How much of the revenue growth came from the Fisher merger versus organic growth?

Most of the reported 157% increase came from consolidating Fisher, which was included only from November 9, 2006. On a pro forma basis, as if the merger had closed January 1, 2006, revenue grew about 10% ($876M). Of that, about $507M came from higher demand and price at existing businesses, $241M from favorable currency translation, and $128M from acquisitions, net of divestitures.

Is the 2007 earnings improvement sustainable, given the one-time items?

Part of the improvement is non-recurring. Net income includes a $32M one-time tax benefit from enacted tax-rate cuts, and 2006 was depressed by $125M of merger-related charges. Ongoing headwinds include roughly $571M of annual intangible amortization and interest expense of $140M, which rose after the Fisher debt was assumed. Investors should focus on pro forma organic growth and segment margins rather than reported year-over-year comparisons.

What are the main risks to investors disclosed in the filing?

Key risks include: (1) a pending patent infringement lawsuit from Applera/Applied Biosystems over mass spectrometer systems, which could cause material damages or an injunction; (2) integration risk from the Fisher merger, including cost synergies that may take longer than expected; (3) goodwill and intangible impairment if performance declines; (4) dependence on customer capital spending and government funding; (5) currency exposure, since about 35% of revenue is international; and (6) leverage, with $2.2B of debt and financial covenants limiting flexibility.

How is Thermo Fisher's balance sheet and liquidity position?

Liquidity is adequate. The company had $639M of cash and short-term investments, $955M of undrawn revolver capacity, and operating cash flow of $1.48B. Debt is mostly long-term, with $149M due in 2008. Shareholders' equity rose to $14.5B, largely from the merger share issuance. Management says these resources are sufficient for at least the next 24 months.

Does the company pay dividends, and how is capital being returned to shareholders?

Thermo Fisher has never paid cash dividends and does not expect to in the foreseeable future. Capital is instead returned through share repurchases, which totaled $898M in 2007 under the board's $300M (February 2007) and $700M (August 2007) authorizations. Approximately $102M remained available under the August 2008 program at year-end 2007.

TMO 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.

Thermo Fisher Scientific's 2007 10-K shows a company transformed by the November 2006 merger with Fisher Scientific International.

Revenue rose to $9.75 billion^a in 2007 from $3.79 billion in 2006, with Laboratory Products and Services contributing $5.84 billion (60%) and Analytical Technologies $4.26 billion (44% before eliminations). Pro forma growth was more modest: had the merger occurred January 1, 2006, revenue would have grown about $876 million, or roughly 10%, with organic growth at existing businesses of about $507 million. Operating income rose to $974 million (10.0% margin) from $242 million (6.4%), though the comparison is distorted by merger charges in 2006 and roughly $571 million of acquisition-related intangible amortization in 2007.

Net income was $761 million^b, or $1.72 diluted EPS, versus $169 million ($0.84) in 2006. Income from continuing operations of $780 million was helped by a one-time $32 million tax benefit from UK, Danish, Canadian and German rate cuts, which pushed the effective tax rate down to 11.5%. Cash flow from operations reached $1.48 billion, and the company repurchased $898 million of its stock.

Leverage is significant: total debt was about $2.20 billion^c, with $955 million available under the revolver and cash and short-term investments of $639 million. Goodwill ($8.71 billion) and intangibles ($7.16 billion) make up a large share of $21.2 billion in total assets, so impairment risk and integration execution are key watch items. Pending litigation with Applera/Applied Biosystems over mass spectrometer patents is disclosed as a potential material adverse risk.

02—Key points

Key Highlights

Revenue of $9.75B in 2007, up 157% from $3.79B, driven mainly by the Fisher merger; pro forma growth was about 10% ($876M), including $507M from existing businesses
Operating income of $974M (10.0% margin) vs. $242M (6.4%) in 2006; segment operating margins were 19.8% for Analytical Technologies and 13.6% for Laboratory Products and Services
Diluted EPS of $1.72 vs. $0.84 in 2006; continuing-operations EPS was $1.76, aided by a one-time $32M tax benefit and an 11.5% effective tax rate
Operating cash flow of $1.48B vs. $406M in 2006; capital expenditures of $176M and guidance of $230–250M for 2008
Share repurchases of $898M in 2007 under $1B authorizations, with $102M remaining under the August 2008 program
Total debt of $2.20B (93% due 2010 and later) and $955M of revolver capacity; the revolver covenant caps leverage at 3.0x debt-to-EBITDA
Goodwill of $8.71B and indefinite-lived intangibles of $1.33B (about 47% of total assets) create impairment risk if integration or organic growth falls short; amortization was $571M in 2007

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2007, Thermo Fisher Scientific kept $0.08.

