Thermo Fisher Scientific Reports Fourth Quarter and Full Year 2018 Results

Consolidated Statement of Income  (a)(b)

Three Months Ended

(In millions except per share amounts)

December 31,

2018

% of

Revenues

December 31,

2017

% of

Revenues

Revenues

$

6,507

$

6,047

Costs and Operating Expenses:

Cost of revenues (c)

3,458

53.1

%

3,249

53.7

%

Selling, general and administrative expenses (d)

1,210

18.6

%

1,165

19.3

%

Amortization of acquisition-related intangible assets

425

6.6

%

441

7.3

%

Research and development expenses

251

3.9

%

233

3.9

%

Restructuring and other costs, net (e)

15

0.2

%

2

—

%

5,359

82.4

%

5,090

84.2

%

Operating Income

1,148

17.6

%

957

15.8

%

Interest Income

45

20

Interest Expense

(172)

(166)

Other (Expense) Income, Net (f)

(9)

9

Income Before Income Taxes

1,012

820

Provision for Income Taxes (g)

(114)

(290)

Income from Continuing Operations

898

530

Loss from Discontinued Operations, Net of Tax

—

(2)

Net Income

$

898

13.8

%

$

528

8.7

%

Earnings per Share from Continuing Operations:

Basic

$

2.23

$

1.32

Diluted

$

2.22

$

1.31

Earnings per Share:

Basic

$

2.23

$

1.32

Diluted

$

2.22

$

1.30

Weighted Average Shares:

Basic

402

401

Diluted

405

405

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

1,148

17.6

%

$

957

15.8

%

Cost of Revenues Charges, Net (c)

5

0.1

%

46

0.8

%

Selling, General and Administrative Charges, Net (d)

22

0.3

%

3

0.0

%

Restructuring and Other Costs, Net (e)

15

0.2

%

2

0.0

%

Amortization of Acquisition-related Intangible Assets

425

6.6

%

441

7.3

%

Adjusted Operating Income (b)

$

1,615

24.8

%

$

1,449

23.9

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

898

$

528

Cost of Revenues Charges, Net (c)

5

46

Selling, General and Administrative Charges, Net (d)

22

3

Restructuring and Other Costs, Net (e)

15

2

Amortization of Acquisition-related Intangible Assets

425

441

Other Expense (Income), Net (f)

21

(11)

(Benefit from) Provision for Income Taxes (g)

(69)

117

Discontinued Operations, Net of Tax

—

2

Adjusted Net Income (b)

$

1,317

$

1,128

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

2.22

$

1.30

Cost of Revenues Charges, Net of Tax (c)

0.01

0.08

Selling, General and Administrative Charges, Net of Tax (d)

0.05

0.04

Restructuring and Other Costs, Net of Tax (e)

0.02

0.02

Amortization of Acquisition-related Intangible Assets, Net of Tax

0.80

0.77

Other Expense (Income), Net of Tax (f)

0.04

(0.02)

Provision for Income Taxes (g)

0.11

0.59

Discontinued Operations, Net of Tax

—

0.01

Adjusted EPS (b)

$

3.25

$

2.79

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

1,801

$

1,866

Net Cash Provided by Discontinued Operations

—

(1)

Purchases of Property, Plant and Equipment

(284)

(215)

Proceeds from Sale of Property, Plant and Equipment

44

3

Free Cash Flow

$

1,561

$

1,653

Segment Data

Three Months Ended

December 31,

% of

December 31,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

1,697

26.1

%

$

1,578

26.1

%

Analytical Instruments

1,568

24.1

%

1,414

23.4

%

Specialty Diagnostics

951

14.6

%

914

15.1

%

Laboratory Products and Services

2,602

40.0

%

2,401

39.7

%

Eliminations

(311)

-4.8

%

(260)

-4.3

%

Consolidated Revenues

$

6,507

100.0

%

$

6,047

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

624

36.8

%

$

561

35.5

%

Analytical Instruments

416

26.6

%

346

24.5

%

Specialty Diagnostics

233

24.5

%

242

26.4

%

Laboratory Products and Services

342

13.1

%

300

12.5

%

Subtotal Reportable Segments

1,615

24.8

%

1,449

23.9

%

Cost of Revenues Charges, Net (c)

(5)

-0.1

%

(46)

-0.8

%

Selling, General and Administrative Charges, Net (d)

(22)

-0.3

%

(3)

0.0

%

Restructuring and Other Costs, Net (e)

(15)

-0.2

%

(2)

0.0

%

Amortization of Acquisition-related Intangible Assets

(425)

-6.6

%

(441)

-7.3

%

GAAP Operating Income (a)

$

1,148

17.6

%

$

957

15.8

%

(a)

"GAAP" (reported) results were determined in accordance with U.S. generally accepted accounting principles (GAAP). The results for 2017 have been restated for the immaterial impacts of adopting new guidance on pension accounting.

