Thermo Fisher Scientific Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Thermo Fisher serves life sciences, analytical instruments, diagnostics, and laboratory products and services markets.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $24.36 billion | $20.92 billion |
| Operating income | $3.78 billion | $2.96 billion |
| Operating margin | 15.5% | 14.2% |
| Income from continuing operations | $2.94 billion | $2.23 billion |
| Diluted EPS | $7.24 | $5.60 |
| Cash from operating activities | $4.54 billion | $4.01 billion |
| Capital expenditures | $758 million | $508 million |
| Cash and cash equivalents at year-end | $2.10 billion | $1.34 billion |
| Debt at carrying value | $18.99 billion | $21.01 billion |
| Working capital | $4.48 billion | $2.37 billion |
Revenue increased 16% year over year. Acquisitions contributed $1.53 billion and favorable currency translation $173 million; excluding those effects, revenue grew $1.74 billion, or 8%, mainly on higher demand. Operating income rose 28%. Management cited higher sales, acquisitions, and productivity improvements, partly offset by strategic growth spending, unfavorable mix, inflation, and acquisition-related amortization. Operating cash flow increased despite higher working-capital investment.
Cash from investing activities was negative $1.25 billion, including $536 million for acquisitions and $758 million of capital expenditures. Financing activities used $2.24 billion, including $2.05 billion of debt repayments, $500 million of share repurchases, and $266 million of dividends. Approximate net debt, using year-end debt carrying value less cash, was $16.89 billion.
Fourth-quarter results and segment trends
Fourth-quarter revenue was $6.51 billion versus $6.05 billion in 2017; net income was $898 million versus $528 million; diluted EPS was $2.22 versus $1.30. The filing reports $42 million of fourth-quarter restructuring and other costs, compared with $51 million in the prior-year quarter.
Full-year revenue grew across all four segments: Life Sciences Solutions $6.27 billion (+9%); Analytical Instruments $5.47 billion (+13%); Specialty Diagnostics $3.72 billion (+7%); and Laboratory Products and Services $10.04 billion (+28%). The last segment’s growth included $1.47 billion from acquisitions, principally the 2017 Patheon acquisition. Segment operating margins, as defined by management before specified acquisition, restructuring, and intangible-amortization items, were 34.4%, 22.8%, 25.6%, and 12.5%, respectively.
Outlook, transactions, risks, and unusual items
- Management expected a 2019 effective tax rate of 7%–10%. No revenue or earnings guidance is stated in the supplied filing text.
- The company said cash, future operating cash flow, and available revolver capacity should meet existing-business cash needs for at least the next 24 months. Its $2.50 billion revolving facility had no borrowings outstanding at year-end; availability was reduced by $82 million for letters of credit.
- Thermo Fisher agreed to acquire Gatan for approximately $925 million in cash, subject to customary closing conditions and regulatory approvals; it expected to fund the deal with cash and short-term borrowings. The commitment is not included in the contractual-obligations table.
- On January 28, 2019, the company agreed to sell its Anatomical Pathology business for approximately $1.14 billion, subject to customary conditions and approvals. The business generated about $344 million of 2018 revenue; the planned sale also led to a $71 million tax valuation-allowance charge in 2018.
- 2018 included a $68 million net adjustment to provisional Tax Act accounting, $91 million of restructuring and other costs, and $38 million of other income, principally from resolution of a litigation matter. The company identified approximately $65 million of additional restructuring charges, primarily in 2019, and expected about $65 million of annual savings from 2018 actions.
- Key risks include acquisition integration and impairment (goodwill was $25.35 billion; Pharma Services had only a 5% fair-value cushion over carrying value), substantial debt and refinancing needs, tax uncertainty, foreign exchange and trade-policy exposure, regulatory and product-liability risks, cyber and data-security threats, and operational or supply disruptions. Environmental liabilities accrued were $69 million. The filing states that unfavorable outcomes in certain legal matters could materially affect results, but does not provide a meaningful loss estimate for some matters.
Most important facts for investors to verify
- Whether underlying organic growth and margin gains continue after separating acquisition and currency effects, particularly in Laboratory Products and Services.
- Integration performance and cash generation from Patheon, and the sensitivity of its goodwill valuation to forecasts and valuation assumptions.
- Execution, financing, and expected returns for the Gatan acquisition and completion terms and proceeds of the Anatomical Pathology sale.
- Debt maturities, refinancing costs, covenant headroom, and cash available after planned investment, dividends, and repurchases.
- Whether the 7%–10% 2019 tax-rate expectation and estimated restructuring savings are achieved, and whether legal, environmental, or regulatory exposures change.