THERMO FISHER SCIENTIFIC Reference is made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations to Notes to the Consolidated Financial Statements , which begin on page F-1 of this report. Management's discussion and analysis of financial condition and results of operations for 2017 is included in Item 7 of the company's 2018 Annual Report on Form 10-K filed with theSecurities and Exchange Commission .
Overview
The company develops, manufactures and sells a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own technologies and by making strategic acquisitions of complementary businesses. The company's operations fall into four segments (see Note 4): Life Sciences Solutions, Analytical Instruments,Specialty Diagnostics and Laboratory Products and Services. Recent Acquisitions and Divestiture The company's strategy is to augment internal growth at existing businesses with complementary acquisitions. The company's principal recent acquisitions and divestiture are described below. OnOctober 25, 2018 , the company acquired, within the Life Sciences Solutions segment, Becton Dickinson and Company's Advanced Bioprocessing business for$477 million in cash. ThisNorth America -based business adds complementary cell culture products that expand the segment's bioproduction offerings to help customers increase yield during production of biologic drugs. The Advanced Bioprocessing business reported revenues of$100 million in 2017. OnApril 30, 2019 , the company acquired, within the Laboratory Products and Services segment,Brammer Bio for approximately$1.67 billion in cash.Brammer Bio is a leading viral vector contract development and manufacturing organization for gene and cell therapies. The acquisition expands the segment's contract manufacturing capabilities.Brammer Bio reported revenues of approximately$140 million in 2018. OnJune 28, 2019 , the company sold its Anatomical Pathology business toPHC Holdings Corporation for$1.13 billion , net of cash divested. The business was part of theSpecialty Diagnostics segment. The sale of this business resulted in a pre-tax gain of approximately$478 million , included in restructuring and other (income) costs, net. Revenues in 2019, through the date of sale, and the full year 2018 of the business sold were approximately$115 million and$238 million , respectively, net of retained sales through the company's healthcare market and research and safety market channel businesses. Overview of Results of Operations and Liquidity (Dollars in millions) 2019 2018 Revenues Life Sciences Solutions$ 6,856 26.8 %$ 6,269 25.7 % Analytical Instruments 5,522 21.6 % 5,469 22.5 % Specialty Diagnostics 3,718 14.6 % 3,724 15.3 % Laboratory Products and Services 10,599 41.5 % 10,035 41.2 % Eliminations (1,153) (4.5) % (1,139) (4.7) %$ 25,542 100 %$ 24,358 100 % Sales in 2019 were$25.54 billion , an increase of$1.18 billion from 2018. Sales increased$153 million due to acquisitions, net of a divestiture. The unfavorable effects of currency translation resulted in a decrease in revenues of$440 million in 2019. Aside from the effects of acquisitions/divestitures and currency translation, revenues increased$1.47 billion (6%) primarily due to increased demand. Sales to customers in each of the company's primary end markets grew with particular strength in sales to customers in the biotech and pharmaceutical industry. Sales growth was strong in each of the company's primary geographic areas in 2019. In the fourth quarter of 2019, sales to industrial customers declined and sales growth inAsia was modest due to weaker end market conditions off of a strong fourth quarter in 2018. 23 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Results of Operations and Liquidity (continued) In 2019, total company operating income and operating income margin were$4.59 billion and 18.0%, respectively, compared with$3.78 billion and 15.5%, respectively, in 2018. The increase in operating income was primarily due to profit on higher sales, the gain on the sale of the Anatomical Pathology business and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by strategic growth investments, sales mix and unfavorable foreign currency exchange. The company's references to strategic growth investments generally refer to targeted spending for enhancing commercial capabilities, including expansion of geographic sales reach and e-commerce platforms, marketing initiatives, expanded service and operational infrastructure, focused research projects and other expenditures to enhance the customer experience. The company's references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system, reduced costs resulting from global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, and low cost region manufacturing. The company recorded a$374 million provision for income taxes in 2019 including$191 million related to the gain on the sale of the Anatomical Pathology business. In 2019, the company recorded a$62 million income tax benefit related to a foreign exchange loss for tax purposes on certain intercompany financing arrangements, implemented foreign tax credit planning inSweden which resulted in$75 million of foreign tax credits, with no related incrementalU.S. income tax expense, and recorded a$79 million income tax benefit related to the deferred tax implications of intra-entity transactions which included a tax benefit to release a valuation allowance against net operating losses previously determined to be unrealizable. The company recorded a$324 million provision for income taxes in 2018 including a net provision of$68 million to adjust the estimated initial effects of the Tax Cuts and Jobs Act of 2017 (the Tax Act) recorded in 2017, consisting of an incremental provision of$117 million offset in part by a$49 million reduction of related unrecognized tax benefits established in 2017. These adjustments were required based on newU.S. Treasury guidance and further analysis of available tax accounting methods and elections, legislative updates, regulations, earnings and profit computations and foreign taxes. In 2018, the provision for income taxes also included a$71 million charge to establish a valuation allowance against net operating losses that will not be utilized as a result of the 2019 sale of the Anatomical Pathology business. The effective tax rate in both 2019 and 2018 was also affected by relatively significant earnings in lower tax jurisdictions. Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company's cash payments for income taxes were higher than its income tax expense for financial reporting purposes and totaled$896 million and$591 million in 2019 and 2018, respectively. The company expects its effective tax rate in 2020 will be between 8% and 10% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits. The effective tax rate can vary significantly from period to period as a result of discrete income tax factors and events. Income from continuing operations increased to$3.70 billion in 2019, from$2.94 billion in 2018 principally due to increase in operating income in 2019 (discussed above) offset in part by$184 million of losses on the early extinguishment of debt in 2019 (Note 10). During 2019, the company's cash flow from operations totaled$4.97 billion compared with$4.54 billion for 2018. The increase primarily resulted from higher income before amortization and depreciation and lower investment in working capital in the 2019 period. As ofDecember 31, 2019 , the company's short-term debt totaled$676 million , including$672 million of senior notes due within the next twelve months. The company has a revolving credit facility with a bank group that provides up to$2.50 billion of unsecured multi-currency revolving credit. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As ofDecember 31, 2019 , no borrowings were outstanding under the company's revolving credit facility, although available capacity was reduced by approximately$72 million as a result of outstanding letters of credit. The company believes that its existing cash and cash equivalents of$2.40 billion as ofDecember 31, 2019 and its future cash flow from operations together with available borrowing capacity under its revolving credit agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months. 24 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies and Estimates The company's discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to intangible assets and goodwill, income taxes and contingencies and litigation. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The company believes the following represent its critical accounting policies and estimates used in the preparation of its financial statements: (a)Intangible Assets andGoodwill The company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of the company's acquisitions, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. The company estimates the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. Definite-lived intangible assets totaled$12.76 billion atDecember 31, 2019 . The company reviews definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. The company evaluates goodwill and indefinite-lived intangible assets for impairment annually and when events occur or circumstances change that would more-likely-than-not reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts.Goodwill and indefinite-lived intangible assets totaled$25.71 billion and$1.25 billion , respectively, atDecember 31, 2019 . Estimates of discounted future cash flows require assumptions related to revenue and operating income growth rates, discount rates and other factors. For the goodwill impairment tests, the company considers (i) peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the respective reporting units and (ii) estimated weighted average costs of capital. Different assumptions from those made in the company's analysis could materially affect projected cash flows and the company's evaluation of goodwill and indefinite-lived intangible assets for impairment. For reporting units where the company performed the quantitative goodwill impairment test, indications of fair value based on projections of profitability and on peer revenues and earnings trading multiples were sufficient to conclude that no impairment of goodwill or indefinite-lived intangible assets existed at the end of the tenth fiscal month of 2019, the date of the company's annual impairment testing. There can be no assurance, however, that an economic downturn will not materially adversely affect peer trading multiples and the company's businesses such that they do not achieve their forecasted profitability and these assets become impaired. Should the fair value of the company's goodwill or indefinite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rate, charges for impairment may be necessary. (b)Income Taxes In the ordinary course of business there is inherent uncertainty in quantifying the company's income tax positions. The company assesses income tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax 25 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies and Estimates (continued) positions where it is more likely than not that a tax benefit will be sustained, the company has recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Should tax return positions that the company expects