyond current estimates could materially affect results, financial position or cash flows.
Most important facts for investors to verify
- How much of the 2019 increase in operating income and net income is attributable to the $478 million divestiture gain and other unusual items, versus recurring operations.
- Whether organic growth, particularly in biotech and pharma, offsets currency pressure and weaker industrial demand.
- Integration, performance and returns from Brammer Bio and other acquisitions, alongside the company’s approximately $25.71 billion goodwill balance and $12.76 billion of definite-lived intangible assets.
- Debt maturities, refinancing costs, covenant headroom and the sustainability of repurchases and dividends relative to cash generation.
- The actual 2020 tax rate, capital spending, licensing-related headwind, restructuring charges and savings, and any financial impact from the coronavirus outbreak.
- Developments in tax uncertainties, litigation, environmental remediation and other contingencies; the filing reports $1.55 billion of unrecognized tax benefits.