(b)

Adjusted results are non-GAAP measures and, for income measures, exclude certain charges to cost of revenues (see note (c) for details); certain credits/charges to selling, general and administrative expenses (see note (d) for details); amortization of acquisition-related intangible assets; restructuring and other costs, net (see note (e) for details); certain other gains or losses that are either isolated or cannot be expected to occur again with any predictability (see note (f) for details); and the tax consequences of the preceding items and certain other tax items (see note (g) for details).

(c)

Reported results in 2018 and 2017 include i) $4 and $40, respectively, of charges for the sale of inventories revalued at the date of acquisition. Reported results in 2018 include $1 of accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations. Reported results in 2017 include $6 of charges to conform the accounting policies of recently acquired businesses with the company's accounting policies.

(d)

Reported results in 2018 and 2017 include i) $18 and $13, respectively, of certain third-party expenses, principally transaction/integration costs related to recently completed acquisitions and ii) $4 and $(10) of charges/(credits) from changes in estimates of contingent acquisition consideration.

(e)

Reported results in 2018 and 2017 include restructuring and other costs, net, consisting principally of severance, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations. Reported results in 2018 include $19 of environmental remediation costs, offset in part by $17 of net gains on the sales of real estate. Reported results in 2017 include $45 of net credits from litigation, $7 of hurricane response/impairment costs and $4 of net losses on the settlement/curtailment of retirement plans.

(f)

Reported results in 2018 include $17 of net losses from investments and $4 of net charges for the settlement/curtailment of pension plans. Reported results in 2017 include $11 of gains on investments.

(g)

Reported provision for income taxes includes i) $114 and $116 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) in 2018, $71 of incremental tax provision due to net operating losses that will not be utilized as a result of the planned sale of the Anatomical Pathology business; and iii) $26 and $1 in 2018 and 2017, respectively, of incremental tax benefit from adjusting the company's non-U.S. deferred tax balances as a result of tax rate changes. Reported provision in 2017 also includes $30 of incremental tax provision due to audit settlements and $204 from the effects of U.S. tax reform legislation, consisting primarily of the transition tax on deemed repatriated earnings of foreign subsidiaries, net of a benefit from adjusting the deferred tax balances for the U.S. rate reduction.

Notes:

Consolidated depreciation expense is $133 and $133 in 2018 and 2017, respectively.

Consolidated Statement of Income  (a)(b)

Year Ended

(In millions except per share amounts)

December 31,

2018

% of

Revenues

December 31,

2017

% of

Revenues

Revenues

$

24,358

$

20,918

Costs and Operating Expenses:

Cost of revenues (c)

12,994

53.3

%

10,958

52.4

%

Selling, general and administrative expenses (d)

4,823

19.8

%

4,422

21.1

%

Amortization of acquisition-related intangible assets

1,741

7.2

%

1,594

7.6

%

Research and development expenses

967

4.0

%

887

4.2

%

Restructuring and other costs, net (e)

50

0.2

%

97

0.4

%

20,575

84.5

%

17,958

85.8

%

Operating Income

3,783

15.5

%

2,960

14.2

%

Interest Income

137

81

Interest Expense

(667)

(592)

Other Income (Expense), Net (f)

9

(20)

Income Before Income Taxes

3,262

2,429

Provision for Income Taxes (g)

(324)

(201)

Income from Continuing Operations

2,938

2,228

Loss from Discontinued Operations, Net of Tax

—

(3)

Net Income

$

2,938

12.1

%

$

2,225

10.6

%

Earnings per Share from Continuing Operations:

Basic

$

7.31

$

5.65

Diluted

$

7.24

$

5.60

Earnings per Share:

Basic

$

7.31

$

5.64

Diluted

$

7.24

$

5.59

Weighted Average Shares:

Basic

402

395

Diluted

406

398

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

3,783

15.5

%

$

2,960

14.2

%

Cost of Revenues Charges (c)

12

0.1

%

123

0.6

%

Selling, General and Administrative Charges, Net (d)

29

0.1

%

78

0.4

%

Restructuring and Other Costs, Net (e)

