On January 30, 2019 Thermo Fisher Scientific Inc. (NYSE: TMO), the world leader in serving science, reported its financial results for the fourth quarter and full year ended December 31, 2018 (Press release, Thermo Fisher Scientific, JAN 30, 2019, View Source [SID1234532983]).
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Fourth Quarter and Full Year 2018 Highlights
Fourth quarter revenue grew 8% to $6.51 billion.
Fourth quarter GAAP diluted earnings per share (EPS) increased 71% to $2.22.
Fourth quarter adjusted EPS increased 16% to $3.25.
Full year revenue grew 16% to $24.36 billion.
Full year GAAP diluted EPS increased 30% to $7.24.
Full year adjusted EPS increased 17% to $11.12.
Invested $1 billion in R&D in 2018 and launched a range of new products that strengthened our leading offering, including the Thermo Scientific Vanquish Duo UHPLC system, Thermo Scientific Q Exactive UHMR mass spectrometer, Ion GeneStudio S5 Series next-generation sequencing systems and the Phadia 200 allergy and autoimmune instrument in Europe.
Built on the excellent growth momentum we had all year in Asia-Pacific and Emerging Markets, capped by another very strong quarter in China, where we recently opened our first Bioprocess Design Center to support development of biologics.
Continued to successfully execute our capital deployment strategy in 2018 to create significant shareholder value – reducing debt by $2.0 billion, closing $540 million of bolt-on acquisitions and returning capital through $500 million of stock buybacks and $275 million of dividends.
Adjusted EPS, adjusted operating income, adjusted operating margin and free cash flow are non-GAAP measures that exclude certain items detailed later in this press release under the heading "Use of Non-GAAP Financial Measures."
"I’m pleased to report that we had a very strong finish to the year," said Marc N. Casper, president and chief executive officer of Thermo Fisher Scientific. "Our outstanding performance in 2018 is testament to the success of our growth strategy and great execution by our team.
"In line with our strategy, we continued to innovate to enable our customers’ scientific advances, leveraged our scale in Asia-Pacific and emerging markets to drive growth, and enhanced our customer value proposition with the smooth integration of Patheon. At the same time, we significantly strengthened our balance sheet and effectively deployed our capital by investing in strategic M&A and returning capital to our shareholders."
Casper concluded, "All in all, it was a fantastic year, which puts us in a great position as we begin 2019."
Fourth Quarter 2018
Revenue for the quarter grew 8% to $6.51 billion in 2018, versus $6.05 billion in 2017. Organic revenue growth was 8%; acquisitions increased revenue by 1% and currency translation decreased revenue by 2%. The components of revenue growth do not sum due to rounding.
GAAP Earnings Results
GAAP diluted EPS in the fourth quarter increased 71% to $2.22, versus $1.30 in the same quarter last year. Results in 2017 included a one-time tax provision associated with U.S. tax reform. GAAP operating income for the fourth quarter of 2018 grew to $1.15 billion, compared with $0.96 billion in the fourth quarter of 2017. GAAP operating margin increased to 17.6%, compared with 15.8% in the fourth quarter of 2017.
Non-GAAP Earnings Results
Adjusted EPS in the fourth quarter of 2018 increased 16% to $3.25, versus $2.79 in the fourth quarter of 2017. Adjusted operating income for the fourth quarter of 2018 grew 12% compared with the year-ago quarter. Adjusted operating margin increased 90 basis points to 24.8%, compared with 23.9% in the fourth quarter of 2017.
Full Year 2018
Revenue for the full year grew 16% to $24.36 billion in 2018, versus $20.92 billion in 2017. Organic revenue growth was 8%; acquisitions increased revenue by 7% and currency translation increased revenue by 1%.
GAAP Earnings Results
GAAP diluted EPS for the full year increased 30% to $7.24, versus $5.59 in 2017. Results in 2017 reflect the one-time tax provision noted above. GAAP operating income for 2018 grew to $3.78 billion, compared with $2.96 billion a year ago. GAAP operating margin was 15.5% in 2018, compared with 14.2% in 2017.
Non-GAAP Earnings Results
Adjusted EPS for the full year rose 17% to $11.12, versus $9.49 in 2017. Adjusted operating income for 2018 grew 16% compared with 2017, and adjusted operating margin was 23.1%, compared with 23.2% a year ago.
Annual Guidance for 2019
The company will provide 2019 financial guidance on its earnings conference call this morning at 8:30 a.m. Eastern time.
Segment Results
Management uses adjusted operating results to monitor and evaluate performance of the company’s four business segments, as highlighted below. Since these results are used for this purpose, they are also considered to be prepared in accordance with GAAP.
Life Sciences Solutions Segment
In the fourth quarter of 2018, Life Sciences Solutions Segment revenue grew 8% to $1.70 billion, compared with revenue of $1.58 billion in the fourth quarter of 2017. Segment adjusted operating margin increased to 36.8%, versus 35.5% in the 2017 quarter.
