01—Abstract
Summary
Summary of the 10-K filed February 26, 2015. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's FY2014 10-K shows a transformational year driven by the February 3, 2014 acquisition of Life Technologies for a total purchase price of $15.30 billiona (net of cash acquired, including $2.28 billion of assumed debt).
Revenue rose 29% to $16.89 billionb from $13.09 billion, with acquisitions contributing $3.31 billion and organic growth of about 4% ($549 million). Reported operating income more than doubled to $2.50 billion (14.8% margin) from $1.61 billion, but this was flattered by $895 million of net gains on business divestitures (sera and media businesses sold to GE Healthcare, and Cole-Parmer), offset by $1.33 billion of acquisition-related intangible amortization. Diluted EPS from continuing operations rose to $4.71 from $3.50.
Note that the reported figures carry significant one-time items, so underlying profitability is better judged from segment income, which rose 45% to $3.69 billionc, and from the organic growth rate. Balance sheet leverage increased sharply. Total assets grew to $42.85 billion, long-term obligations to $12.35 billion, and total debt to about $14.56 billion, with goodwill of $18.84 billion and intangibles of $14.11 billion representing a large share of assets and creating impairment risk if the Life Sciences Solutions segment underperforms (its goodwill cushion was only 9% at the October 2014 test).
Operating cash flow of $2.62 billiond comfortably covered $428 million of capex and $235 million of dividends, and the company repurchased $500 million of stock in early 2015 under a $910 million remaining authorization. Management flagged a significant expected negative currency impact on 2015 revenue and operating income from the stronger U.S. dollar, and expects a 2015 effective tax rate below 3%. Key risks for investors include the integration of Life Technologies, covenant compliance (leverage covenant of 4.5x stepping down to 3.5x by August 2015), exposure to U.S. government and NIH funding, currency translation, and ongoing intellectual property litigation inherited from Life Technologies, including a Promega case in which a $52 million award was overturned and then partially revived on appeal.
02—Key points
Key Highlights
- Revenue grew 29% to $16.89 billion, with $3.31 billion from acquisitions (mainly Life Technologies) and about 4% organic growth ($549 million) driven by biopharma demand.
- Operating income more than doubled to $2.50 billion (14.8% margin), but included $895 million of net gains on divestitures and $1.33 billion of acquisition-related amortization, so underlying results are better read via segment income.
- Reportable segment income rose 45% to $3.69 billion, with Life Sciences Solutions segment income jumping to $1.21 billion from $170 million.
- Diluted EPS from continuing operations increased to $4.71 from $3.50 (2013), helped by a 9.2% effective tax rate that benefited from foreign tax credits and gains.
- Total debt rose to about $14.56 billion and total assets to $42.85 billion; goodwill ($18.84 billion) and intangibles ($14.11 billion) now dominate the balance sheet, creating impairment risk.
- Management expects a significant negative currency impact on 2015 revenue and operating income from the stronger U.S. dollar, and expects a 2015 effective tax rate under 3%.
- Shareholder returns: $0.60 annual dividend (unchanged), $910 million remaining buyback authorization at year-end, and $500 million repurchased in early 2015.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Thermo Fisher Scientific kept $0.11.
- Revenue$16.89B100.0%
- Cost of revenue−$7.93B47.0%
- Gross profit$8.95B53.0%
- Operating costs−$6.45B38.2%
- Operating income$2.50B14.8%
- Interest, other & tax−$608.6M3.6%
- Net income$1.89B11.2%
Where FY2014 revenue went
$16.89B- Cost of revenue: $7.93B, 47% of revenue
- SG&A: $4.90B, 29% of revenue
- Net income: $1.89B, 11% of revenue
- R&D: $691.1M, 4.1% of revenue
- Other operating costs: $864.7M, 5.1% of revenue
- Interest, other & tax: $608.6M, 3.6% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 26, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $16.89B$13.09B | +29.0% |
| Cost of Revenue | $7.93B$6.31B | +25.8% |
| Gross Profit | $8.95B$6.78B | +32.1% |
| R&D Expenses | $691.10M$395.50M | +74.7% |
| SG&A Expenses | $4.90B$3.45B | +42.1% |
| Operating Expenses | $14.39B$11.48B | +25.3% |
| Operating Income | $2.50B$1.61B | +55.5% |
| Interest Expense | $479.90M$262.10M | +83.1% |
| Net Income | $1.89B$1.27B | +48.8% |
| EPS (Basic) | $4.76$3.53 | +34.8% |
| EPS (Diluted) | $4.71$3.48 | +35.3% |
| Shares Outstanding (Basic) | 398.20M360.30M | +10.5% |
| Shares Outstanding (Diluted) | 402.30M365.80M | +10.0% |
05—Questions
Frequently Asked Questions
What was the main driver of Thermo Fisher's revenue growth in 2014?
The February 2014 acquisition of Life Technologies drove most of the increase. Revenue rose $3.80 billion to $16.89 billion, of which $3.31 billion came from acquisitions net of divestitures. Organic growth was about $549 million (roughly 4%), led by biopharma demand, with Europe strongest and North America and Asia moderate.
Is the 2014 operating income improvement sustainable?
Only partly. Reported operating income of $2.50 billion included $895 million of net gains on business sales and $130 million+ of restructuring-related gains, offset by $450 million-plus of acquisition charges and $1.33 billion of amortization. Investors should focus on segment income ($3.69 billion, up 45%) and organic growth to gauge the underlying earnings base, and recognize that the acquisition's amortization will remain a large non-cash drag (about $1.3 billion per year scheduled for 2015-2017).
How much debt does Thermo Fisher carry, and are there any near-term pressures?
Total debt was about $14.56 billion at year-end 2014, with $2.21 billion of short-term obligations, including $1.21 billion of senior notes due in the first half of 2015 and $1.00 billion of term loan payments due within twelve months. The company said it would redeem $250 million of 5% notes in March 2015 and has a $2.00 billion revolver (increased from $1.50 billion in February 2015). Its covenants require a debt-to-EBITDA ratio below 4.5x, stepping down to 3.5x by August 2015, and interest coverage of at least 3.0x. Operating cash flow of $2.62 billion and $1.35 billion of cash and short-term investments provide liquidity for at least the next 24 months.
What are the main risks flagged in the filing?
Key risks include integrating Life Technologies (potential loss of key employees and unanticipated systems issues), a strong U.S. dollar that will hurt 2015 reported results, federal funding cuts affecting NIH-dependent customers, potential goodwill and intangible impairment (the Life Sciences Solutions segment had only a 9% fair-value cushion), ongoing patent litigation inherited from Life Technologies, sensitivity to government contract compliance, and reliance on a few large distribution and delivery partners. The company also notes that its largest laboratory-products customer is also a competitor.
Why is the 2014 effective tax rate so low, and will it persist?
The effective tax rate was 9.2% in 2014 (versus 3.1% in 2013). Drivers included U.S. foreign tax credits from non-U.S. cash distributions, R&D tax credits, Singapore tax holiday benefits, and earnings concentrated in lower-tax jurisdictions. Although the 2014 provision included $390 million of tax on divestiture gains, management expects the 2015 effective rate to be below 3%, but notes that the U.S. R&D credit had not been extended for 2015 as of February 26, 2015, and that cash taxes ($586 million in 2014) exceeded book tax expense because of non-deductible intangible amortization.
06—Continue