50

0.2

%

97

0.4

%

Amortization of Acquisition-related Intangible Assets

1,741

7.2

%

1,594

7.6

%

Adjusted Operating Income (b)

$

5,615

23.1

%

$

4,852

23.2

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

2,938

$

2,225

Cost of Revenues Charges (c)

12

123

Selling, General and Administrative Charges, Net (d)

29

78

Restructuring and Other Costs, Net (e)

50

97

Amortization of Acquisition-related Intangible Assets

1,741

1,594

Other Expense, Net (f)

25

19

Benefit from Income Taxes (g)

(284)

(364)

Discontinued Operations, Net of Tax

—

3

Adjusted Net Income (b)

$

4,511

$

3,775

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

7.24

$

5.59

Cost of Revenues Charges, Net of Tax (c)

0.02

0.21

Selling, General and Administrative Charges, Net of Tax (d)

0.06

0.17

Restructuring and Other Costs, Net of Tax (e)

0.09

0.18

Amortization of Acquisition-related Intangible Assets, Net of Tax

3.34

2.86

Other Expense, Net of Tax (f)

0.05

0.03

Provision for Income Taxes (g)

0.32

0.44

Discontinued Operations, Net of Tax

—

0.01

Adjusted EPS (b)

$

11.12

$

9.49

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

4,543

$

4,005

Net Cash Used in Discontinued Operations

—

1

Purchases of Property, Plant and Equipment

(758)

(508)

Proceeds from Sale of Property, Plant and Equipment

50

7

Free Cash Flow

$

3,835

$

3,505

Segment Data

Year Ended

December 31,

% of

December 31,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

6,269

25.7

%

$

5,728

27.4

%

Analytical Instruments

5,469

22.5

%

4,821

23.0

%

Specialty Diagnostics

3,724

15.3

%

3,486

16.7

%

Laboratory Products and Services

10,035

41.2

%

7,825

37.4

%

Eliminations

(1,139)

-4.7

%

(942)

-4.5

%

Consolidated Revenues

$

24,358

100.0

%

$

20,918

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

2,158

34.4

%

$

1,894

33.1

%

Analytical Instruments

1,247

22.8

%

1,027

21.3

%

Specialty Diagnostics

952

25.6

%

927

26.6

%

Laboratory Products and Services

1,258

12.5

%

1,004

12.8

%

Subtotal Reportable Segments

5,615

23.1

%

4,852

23.2

%

Cost of Revenues Charges (c)

(12)

-0.1

%

(123)

-0.6

%

Selling, General and Administrative Charges, Net (d)

(29)

-0.1

%

(78)

-0.4

%

Restructuring and Other Costs, Net (e)

(50)

-0.2

%

(97)

-0.4

%

Amortization of Acquisition-related Intangible Assets

(1,741)

-7.2

%

(1,594)

-7.6

%

GAAP Operating Income (a)

$

3,783

15.5

%

$

2,960

14.2

%

(a)

"GAAP" (reported) results were determined in accordance with U.S. generally accepted accounting principles (GAAP). The results for 2017 have been restated for the immaterial impacts of adopting new guidance on pension accounting.

(b)

Adjusted results are non-GAAP measures and, for income measures, exclude certain charges to cost of revenues (see note (c) for details); certain credits/charges to selling, general and administrative expenses (see note (d) for details); amortization of acquisition-related intangible assets; restructuring and other costs, net (see note (e) for details); certain other gains or losses that are either isolated or cannot be expected to occur again with any predictability (see note (f) for details); and the tax consequences of the preceding items and certain other tax items (see note (g) for details).

(c)

Reported results in 2018 and 2017 include i) $14 and $87, respectively, of charges for the sale of inventories revalued at the date of acquisition; ii) $(3) and $33, respectively, of (credits)/charges to conform the accounting policies of recently acquired businesses with the company's accounting policies and iii) $1 and $3, respectively, of accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations.

(d)

Reported results in 2018 and 2017 include i) $40 and $63, respectively, of certain third-party expenses, principally transaction/integration costs related to recently completed acquisitions and ii) $11 and $8, respectively, of income associated with product liability litigation. Reported results in 2017 also include $15 of charges from changes in estimates of contingent acquisition consideration, $6 of charges to conform the accounting policies of recently acquired businesses with the company's accounting policies and $2 of accelerated depreciation on fixed assets to be abandoned due to integration synergies.

