01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's FY2016 10-K shows a company that grew revenue 8% to $18.27 billiona, with about 4% organic growth and roughly $733 million contributed by acquisitions, most notably Affymetrix (March 2016, $1.34 billion) and FEI Company (September 2016, $4.08 billion).
Operating income rose 5% to $2.45 billionb, but operating margin slipped to 13.4% from 13.8% because of higher restructuring and acquisition-related charges, strategic growth investments, and unfavorable sales mix. Diluted EPS from continuing operations was $5.10, versus $4.93 in 2015. Cash flow from operations improved to $3.16 billion.
Management expects the 2017 effective tax rate to be below 3%, aided by foreign tax credit planning, and expects a continued currency headwind from the stronger U.S. dollar. The balance sheet took on significant leverage. Total debt rose to about $16.63 billionc, from $12.47 billion at year-end 2015, to fund acquisitions.
Goodwill and intangibles now total roughly $35 billiond, or about 77% of total assets of $45.9 billion, which creates impairment risk. The 10-K flags that the Materials and Structural Analysis reporting unit (the former FEI business) had only a nominal fair-value cushion over book value at its October/November 2016 test date, with $1.99 billion of goodwill. Debt covenants require a total leverage ratio below 4.5x, stepping down to 3.5x, and an interest coverage ratio of at least 3.0x.
For investors, the key trade-offs are strong organic demand from pharma and biotech and a growing analytical instruments franchise, against heavier debt, large acquisition-driven amortization of about $1.38 billion, a thin goodwill cushion in the FEI unit, and ongoing IP litigation in the Life Technologies business. Management reiterated a $0.15 quarterly dividend and repurchased $1.25 billion of stock during 2016, with $750 million left under the authorization as of February 28, 2017.
02—Key points
Key Highlights
- Revenue rose 8% to $18.27 billion (about 4% organic growth, $733 million from acquisitions, and a $145 million currency headwind).
- Operating income grew 5% to $2.45 billion, but operating margin fell to 13.4% from 13.8% due to restructuring, acquisition charges, and growth investments.
- Diluted EPS from continuing operations was $5.10, up from $4.93, and operating cash flow reached $3.16 billion.
- Total debt increased to about $16.63 billion from $12.47 billion, funding the $5.46 billion of 2016 acquisitions (FEI and Affymetrix) and the $1.25 billion of share repurchases.
- Goodwill of $21.33 billion and indefinite-lived intangibles of $1.34 billion together represent about 50% of total assets; the FEI-related Materials and Structural Analysis unit had only a nominal fair-value cushion.
- Life Sciences Solutions (Life Technologies, Affymetrix) was the largest segment at $4.98 billion in revenue with a 30.4% operating margin, and Analytical Instruments grew 14% to $3.67 billion.
- The 2017 effective tax rate is expected to be below 3%, but the company faces risks from U.S. tax and trade policy shifts, the Brexit referendum, and an ongoing patent litigation docket.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Thermo Fisher Scientific kept $0.11.
- Revenue$18.27B100.0%
- Cost of revenue−$8.21B44.9%
- Gross profit$10.06B55.1%
- Operating costs−$7.60B41.6%
- Operating income$2.46B13.5%
- Interest, other & tax−$436.0M2.4%
- Net income$2.02B11.1%
Where FY2016 revenue went
$18.27B- Cost of revenue: $8.21B, 45% of revenue
- SG&A: $4.97B, 27% of revenue
- Net income: $2.02B, 11% of revenue
- R&D: $754.0M, 4.1% of revenue
- Other operating costs: $1.88B, 10% of revenue
- Interest, other & tax: $436.0M, 2.4% of revenue
Kept 11% as net incomeInterest, other & tax $436.0M · 2.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $18.27B$16.96B | +7.7% |
| Cost of Revenue | $8.21B$7.58B | +8.3% |
| Gross Profit | $10.06B$9.38B | +7.2% |
| R&D Expenses | $754.00M$692.00M | +9.0% |
| SG&A Expenses | $4.97B$4.61B | +7.8% |
| Operating Expenses | $15.82B$14.63B | +8.1% |
| Operating Income | $2.46B$2.34B | +5.2% |
| Interest Expense | $469.00M$415.00M | +13.0% |
| Net Income | $2.02B$1.98B | +2.4% |
| EPS (Basic) | $5.12$4.96 | +3.2% |
| EPS (Diluted) | $5.09$4.92 | +3.5% |
| Shares Outstanding (Basic) | 395.00M399.00M | −1.0% |
| Shares Outstanding (Diluted) | 397.00M402.00M | −1.2% |
05—Questions
Frequently Asked Questions
Why did operating margin decline in 2016 even though revenue grew?
Operating margin fell to 13.4% from 13.8% mainly because of higher restructuring and acquisition-related charges ($395 million in total restructuring and other costs, including FEI and Affymetrix integration costs), strategic growth investments, and unfavorable sales mix. Acquisition-related amortization also rose to $1.38 billion.
How much debt does Thermo Fisher carry, and is it manageable?
Total borrowings were about $16.63 billion at year-end 2016, up from $12.47 billion. Management says cash flow from operations and an undrawn $2.50 billion revolver should cover obligations, and the company reports compliance with its covenants (leverage below 4.5x stepping down to 3.5x, and interest coverage of at least 3.0x). Higher leverage does reduce financial flexibility, which is a key risk to monitor.
Is there a goodwill impairment risk from the FEI acquisition?
The 10-K states that the Materials and Structural Analysis reporting unit, which consists of the former FEI business, had a nominal cushion of fair value over book value during the 2016 impairment test, with $1.99 billion of goodwill and a $3.93 billion carrying value. Small changes in cash flows, margins, or the discount rate could trigger an impairment charge, so this is a key area to watch.
What is the outlook for 2017 earnings and taxes?
The company expects a continued adverse currency effect on 2017 revenue and operating income from the stronger U.S. dollar. It forecasts a 2017 effective tax rate below 3%, based on its foreign tax credit planning and lower-tax jurisdictions. Restructuring charges of about $85 million are expected in 2017, and restructuring savings of about $100 million from 2016 actions are expected to build through 2017.
How is the company returning capital to shareholders?
Thermo Fisher paid a $0.15 quarterly dividend ($0.60 per year, or about $238 million total) and repurchased $1.25 billion of common stock during 2016. As of February 28, 2017, $750 million remained under the July 2016 $1.50 billion repurchase authorization, after an early-2017 buyback of $500 million.
06—Continue