Thermo Fisher Scientific Reports Third Quarter 2018 Results

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

Three Months Ended

September 29,

% of

September 30,

% of

(In millions except per share amounts)

2018

Revenues

2017

Revenues

Revenues

$

5,920

$

5,116

Costs and Operating Expenses:

Cost of revenues (c)

3,181

53.7

%

2,685

52.5

%

Selling, general and administrative expenses (d)

1,183

20.0

%

1,126

22.0

%

Amortization of acquisition-related intangible assets

431

7.3

%

405

7.9

%

Research and development expenses

240

4.1

%

217

4.2

%

Restructuring and other (income) costs, net (e)

(27)

-0.5

%

49

1.0

%

5,008

84.6

%

4,482

87.6

%

Operating Income

912

15.4

%

634

12.4

%

Interest Income

41

25

Interest Expense

(162)

(157)

Other Income (Expense), Net (f)

19

(22)

Income Before Income Taxes

810

480

(Provision for) Benefit from Income Taxes (g)

(101)

54

Net Income

$

709

12.0

%

$

534

10.4

%

Earnings per Share:

Basic

$

1.76

$

1.35

Diluted

$

1.75

$

1.34

Weighted Average Shares:

Basic

402

396

Diluted

406

400

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

912

15.4

%

$

634

12.4

%

Cost of Revenues (Credits) Charges, Net (c)

(1)

0.0

%

45

0.9

%

Selling, General and Administrative (Credits) Charges, Net (d)

(4)

-0.1

%

37

0.7

%

Restructuring and Other (Income) Costs, Net (e)

(27)

-0.5

%

49

1.0

%

Amortization of Acquisition-related Intangible Assets

431

7.3

%

405

7.9

%

Adjusted Operating Income (b)

$

1,311

22.1

%

$

1,170

22.9

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

709

$

534

Cost of Revenues (Credits) Charges, Net (c)

(1)

45

Selling, General and Administrative (Credits) Charges, Net (d)

(4)

37

Restructuring and Other (Income) Costs, Net (e)

(27)

49

Amortization of Acquisition-related Intangible Assets

431

405

Other (Income) Expense, Net (f)

(5)

30

Benefit from Income Taxes (g)

(37)

(176)

Adjusted Net Income (b)

$

1,066

$

924

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

1.75

$

1.34

Cost of Revenues Charges, Net of Tax (c)

—

0.07

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

(0.01)

0.07

Restructuring and Other (Income) Costs, Net of Tax (e)

(0.06)

0.07

Amortization of Acquisition-related Intangible Assets, Net of Tax

0.82

0.70

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

(0.01)

0.05

Provision for Income Taxes (g)

0.13

0.01

Adjusted EPS (b)

$

2.62

$

2.31

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

1,220

$

929

Net Cash Used in Discontinued Operations

—

1

Purchases of Property, Plant and Equipment

(173)

(112)

Proceeds from Sale of Property, Plant and Equipment

3

2

Free Cash Flow

$

1,050

$

820

Segment Data

Three Months Ended

September 29,

% of

September 30,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

1,504

25.4

%

$

1,382

27.0

%

Analytical Instruments

1,333

22.5

%

1,189

23.2

%

Specialty Diagnostics

894

15.1

%

844

16.5

%

Laboratory Products and Services

2,470

41.7

%

1,933

37.8

%

Eliminations

(281)

-4.7

%

(232)

-4.5

%

Consolidated Revenues

$

5,920

100.0

%

$

5,116

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

495

32.9

%

$

452

32.7

%

Analytical Instruments

294

22.0

%

257

21.6

%

Specialty Diagnostics

223

25.0

%

218

25.9

%

Laboratory Products and Services

299

12.1

%

243

12.6

%

Subtotal Reportable Segments

1,311

22.1

%

1,170

22.9

%

Cost of Revenues Credits (Charges), Net (c)

1

0.0

%

(45)

-0.9

%

Selling, General and Administrative Credits (Charges), Net (d)

4

0.1

%

(37)

-0.7

%

Restructuring and Other Income (Costs), Net (e)

27

0.5

%

(49)

-1.0

%

Amortization of Acquisition-related Intangible Assets

(431)

-7.3

%

(405)

-7.9

%

GAAP Operating Income (a)

$

912

15.4

%

$

634

12.4

%

(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) $2 and $16, respectively, of charges for the sale of inventories revalued at the date of acquisition and ii) $(3) and $27, respectively, of (credits)/charges to conform the accounting policies of recently acquired businesses with the company's accounting policies. Reported results in 2017 also include $2 of accelerated depreciation on fixed assets to be abandoned due to facility consolidations.

(d)

Reported results in 2018 and 2017 include i) $10 and $38, 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 2018 also include $3 of credits from changes in estimates of contingent acquisition consideration. Reported results in 2017 also include $6 of charges to conform the accounting policies of recently acquired businesses with the company's accounting policies and $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 $52 of credits from litigation and $1 of hurricane response costs. Reported results in 2017 include $15 of net charges for litigation and $6 of compensation due at an acquired business on the date of acquisition.