are sustainable not be sustained upon audit, the company could be required to record an incremental tax provision for such taxes. The company's liability for these unrecognized tax benefits totaled$1.55 billion atDecember 31, 2019 . The company operates in numerous countries under many legal forms and, as a result, is subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the company to interpret the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, currency exchange restrictions or the company's level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and hence the company's net income. The company estimates the degree to which tax assets will result in a benefit, after consideration of all positive and negative evidence, and provides a valuation allowance for tax assets that it believes will more likely than not go unused. In situations in which the company has been able to determine that its deferred tax assets will be realized, that determination generally relies on future reversals of taxable temporary differences and expected future taxable income. If it becomes more likely than not that a tax asset will be used, the company reverses the related valuation allowance. Any such reversals are recorded as a reduction of the company's tax provision. The company's tax valuation allowance totaled$408 million atDecember 31, 2019 . Should the company's actual future taxable income by tax jurisdiction vary from estimates, additional allowances or reversals thereof may be necessary. The company has not providedU.S. state income taxes or additional non-U.S. taxes on certain of its non-U.S. subsidiaries' undistributed earnings, as such amounts are intended to be reinvested outsidethe United States indefinitely in the respective jurisdictions based on specific business plans and tax strategies. These business plans and tax strategies consider: short-term and long-term forecasts and budgets of theU.S. parent and non-U.S. subsidiaries; working capital and other needs in locations where earnings are generated; the company's past practices regarding non-U.S. subsidiary dividends; sources of financing by theU.S. parent, such as issuing debt or equity; and uses of cash by theU.S. parent that are more discretionary in nature, such as business combinations and share repurchase programs. However, should the company change its business plans and tax strategies in the future and decide to repatriate a portion of these earnings to one of itsU.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries, the company would recognize additional tax liabilities. It is not practicable to estimate the amount of additionalU.S. state income tax and non-U.S. tax liabilities that the company would incur. The company's intent is to only make distributions from non-U.S. subsidiaries in the future when they can be made at no net tax costs. (c)Contingencies and Litigation The company records accruals for various contingencies, including legal proceedings, environmental, workers' compensation, product, general and auto liabilities, and other claims that arise in the normal course of business. The accruals are based on management's judgment, historical claims experience, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarial estimates. Accruals of acquired businesses, including product liability and environmental accruals, are initially recorded at fair value and discounted to their net present value. Additionally, the company records receivables from third-party insurers when recovery has been determined to be probable. 26 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 2019 Compared With 2018 Currency Total Translation / (In millions) 2019 2018 Change Other * Acquisitions/Divestitures Operations Revenues
Life Sciences Solutions
89 $ 620
Analytical Instruments 5,522 5,469 53 (96) -
149
Specialty Diagnostics 3,718 3,724 (6) (66) (126)
186
Laboratory Products and Services 10,599 10,035 564 (227) 187 604 Eliminations (1,153) (1,139) (14) 71 3 (88) Consolidated Revenues$ 25,542 $ 24,358 $ 1,184 $ (440) $ 153$ 1,471 * Currency Translation/Other for the Laboratory Products and Services segment includes a reduction of revenue of$60 million for the impact of a change in the method of reporting certain intersegment sales with no impact on consolidated results. Sales in 2019 were$25.54 billion , an increase of$1.18 billion from 2018. Sales increased$153 million due to acquisitions. The unfavorable effects of currency translation resulted in a decrease in revenues of$440 million in 2019. Aside from the effects of acquisitions and currency translation, revenues increased$1.47 billion (6%) primarily due to increased demand. Sales to customers in each of the company's primary end markets grew with particular strength in sales to customers in the biotech and pharmaceutical industry. Sales growth was strong in each of the company's primary geographic areas in 2019. In the fourth quarter of 2019, sales to industrial customers declined and sales growth inAsia was modest due to weaker end market conditions off of a strong fourth quarter in 2018. In 2019, total company operating income and operating income margin were$4.59 billion and 18.0%, respectively, compared with$3.78 billion and 15.5%, respectively, in 2018. The increase in operating income was primarily due to profit on higher sales, the gain on the sale of the Anatomical Pathology business and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by strategic growth investments, sales mix and unfavorable foreign currency exchange. In 2019, the company recorded restructuring and other income, net, of$334 million , including$482 million of net gains on the sale of businesses, principally