Thermo Fisher Scientific Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports quarterly results; Q4 ended December 31, 2015. Amounts are U.S. dollars unless stated otherwise.
Business context
Thermo Fisher is a global life-sciences, analytical-instruments, diagnostics, and laboratory-products and services company. It reported four segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services. The company had approximately 52,000 employees and served more than 400,000 customers.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $16.965 billion | $16.890 billion |
| Operating income | $2.336 billion | $2.503 billion |
| Operating margin | 13.8% | 14.8% |
| Income from continuing operations | $1.980 billion | $1.896 billion |
| Net income | $1.975 billion | $1.894 billion |
| Diluted EPS | $4.92 | $4.71 |
| Cash provided by operating activities | $2.817 billion | $2.620 billion |
| Cash and cash equivalents at year-end | $452 million | $1.344 billion |
| Working capital at year-end | $1.594 billion | $1.190 billion |
| Total borrowings at carrying value | $12.527 billion | $14.564 billion |
Capital expenditures were $423 million; acquisition spending was $695 million. Cash dividends paid were $241 million, and the company repurchased $500 million of stock. Management said cash, operating cash flow, and available revolver capacity should cover existing-business needs for at least 24 months. The $2.0 billion revolving facility had no borrowings at year-end, with availability reduced by approximately $65 million for letters of credit.
Q4 FY2015: Revenue was $4.653 billion versus $4.493 billion in Q4 2014; gross profit was $2.108 billion versus $2.092 billion. Income from continuing operations was $606 million versus $604 million, and diluted EPS was $1.51 versus $1.49.
Material changes versus prior periods
- Reported FY2015 revenue increased only $76 million, but currency translation reduced revenue by approximately $938 million. Excluding currency effects and acquisitions/divestitures, revenue increased $803 million, or 5%, primarily on higher demand.
- Pharmaceutical and biotech demand was particularly strong; sales growth was moderate in North America and Europe and strong in Asia.
- Operating income and margin declined from FY2014. Management attributed the comparison primarily to FY2014 net gains of $895 million on business sales, partly offset by $450 million of acquisition-related charges in 2014, as well as unfavorable currency effects.
- Income from continuing operations and diluted EPS rose year over year, helped by a 2015 income tax benefit and $65 million lower interest expense, despite lower operating income.
- Segment revenue changes were mixed: Life Sciences Solutions +6%, Analytical Instruments −1%, Specialty Diagnostics −3%, and Laboratory Products and Services +1%. Segment operating income is a management measure before specified acquisition, restructuring, and intangible-amortization items; it is not GAAP operating income.
Outlook, commentary, risks, and unusual items
- Management expected a significant adverse foreign-exchange effect on 2016 reported revenue and operating income. It forecast a 2016 effective tax rate below 3%, based on expected geographic profitability and foreign tax credits.
- The company expected 2016 capital expenditures of approximately $415–$430 million. It identified about $55 million of additional restructuring charges, primarily in 2016, and expected annual savings of approximately $100 million from 2015 restructuring actions.
- In January 2016, Thermo Fisher agreed to acquire Affymetrix for approximately $1.3 billion in cash, subject to shareholder and regulatory approvals; it expected to use debt to partially fund the transaction.
- 2015 unusual costs included approximately $171 million of restructuring and other charges, including severance, facility consolidation, acquisition integration, litigation-related costs, and impairment of acquired technology. FY2014 included substantial gains on divestitures, making year-over-year operating comparisons less representative of underlying performance.
- Key risks include currency movements, customer and government funding cycles, competition and product innovation, acquisition integration and impairment of goodwill/intangibles, regulatory compliance, intellectual-property litigation, product liability, and debt servicing and covenant compliance. Debt agreements include a maximum consolidated leverage ratio of 3.5 to 1.0 and minimum interest coverage of 3.0 to 1.0; actual year-end covenant ratios are not stated in the provided filing text.
- Contingencies include a $35 million environmental liability accrual and a $217 million accrual for product liability, workers’ compensation, and other personal-injury matters, net of separately recognized insurance receivables. The filing says adverse litigation outcomes above current estimates could materially affect results, financial position, or cash flows.
Important facts for investors to verify
- How much of the 5% underlying revenue growth and segment performance persists after separating organic demand, currency translation, and acquisitions or divestitures.
- Whether the below-3% 2016 tax-rate expectation and foreign tax-credit benefits are sustainable; FY2015 earnings included material tax-planning benefits.
- The actual effect of foreign exchange on 2016 revenue, operating income, and cash generation.
- Debt maturities, covenant headroom, and the financing and integration impact of the planned Affymetrix acquisition and subsequent share repurchases.
- Developments in significant intellectual-property and product-liability matters, insurance recoverability, and potential environmental or other contingent obligations.