(e)

Reported results in 2018 and 2017 include restructuring and other costs, net, consisting principally of severance, abandoned facility and other expenses of headcount reductions within several businesses and real estate consolidations. Reported results in 2018 include $46 of net credits from litigation, $17 of net gains on the sales of real estate, $19 of environmental remediation costs and $5 of hurricane response costs. Reported results in 2017 include $27 of net credits from litigation, $6 of compensation due at an acquired business on the date of acquisition, $7 of hurricane response/impairment costs and $6 of net charges for the settlement/curtailment of retirement plans.

(f)

Reported results in 2018 include $15 of net losses from investments, $7 of net charges for the settlement/curtailment of pension plans and $3 of losses on the early extinguishment of debt. Reported results in 2017 include $4 of losses on the early extinguishment of debt and a $32 charge related to fees paid to obtain bridge financing commitments for the acquisition of Patheon, offset in part by $17 of net gains from investments.

(g)

Reported provision for income taxes includes i) $411 and $538 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) $12 and $61 of incremental tax benefit in 2018 and 2017, respectively, from adjusting the company's non-U.S. deferred tax balances as a result of tax rate changes, iii) in 2018, $71 of incremental tax provision due to net operating losses that will not be utilized as a result of the planned sale of the Anatomical Pathology business; iv) in 2018, $68 of incremental tax provision to adjust the estimated initial impacts of U.S. tax reform legislation recorded in 2017; v) in 2017, $204 from the effects of U.S. tax reform legislation, consisting primarily of the transition tax on deemed repatriated earnings of foreign subsidiaries, net of a benefit from adjusting the deferred tax balances for the U.S. rate reduction and vi) in 2017, $31 of incremental tax provision in 2017 due to audit settlements.

Notes:

Consolidated depreciation expense is $526 and $439 in 2018 and 2017, respectively.

Condensed Consolidated Balance Sheet

December 31,

December 31,

(In millions)

2018

2017

Assets

Current Assets:

Cash and cash equivalents

$

2,103

$

1,335

Accounts receivable, net

4,136

3,879

Inventories

3,005

2,971

Other current assets

1,396

1,236

Total current assets

10,640

9,421

Property, Plant and Equipment, Net

4,165

4,047

Acquisition-related Intangible Assets

14,978

16,684

Other Assets

1,051

1,227

Goodwill

25,347

25,290

Total Assets

$

56,181

$

56,669

Liabilities and Shareholders' Equity

Current Liabilities:

Short-term obligations and current maturities of long-term obligations

$

1,271

$

2,135

Other current liabilities

4,952

4,913

Total current liabilities

6,223

7,048

Other Long-term Liabilities

4,653

5,335

Long-term Obligations

17,719

18,873

Total Shareholders' Equity

27,586

25,413

Total Liabilities and Shareholders' Equity

$

56,181

$

56,669

Condensed Consolidated Statement of Cash Flows

Year Ended

December 31,

December 31,

(In millions)

2018

2017

Operating Activities

Net income

$

2,938

$

2,225

Loss from discontinued operations

—

3

Income from continuing operations

2,938

2,228

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

2,267

2,033

Change in deferred income taxes

(419)

(1,098)

Other non-cash expenses, net

287

349

Changes in assets and liabilities, excluding the effects of acquisitions

(530)

494

Net cash provided by continuing operations

4,543

4,006

Net cash used in discontinued operations

—

(1)

Net cash provided by operating activities

4,543

4,005

Investing Activities

Acquisitions, net of cash acquired

(536)

(7,226)

Purchases of property, plant and equipment

(758)

(508)

Proceeds from sale of property, plant and equipment

50

7

Other investing activities, net

(9)

(2)

Net cash used in investing activities

(1,253)

(7,729)

Financing Activities

Net proceeds from issuance of debt

690

6,459

Repayment of debt

(2,052)

(3,299)

Net proceeds from issuance of commercial paper

5,060

8,380

Repayment of commercial paper

(5,254)

(8,514)

Purchases of company common stock

(500)

(750)

Dividends paid

(266)

(237)

Net proceeds from issuance of company common stock

—

1,690

Net proceeds from issuance of company common stock under employee stock plans

136

128

Other financing activities, net

(51)

(3)

Net cash (used in) provided by financing activities

(2,237)

3,854

Exchange Rate Effect on Cash

(297)

420

Increase in Cash, Cash Equivalents and Restricted Cash

756

550

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

1,361

811

Cash, Cash Equivalents and Restricted Cash at End of Period

$

2,117

$

1,361

Free Cash Flow (a)

$

3,835

$

3,505

(a) Free cash flow is net cash provided by operating activities of continuing operations less net purchases of property, plant and equipment.