Thermo Fisher Scientific Reports Second Quarter 2018 Results

Consolidated Statement of Income (unaudited) (a)(b)

Three Months Ended

June 30,

% of

July 1,

% of

(In millions except per share amounts)

2018

Revenues

2017

Revenues

Revenues

$

6,078

$

4,990

Costs and Operating Expenses:

Cost of revenues (c)

3,211

52.8

%

2,578

51.7

%

Selling, general and administrative expenses (d)

1,230

20.2

%

1,039

20.8

%

Amortization of acquisition-related intangible assets

441

7.3

%

380

7.6

%

Research and development expenses

242

4.0

%

222

4.4

%

Restructuring and other costs, net (e)

17

0.3

%

22

0.5

%

5,141

84.6

%

4,241

85.0

%

Operating Income

937

15.4

%

749

15.0

%

Interest Income

31

18

Interest Expense

(170)

(134)

Other Income (Expense), Net (f)

8

(7)

Income Before Income Taxes

806

626

Provision for Income Taxes (g)

(54)

(13)

Income from Continuing Operations

752

613

Loss from Discontinued Operations

—

(1)

Net Income

$

752

12.4

%

$

612

12.3

%

Earnings per Share from Continuing Operations:

Basic

$

1.87

$

1.57

Diluted

$

1.85

$

1.56

Earnings per Share:

Basic

$

1.87

$

1.57

Diluted

$

1.85

$

1.56

Weighted Average Shares:

Basic

403

390

Diluted

406

393

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

937

15.4

%

$

749

15.0

%

Cost of Revenues Charges (c)

5

0.1

%

1

0.0

%

Selling, General and Administrative Charges, Net (d)

3

0.0

%

7

0.1

%

Restructuring and Other Costs, Net (e)

17

0.3

%

22

0.5

%

Amortization of Acquisition-related Intangible Assets

441

7.3

%

380

7.6

%

Adjusted Operating Income (b)

$

1,403

23.1

%

$

1,159

23.2

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

752

$

612

Cost of Revenues Charges (c)

5

1

Selling, General and Administrative Charges, Net (d)

3

7

Restructuring and Other Costs, Net (e)

17

22

Amortization of Acquisition-related Intangible Assets

441

380

Other (Income) Expense, Net (f)

1

3

Benefit from Income Taxes (g)

(103)

(123)

Discontinued Operations, Net of Tax

—

1

Adjusted Net Income (b)

$

1,116

$

903

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

1.85

$

1.56

Cost of Revenues Charges, Net of Tax (c)

0.01

—

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

0.01

0.01

Restructuring and Other Costs, Net of Tax (e)

0.03

0.04

Amortization of Acquisition-related Intangible Assets, Net of Tax

0.83

0.68

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

0.01

0.01

Provision for (Benefit from) Income Taxes (g)

0.01

—

Discontinued Operations, Net of Tax

—

—

Adjusted EPS (b)

$

2.75

$

2.30

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

1,444

$

849

Net Cash Used in Discontinued Operations

—

—

Purchases of Property, Plant and Equipment

(183)

(88)

Proceeds from Sale of Property, Plant and Equipment

1

1

Free Cash Flow

$

1,262

$

762

Segment Data

Three Months Ended

June 30,

% of

July 1,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

1,569

25.8

%

$

1,405

28.2

%

Analytical Instruments

1,311

21.6

%

1,166

23.4

%

Specialty Diagnostics

932

15.3

%

862

17.3

%

Laboratory Products and Services

2,550

42.0

%

1,792

35.9

%

Eliminations

(284)

-4.7

%

(235)

-4.8

%

Consolidated Revenues

$

6,078

100.0

%

$

4,990

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

522

33.3

%

$

448

31.9

%

Analytical Instruments

291

22.2

%

232

19.9

%

Specialty Diagnostics

253

27.2

%

234

27.2

%

Laboratory Products and Services

337

13.2

%

245

13.7

%

Subtotal Reportable Segments

1,403

23.1

%

1,159

23.2

%

Cost of Revenues Charges (c)

(5)

-0.1

%

(1)

0.0

%

Selling, General and Administrative Charges, Net (d)

(3)

0.0

%

(7)

-0.1

%

Restructuring and Other Costs, Net (e)

(17)

-0.3

%

(22)

-0.5

%

Amortization of Acquisition-related Intangible Assets

(441)

-7.3

%

(380)

-7.6

%

GAAP Operating Income (a)

$

937

15.4

%

$

749

15.0

%

(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 include $5 of charges for the sale of inventories revalued at the date of acquisition. Reported results in 2017 include $1 of accelerated depreciation on fixed assets to be abandoned due to facility consolidations.