the Anatomical Pathology business (see Note 2). The company also recorded$17 million of charges to cost of revenues primarily for the sale of inventories revalued at the date of acquisition, and$62 million of net charges to selling, general and administrative expenses, principally transaction and integration-related costs related to acquisitions and a divestiture. In addition, the company recorded$52 million of cash restructuring charges, net, primarily for employee severance and abandoned facilities costs associated with the closure and consolidation of facilities in theU.S. andEurope (see Note 16). In 2018, the company recorded restructuring and other costs, net, of$91 million , including$12 million of charges to cost of revenues primarily for the sale of inventories revalued at the date of acquisition. The company recorded$29 million of net charges to selling, general and administrative expenses, primarily for third-party transaction and integration costs associated with recent and pending acquisitions, offset in part by income from favorable results of product liability litigation. In addition, the company recorded$88 million of cash restructuring costs, in its continued effort to streamline operations, including severance at several businesses and abandoned facility expenses at businesses that have been or are being consolidated in theU.S. andEurope . The company also recorded$38 million of other income, net, principally for resolution of a litigation matter. As ofFebruary 26, 2020 , the company has identified restructuring actions that will result in additional charges of approximately$65 million , primarily in 2020, and expects to identify additional actions during 2020 which will be recorded when specified criteria are met, such as communication of benefit arrangements or when the costs have been incurred. Approximately 25% of the additional charges will be incurred in the Life Sciences Solutions segment, 30% in the Analytical Instruments segment, 35% in the Laboratory Products and Services segment, and 10% in theSpecialty Diagnostics segment. The restructuring projects for which charges were incurred in 2019 are expected to result in annual cost savings of approximately$60 million beginning in part in 2019 and, to a greater extent, in 2020, including$20 million in the Life Sciences Solutions segment,$15 million in the Analytical Instruments segment,$5 million in theSpecialty Diagnostics segment and$20 27 --------------------------------------------------------------------------------THERMO FISHER SCIENTIFIC INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (continued) million in the Laboratory Products and Services segment. The restructuring actions for which charges were incurred in 2018 resulted in annual cost savings of approximately$65 million beginning in part in 2018 and to a greater extent in 2019, including$20 million in the Life Sciences Solutions segment,$10 million in the Analytical Instruments segment,$5 million in theSpecialty Diagnostics segment and$30 million in the Laboratory Products and Services segment. Segment Results The company's management evaluates segment operating performance using operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition-related activities; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets. The company uses this measure because it helps management understand and evaluate the segments' core operating results and facilitate comparison of performance for determining compensation (Note 4). Accordingly, the following segment data is reported on this basis. (Dollars in millions) 2019 2018 Change Revenues Life Sciences Solutions$ 6,856 $ 6,269 9 % Analytical Instruments 5,522 5,469 1 % Specialty Diagnostics 3,718 3,724 - % Laboratory Products and Services 10,599 10,035 6 % Eliminations (1,153) (1,139) 1 % Consolidated Revenues$ 25,542 $ 24,358 5 % Segment Income Life Sciences Solutions$ 2,446 $ 2,158 13 % Analytical Instruments 1,273 1,247 2 % Specialty Diagnostics 930 952 (2) % Laboratory Products and Services 1,324 1,258 5 % Subtotal Reportable Segments 5,973 5,615 6 % Cost of Revenues Charges (17) (12) Selling, General and Administrative Charges, Net (62)
(29)
Restructuring and Other (Costs) Income, Net 413
(50)
Amortization of Acquisition-related Intangible Assets (1,713) (1,741)
Consolidated Operating Income$ 4,594 $
3,783 21 %
Reportable Segments Operating Income Margin 23.4 %
23.1 %
Consolidated Operating Income Margin 18.0 %
15.5 %
Income from the company's reportable segments increased 6% to$5.97 billion in 2019 due primarily to profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments, sales mix and unfavorable foreign currency exchange. Life Sciences Solutions (Dollars in millions) 2019 2018 Change Revenues$ 6,856 $ 6,269 9 % Operating Income Margin 35.7 % 34.4 % 1.3 pt 28
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Sales in the Life Sciences Solutions segment increased $587 million to $6.86
billion in 2019. Sales increased $620 million (10%) due to higher revenues at
existing businesses and $89 million due to an acquisition. The unfavorable
effects of currency translation resulted in a decrease in revenues of $122
million . The increase in revenue at existing businesses was primarily due to
increased demand in each of the segment's principal businesses with particular
strength in sales of bioproduction and biosciences products.
Operating income margin was 35.7% in 2019 compared to 34.4% in 2018. The
increase in operating margin resulted primarily from profit on higher sales
offset in part by strategic growth investments and, to a lesser extent, sales
mix and unfavorable foreign currency exchange.
