01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific (NYSE: TMO) closed 2009 with revenues of $10.11 billiona, down 4% from $10.50 billion in 2008, as the global economic downturn reduced demand for equipment and, to a lesser extent, services.
Consumables held up better. Organic revenue fell about 3%, with currency translation (-$211 millionb) and acquisitions (+$165 million net) making up the rest of the change. Operating income declined 15% to $1.05 billion, and the operating margin compressed to 10.4% from 11.7%.
Net income was $850.3 millionc, or $2.01 per diluted share, versus $2.25 in 2008. The effective tax rate fell to 8.2%, which flattered the bottom line. Management expects a 17%-19% rate in 2010, so earnings quality on a go-forward basis deserves scrutiny.
Cash generation was a bright spot. Operating cash flow rose to $1.66 billiond from $1.42 billion, driven mainly by working-capital releases in receivables and inventories. Cash and short-term investments reached $1.57 billion at year-end.
The company spent $637 million on acquisitions, including B.R.A.H.M.S. AG (about $482 million) and Biolab (about $132 million), and repurchased $415 million of stock. Total debt is $2.18 billion, of which about $0.66 billion is convertible.
The company refinanced by issuing $748 million of new senior notes and retired its 6.75% notes and a portion of its 2.50% converts. Management states that cash and facilities are sufficient for at least the next 24 months. The key watch items for investors are the 2010 outlook and the segment mix.
Analytical Technologies fell 7% in revenue and its margin declined to 20.2%. Laboratory Products and Services was flat in revenue and its margin declined to 13.7%. The company also disclosed that a significant healthcare supplier is ending an arrangement, reducing sales by roughly $130 million year over year in 2010 (about $75 million of product sales expected in 2010 versus $205 million in 2009, partly offset by a new supplier).
Goodwill and intangibles total roughly $15.3 billion, or about 71% of assets, so impairment risk is material if the recovery stalls. Restructuring actions are expected to yield about $107 million of annual savings. Management notes an unfavorable reading of the global recession and healthcare reform as risks.
02—Key points
Key Highlights
- Revenue fell 4% to $10.11B (from $10.50B); organic revenue declined about 3%, with equipment sales hit hardest while consumables held up better.
- Operating income fell 15% to $1.05B, and operating margin contracted to 10.4% from 11.7%, reflecting lower volumes partly offset by pricing and productivity gains.
- Diluted EPS of $2.01 vs. $2.25 in 2008; the effective tax rate of 8.2% (vs. 13.5%) provided a meaningful boost that management expects will not persist (17%-19% guided for 2010).
- Operating cash flow rose to $1.66B from $1.42B, supported by working-capital reductions in receivables and inventory; cash and short-term investments ended the year at $1.57B.
- Acquisitions totaled $637M in 2009, led by B.R.A.H.M.S. AG (diagnostics, approximately $482M) and Biolab (Australia, approximately $132M), while $415M of stock was repurchased.
- Goodwill ($8.98B) and indefinite-lived intangibles ($1.33B) together represent roughly 48% of total assets, creating impairment risk if the recovery stalls.
- A major healthcare-channel supplier is terminating its arrangement, with related sales expected to fall to about $75M in 2010 from $205M in 2009, partially offset by a new supplier (about $40M expected).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Thermo Fisher Scientific kept $0.09.
- Revenue$9.91B100.0%
- Cost of revenue−$5.16B52.0%
- Gross profit$4.76B48.0%
- Operating costs−$3.75B37.9%
- Operating income$1.00B10.1%
- Interest, other & tax−$151.8M1.5%
- Net income$850.3M8.6%
Where FY2009 revenue went
$9.91B- Cost of revenue: $5.16B, 52% of revenue
- SG&A: $2.59B, 26% of revenue
- Net income: $850.3M, 8.6% of revenue
- Other operating costs: $1.16B, 12% of revenue
- Interest, other & tax: $151.8M, 1.5% of revenue
Kept 8.6% as net incomeInterest, other & tax $151.8M · 1.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $9.91B$10.50B | −5.6% |
| Cost of Revenue | $5.16B$5.30B | −2.7% |
| Gross Profit | $4.76B$5.20B | −8.5% |
| SG&A Expenses | $2.59B$2.69B | −3.7% |
| Operating Expenses | $8.91B$9.27B | −3.9% |
| Operating Income | $1.00B$1.23B | −18.5% |
| Interest Expense | $118.00M$151.50M | −22.1% |
| Net Income | $850.30M$980.90M | −13.3% |
| EPS (Basic) | $2.06$2.34 | −12.0% |
| EPS (Diluted) | $2.01$2.25 | −10.7% |
| Shares Outstanding (Basic) | 412.40M418.20M | −1.4% |
| Shares Outstanding (Diluted) | 422.80M434.70M | −2.7% |
05—Questions
Frequently Asked Questions
Why did Thermo Fisher's revenue and operating income decline in 2009?
Management attributes the decline mainly to the global economic downturn, which reduced customer demand for capital equipment and services, particularly in industrial environmental and process-control markets. Organic revenue fell about 3% ($342 million), and currency translation reduced revenue by another $211 million. Acquisitions added roughly $165 million net. Operating income fell 15% because lower volumes at existing businesses outweighed price increases, productivity gains, and lower operating costs from restructuring.
Is the 2009 net income of $850 million sustainable given the low tax rate?
Probably not at the same level. The 8.2% effective tax rate in 2009 was helped by income tax credits, a reversal of an acquisition-era tax reserve, and a shift in earnings away from higher-tax jurisdictions. Management guided to a 17%-19% effective tax rate for 2010, which would reduce net income all else equal. Investors should model earnings on the higher rate.
How strong is the balance sheet and how is the company funding its obligations?
The company ended 2009 with $1.57 billion of cash and short-term investments and $2.18 billion of total debt, including about $0.66 billion of convertible notes. It issued $748 million of new senior notes in November 2009 to refinance higher-coupon debt and retired the 6.75% senior subordinated notes and part of the 2.50% converts. It has $946 million of available capacity under its $1 billion revolver, which expires in 2012. Management believes existing liquidity suffices for at least the next 24 months, though the company may need to draw on the revolver to settle convertible obligations ($113 million classified as current).
What are the main risks to the investment case going forward?
Key risks include a slow recovery in capital spending by pharmaceutical, industrial, and government customers; currency fluctuations; goodwill and intangible impairment risk (about $10.3 billion combined, or roughly 48% of total assets); the loss of a significant healthcare-channel supplier; potential U.S. healthcare reform and device tax proposals; and dependence on UPS and FedEx for delivery. The company also faces a litigation reserve of about $159 million for product liability and related matters, with potential recoveries from insurers that are subject to legal dispute.
What did the company do with its capital in 2009, and what is the outlook?
In 2009 Thermo Fisher spent $637 million on acquisitions (including B.R.A.H.M.S. and Biolab), $208 million on capital expenditures, and $415 million on share repurchases, and it paid no dividends. Management expects 2010 capital expenditures of $275-$300 million, $38 million of additional restructuring charges, and annual savings of about $107 million from actions initiated in 2009. The company has not paid cash dividends and does not expect to do so in the foreseeable future. It also entered agreements in early 2010 to acquire three businesses for about $225 million plus up to $30 million of contingent consideration.
06—Continue