(d)

Reported results in 2018 and 2017 include $4 and $6, respectively, of certain third-party expenses, principally transaction/integration costs related to recently completed acquisitions. Reported results in 2018 also include $1 of credits from changes in estimates of contingent acquisition consideration. Reported results in 2017 also included $1 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 $1 of hurricane response costs. Reported results in 2017 include $2 of charges for the settlement of retirement plans.

(f)

Reported results in 2018 and 2017 include $2 and $1, respectively, of net gains on investments, offset in part by $1 and $1, respectively, of losses on the early extinguishment of debt. Reported results in 2018 also include $2 of net charges for the settlement/curtailment of pension plans. Reported results in 2017 also include a $3 charge related to fees paid to obtain bridge financing commitments for the acquisition of Patheon.

(g)

Reported provision for income taxes includes i) $109 and $124 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) $6 in 2018, of incremental tax provision from adjusting the company's non-U.S. deferred tax balances as a result of tax rate changes; and iii) $1 in 2017, of incremental tax provision due to audit settlements.

Notes:

     Consolidated depreciation expense is $130 and $97 in 2018 and 2017, respectively.

Consolidated Statement of Income (unaudited) (a)(b)

Six Months Ended

June 30,

% of

July 1,

% of

(In millions except per share amounts)

2018

Revenues

2017

Revenues

Revenues

$

11,931

$

9,755

Costs and Operating Expenses:

Cost of revenues (c)

6,355

53.3

%

5,024

51.5

%

Selling, general and administrative expenses (d)

2,430

20.4

%

2,131

21.8

%

Amortization of acquisition-related intangible assets

885

7.4

%

748

7.7

%

Research and development expenses

476

4.0

%

437

4.5

%

Restructuring and other costs, net (e)

62

0.5

%

46

0.5

%

10,208

85.6

%

8,386

86.0

%

Operating Income

1,723

14.4

%

1,369

14.0

%

Interest Income

51

36

Interest Expense

(333)

(269)

Other Expense, Net (f)

(1)

(7)

Income Before Income Taxes

1,440

1,129

(Provision for) Benefit from Income Taxes (g)

(109)

35

Income from Continuing Operations

1,331

1,164

Loss from Discontinued Operations, Net of Tax

—

(1)

Net Income

$

1,331

11.2

%

$

1,163

11.9

%

Earnings per Share from Continuing Operations:

Basic

$

3.31

$

2.98

Diluted

$

3.28

$

2.96

Earnings per Share:

Basic

$

3.31

$

2.98

Diluted

$

3.28

$

2.95

Weighted Average Shares:

Basic

402

390

Diluted

406

394

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

1,723

14.4

%

$

1,369

14.0

%

Cost of Revenues Charges (c)

8

0.1

%

32

0.3

%

Selling, General and Administrative Charges, Net (d)

11

0.1

%

38

0.4

%

Restructuring and Other Costs, Net (e)

62

0.5

%

46

0.5

%

Amortization of Acquisition-related Intangible Assets

885

7.4

%

748

7.7

%

Adjusted Operating Income (b)

$

2,689

22.5

%

$

2,233

22.9

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

1,331

$

1,163

Cost of Revenues Charges (c)

8

32

Selling, General and Administrative Charges, Net (d)

11

38

Restructuring and Other Costs, Net (e)

62

46

Amortization of Acquisition-related Intangible Assets

885

748

Other Expense, Net (f)

9

—

Benefit from Income Taxes (g)

(178)

(305)

Discontinued Operations, Net of Tax

—

1

Adjusted Net Income (b)

$

2,128

$

1,723

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

3.28

$

2.95

Cost of Revenues Charges, Net of Tax (c)

0.01

0.05

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

0.02

0.07

Restructuring and Other Costs, Net of Tax (e)

0.12

0.08

Amortization of Acquisition-related Intangible Assets, Net of Tax

1.72

1.38

Other Expense, Net of Tax (f)

0.02

—

Provision for (Benefit from) Income Taxes (g)

0.07

(0.15)

Discontinued Operations, Net of Tax

—

—

Adjusted EPS (b)

$

5.24

$

4.38

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

1,522

$

1,210

Net Cash Used in Discontinued Operations

—

1

Purchases of Property, Plant and Equipment

(301)

(181)

Proceeds from Sale of Property, Plant and Equipment

3

2

Free Cash Flow

$

1,224

$

1,032

Segment Data

Six Months Ended

June 30,

% of

July 1,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

3,068

25.7

%

$

2,768

28.4

%

Analytical Instruments

2,568

21.5

%

2,218

22.7

%

Specialty Diagnostics

1,879

15.7

%

1,728

17.7

%

Laboratory Products and Services

4,963

41.6

%

3,491

35.8

%

Eliminations

(547)

-4.5

%

(450)