Revenue$9.75B100.0%100.0%
Cost of revenue−$5.08B52.1%52.1%
Gross profit$4.67B47.9%47.9%
Operating costs−$3.69B37.9%37.9%
Operating income$974.4M10.0%10.0%
Interest, other & tax−$226.0M2.3%2.3%
Net income$748.4M7.7%7.7%

10-KFY2007filed February 29, 2008Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2007 revenue went

$9.75B

Cost of revenue: $5.08B, 52% of revenue
SG&A: $2.55B, 26% of revenue
Net income: $748.4M, 7.7% of revenue
Other operating costs: $1.14B, 12% of revenue
Interest, other & tax: $226.0M, 2.3% of revenue

Kept 7.7% as net income

Full revenue history →

04—Financials

Financial Highlights

10-KFY2007filed February 29, 2008

Revenue$9.75B47.9% Gross Margin Net Income$748.40M7.7% Net Margin EPS (Diluted)$1.69 Cash & Equivalents$625.10M Free Cash Flow$1.31B

Financial Statements

Revenue	$9.75B
Cost of Revenue	$5.08B
Gross Profit	$4.67B
SG&A Expenses	$2.55B
Operating Expenses	$8.77B
Operating Income	$974.40M
Net Income	$748.40M
EPS (Basic)	$1.77
EPS (Diluted)	$1.69
Shares Outstanding (Basic)	421.50M
Shares Outstanding (Diluted)	443.60M

05—Questions

Frequently Asked Questions

How much of the revenue growth came from the Fisher merger versus organic growth?
Most of the reported 157% increase came from consolidating Fisher, which was included only from November 9, 2006. On a pro forma basis, as if the merger had closed January 1, 2006, revenue grew about 10% ($876M). Of that, about $507M came from higher demand and price at existing businesses, $241M from favorable currency translation, and $128M from acquisitions, net of divestitures.
Is the 2007 earnings improvement sustainable, given the one-time items?
Part of the improvement is non-recurring. Net income includes a $32M one-time tax benefit from enacted tax-rate cuts, and 2006 was depressed by $125M of merger-related charges. Ongoing headwinds include roughly $571M of annual intangible amortization and interest expense of $140M, which rose after the Fisher debt was assumed. Investors should focus on pro forma organic growth and segment margins rather than reported year-over-year comparisons.
What are the main risks to investors disclosed in the filing?
Key risks include: (1) a pending patent infringement lawsuit from Applera/Applied Biosystems over mass spectrometer systems, which could cause material damages or an injunction; (2) integration risk from the Fisher merger, including cost synergies that may take longer than expected; (3) goodwill and intangible impairment if performance declines; (4) dependence on customer capital spending and government funding; (5) currency exposure, since about 35% of revenue is international; and (6) leverage, with $2.2B of debt and financial covenants limiting flexibility.
How is Thermo Fisher's balance sheet and liquidity position?
Liquidity is adequate. The company had $639M of cash and short-term investments, $955M of undrawn revolver capacity, and operating cash flow of $1.48B. Debt is mostly long-term, with $149M due in 2008. Shareholders' equity rose to $14.5B, largely from the merger share issuance. Management says these resources are sufficient for at least the next 24 months.
Does the company pay dividends, and how is capital being returned to shareholders?
Thermo Fisher has never paid cash dividends and does not expect to in the foreseeable future. Capital is instead returned through share repurchases, which totaled $898M in 2007 under the board's $300M (February 2007) and $700M (August 2007) authorizations. Approximately $102M remained available under the August 2008 program at year-end 2007.

06—Continue

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