01—Abstract
Summary
Summary of the 10-K filed February 28, 2018. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's fiscal 2017 10-K shows a company that grew revenue 14% to $20.92 billiona, with about 5% organic growth ($949 million) alongside $1.63 billion from acquisitions, led by the $7.36 billion Patheon N.V. purchase closed in August 2017.
Operating income rose 21% to $2.97 billionb, and the operating margin expanded to 14.2% from 13.4%. Reportable segment income grew 15% to $4.86 billion, with the Analytical Instruments segment (up 38%) and Life Sciences Solutions (up 19%) leading. Cash from operations reached $4.01 billion, helped by a $1.02 billion increase in other liabilities tied to the one-time transition tax under the Tax Act.
Net income rose to $2.23 billionc from continuing operations, and diluted EPS from continuing operations was $5.60, up from $5.10. The balance sheet is considerably more leveraged. Total debt rose to about $21.0 billion from $16.6 billion, and goodwill plus intangibles now total roughly $43 billion, about 76% of total assets of $56.7 billion.
Management guides to a 2018 effective tax rate of 6% to 9%, and the company remains in compliance with its covenants, with a maximum leverage ratio of 4.0x stepping down to 3.5x in Q3 2018. The company also issued about $1.69 billiond of equity in 2017 to help fund the Patheon deal.
Key risks for investors include debt-service burden, goodwill impairment sensitivity in the newly formed Patheon reporting unit (carrying value $7.33 billion, with only a qualitative test performed), a $1.41 billion unrecognized tax benefit reserve, and ongoing intellectual property litigation at Life Technologies. Overall, the filing shows strong organic demand and margin expansion, but growth in 2017 depended heavily on debt-financed M&A, which makes integration execution and deleveraging central to the investment case.
02—Key points
Key Highlights
- Revenue rose 14% to $20.92B; organic growth of about 5% ($949M), with acquisitions contributing $1.63B and currency adding $70M.
- Operating income increased 21% to $2.97B, and operating margin expanded 80 bps to 14.2%.
- Analytical Instruments segment revenue grew 31% to $4.82B, with segment income up 38%; Life Sciences Solutions margin reached 33.1%.
- Patheon N.V. acquisition (closed Aug 2017, $7.36B including net debt) added a CDMO platform; Patheon contributed $722M of revenue post-close, with a $108M operating loss due to acquisition charges.
- Cash from operations was $4.01B, but the figure was boosted by a $1.02B increase in other liabilities from the transition tax; free cash flow after $508M capex was about $3.5B.
- Total debt increased to about $21.0B (from $16.6B), and total goodwill plus intangibles of roughly $43B represent about 76% of total assets, raising impairment and leverage risk.
- Tax Act impact: a net $204M provisional charge, with a 2018 effective tax rate guided to 6%–9%; the company also holds a $1.41B unrecognized tax benefit reserve.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Thermo Fisher Scientific kept $0.11.
- Revenue$20.92B100.0%
- Cost of revenue−$8.98B42.9%
- Gross profit$11.94B57.1%
- Operating costs−$8.98B42.9%
- Operating income$2.96B14.2%
- Interest, other & tax−$735.0M3.5%
- Net income$2.23B10.6%
Where FY2017 revenue went
$20.92B- Cost of revenue: $8.98B, 43% of revenue
- SG&A: $5.50B, 26% of revenue
- Other operating costs: $2.59B, 12% of revenue
- Net income: $2.23B, 11% of revenue
- R&D: $887.0M, 4.2% of revenue
- Interest, other & tax: $735.0M, 3.5% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 28, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $20.92B$18.27B | +14.5% |
| Cost of Revenue | $8.98B$8.21B | +9.3% |
| Gross Profit | $11.94B$10.06B | +18.7% |
| R&D Expenses | $887.00M$754.00M | +17.6% |
| SG&A Expenses | $5.50B$4.97B | +10.7% |
| Operating Expenses | $17.96B$15.82B | +13.5% |
| Operating Income | $2.96B$2.46B | +20.4% |
| Interest Expense | $592.00M$469.00M | +26.2% |
| Net Income | $2.23B$2.02B | +10.0% |
| EPS (Basic) | $5.64$5.12 | +10.2% |
| EPS (Diluted) | $5.59$5.09 | +9.8% |
| Shares Outstanding (Basic) | 395.00M395.00M | 0.0% |
| Shares Outstanding (Diluted) | 398.00M397.00M | +0.3% |
05—Questions
Frequently Asked Questions
How much of Thermo Fisher's 2017 growth came from organic demand versus acquisitions?
Of the $2.64B revenue increase, about $1.63B came from acquisitions (mainly Patheon, FEI-related growth and Finesse/Core Informatics), $70M from favorable currency translation, and $949M (about 5%) from organic growth in existing businesses. Organic growth was strongest in Asia and in the Analytical Instruments and Life Sciences Solutions segments.
Is the Patheon acquisition at risk of goodwill impairment?
Management established a separate Patheon reporting unit with a carrying value of $7.33B, including $3.25B of goodwill. Because its fair value was not substantially in excess of carrying value at the 2017 annual test, the company used a qualitative assessment rather than a quantitative test. The filing notes that small decreases in future cash flows, profitability or terminal growth assumptions could trigger an impairment.
How leveraged is Thermo Fisher after the 2017 acquisitions, and are there covenant concerns?
Total borrowings were about $21.0B at year-end 2017, versus $16.6B a year earlier, with $2.14B of short-term debt. The revolving credit facility covenants require a maximum consolidated leverage ratio of 4.0x through Q2 2018, stepping down to 3.5x from Q3 2018, and a minimum interest coverage ratio of 3.0x. As of year-end, no revolver borrowings were outstanding, and the company said it was in compliance. Compliance depends on continued EBITDA growth and deleveraging.
What drove the large 2017 operating cash flow, and is it sustainable?
Operating cash flow of $4.01B was lifted by a $1.02B increase in other liabilities, primarily from the one-time Tax Act transition tax liability. Management said foreign tax credits mean this will not require significant cash outlays. Underlying cash flow also benefited from higher pre-tax income. Cash taxes were $479M, down from $663M. Investors should look at recurring cash generation excluding these one-time items.
What are the main risks to investors highlighted in the filing?
Key risks include the leveraged balance sheet and interest burden, goodwill and intangible impairment risk (about $43B combined), ongoing patent litigation at Life Technologies (Promega, Unisone and Enzo matters), exposure to Patheon quality and regulatory compliance, a $1.41B unrecognized tax benefit reserve, and U.S. trade and drug-pricing policy changes that could affect demand or costs. Currency exposure is also significant, since about half of cash and cash flow is generated outside the U.S. and the company has permanently reinvested foreign earnings.
06—Continue