Thermo Fisher Scientific Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone Q4 filing. The 2013 financial statements reflect legacy Thermo Fisher; Life Technologies was acquired on February 3, 2014, and its results are not included in 2013 reported results.
Business context and reporting period
Thermo Fisher supplies analytical instruments, diagnostics, laboratory products, reagents, software and related services. Before the Life Technologies acquisition, it reported three segments: Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services. Management established a fourth segment, Life Sciences Solutions, effective January 1, 2014.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $13.090 billion | $12.510 billion |
| Operating income / margin | $1.610 billion / 12.3% | $1.482 billion / 11.8% |
| Income from continuing operations | $1.279 billion | $1.258 billion |
| Net income | $1.273 billion | $1.178 billion |
| Diluted EPS from continuing operations | $3.50 | $3.43 |
| Diluted EPS | $3.48 | $3.21 |
| Cash provided by operating activities | $2.011 billion | $2.040 billion |
| Capital expenditures | $282 million | $315 million |
| Cash and short-term investments at year-end | $5.831 billion | $810 million |
| Debt at carrying value | $10.487 billion | $7.124 billion |
| Working capital | $6.755 billion | $2.742 billion |
Q4 2013: Revenue was $3.467 billion, gross profit $1.482 billion, income from continuing operations $343.0 million, net income $342.1 million, and diluted EPS from continuing operations $0.92. Q4 2012 comparatives were $3.259 billion, $1.386 billion, $385.8 million, $376.4 million, and $1.07, respectively.
Material changes versus prior comparable periods
- Annual revenue increased 4.6%. Acquisitions contributed $188 million; unfavorable currency translation reduced revenue by $36 million; revenue growth excluding those effects was $429 million, or 3%.
- Operating income rose 9%, and operating margin improved by 0.5 percentage point. Management attributed the improvement mainly to productivity gains and, to a lesser extent, acquired-business contributions; strategic investments, currency effects, acquisition charges and a medical-device excise tax were offsets.
- Continuing-operations income increased modestly, despite $126 million of Life Technologies acquisition and financing costs. Net income and diluted EPS also increased year over year.
- Operating cash flow was slightly lower, reflecting acquisition-related financing and transaction payments and increased working capital needs. Year-end cash rose substantially because of debt issued to help fund the pending Life Technologies purchase.
- Debt increased, and share repurchases were suspended at the end of Q1 2013 in connection with the acquisition.
Segment performance
- Analytical Technologies: Revenue $4.125 billion, up 3%; adjusted segment operating margin 18.6%, unchanged.
- Specialty Diagnostics: Revenue $3.192 billion, up 8%; adjusted segment operating margin 27.2%, versus 25.7%.
- Laboratory Products and Services: Revenue $6.351 billion, up 5%; adjusted segment operating margin 14.5%, versus 14.4%.
Segment margins are management’s adjusted measure and exclude specified acquisition-related charges, restructuring and other costs, and acquisition-related intangible amortization; they are not directly comparable to the consolidated operating margin.
Outlook, management commentary, risks and unusual items
- The company completed the $13.6 billion cash acquisition of Life Technologies on February 3, 2014, assuming certain Life Technologies debt. It borrowed $5.0 billion under a term facility and issued 34.9 million shares for proceeds of approximately $2.94 billion in January and February 2014; cash on hand also funded the transaction. Management said remaining cash, operating cash flow and available revolving credit were expected to meet cash needs for at least 24 months.
- Thermo Fisher agreed to sell its sera and media, gene modulation, and magnetic beads businesses to GE Healthcare for approximately $1.06 billion. The businesses generated about $250 million in 2013 revenue and $80 million in operating income. The sale remained subject to regulatory approvals and customary closing conditions at filing.
- Management expected a 2014 effective tax rate of 2%–5%, based on forecast profitability by country. The unusually low 2013 rate of 3.1% benefited significantly from foreign tax credits and other tax items; the R&D tax credit had not been extended as of February 26, 2014.
- The company identified approximately $50 million of additional 2014 restructuring charges and expected further actions, including Life Technologies integration costs. 2013 restructuring and other costs were $179.8 million; related 2013 actions were expected to generate about $80 million in annual savings, with greater savings anticipated in 2014.
- Key risks include integrating Life Technologies and realizing expected synergies, elevated leverage and compliance with debt covenants, economic and government-funding uncertainty, foreign exchange exposure, competitive and technology risks, regulatory obligations, and potential impairment of substantial goodwill and intangible assets. Goodwill was $12.50 billion at year-end; management reported no impairment in its 2013 annual test, but noted sensitivity in the ImmunoDiagnostics reporting unit.
- Life Technologies brought multiple intellectual-property disputes. A $60.9 million Enzo judgment and interest was accrued and on appeal; a separate $52 million Promega jury award had been overturned by the district court but remained accrued while on appeal. The filing cautions that adverse outcomes in these or other matters could materially affect results.
- Thermo Fisher reported $29 million of environmental liabilities at year-end and stated that unexpected remediation or compliance developments could increase exposure. The filing also disclosed product-liability reserves and other contingent claims.
Most important facts for investors to verify
- Post-close Life Technologies purchase accounting, acquired debt, integration costs, realized synergies, and the combined company’s actual leverage and covenant headroom.
- Completion and proceeds of the GE Healthcare divestiture, and the impact of the disposal on continuing operations.
- Whether underlying organic growth continues, particularly in academic and government markets and in North America and Europe.
- Sustainability of the unusually low effective tax rate and the status of the research and development tax credit.
- Developments in the disclosed intellectual-property litigation, environmental remediation, and goodwill impairment sensitivities.