Thermo Fisher Scientific Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; the fourth-quarter figures are included in the filing’s unaudited quarterly data. Thermo Fisher supplies instruments, laboratory products, diagnostics, reagents, software and services across life sciences, analytical instruments, specialty diagnostics, and laboratory products and services. The February 3, 2014 acquisition of Life Technologies materially expanded the business.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $16.89 billion | $13.09 billion |
| Operating income / margin | $2.50 billion / 14.8% | $1.61 billion / 12.3% |
| Income from continuing operations | $1.90 billion | $1.28 billion |
| Net income | $1.89 billion | $1.27 billion |
| Diluted EPS | $4.71 | $3.48 |
| Cash from operating activities | $2.62 billion | $2.01 billion |
| Cash and short-term investments at year-end | $1.35 billion | $5.83 billion |
| Working capital at year-end | $1.19 billion | $6.75 billion |
| Debt at carrying value | $14.56 billion | $10.49 billion |
Fourth quarter: Revenue was $4.49 billion versus $3.47 billion in Q4 2013; gross profit was $2.09 billion versus $1.48 billion. Income from continuing operations was $604 million versus $343 million, and diluted EPS was $1.49 versus $0.92. Q4 net income was $601 million versus $342 million. The filing does not provide a clear standalone Q4 operating income or operating margin value in the supplied quarterly table.
Cash, investment and liquidity: Investing activities used $11.78 billion, principally for acquisitions; capital expenditures were $428 million. Financing activities provided $4.80 billion, including debt proceeds and $2.94 billion of net common-stock proceeds used in part to fund Life Technologies. Management said cash, expected operating cash flow and available revolver capacity were sufficient for existing-business needs for at least 24 months. Short-term obligations and current maturities were $2.21 billion; no borrowings were outstanding under the revolving credit facility at year-end.
Changes versus the prior comparable period
- Revenue rose 29%, but $3.31 billion of the increase was attributable to acquisitions, net of divestitures. Excluding currency and acquisition/divestiture effects, revenue increased $549 million, or 4%, primarily on higher demand.
- Operating income and margin increased substantially, but results included $895 million of net gains on business sales. Other contributors included Life Technologies and productivity improvements; offsets included $450 million of acquisition-related charges and $569 million of higher amortization, primarily acquisition-related.
- Operating cash flow increased by $609 million. Year-end cash and working capital fell sharply, primarily due to funding the Life Technologies acquisition and increased short-term debt.
- Interest expense increased $218 million, primarily due to debt issued and assumed in connection with the acquisition. The effective tax rate rose to 9.2% from 3.1%; both years included significant tax benefits and other discrete effects.
- Reported R&D expense increased to $691 million from $396 million, reflecting the expanded business following the acquisition.
Outlook, management commentary and risks
- Management expected a significant adverse effect on 2015 reported revenue and operating income from the stronger U.S. dollar. Currency translation reduced 2014 revenue by about $60 million.
- Management expected a 2015 effective tax rate below 3%, based on forecast profitability by country; this outlook is sensitive to the geographic mix of earnings and tax changes.
- The company expected approximately $450–$470 million of 2015 capital expenditures and identified about $70 million of additional restructuring charges, primarily in 2015. Restructuring actions charged in 2014 were expected to generate approximately $120 million in annual savings, beginning partly in 2014 and more substantially in 2015.
- Life Technologies integration, expected synergies and retention of key employees are material execution risks. Life Sciences Solutions had $7.25 billion of goodwill and only a 9% estimated fair-value cushion over carrying value in the October 2014 impairment test; management warned that relatively small adverse changes in forecasts or assumptions could result in impairment.
- Debt totaled approximately $14.56 billion at year-end. Debt covenants included leverage and interest-coverage requirements; failure to comply could trigger default or acceleration. Near-term maturities included significant 2015 obligations.
- Other notable risks include competition and technology change, uneven customer and government funding, foreign exchange exposure, regulatory compliance, intellectual-property litigation, environmental remediation and product-liability claims. Environmental liabilities were $32 million. Product-liability and related accruals for continuing operations were $186 million, with estimated insurer recoveries of $93 million; adverse legal outcomes could exceed current accruals.
- Unusual items included the Life Technologies acquisition for $15.30 billion net of cash acquired, assumption of $2.28 billion of debt, and the sale of businesses for significant gains. The filing also reports a $29.6 million pension settlement charge in 2014.
Important facts for investors to verify
- How much of future growth and margin performance is organic and recurring, excluding acquisition effects, divestitures, sale gains and acquisition-related charges.
- Progress integrating Life Technologies, realization of projected cost savings, and impairment sensitivity of the acquired goodwill and intangible assets.
- 2015 foreign-exchange impact, debt maturities and covenant headroom, and the company’s ability to sustain liquidity while funding investment and shareholder returns.
- Whether the unusually low forecast tax rate is achieved and how tax-credit availability, foreign earnings and tax disputes affect cash taxes.
- Developments in acquired intellectual-property cases and other litigation, including whether potential losses or environmental costs exceed recorded accruals.