01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's FY2013 10-K, filed February 27, 2014, is dominated by its transformational acquisition of Life Technologies, which closed February 3, 2014 for roughly $13.6 billiona in cash plus about $1.5 billion of assumed net debt.
The filing reports 2013 revenue of $13.09 billionb, up 4.6% year over year, with organic growth of about 3%. GAAP operating income rose to $1.61 billion (12.3% margin) from $1.48 billion, and diluted EPS from continuing operations was $3.50 versus $3.43. Income from continuing operations rose modestly to $1.28 billion, though 2013 results carried $126 million of acquisition and financing costs and $180 million of restructuring and other charges.
Large amortization of acquired intangibles ($763 millionc) continues to weigh on GAAP earnings, and the effective tax rate was unusually low at 3.1%. The balance sheet changed sharply at year-end. Cash and equivalents rose to $5.83 billion, largely from $3.2 billion of senior notes issued in December 2013 ahead of the deal, and total assets grew to $31.9 billion.
Total debt was about $10.5 billiond at year-end, and the company then borrowed a $5.0 billion term loan and issued about 34.9 million shares through equity forwards (about $2.94 billion) in January and February 2014 to fund the purchase. Financial covenants cap the consolidated leverage ratio at 5.5x during the first six months after closing, stepping down to 3.5x after 18 months, with a minimum interest coverage of 3.0x. Investors should expect pro forma leverage to be elevated for some time.
Management guided to a 2014 effective tax rate of 2% to 5%, and the company agreed to sell its sera and media, gene modulation and magnetic beads businesses to GE Healthcare for about $1.06 billion to secure antitrust clearance. The company is reorganizing into four reporting segments in 2014, with the new Life Sciences Solutions segment at its core.
Management also disclosed a number of pending intellectual property lawsuits inherited from Life Technologies, including Illumina, Enzo, and Promega, with a $60.9 million Enzo judgment accrued. These matters, along with integration risk and the heavy goodwill and intangibles base (about $12.5 billion of goodwill and $1.34 billion of indefinite-lived tradenames), are the key risks the filing highlights.
02—Key points
Key Highlights
- Closed the approximately $13.6 billion cash acquisition of Life Technologies on February 3, 2014, funded by a $5.0 billion term loan, senior notes, roughly $2.94 billion of equity forwards, and cash on hand.
- 2013 revenue reached $13.09 billion, up 4.6% from $12.51 billion; organic growth was about 3%, with strength in pharma/biotech and Asia and softer academic and government demand.
- GAAP operating income rose to $1.61 billion (12.3% margin) from $1.48 billion (11.8%), while reportable segment income grew 7% to $2.55 billion.
- Diluted EPS from continuing operations was $3.50, up from $3.43; the 3.1% effective tax rate was helped by a $104 million net benefit from repatriation transactions, and 2014 guidance is 2% to 5%.
- Year-end cash and short-term investments were $5.83 billion, but total debt of about $10.5 billion rises substantially post-acquisition, with leverage covenants stepping down from 5.5x to 3.5x.
- Four segments take effect in 2014, including the new Life Sciences Solutions segment; sera and media and related businesses are being sold to GE Healthcare for about $1.06 billion.
- Life Technologies inherits multiple patent infringement suits (Illumina, Enzo, Promega, and others), and the filing discloses a $60.9 million Enzo judgment already accrued.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Thermo Fisher Scientific kept $0.10.
- Revenue$13.09B100.0%
- Cost of revenue−$6.31B48.2%
- Gross profit$6.78B51.8%
- Operating costs−$5.17B39.5%
- Operating income$1.61B12.3%
- Interest, other & tax−$336.3M2.6%
- Net income$1.27B9.7%
Where FY2013 revenue went
$13.09B- Cost of revenue: $6.31B, 48% of revenue
- SG&A: $3.45B, 26% of revenue
- Net income: $1.27B, 9.7% of revenue
- R&D: $395.5M, 3.0% of revenue
- Other operating costs: $1.33B, 10% of revenue
- Interest, other & tax: $336.3M, 2.6% of revenue
Kept 9.7% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $13.09B$12.51B | +4.6% |
| Cost of Revenue | $6.31B$6.10B | +3.4% |
| Gross Profit | $6.78B$6.41B | +5.8% |
| R&D Expenses | $395.50M$376.40M | +5.1% |
| SG&A Expenses | $3.45B$3.35B | +2.7% |
| Operating Expenses | $11.48B$11.03B | +4.1% |
| Operating Income | $1.61B$1.48B | +8.6% |
| Interest Expense | $262.10M$241.60M | +8.5% |
| Net Income | $1.27B$1.18B | +8.1% |
| EPS (Basic) | $3.53$3.24 | +9.0% |
| EPS (Diluted) | $3.48$3.21 | +8.4% |
| Shares Outstanding (Basic) | 360.30M363.80M | −1.0% |
| Shares Outstanding (Diluted) | 365.80M366.60M | −0.2% |
05—Questions
Frequently Asked Questions
Why did Thermo Fisher take on so much debt in late 2013 and early 2014?
The company needed roughly $13.6 billion in cash to acquire Life Technologies. It raised $3.2 billion of senior notes in December 2013, drew a $5.0 billion term loan in January 2014, and sold about $2.94 billion of equity through forward agreements. Cash on hand covered the remainder. Total debt therefore rises well above the roughly $10.5 billion outstanding at December 31, 2013.
How did the core business perform in 2013 before the acquisition closed?
Revenue grew 4.6% to $13.09 billion, with about 3% organic growth. Growth was strongest in pharma and biotech and in Asia. Academic and government demand was weaker because of funding uncertainty, and the Specialty Diagnostics segment grew the fastest, aided by acquisitions and a strong flu and allergy season. Operating margin improved to 12.3% on productivity gains.
Why is GAAP earnings much lower than the segment-level profit figures?
Segment income excludes amortization of acquisition-related intangibles, which was $763 million in 2013. It also excludes restructuring costs ($180 million total in 2013, including $74 million in SG&A tied largely to the Life Technologies deal) and other acquisition-related charges. Investors often focus on the adjusted measure, but the GAAP figures reflect the real cost of past acquisitions.
What are the main risks investors should watch after the Life Technologies deal?
The main risks are integration execution, which could delay promised cost savings and cause staff or customer losses; leverage, given covenant limits of 5.5x debt to EBITDA stepping down to 3.5x and a 3.0x minimum interest coverage; ongoing patent litigation inherited from Life Technologies; and possible goodwill impairment, since the ImmunoDiagnostics unit had only an 11% cushion of fair value over book value. Continued softness in government-funded research demand is another risk.
06—Continue