Thermo Fisher Scientific Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; fourth-quarter figures below are unaudited quarterly data included in the 10-K. Thermo Fisher supplies scientific instruments, laboratory products, diagnostics, reagents and related services through four segments.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $18.274 billion | $16.965 billion | +8% |
| Operating income | $2.449 billion | $2.336 billion | +5% |
| Operating margin | 13.4% | 13.8% | Down 0.4 percentage points |
| Income from continuing operations | $2.025 billion | $1.980 billion | +2% |
| Net income | $2.022 billion | $1.975 billion | +2% |
| Diluted EPS | $5.09 | $4.92 | +3% |
| Cash from operating activities | $3.156 billion | $2.817 billion | +12% |
| Capital expenditures | $444 million | $423 million | — |
Revenue growth included $733 million from acquisitions, while currency translation reduced revenue by $145 million. Excluding acquisitions and currency, revenue grew $721 million, or 4%, primarily on higher demand. Pharmaceutical and biotech demand was particularly strong; growth was strong in Asia, moderate in Europe and modest in North America. Cash provided by operations increased mainly due to lower working-capital investment and higher income before depreciation and amortization.
Segment revenue and operating income (management’s segment measure): Life Sciences Solutions, $4.978 billion and $1.515 billion; Analytical Instruments, $3.668 billion and $745 million; Specialty Diagnostics, $3.339 billion and $910 million; Laboratory Products and Services, $7.030 billion and $1.052 billion. Segment revenue increased across all four segments, led by Analytical Instruments (+14%) and Life Sciences Solutions (+12%).
Fourth-quarter snapshot
Q4 2016 revenue was $4.953 billion versus $4.653 billion in Q4 2015, approximately +6%. Income from continuing operations was $633 million versus $606 million; net income was $630 million versus $603 million. Diluted EPS was $1.59 versus $1.50. Q4 gross profit was $2.279 billion versus $2.108 billion.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $786 million at year-end, up from $452 million. Working capital was $2.155 billion, up from $1.595 billion.
- Debt carrying value was $16.628 billion, including $1.256 billion of short-term obligations and current maturities; long-term obligations were $15.372 billion. Commercial paper outstanding was $953 million.
- The company had a $2.50 billion revolving credit facility, with no borrowings outstanding at year-end and availability reduced by $72 million for letters of credit. Management said cash, operating cash flow and available borrowing capacity should cover requirements for at least 24 months.
- Investing activities used $5.532 billion, including $5.188 billion for acquisitions. Financing activities provided $2.861 billion. The company repurchased $1.25 billion of shares and paid $238 million in dividends during 2016.
Material changes, outlook and unusual items
- Acquired Affymetrix on March 31, 2016, for approximately $1.34 billion, and FEI Company on September 19, 2016, for approximately $4.08 billion. Both acquisitions expanded the company’s life-sciences and analytical-instrument portfolios. The acquired businesses recorded post-acquisition operating losses, primarily from acquisition-related charges and restructuring.
- FY2016 restructuring and other costs were approximately $395 million, versus $171 million in 2015. These included acquisition integration and transaction costs, inventory revaluation, facility closures and severance, and litigation and environmental charges. The company estimated approximately $85 million of additional restructuring charges in 2017 and expected about $100 million in annual savings from 2016 actions as savings phase in.
- Management expected the stronger U.S. dollar to continue adversely affecting reported 2017 revenue and operating income. It forecast a 2017 effective tax rate below 3%, based on expected profitability by jurisdiction and foreign tax credits. The filing does not provide a specific 2017 revenue or earnings-growth target.
- 2016 income tax benefit was $1 million, compared with a $44 million benefit in 2015. Tax results included foreign tax-credit planning; management cautioned that future credits may vary. Cash income taxes paid rose to $663 million from $477 million.
- Goodwill was $21.328 billion and acquisition-related intangible assets were $13.969 billion at year-end. The newly established Materials and Structural Analysis reporting unit had $1.99 billion of goodwill and only nominal fair-value headroom in the 2016 impairment test; relatively small adverse changes in forecasts or assumptions could trigger impairment.
- Environmental liabilities were accrued at $49 million. Product liability, workers’ compensation and other personal-injury accruals were $230 million; related estimated insurance recoveries were $97 million. The company disclosed pending intellectual-property and commercial litigation, including a commercial antitrust matter expected to be scheduled for trial in 2017. Outcomes and potential losses may differ from current estimates.
- Other material risks include acquisition integration and impairment, technological change and competition, foreign exchange, government and healthcare regulation, customer capital-spending cycles, cybersecurity and operational disruption, and debt covenant compliance. Debt covenants include leverage and interest-coverage tests.
- A February 2017 acquisition of Finesse Solutions for approximately $225 million was disclosed as a subsequent event. The company also repurchased $500 million of shares early in 2017.
Investor verification priorities
- Assess underlying growth and margins separately from acquisition contributions, currency effects and the substantial restructuring and acquisition-related charges.
- Review FEI and Affymetrix integration progress, realized synergies, and the sensitivity of Materials and Structural Analysis goodwill to forecasts and discount-rate assumptions.
- Verify debt maturities, commercial-paper refinancing access and covenant headroom following the acquisition-related borrowing and subsequent share repurchases.
- Evaluate the sustainability of the unusually low expected 2017 tax rate and the company’s dependence on foreign tax credits and tax-planning actions.
- Track the status and possible financial exposure of the disclosed litigation, environmental remediation, and other contingencies; the filing does not quantify a clear reasonably possible loss range for every matter.