-4.6

%

Consolidated Revenues

$

11,931

100.0

%

$

9,755

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

1,039

33.9

%

$

881

31.8

%

Analytical Instruments

537

20.9

%

424

19.1

%

Specialty Diagnostics

496

26.4

%

467

27.0

%

Laboratory Products and Services

617

12.4

%

461

13.2

%

Subtotal Reportable Segments

2,689

22.5

%

2,233

22.9

%

Cost of Revenues Charges (c)

(8)

-0.1

%

(32)

-0.3

%

Selling, General and Administrative Charges, Net (d)

(11)

-0.1

%

(38)

-0.4

%

Restructuring and Other Costs, Net (e)

(62)

-0.5

%

(46)

-0.5

%

Amortization of Acquisition-related Intangible Assets

(885)

-7.4

%

(748)

-7.7

%

GAAP Operating Income (a)

$

1,723

14.4

%

$

1,369

14.0

%

(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) $8 and $31, respectively, of charges for the sale of inventories revalued at the date of acquisition.  Reported results in 2017 also include $1 of accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations.

(d)

Reported results in 2018 and 2017 include i) $12 and $12, respectively, of certain third-party expenses, principally transaction/integration costs related to recently completed acquisitions and ii) $(1) and $25, respectively, of (credits)/charges from changes in estimates of contingent acquisition consideration. Reported results in 2017 also include $1 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 $6 of net charges for litigation and $4 of hurricane response costs. Reported results in 2017 include $4 of net charges for litigation and $2 of charges for the settlement of retirement plans.

(f)

Reported results in 2018 include $4 of net losses from investments, $3 of losses on the early extinguishment of debt and $2 of net charges for the settlement/curtailment of pension plans. Reported results in 2017 include $4 of losses on the early extinguishment of debt and a $3 charge related to fees paid to obtain bridge financing commitments for the acquisition of Patheon, offset in part by $7 of net gains from investments.

(g)

Reported provision for income taxes includes i) $208 and $243 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) $(9) and $63 of incremental tax (provision) 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, $21 of incremental tax provision to adjust the estimated initial impacts of U.S. tax reform legislation recorded in 2017 and iv) in 2017, $1 of incremental tax provision in 2017 due to audit settlements.

Notes:

     Consolidated depreciation expense is $261 and $194 in 2018 and 2017, respectively.

Condensed Consolidated Balance Sheet (unaudited)

June 30,

December 31,

(In millions)

2018

2017

Assets

Current Assets:

Cash and cash equivalents

$

937

$

1,335

Accounts receivable, net

3,911

3,879

Inventories

2,866

2,971

Other current assets

1,760

1,236

Total current assets

9,474

9,421

Property, Plant and Equipment, Net

3,952

4,047

Acquisition-related Intangible Assets

15,680

16,684

Other Assets

1,177

1,227

Goodwill

25,120

25,290

Total Assets

$

55,403

$

56,669

Liabilities and Shareholders' Equity

Current Liabilities:

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

$

1,711

$

2,135

Other current liabilities

4,269

4,913

Total current liabilities

5,980

7,048

Other Long-term Liabilities

5,269

5,335

Long-term Obligations

17,709

18,873

Total Shareholders' Equity

26,445

25,413

Total Liabilities and Shareholders' Equity

$

55,403

$

56,669

Condensed Consolidated Statement of Cash Flows (unaudited)

Six Months Ended

June 30,

July 1,

(In millions)

2018

2017

Operating Activities

Net income

$

1,331

$

1,163

Loss from discontinued operations

—

1

Income from continuing operations

1,331

1,164

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

Depreciation and amortization

1,146

942

Change in deferred income taxes

(99)

(299)

Other non-cash expenses, net

154

148

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions

(1,010)

(744)

Net cash provided by continuing operations

1,522

1,211

Net cash used in discontinued operations

—

(1)

Net cash provided by operating activities

1,522

1,210

Investing Activities

Acquisitions, net of cash acquired

(59)

(307)

Purchases of property, plant and equipment

(301)

(181)

Proceeds from sale of property, plant and equipment

3

2

Other investing activities, net

(7)

9

Net cash used in investing activities

(364)

(477)

Financing Activities

Net proceeds from issuance of debt

—

519

Repayment of debt

(1,353)

(1,329)

Net proceeds from issuance of commercial paper

2,761

4,487

Repayment of commercial paper

(2,655)

(3,991)

Purchases of company common stock

—

(750)

Dividends paid

(129)

(118)

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

78

99

Other financing activities, net

(50)

—

Net cash used in financing activities

(1,348)

(1,083)

Exchange Rate Effect on Cash

(215)

168

Decrease in Cash, Cash Equivalents and Restricted Cash

(405)

(182)

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

1,361

811

Cash, Cash Equivalents and Restricted Cash at End of Period

$

956

$

629

Free Cash Flow (a)

$

1,224

$

1,032

a)

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