Analytical Instruments
(Dollars in millions) 2019 2018 Change
Revenues $ 5,522 $ 5,469 1 %
Operating Income Margin 23.1 % 22.8 % 0.3 pt
Sales in the Analytical Instruments segment increased $53 million to $5.52
billion in 2019. Sales increased $149 million (3%) due to higher revenues at
existing businesses. The unfavorable effects of currency translation resulted in
a decrease in revenues of $96 million . The increase in revenue at existing
businesses was due to increased demand for products sold by each of the
segment's primary businesses with particular strength in chromatography and mass
spectrometry instruments. Sales decreased in the fourth quarter of 2019 due to
industrial end market conditions off of a strong fourth quarter of 2018.
Operating income margin was 23.1% in 2019 compared to 22.8% in 2018. The
increase resulted primarily from profit on higher sales and productivity
improvements, net of inflationary cost increases. These increases were offset in
part by sales mix and strategic growth investments.
Specialty Diagnostics
(Dollars in millions) 2019 2018 Change
Revenues $ 3,718 $ 3,724 - %
Operating Income Margin 25.0 % 25.6 % -0.6 pt
Sales in the Specialty Diagnostics segment remained flat at $3.72 billion in
2019. Sales increased $186 million (5%) due to higher revenues at existing
businesses. The unfavorable effects of currency translation resulted in a
decrease in revenues of $66 million and the divestiture of the Anatomical
Pathology business decreased revenues by $126 million . The increase in revenue
at existing businesses was due to increased demand for products sold through the
segment's healthcare market channel as well as clinical diagnostic and
immunodiagnostic products.
Operating income margin was 25.0% in 2019 and 25.6% in 2018. The decrease was
primarily due to strategic growth investments and, to a lesser extent, sales mix
and the divestiture of the Anatomical Pathology business. These decreases were
offset in part by profit on higher sales and, to a lesser extent, productivity
improvements, net of inflationary cost increases. Following multi-year
extensions of several expiring licensing arrangements with commercial partners,
segment revenues and operating income in 2020 will both be unfavorably affected
by approximately $30 million .
Laboratory Products and Services
(Dollars in millions) 2019 2018 Change
Revenues $ 10,599 $ 10,035 6 %
Operating Income Margin 12.5 % 12.5 % 0 pt
Sales in the Laboratory Products and Services segment increased $564 million to
$10.60 billion in 2019. Sales increased $604 million (6%) due to higher revenues
at existing businesses and $187 million due to acquisitions. The unfavorable
effects of currency translation resulted in a decrease in revenues of $167
million . A change in the method of reporting certain intersegment sales reduced
segment revenues by $60 million with no impact to consolidated results. The
increase in revenue at
29
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
existing businesses was primarily due to increased demand in each of the
segment's principal businesses with particular strength in service offerings of
its pharma services business and products sold through its research and safety
market channel business.
Operating income margin was 12.5% in both 2019 and 2018. Increases from profit
on higher sales and productivity improvements, net of inflationary cost
increases, were offset by strategic growth investments and, to a lesser extent,
sales mix.
Other Expense/Income, Net
In 2019, the company recorded $184 million of losses on the early extinguishment
of debt, offset in part by $44 million of net gains on investments. The
investment gains include a $28 million gain on the sale of a joint venture for
net proceeds of $42 million . In 2018, the company recorded $15 million of net
losses on investments.
Provision for Income Taxes
The company recorded a $374 million provision for income taxes in 2019 including
$191 million related to the gain on the sale of the Anatomical Pathology
business. In 2019, the company recorded a $62 million income tax benefit related
to a foreign exchange loss for tax purposes on certain intercompany financing
arrangements, implemented foreign tax credit planning in Sweden which resulted
in $75 million of foreign tax credits, with no related incremental U.S. income
tax expense, and recorded a $79 million income tax benefit related to the
deferred tax implications of intra-entity transactions which included a tax
benefit to release a valuation allowance against net operating losses previously
determined to be unrealizable.
The company recorded a $324 million provision for income taxes in 2018 including
a net provision of $68 million to adjust the estimated initial effects of the
Tax Cuts and Jobs Act of 2017 recorded in 2017, consisting of an incremental
provision of $117 million offset in part by a $49 million reduction of related
unrecognized tax benefits established in 2017. These adjustments were required
based on new U.S. Treasury guidance and further analysis of available tax
accounting methods and elections, legislative updates, regulations, earnings and
profit computations and foreign taxes. In 2018, the provision for income taxes
also included a $71 million charge to establish a valuation allowance against
net operating losses that will not be utilized as a result of the 2019 sale of
the Anatomical Pathology business.
