01—Abstract
Summary
Summary of the 10-K filed March 20, 1997. Cited figures are marked; the original filing is the authoritative source.
Thermo Electron Corporation (NYSE: TMO, the predecessor of today's Thermo Fisher Scientific; the filing is for fiscal 1996, ended December 28, 1996, and the registrant is Thermo Electron, not Thermo Fisher) reported strong top-line growth.
Revenues rose 29% to $2.93 billiona, driven largely by acquisitions in Instruments, Biomedical Products, and Environmental Services. Operating income grew 9% to $246.5 million, and net income rose 37% to $190.8 million, or $1.35 primary and $1.22 fully diluted EPS. Restructuring and other nonrecurring charges of $37.6 million weighed on operating results, and segment margins in several acquired businesses declined.
Investors should weigh earnings quality carefully. Gains on the issuance of stock by majority-owned subsidiaries totaled $126.6 millionb pre-tax, roughly two-thirds of reported net income. These gains are non-taxable and depend on market conditions and subsidiary equity offerings, so management states they cannot be assumed to recur.
The balance sheet expanded substantially, with total assets up to $5.14 billionc from $3.79 billion, and cash plus short-term investments of $1.85 billion. However, long-term obligations rose to $1.55 billion, mostly convertible debentures, and $684 million of minority interest reflects the company's decentralized spinout model. Roughly $1.18 billion of the $1.94 billion in total cash and investments sits in majority-owned subsidiaries, which limits parent-level access.
Looking ahead, backlog grew to $811.9 milliond from $697.9 million, and the company agreed to acquire Life Sciences International (about $2.16 per share) and entered into a letter of intent to buy the stock-preparation business of Black Clawson for about $110 million. Management also disclosed risks including New Hampshire utility deregulation affecting Thermo Ecotek's plants, expected lower margins at certain Thermo Ecotek projects, and pending litigation seeking $25 million and $36 million in damages.
02—Key points
Key Highlights
- Revenue grew 29% to $2,932.6 million (from $2,270.3 million), with acquisitions adding substantially to Instruments (up 55%) and Biomedical Products (up 44%).
- Net income rose 37% to $190.8 million; primary EPS was $1.35 and fully diluted EPS was $1.22, versus $1.10 and $0.97 in 1995.
- Pre-tax gains of $126.6 million from subsidiary stock issuances represented about two-thirds of net income, a significant and non-recurring-by-nature earnings contributor.
- Operating income rose to $246.5 million, but restructuring and nonrecurring costs of $37.6 million and lower margins at acquired Fisons instrument businesses constrained profit growth.
- Backlog increased to $811.9 million from $697.9 million, with management expecting about 95% to be filled in 1997.
- Balance sheet expanded to $5.14 billion in total assets, including $1.85 billion in cash and short-term investments, against $1.55 billion of long-term obligations (largely convertible debentures).
- The company has never paid cash dividends, and it plans to pursue further acquisitions (Life Sciences, Black Clawson, and about $120 million in other proposed deals) as part of its spinout strategy.
03—Questions
Frequently Asked Questions
How much of Thermo Electron's 1996 profit came from one-time gains on subsidiary stock sales?
Gains on the issuance of stock by majority-owned subsidiaries were $126.6 million pre-tax in 1996, versus $190.8 million of net income. These gains are non-taxable and arise from subsidiary IPOs, private placements, and convertible debenture conversions. Management states that their timing and size depend on market conditions and cannot be assured in future periods, so investors should evaluate earnings excluding these gains.
Why did Thermo Electron's total assets and debt increase so much in 1996?
Total assets grew to $5.14 billion from $3.79 billion, largely due to acquisitions (including the Fisons scientific instruments businesses for about $189 million in cash plus $47 million of assumed debt) and a $953 million issuance of long-term obligations. Long-term obligations rose to $1.55 billion, with most of the increase in convertible debentures issued at the parent and subsidiary levels, including $585 million of 4 1/4% subordinated convertible debentures due 2003.
Can Thermo Electron's parent company freely use all of its cash?
Not entirely. Of $1.94 billion in total cash and investments at year-end 1996, $1.18 billion was held by majority-owned subsidiaries. Access to those funds through dividends, loans, or other transactions is subject to fiduciary duties to minority shareholders, and dividends from non-consolidated subsidiaries are taxable. The company also has a Charter that allows financial support among group members, which may rank junior, pari passu, or senior to other debt.
What are the main legal and business risks disclosed in the filing?
Key risks include: a lawsuit from third-party developers seeking $25 million over an alternative-energy facility; a claim by Fischer Imaging alleging patent infringement by Trex Medical's prone breast-biopsy systems, with cumulative product revenue of about $73.8 million; a $36 million arbitration claim by former Epsilon employees; and uncertainty around Thermo Ecotek's New Hampshire plants if PSNH defaults or deregulation proceeds. Management believes the pending matters will not be material to financial position, though they could affect results in a particular period.
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