01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's FY2015 10-K shows a company with $16.97 billiona in revenue, up just 0.5% from $16.89 billion in 2014, but up about 5% on an organic basis after stripping out a $938 million currency headwind and roughly $212 million of net acquisition contributions.
Operating income fell 7% to $2.34 billionb, with operating margin dropping to 13.8% from 14.8%, largely because 2014 included roughly $895 million of gains on business divestitures that did not recur. Excluding those one-time items, segment income rose 3% to $3.82 billion, and reportable segment margin improved to 22.5% from 21.9%, driven by productivity gains and the Life Technologies integration. Diluted EPS from continuing operations was $4.93, up from $4.71, helped by a benefit from income taxes in 2015 and a lower interest expense of $65 million.
The balance sheet and cash generation remain strong. Operating cash flow was $2.82 billionc, and the company repaid $3.78 billion of long-term debt and repurchased $500 million of stock in 2015. Total debt fell to about $12.5 billion from $14.6 billion, and year-end cash was $452 million.
Goodwill of $18.8 billiond and definite-lived intangibles of $11.5 billion remain large relative to $40.9 billion of total assets, so impairment risk and continued amortization of roughly $1.3 billion per year are material considerations. Management expects a stronger U.S. dollar to weigh on 2016 revenue and operating income, and guided to an effective tax rate below 3%.
The key forward-looking event is the agreed acquisition of Affymetrix for about $1.3 billion in cash, expected to close by mid-2016 and to be partly funded with new debt. Investors should weigh the deal's expansion into flow cytometry and single-cell biology against the added leverage, the currency headwinds, and the sustainability of a tax rate that management projects will be far below the historical level.
02—Key points
Key Highlights
- Revenue of $16.97B (+0.5% reported; roughly +5% organic), with currency translation a $938M headwind in 2015.
- Operating income fell 7% to $2.34B (13.8% margin vs. 14.8%), mainly because 2014 included about $895M of divestiture gains; reportable segment income rose 3% to $3.82B.
- Life Sciences Solutions was the standout segment, with revenue up 6% to $4.44B and segment margin up 1.1 points to 30.1%, reflecting Life Technologies integration and bioprocess demand.
- Diluted EPS from continuing operations of $4.93 (vs. $4.71), supported by a $43.9M income tax benefit from 2015 tax planning initiatives.
- Operating cash flow of $2.82B funded $3.78B of debt repayment, $500M of share repurchases, and $241M of dividends; total debt fell to about $12.5B.
- Goodwill ($18.8B) and intangibles ($12.8B) are large relative to $40.9B of assets; amortization of about $1.3B per year weighs on reported earnings.
- Pending $1.3B cash acquisition of Affymetrix (2015 revenue $360M), expected to close by Q2 2016 and partly funded with new debt; management expects a significant 2016 headwind from the stronger dollar.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Thermo Fisher Scientific kept $0.12.
- Revenue$16.96B100.0%
- Cost of revenue−$7.58B44.7%
- Gross profit$9.38B55.3%
- Operating costs−$7.04B41.5%
- Operating income$2.34B13.8%
- Interest, other & tax−$361.0M2.1%
- Net income$1.98B11.6%
Where FY2015 revenue went
$16.96B- Cost of revenue: $7.58B, 45% of revenue
- SG&A: $4.61B, 27% of revenue
- Net income: $1.98B, 12% of revenue
- R&D: $692.0M, 4.1% of revenue
- Other operating costs: $1.74B, 10% of revenue
- Interest, other & tax: $361.0M, 2.1% of revenue
Kept 12% as net incomeInterest, other & tax $361.0M · 2.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $16.96B$16.89B | +0.4% |
| Cost of Revenue | $7.58B$7.93B | −4.4% |
| Gross Profit | $9.38B$8.95B | +4.8% |
| R&D Expenses | $692.00M$691.10M | +0.1% |
| SG&A Expenses | $4.61B$4.90B | −5.8% |
| Operating Expenses | $14.63B$14.39B | +1.7% |
| Operating Income | $2.34B$2.50B | −6.7% |
| Interest Expense | $415.00M$479.90M | −13.5% |
| Net Income | $1.98B$1.89B | +4.3% |
| EPS (Basic) | $4.96$4.76 | +4.2% |
| EPS (Diluted) | $4.92$4.71 | +4.5% |
| Shares Outstanding (Basic) | 399.00M398.20M | +0.2% |
| Shares Outstanding (Diluted) | 402.00M402.30M | −0.1% |
05—Questions
Frequently Asked Questions
Why did operating income decline in 2015 even though segment income grew?
The 2014 results included about $895M of net gains on business sales (the legacy sera and media businesses and Cole-Parmer), which inflated that year's operating income. Excluding those gains and related charges, reportable segment income rose 3% to $3.82B, and the segment margin improved to 22.5%. The reported decline therefore largely reflects the non-recurrence of one-time gains rather than weaker core operations.
How much of 2015 revenue growth came from acquisitions versus the core business?
Reported revenue rose only $76M, but that figure absorbed a $938M currency translation headwind. Acquisitions, net of divestitures, added about $212M, and existing businesses grew about $803M (roughly 5%) on higher demand, particularly from pharma and biotech customers. The organic growth was strong in Asia and moderate in North America and Europe.
What is the outlook for 2016 and the effect of the Affymetrix acquisition?
Management expects a stronger U.S. dollar to create a significant negative impact on 2016 revenue and operating income, and it forecasts an effective tax rate below 3%. The Affymetrix deal (about $1.3B, 2015 revenue of $360M) would expand the company's flow cytometry and single-cell biology offerings, but it is subject to shareholder and regulatory approvals and is expected to close by the end of Q2 2016, with debt issuance planned ahead of closing.
How strong is the balance sheet and how is leverage trending?
Total borrowings at carrying value declined to $12.53B from $14.56B as the company repaid $3.78B of debt in 2015. Cash fell to $452M from $1.34B, and the company had a $2.0B undrawn revolver. The revolver covenants require a leverage ratio below 3.5x and interest coverage above 3.0x. Management believes existing cash and operating cash flow are sufficient for at least the next 24 months, but the planned Affymetrix debt will increase leverage again.
What are the main risks to the investment case?
Key risks include significant currency exposure (over half of revenue is international and there is a $938M translation hit in 2015), budget-driven government and academic spending, and substantial goodwill and intangible assets that could require impairment if business performance falters. Dependence on acquisitions, large intangible amortization, a concentrated set of Life Technologies-related patent lawsuits, and the sustainability of a very low tax rate are also material considerations for investors.
06—Continue