01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific (TMO) reported full-year 2008 revenue of $10.50 billiona, up 8% from $9.75 billion in 2007, with operating income rising 26% to $1.23 billion (11.7% margin, versus 10.0% in 2007).
Growth was driven mainly by higher demand and price increases at existing businesses, with Asia strong, North America moderate and Europe modest; acquisitions added about $186 millionb and currency translation about $113 million. Diluted EPS from continuing operations rose to $2.27 from $1.76, and net income was $994.2 million, though the effective tax rate increased to 14.0% from 11.5%. Both segments grew, with Analytical Technologies up 7% and Laboratory Products and Services up 9%, and segment operating margins expanded in both.
The filing also flags headwinds heading into 2009. Management expects roughly 4% currency translation pressure on 2009 revenue (about $0.15c of EPS) at early-2009 exchange rates, and noted that the economic downturn led to restructuring actions and a market capitalization decline to roughly book value at year-end. Balance sheet highlights include $1.28 billion of cash and equivalents, $2.06 billion of debt (about $969 million convertible, with $295 million currently convertible as of February 27, 2009), and $950 million of available revolver capacity.
Goodwill and intangibles remain large at about $8.7 billiond and $6.4 billion, so future impairment or integration issues are a meaningful risk. The company also faces an ongoing patent suit from Applera/Applied Biosystems over its mass spectrometer systems, which could have a material adverse effect if resolved unfavorably.
For investors, the key takeaways are solid organic growth and margin expansion from merger integration and productivity gains, a strengthened cash position, and a stock that fell sharply in late 2008 (Q4 low of $26.65). Risks center on a likely weaker 2009 demand environment, a stronger U.S. dollar, a higher share of convertible debt maturing or being put in 2010 and 2011, and the mounting cost of acquisition-related amortization (about $603 million in 2008).
02—Key points
Key Highlights
- Revenue grew 8% to $10.50 billion in 2008, with organic growth of about $453 million driven by demand and price increases, and both segments expanding.
- Operating income rose 26% to $1.23 billion, with operating margin improving to 11.7% from 10.0%, helped by merger integration savings, global sourcing and restructuring.
- Diluted EPS from continuing operations increased to $2.27 from $1.76, while net income reached $994.2 million, though the effective tax rate rose to 14.0%.
- Cash flow from operations was $1.42 billion, and year-end cash and short-term investments reached $1.29 billion, supporting a $500 million buyback authorization with $415 million remaining.
- Management expects currency translation to reduce 2009 revenue by about 4% (roughly $0.15 of EPS) at early-2009 exchange rates, and FSP APB 14-1 will add about $23 million of non-cash interest expense (about $0.03 EPS).
- Debt totals $2.06 billion, with about $969 million convertible and $295 million currently convertible; the company intends to fund conversions through its $950 million revolver.
- Goodwill of $8.68 billion and indefinite-lived intangibles of $1.33 billion are large relative to equity of $14.9 billion, creating impairment risk if the 2009 downturn deepens; the Applera patent litigation is an ongoing contingent risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Thermo Fisher Scientific kept $0.09.
- Revenue$10.50B100.0%
- Cost of revenue−$5.30B50.5%
- Gross profit$5.20B49.5%
- Operating costs−$3.97B37.8%
- Operating income$1.23B11.7%
- Interest, other & tax−$248.5M2.4%
- Net income$980.9M9.3%
Where FY2008 revenue went
$10.50B- Cost of revenue: $5.30B, 50% of revenue
- SG&A: $2.69B, 26% of revenue
- Other operating costs: $1.28B, 12% of revenue
- Net income: $980.9M, 9.3% of revenue
- Interest, other & tax: $248.5M, 2.4% of revenue
Kept 9.3% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $10.50B$9.75B | +7.7% |
| Cost of Revenue | $5.30B$5.08B | +4.3% |
| Gross Profit | $5.20B$4.67B | +11.4% |
| SG&A Expenses | $2.69B$2.55B | +5.6% |
| Operating Expenses | $9.27B$8.77B | +5.7% |
| Operating Income | $1.23B$974.40M | +26.2% |
| Interest Expense | $151.50M— | — |
| Net Income | $980.90M$748.40M | +31.1% |
| EPS (Basic) | $2.34$1.77 | +32.2% |
| EPS (Diluted) | $2.25$1.69 | +33.1% |
| Shares Outstanding (Basic) | 418.20M421.50M | −0.8% |
| Shares Outstanding (Diluted) | 434.70M443.60M | −2.0% |
05—Questions
Frequently Asked Questions
How did Thermo Fisher perform financially in 2008?
Revenue rose 8% to $10.50 billion, operating income increased 26% to $1.23 billion, and net income was $994.2 million, or $2.29 diluted EPS. Growth came mainly from higher demand and pricing at existing businesses, plus acquisitions and favorable currency translation in 2008.
What is the outlook for 2009 that investors should know about?
The filing indicates that currency translation at early-2009 rates would reduce revenue by about 4% in 2009, which management estimated would lower EPS by about $0.15. The company also noted that the economic downturn could cause customers to delay or cancel orders, and it cannot rule out further deterioration in peer valuations affecting goodwill.
How strong is Thermo Fisher's balance sheet and liquidity position?
The company had $1.28 billion of cash and equivalents at year-end 2008 and $950 million of undrawn revolver capacity. Total debt was $2.06 billion, and management believes resources are sufficient for at least the next 24 months. Convertible notes are a key watch item because holders may convert or put them in 2010 and 2011, requiring cash principal payments.
What are the main legal and financial risks disclosed?
The most prominent item is a patent infringement lawsuit filed in 2004 by Applera, MDS and Applied Biosystems/MDS Scientific Instruments over the company's mass spectrometer systems, which seeks treble damages and injunctive relief. The company also carries about $8.7 billion of goodwill and $6.4 billion of acquisition-related intangibles, so future impairments and integration shortfalls are material risks.
Why did the stock price fall sharply in late 2008?
The stock traded between $26.65 and $56.42 in the fourth quarter of 2008, versus a high of $62.77 in the third quarter. The company attributed the decline in market capitalization, which approached book value around year-end, primarily to broader economic uncertainty and concern about companies' ability to meet financial goals, not to a deterioration in its own operating results.
06—Continue