For the full year 2018, Life Sciences Solutions Segment revenue rose 9% to $6.27 billion, compared with revenue of $5.73 billion in 2017. Segment adjusted operating margin increased to 34.4% in 2018, compared with 33.1% a year ago.
Analytical Instruments Segment
Analytical Instruments Segment revenue grew 11% to $1.57 billion in the fourth quarter of 2018, compared with revenue of $1.41 billion in the fourth quarter of 2017. Segment adjusted operating margin increased to 26.6%, versus 24.5% in the 2017 quarter.
For the full year 2018, Analytical Instruments Segment revenue rose 13% to $5.47 billion, compared with revenue of $4.82 billion in 2017. Segment adjusted operating margin grew to 22.8%, versus 21.3% in 2017.
Specialty Diagnostics Segment
In the fourth quarter of 2018, Specialty Diagnostics Segment revenue grew 4% to $0.95 billion, compared with revenue of $0.91 billion in the fourth quarter of 2017. Segment adjusted operating margin was 24.5%, versus 26.4% in the 2017 quarter.
For the full year 2018, Specialty Diagnostics Segment revenue grew 7% to $3.72 billion, compared with revenue of $3.49 billion in 2017. Segment adjusted operating margin was 25.6%, versus 2017 results of 26.6%.
Laboratory Products and Services Segment
Laboratory Products and Services Segment revenue grew 8% to $2.60 billion in the fourth quarter of 2018, compared with revenue of $2.40 billion in the fourth quarter of 2017. Segment adjusted operating margin increased to 13.1%, versus 12.5% in the 2017 quarter.
For the full year 2018, Laboratory Products and Services Segment revenue grew 28% to $10.04 billion, compared with revenue of $7.83 billion in 2017. Segment adjusted operating margin was 12.5%, versus 12.8% in 2017.
Use of Non-GAAP Financial Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margin, which exclude certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition and significant transaction costs; restructuring and other costs/income; and amortization of acquisition-related intangible assets. Adjusted EPS also excludes certain other gains and losses that are either isolated or cannot be expected to occur again with any predictability, tax provisions/benefits related to the previous items, benefits from tax credit carryforwards, the impact of significant tax audits or events and the results of discontinued operations. We exclude the above items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. We also use a non-GAAP measure, free cash flow, which is operating cash flow, excluding net capital expenditures, and also excludes operating cash flows from discontinued operations to provide a view of the continuing operations’ ability to generate cash for use in acquisitions and other investing and financing activities. We believe that the use of non-GAAP measures helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company’s performance, especially when comparing such results to previous periods or forecasts.
For example:
We exclude costs and tax effects associated with restructuring activities, such as reducing overhead and consolidating facilities. We believe that the costs related to these restructuring activities are not indicative of our normal operating costs.
We exclude certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition and significant transaction costs. We exclude these costs because we do not believe they are indicative of our normal operating costs.
We exclude the expense and tax effects associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of 3 to 20 years. In 2019, based on acquisitions closed through the end of 2018, our adjusted EPS will exclude approximately $3.27 of expense for the amortization of acquisition-related intangible assets. Exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.
We also exclude certain gains/losses and related tax effects, benefits from tax credit carryforwards and the impact of significant tax audits or events (such as the effect on deferred tax balances of enacted changes in tax rates or, in 2017, the incremental impact of tax reform legislation in the U.S.), which are either isolated or cannot be expected to occur again with any predictability and that we believe are not indicative of our normal operating gains and losses. For example, we exclude gains/losses from items such as the sale of a business or real estate, gains or losses on significant litigation-related matters, gains on curtailments of pension plans, the early retirement of debt and discontinued operations.
We also report free cash flow, which is operating cash flow, excluding net capital expenditures, and also excludes operating cash flows from discontinued operations to provide a view of the continuing operations’ ability to generate cash for use in acquisitions and other investing and financing activities.
Thermo Fisher’s management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring the company’s core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. Such measures are also used by management in their financial and operating decision-making and for compensation purposes.
The non-GAAP financial measures of Thermo Fisher’s results of operations and cash flows included in this press release are not meant to be considered superior to or a substitute for Thermo Fisher’s results of operations prepared in accordance with GAAP. Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in the accompanying tables. Thermo Fisher does not provide GAAP financial measures on a forward-looking basis because we are unable to predict with reasonable certainty and without unreasonable effort items such as the timing and amount of future restructuring actions and acquisition-related charges as well as gains or losses from sales of real estate and businesses, the early retirement of debt and the outcome of legal proceedings. The timing and amount of these items are uncertain and could be material to Thermo Fisher’s results computed in accordance with GAAP.
Conference Call
Thermo Fisher Scientific will hold its earnings conference call today, January 30, 2019, at 8:30 a.m. Eastern time. To listen, dial 877-273-7122 within the U.S. or 647-689-5496 outside the U.S. You may also listen to the call live on our website, www.thermofisher.com, by clicking on "Investors." You will find this press release, including the accompanying reconciliation of non-GAAP financial measures and related information, in that section of our website under "Financial Results." An audio archive of the call will be available under "Webcasts and Presentations" through Friday, February 8, 2019.