The effective tax rate in both 2019 and 2018 was also affected by relatively
significant earnings in lower tax jurisdictions. Due primarily to the
non-deductibility of intangible asset amortization for tax purposes, the
company's cash payments for income taxes were higher than its income tax expense
for financial reporting purposes and totaled $896 million and $591 million in
2019 and 2018, respectively.
The company expects its effective tax rate in 2020 will be between 8% and 10%
based on currently forecasted rates of profitability in the countries in which
the company conducts business and expected generation of foreign tax credits.
The effective tax rate can vary significantly from period to period as a result
of discrete income tax factors and events.
The company has operations and a taxable presence in approximately 50 countries
outside the U.S. Some of these countries have lower tax rates than the U.S. The
company's ability to obtain a benefit from lower tax rates outside the U.S. is
dependent on its relative levels of income in countries outside the U.S. and on
the statutory tax rates in those countries. Based on the dispersion of the
company's non-U.S. income tax provision among many countries, the company
believes that a change in the statutory tax rate in any individual country is
not likely to materially affect the company's income tax provision or net
income, aside from any resulting one-time adjustment to the company's deferred
tax balances to reflect a new rate.
Recent Accounting Pronouncements
A description of recently issued accounting standards is included under the
heading "Recent Accounting Pronouncements" in Note 1.
Contingent Liabilities
The company is contingently liable with respect to certain legal proceedings and
related matters. An unfavorable outcome that differs materially from current
accrual estimates, if any, for one or more of the matters described under the
headings "Product Liability, Workers Compensation and Other Personal Injury
Matters," and "Intellectual Property Matters" in Note 12 could have a material
adverse effect on the company's financial position as well as its results of
operations and cash flows.
30
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Consolidated working capital (current assets less current liabilities) was $5.70
billion at December 31, 2019 , compared with $4.48 billion at December 31, 2018 ,
primarily due to lower short-term debt and higher cash balances. Included in
working capital were cash and cash equivalents of $2.40 billion at December 31,
2019 and $2.10 billion at December 31, 2018 .
2019
Cash provided by operating activities was $4.97 billion during 2019. Cash
provided by income was offset in part by increased investments in working
capital. Increases in accounts receivable and inventories used cash of $225
million and $458 million , respectively, primarily to support growth in sales. An
increase in other assets used cash of $408 million primarily due to the timing
of customer billings and tax refunds. Other liabilities increased by $210
million primarily due to advance payments from customers. Cash payments for
income taxes increased to $896 million during 2019, compared with $591 million
in 2018. The company made cash contributions to its pension and postretirement
benefit plans totaling $50 million during 2019. Payments for restructuring
actions, principally severance costs and lease and other expenses of real estate
consolidation, used cash of $69 million during 2019.
During 2019, the company's investing activities used $1.49 billion of cash.
Acquisitions used cash of $1.84 billion . Proceeds from the sale of the
Anatomical Pathology business provided $1.13 billion . The company's investing
activities also included the purchase of $926 million of property, plant and
equipment.
The company's financing activities used $3.12 billion of cash during 2019.
Repayment of senior notes used cash of $6.36 billion . New long-term borrowings
provided cash of $5.64 billion . A net decrease in commercial paper obligations
used cash of $683 million . The company's financing activities also included the
repurchase of $1.50 billion of the company's common stock and the payment of
$297 million in cash dividends, offset in part by $153 million of net proceeds
from employee stock option exercises. On November 8, 2019 , the Board of
Directors replaced the existing authorization to repurchase the company's common
stock, of which $500 million was remaining, with a new authorization to
repurchase up to $2.50 billion of the company's common stock. At February 26,
2020 , authorization remained for $1.00 billion of future repurchases of the
company's common stock.
As of December 31, 2019 , the company's short-term debt totaled $676 million ,
including $672 million of senior notes due within the next twelve months. The
company has a revolving credit facility with a bank group that provides up to
$2.50 billion of unsecured multi-currency revolving credit. If the company
borrows under this facility, it intends to leave undrawn an amount equivalent to
outstanding commercial paper to provide a source of funds in the event that
commercial paper markets are not available. As of December 31, 2019 , no
borrowings were outstanding under the company's revolving credit facility,
although available capacity was reduced by approximately $72 million as a result
of outstanding letters of credit.
