Thermo Fisher Scientific Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter results are summarized below. Amounts are in U.S. dollars.
Business context
Thermo Fisher supplies analytical instruments, laboratory products and consumables, diagnostics, software, and services to life sciences, healthcare, research, industrial, and government customers. It reports two segments: Analytical Technologies and Laboratory Products and Services. The company had approximately 35,400 employees.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $10.110 billion | $10.498 billion |
| Operating income | $1.049 billion | $1.229 billion |
| Operating margin | 10.4% | 11.7% |
| Income from continuing operations | $851.3 million | $975.4 million |
| Net income | $850.3 million | $980.9 million |
| Diluted EPS | $2.01 | $2.25 |
| Cash provided by operating activities | $1.659 billion | $1.420 billion |
| Capital expenditures | $207.5 million | $264.4 million |
FY revenue fell 4% year over year. Excluding currency translation and acquisitions net of divestitures, revenue declined 3%, primarily from weaker demand; price increases partly offset the decline. Currency translation reduced revenue by $211 million, while acquisitions net of divestitures added $165 million. Operating income fell 15%, and diluted EPS fell 11%. The effective tax rate was 8.2%, versus 13.5% in 2008.
Analytical Technologies revenue was $4.154 billion, down 7%, with segment income of $837.3 million, down 12%; its operating margin fell to 20.2% from 21.4%. Laboratory Products and Services revenue was $6.427 billion, effectively flat, while segment income fell 4% to $877.6 million; its operating margin was 13.7%, versus 14.2%. Segment income is a company-defined measure before specified acquisition-related, restructuring, and amortization items.
Fourth quarter: Revenue was $2.839 billion versus $2.646 billion in Q4 2008. Income from continuing operations was $274.3 million versus $287.5 million; net income was $273.3 million versus $287.0 million. Diluted EPS was $0.65 versus $0.67. The filing notes that fourth-quarter sales are historically stronger because of customer capital-spending patterns.
Liquidity, debt, and capital allocation
At year-end, cash and cash equivalents were $1.564 billion, short-term investments were $7.1 million, and working capital was $2.892 billion. Total debt obligations were approximately $2.182 billion, including about $668.8 million of convertible debt principal; $117.5 million of debt was classified as short-term or current. The company had $946 million available under its $1 billion revolving credit facility, which expires in 2012, and reported compliance with debt covenants.
Operating cash flow increased $239 million, primarily because accounts receivable and inventory reductions provided cash. The company spent $637 million on acquisitions and repurchased $414.6 million of common stock. It issued $750 million of senior notes in November and used cash to redeem $300 million of subordinated notes and tender for $282 million principal amount of convertible notes. Management said cash, expected operating cash flow, and available borrowing capacity should meet existing-business cash needs for at least the next 24 months.
Material changes, outlook, and risks
- Management said results progressively improved during 2009, but the global downturn reduced demand, particularly for equipment and industrial environmental and process-control products. Consumables were more resilient; Asia grew modestly while North America and Europe declined.
- 2009 acquisitions included Biolab and specialty-diagnostics provider B.R.A.H.M.S. The company spent $637 million on acquisitions. Three additional acquisitions agreed in January and February 2010 were expected to require approximately $225 million cash, plus up to $30 million contingent consideration.
- Restructuring and other costs were $69 million in 2009. Actions initiated in 2009 were expected to generate approximately $107 million in annual savings; approximately $38 million of additional restructuring charges were identified for 2010. Management gave no full-year revenue or earnings forecast in the supplied filing text.
- Management expected a 2010 effective tax rate of 17%–19% and capital expenditures of approximately $275–$300 million.
- A significant healthcare-channel supplier planned to end its current arrangement: related sales were expected to be approximately $75 million in 2010 and none thereafter. A replacement supplier was expected to contribute approximately $40 million of sales in 2010.
- Key risks include prolonged economic weakness and customer spending cuts, foreign-exchange movements, competition and rapid technological change, acquisition integration and potential impairment of goodwill or intangibles, regulatory and product-liability exposure, and debt/covenant and convertible-note cash requirements. Goodwill was $8.983 billion and acquisition-related intangible assets were $6.337 billion; no impairment was recorded at year-end.
- Contingencies include product-liability and personal-injury reserves of $159 million on a discounted basis, with estimated insurer recoveries of $93 million; the filing cautions that insurance-related litigation outcomes could require material adjustments. Environmental liabilities were approximately $23 million. Management did not expect these matters to have a material adverse effect, but noted that outcomes and estimates involve uncertainty.
Important facts for investors to verify
- Whether the recovery in demand and the reported improvement through 2009 continued, especially in equipment and industrial markets.
- Execution and realized savings from restructuring, and whether the planned 2010 charges and capital spending matched expectations.
- The revenue and earnings impact of the supplier termination and the extent to which replacement products offset lost sales.
- Cash needs from convertible-note conversions or puts, debt maturities, and continued compliance with credit-facility covenants.
- Whether acquisition performance supports the carrying values of goodwill and intangible assets, and whether litigation insurance recoveries and environmental estimates remain supportable.