(f)

Reported results in 2018 include $6 of net gains from investments and $1 of net charges for the settlement/curtailment of pension plans. Reported results in 2017 include a $29 charge related to fees paid to obtain bridge financing commitments for the acquisition of Patheon and $1 of losses on investments.

(g)

Reported provision for income taxes includes i) $89 and $179 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) $5 and $3 in 2018 and 2017, respectively, of incremental tax provision from adjusting the company's non-U.S. deferred tax balances as a result of tax rate changes and iii) in 2018, $47 of incremental tax provision to adjust the estimated initial impacts of U.S. tax reform legislation recorded in 2017.

Notes:

Consolidated depreciation expense is $132 and $112 in 2018 and 2017, respectively.

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

Nine Months Ended

September 29,

% of

September 30,

% of

(In millions except per share amounts)

2018

Revenues

2017

Revenues

Revenues

$

17,851

$

14,871

Costs and Operating Expenses:

Cost of revenues (c)

9,536

53.4

%

7,709

51.8

%

Selling, general and administrative expenses (d)

3,613

20.2

%

3,257

21.9

%

Amortization of acquisition-related intangible assets

1,316

7.4

%

1,153

7.8

%

Research and development expenses

716

4.0

%

654

4.4

%

Restructuring and other costs, net (e)

35

0.2

%

95

0.6

%

15,216

85.2

%

12,868

86.5

%

Operating Income

2,635

14.8

%

2,003

13.5

%

Interest Income

92

61

Interest Expense

(495)

(426)

Other Income (Expense), Net (f)

18

(29)

Income Before Income Taxes

2,250

1,609

(Provision for) Benefit from Income Taxes (g)

(210)

89

Income from Continuing Operations

2,040

1,698

Loss from Discontinued Operations, Net of Tax

—

(1)

Net Income

$

2,040

11.4

%

$

1,697

11.4

%

Earnings per Share from Continuing Operations:

Basic

$

5.07

$

4.33

Diluted

$

5.03

$

4.29

Earnings per Share:

Basic

$

5.07

$

4.32

Diluted

$

5.03

$

4.29

Weighted Average Shares:

Basic

402

392

Diluted

406

396

Reconciliation of Adjusted Operating Income and Adjusted Operating Margin

GAAP Operating Income (a)

$

2,635

14.8

%

$

2,003

13.5

%

Cost of Revenues Charges (c)

7

0.0

%

77

0.5

%

Selling, General and Administrative Charges, Net (d)

7

0.0

%

75

0.5

%

Restructuring and Other Costs, Net (e)

35

0.2

%

95

0.6

%

Amortization of Acquisition-related Intangible Assets

1,316

7.4

%

1,153

7.8

%

Adjusted Operating Income (b)

$

4,000

22.4

%

$

3,403

22.9

%

Reconciliation of Adjusted Net Income

GAAP Net Income (a)

$

2,040

$

1,697

Cost of Revenues Charges (c)

7

77

Selling, General and Administrative Charges, Net (d)

7

75

Restructuring and Other Costs, Net (e)

35

95

Amortization of Acquisition-related Intangible Assets

1,316

1,153

Other Expense, Net (f)

4

30

Benefit from Income Taxes (g)

(215)

(481)

Discontinued Operations, Net of Tax

—

1

Adjusted Net Income (b)

$

3,194

$

2,647

Reconciliation of Adjusted Earnings per Share

GAAP EPS (a)

$

5.03

$

4.29

Cost of Revenues Charges, Net of Tax (c)

0.01

0.13

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

0.01

0.13

Restructuring and Other Costs, Net of Tax (e)

0.07

0.16

Amortization of Acquisition-related Intangible Assets, Net of Tax

2.54

2.08

Other Expense, Net of Tax (f)

0.01

0.05

Provision for (Benefit from) Income Taxes (g)

0.20

(0.15)

Discontinued Operations, Net of Tax

—

—

Adjusted EPS (b)

$

7.87

$

6.69

Reconciliation of Free Cash Flow

GAAP Net Cash Provided by Operating Activities (a)

$

2,742

$

2,139

Net Cash Used in Discontinued Operations

—

2

Purchases of Property, Plant and Equipment

(474)

(293)

Proceeds from Sale of Property, Plant and Equipment

6

4

Free Cash Flow

$

2,274

$

1,852

Segment Data

Nine Months Ended

September 29,

% of

September 30,

% of

(In millions)

2018

Revenues

2017

Revenues

Revenues

Life Sciences Solutions

$

4,572

25.6

%

$

4,150

27.9

%

Analytical Instruments

3,901

21.9

%

3,407

22.9

%

Specialty Diagnostics

2,773

15.5

%

2,572

17.3

%

Laboratory Products and Services

7,433

41.6

%

5,424

36.5

%

Eliminations

(828)

-4.6

%

(682)

