01—Abstract
Summary
Summary of the 10-K filed February 27, 2019. Cited figures are marked; the original filing is the authoritative source.
Thermo Fisher Scientific's 2018 Form 10-K shows a strong year of organic and acquisitive growth.
Revenue rose 16% to $24.36 billiona (about 8% organic growth, excluding $1.53 billion from acquisitions and $173 million from favorable currency), and GAAP operating income climbed 28% to $3.78 billion, with operating margin expanding to 15.5% from 14.2%. Net income grew 32% to $2.94 billion and diluted EPS rose to $7.24 from $5.59, helped by a lower U.S. tax rate under the Tax Act. Operating cash flow reached $4.54 billion, and capital expenditures were $758 million.
Growth was broad across all four segments, with Laboratory Products and Services (up 28%, boosted by the Patheon acquisition) and Analytical Instruments (up 13%) leading. The balance sheet carries significant leverage from acquisitions. Total debt was about $19.0 billionb at year-end, against $2.10 billion of cash, and goodwill plus intangibles total roughly $40 billion, or about 71% of total assets, which creates impairment risk if growth slows.
Amortization of acquisition-related intangibles was $1.74 billionc, a large drag on GAAP earnings. The company is also in the middle of portfolio reshaping: it agreed in January 2019 to sell Anatomical Pathology to PHC Holdings for about $1.14 billion, and it is acquiring Gatan for about $925 million. Management guides to a 2019 effective tax rate of 7% to 10%, and it repurchased $500 million of stock in 2018 and $750 million in January 2019.
Key risks for investors include the Pharma Services reporting unit, where the fair value cushion over carrying value was only about 5% (carrying value $7.70 billiond, goodwill $3.37 billion); tariff and trade exposure to China; heavy reliance on government and pharmaceutical customers; and a 3.5x maximum leverage covenant under the revolving credit facility. The company also faces ongoing environmental remediation obligations (accrued $69 million) and product liability claims.
02—Key points
Key Highlights
- Revenue grew 16% to $24.36B, with about 8% organic growth (excluding $1.53B from acquisitions and $173M from currency) driven by demand across all end markets and strength in Asia.
- GAAP operating income rose 28% to $3.78B and operating margin expanded 130 bps to 15.5%; reportable segment income grew 16% to $5.62B.
- Diluted EPS of $7.24 (vs. $5.59 in 2017) and net income of $2.94B (up 32%), supported by a lower U.S. statutory tax rate and a $68M net Tax Act charge.
- Operating cash flow of $4.54B (up 13%) and capex of $758M (up 49%); year-end cash of $2.10B against about $19.0B of total debt.
- Acquisition-driven balance sheet: goodwill ($25.3B) and intangibles ($15.0B) represent roughly 71% of total assets, and amortization of acquired intangibles reached $1.74B.
- Portfolio reshaping: agreed to sell Anatomical Pathology to PHC Holdings for about $1.14B and to acquire Gatan for about $925M; 2018 acquisitions included Becton Dickinson's Advanced Bioprocessing business ($477M).
- Capital returns: $500M of buybacks in 2018, $750M more in January 2019, $1.25B of authorization remaining at February 27, 2019, and dividends of $0.68 per share (up from $0.60).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 27, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $24.36B$20.92B | +16.4% |
| R&D Expenses | $967.00M$887.00M | +9.0% |
| SG&A Expenses | $6.06B$5.50B | +10.0% |
| Operating Expenses | $20.57B$17.96B | +14.6% |
| Operating Income | $3.78B$2.96B | +27.8% |
| Interest Expense | $667.00M$592.00M | +12.7% |
| Net Income | $2.94B$2.23B | +32.0% |
| EPS (Basic) | $7.31$5.64 | +29.6% |
| EPS (Diluted) | $7.24$5.59 | +29.5% |
| Shares Outstanding (Basic) | 402.00M395.00M | +1.8% |
| Shares Outstanding (Diluted) | 406.00M398.00M | +2.0% |
05—Questions
Frequently Asked Questions
How strong was Thermo Fisher's underlying growth in 2018, excluding acquisitions and currency?
Organic revenue growth was about 8%, or $1.74B, driven primarily by higher demand across each end market and geography, particularly Asia. Acquisitions added $1.53B and favorable currency added $173M, for total reported growth of 16%. Segment margins were mixed, with Life Sciences Solutions up 1.3 points and Analytical Instruments up 1.5 points, while Laboratory Products and Services fell 0.3 points due to sales mix and growth investments.
How much goodwill and intangible risk does the balance sheet carry, and which area is most exposed?
Goodwill of $25.35B and indefinite-lived intangibles of $1.27B were tested with no impairment in 2018. The Pharma Services reporting unit (legacy Patheon) carries $3.37B of goodwill and a $7.70B carrying value, but its fair value exceeded carrying value by only about 5%. Small declines in forecast cash flows, peer multiples or a higher discount rate could trigger an impairment charge.
What is the debt and liquidity profile, and are there covenant constraints?
Total borrowings were $18.99B at carrying value, with $1.27B due within a year, including $693M of commercial paper. The company had $2.10B of cash and a $2.50B undrawn revolver that expires in July 2021. Covenants require a maximum consolidated leverage ratio of 3.5x debt to EBITDA and a minimum interest coverage ratio of 3.0x. Management says cash and operations are sufficient for at least the next 24 months.
What will drive the 2019 tax rate and earnings outlook?
Management expects a 2019 effective tax rate of 7% to 10%, based on forecast profitability by country and expected foreign tax credits. The 2018 provision included a $71M valuation allowance tied to the planned Anatomical Pathology sale and a $117M incremental transition-tax charge, partly offset by a $49M reserve reduction. The company also expects about $65M of additional restructuring charges in 2019, mostly in that year, against about $65M of annual savings from 2018 actions.
06—Continue