01—Abstract
Summary
Summary of the 10-K filed February 24, 2011. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific (TMO) reported FY2010 revenue of $10.79 billiona, up 7% from $10.11 billion in 2009 (about 4% organic after currency and acquisitions).
Operating income rose 21% to $1.26 billionb, with operating margin expanding to 11.7% from 10.4%, driven by profit on incremental sales, productivity gains, and restructuring savings. Diluted EPS was $2.53, up from $2.01. Demand recovered in Analytical Technologies (up 11% to $4.61 billion) and Laboratory Products and Services (up 4% to $6.69 billion), though the supply-contract cessation in the healthcare channel and a milder flu season cut growth by about 2 points.
Cash generation remained solid, with operating cash flow of $1.50 billionc, though down from $1.66 billion on working capital build. The company spent $606 million on acquisitions and $1.01 billion on share repurchases during 2010. Total debt ended at $2.14 billion, with $926 million in cash and short-term investments and $952 million of undrawn revolver capacity.
Management guided to a 2011 effective tax rate of 15.5% to 17.5%. The key forward-looking event is the pending $2.1 billiond cash acquisition of Dionex, funded by $2.2 billion of senior notes issued in February 2011, with a September 30, 2011 deadline for closing or the notes must be redeemed at 101%.
Thermo also agreed to sell Athena Diagnostics and Lancaster Laboratories for $940 million in aggregate. Investors should weigh the integration and leverage risk from Dionex against the company's margin momentum and capital return program.
02—Key points
Key Highlights
- Revenue grew 7% to $10.79 billion in 2010; organic growth was about 4%, with stronger demand in Asia and a rebound from a weak 2009.
- Operating income rose 21% to $1.26 billion, and operating margin expanded 130 basis points to 11.7%, reflecting incremental sales profit and restructuring savings.
- Diluted EPS increased to $2.53 from $2.01, and net income reached $1.04 billion.
- Operating cash flow was $1.50 billion, down from $1.66 billion, as receivables and inventories grew to support sales.
- The company repurchased $1.01 billion of stock in 2010 and authorized an additional $750 million in February 2011.
- Pending $2.1 billion Dionex acquisition is financed by $2.2 billion of senior notes issued in February 2011; if the deal does not close by September 30, 2011, the notes must be redeemed at 101%.
- Goodwill of $9.27 billion and indefinite-lived intangibles of $1.33 billion make up a large share of $21.35 billion total assets, creating impairment risk if performance weakens.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Thermo Fisher Scientific kept $0.10.
- Revenue$10.39B100.0%
- Cost of revenue−$5.26B50.7%
- Gross profit$5.13B49.3%
- Operating costs−$3.94B37.9%
- Operating income$1.19B11.4%
- Interest, other & tax−$152.5M1.5%
- Net income$1.04B10.0%
Where FY2010 revenue went
$10.39B- Cost of revenue: $5.26B, 51% of revenue
- SG&A: $2.73B, 26% of revenue
- Net income: $1.04B, 10.0% of revenue
- R&D: $284.4M, 2.7% of revenue
- Other operating costs: $927.1M, 8.9% of revenue
- Interest, other & tax: $152.5M, 1.5% of revenue
Kept 10.0% as net incomeInterest, other & tax $152.5M · 1.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 24, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $10.39B$9.91B | +4.9% |
| Cost of Revenue | $5.26B$5.16B | +2.1% |
| Gross Profit | $5.13B$4.76B | +7.8% |
| R&D Expenses | $284.40M— | — |
| SG&A Expenses | $2.73B$2.59B | +5.2% |
| Operating Expenses | $9.21B$8.91B | +3.3% |
| Operating Income | $1.19B$1.00B | +18.6% |
| Interest Expense | $84.70M$118.00M | −28.2% |
| Net Income | $1.04B$850.30M | +21.8% |
| EPS (Basic) | $2.57$2.06 | +24.8% |
| EPS (Diluted) | $2.53$2.01 | +25.9% |
| Shares Outstanding (Basic) | 403.30M412.40M | −2.2% |
| Shares Outstanding (Diluted) | 409.40M422.80M | −3.2% |
05—Questions
Frequently Asked Questions
What drove the improvement in Thermo Fisher's profitability in 2010?
Operating margin rose to 11.7% from 10.4% mainly because of profit on higher sales volume, along with productivity gains, global sourcing initiatives, and lower costs after restructuring. Amortization of acquisition intangibles also fell by $25 million. The Analytical Technologies segment's margin improved to 21.3%, and Laboratory Products and Services improved to 13.9%.
How is the Dionex acquisition being financed, and what is the risk if it fails?
Thermo Fisher issued $2.2 billion of senior notes in February 2011 to fund the $2.1 billion all-cash purchase of Dionex. The notes carry a special mandatory redemption provision: if the acquisition is not completed by September 30, 2011, the company must redeem the notes at 101% of principal plus accrued interest. Completion still depends on a majority of Dionex shares being tendered and on regulatory approvals.
What are the main headwinds the company identified for 2011?
Management cited the cessation of a healthcare-channel supply contract, which is expected to reduce revenue growth by about $55 million in the first half of 2011. Other risks include a higher effective tax rate (15.5% to 17.5%), reduced foreign tax credits from new U.S. legislation, about $35 million of additional restructuring charges, and continued dependence on government and capital spending. Exposure to currency movements is also a factor, since a 10% depreciation in foreign currencies would reduce equity by $441 million.
How strong is the balance sheet and how much debt does the company carry?
Total debt was $2.14 billion at year-end 2010, with about $0.33 billion in convertible debt. Cash and short-term investments were $926 million, and $952 million was available under the revolver, which expires in 2012. Shareholders' equity was $15.36 billion. The company's revolver covenant caps the consolidated leverage ratio at 3.0 to 1.0. After the February 2011 notes issuance, debt will rise substantially, so leverage will increase unless the company deleverages quickly.
What is the company's capital return policy?
Thermo Fisher has never paid cash dividends and does not expect to in the foreseeable future. Instead it returns capital through share repurchases: $1.01 billion was repurchased in 2010, with $487.5 million remaining at year-end under existing authorizations. The board authorized an additional $750 million on February 23, 2011, running through February 2012. Repurchases may be reduced in favor of debt paydown or acquisitions such as Dionex.
06—Continue