-4.6

%

Consolidated Revenues

$

17,851

100.0

%

$

14,871

100.0

%

Operating Income and Operating Margin

Life Sciences Solutions

$

1,534

33.5

%

$

1,333

32.1

%

Analytical Instruments

831

21.3

%

681

20.0

%

Specialty Diagnostics

719

25.9

%

685

26.7

%

Laboratory Products and Services

916

12.3

%

704

13.0

%

Subtotal Reportable Segments

4,000

22.4

%

3,403

22.9

%

Cost of Revenues Charges (c)

(7)

0.0

%

(77)

-0.5

%

Selling, General and Administrative Charges, Net (d)

(7)

0.0

%

(75)

-0.5

%

Restructuring and Other Costs, Net (e)

(35)

-0.2

%

(95)

-0.6

%

Amortization of Acquisition-related Intangible Assets

(1,316)

-7.4

%

(1,153)

-7.8

%

GAAP Operating Income (a)

$

2,635

14.8

%

$

2,003

13.5

%

(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) $10 and $47, respectively, of charges for the sale of inventories revalued at the date of acquisition and ii) $(3) and $27, respectively, of (credits)/charges to conform the accounting policies of recently acquired businesses with the company's accounting policies. Reported results in 2017 also include $3 of accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations.

(d)

Reported results in 2018 and 2017 include i) $22 and $50, respectively, of certain third-party expenses, principally transaction/integration costs related to recently completed acquisitions; ii) $11 and $8, respectively, of income associated with product liability litigation and iii) $(4) and $25, respectively, of (credits)/charges from changes in estimates of contingent acquisition consideration. Reported results in 2017 also include $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 and $5 of hurricane response costs. Reported results in 2017 include $18 of net charges for litigation, $6 of compensation due at an acquired business on the date of acquisition and $2 of charges for the settlement of retirement plans.

(f)

Reported results in 2018 include $2 of net gains from investments, $3 of losses on the early extinguishment of debt and $3 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 $32 charge related to fees paid to obtain bridge financing commitments for the acquisition of Patheon, offset in part by $6 of net gains from investments.

(g)

Reported provision for income taxes includes i) $297 and $422 of incremental tax benefit in 2018 and 2017, respectively, for the pre-tax reconciling items between GAAP and adjusted net income; ii) $(14) and $60 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, $68 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 $393 and $306 in 2018 and 2017, respectively.

Condensed Consolidated Balance Sheet (unaudited)

September 29,

December 31,

(In millions)

2018

2017

Assets

Current Assets:

Cash and cash equivalents

$

1,098

$

1,335

Accounts receivable, net

3,852

3,879

Inventories

2,982

2,971

Other current assets

1,634

1,236

Total current assets

9,566

9,421

Property, Plant and Equipment, Net

3,978

4,047

Acquisition-related Intangible Assets

15,219

16,684

Other Assets

1,173

1,227

Goodwill

25,142

25,290

Total Assets

$

55,078

$

56,669

Liabilities and Shareholders' Equity

Current Liabilities:

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

$

1,014

$

2,135

Other current liabilities

4,182

4,913

Total current liabilities

5,196

7,048

Other Long-term Liabilities

5,232

5,335

Long-term Obligations

17,760

18,873

Total Shareholders' Equity

26,890

25,413

Total Liabilities and Shareholders' Equity

$

55,078

$

56,669

Condensed Consolidated Statement of Cash Flows (unaudited)

Nine Months Ended

September 29,

September 30,

(In millions)

2018

2017

Operating Activities

Net income

$

2,040

$

1,697

Loss from discontinued operations

—

1

Income from continuing operations

2,040

1,698

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

Depreciation and amortization

1,709

1,459

Change in deferred income taxes

(317)

(484)

Other non-cash expenses, net

214

230

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

(904)

(762)

Net cash provided by continuing operations

2,742

2,141

Net cash used in discontinued operations

—

(2)

Net cash provided by operating activities

2,742

2,139

Investing Activities

Acquisitions, net of cash acquired

(59)

(7,160)

Purchases of property, plant and equipment

(474)

(293)

Proceeds from sale of property, plant and equipment

6

4

Other investing activities, net

(5)

3

Net cash used in investing activities

(532)

(7,446)

Financing Activities

Net proceeds from issuance of debt

690

6,459

Repayment of debt

(2,048)

(2,552)

Net proceeds from issuance of commercial paper

3,378

6,030

Repayment of commercial paper

(3,842)

(5,809)

Purchases of company common stock

(250)

(750)

Dividends paid

(198)

(177)

Net proceeds from issuance of company common stock

—

1,690

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

97

108

Other financing activities, net

(51)

(1)

Net cash (used in) provided by financing activities

(2,224)

4,998

Exchange Rate Effect on Cash

(236)

256

Decrease in Cash, Cash Equivalents and Restricted Cash

(250)

(53)

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

1,361

811

Cash, Cash Equivalents and Restricted Cash at End of Period

$

1,111

$

758

Free Cash Flow (a)

$

2,274

$

1,852

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