Approximately half of the company's cash balances and cash flows from operations
are from outside the U.S. The company uses its non-U.S. cash for needs outside
of the U.S. including acquisitions and repayment of acquisition-related
intercompany debt to the U.S. In addition, the company also transfers cash to
the U.S. using non-taxable returns of capital as well as dividends where the
related U.S. dividend received deduction or foreign tax credit equals any tax
cost arising from the dividends. As a result of using such means of transferring
cash to the U.S. , the company does not expect any material adverse liquidity
effects from its significant non-U.S. cash balances for the foreseeable future.
The company believes that its existing cash and cash equivalents of $2.40
billion as of December 31, 2019 and its future cash flow from operations
together with available borrowing capacity under its revolving credit agreement
will be sufficient to meet the cash requirements of its existing businesses for
the foreseeable future, including at least the next 24 months.
2018
Cash provided by operating activities was $4.54 billion during 2018. Cash
provided by income was offset in part by investments in working capital.
Increases in accounts receivable and inventories used cash of $366 million and
$324 million , respectively, primarily to support growth in sales. Cash payments
for income taxes increased to $591 million during 2018, compared with $479
million in 2017. The company made cash contributions to its pension and
postretirement benefit plans totaling $93 million during 2018. Payments for
restructuring actions, principally severance costs and lease and other expenses
of real estate consolidation, used cash of $83 million during 2018.
During 2018, the company's investing activities used $1.25 billion of cash.
Acquisitions used cash of $536 million . The company's investing activities also
included the purchase of $758 million of property, plant and equipment.
31
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
The company's financing activities used $2.24 billion of cash during 2018.
Repayment of senior notes used cash of $2.05 billion . New long-term borrowings
provided cash of $690 million . A net decrease in commercial paper obligations
used cash of $194 million . The company's financing activities also included the
repurchase of $500 million of the company's common stock and the payment of $266
million in cash dividends, offset in part by $136 million of net proceeds from
employee stock option exercises.
Off-Balance Sheet Arrangements
The company did not use special purpose entities or other off-balance-sheet
financing arrangements in 2017, 2018 or 2019, except for letters of credit, bank
guarantees, residual value guarantees under three lease agreements, surety bonds
and other guarantees disclosed in the table or discussed below. The amounts
disclosed in the table below for letters of credit, bank guarantees, surety
bonds and other guarantees relate to guarantees of the company's performance,
primarily in the ordinary course of business.
Contractual Obligations and Other Commercial Commitments
The table below summarizes, by period due or expiration of commitment, the
company's contractual obligations and other commercial commitments as of
December 31, 2019 .
Payments due by Period or Expiration of Commitment
2025 and
(In millions) 2020 2021 and 2022 2023 and 2024 Thereafter Total
Contractual Obligations and Other Commercial
Commitments
Debt principal, including short-term debt (a) $ 673 $ 562 $ 3,122 $ 13,593 $ 17,950
Finance lease obligations 3 6 1 - 10
Interest 371 742 652 2,694 4,459
Operating lease obligations 197 282 160 197 836
Unconditional purchase obligations (b) 830 283 86 4 1,203
Letters of credit and bank guarantees 232 23 9 8 272
Surety bonds and other guarantees 45 16 - - 61
Pension obligations on balance sheet 42 91 100 336 569
Asset retirement obligations accrued on balance
sheet 7 14 5 15 41
Acquisition-related contingent consideration
accrued on balance sheet 11 20 8 16 55
$ 2,411 $ 2,039 $ 4,143 $ 16,863 $ 25,456
(a)Amounts represent the expected cash payments for debt and do not include any
deferred issuance costs.
(b)Unconditional purchase obligations include agreements to purchase goods,
services or fixed assets that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations exclude agreements that are
cancelable at any time without penalty.
Reserves for unrecognized tax benefits of $1.55 billion have not been included
in the above table due to the inability to predict the timing of tax audit
resolutions.
The company has no material commitments for purchases of property, plant and
equipment, other than those included in the above table, but expects that for
2020, such expenditures will be between $1 and $1.1 billion .
Guarantees of residual value under lease arrangements for three facilities have
not been included in the above table due to the inability to predict if and when
the guarantees may require payment (see Note 11). The residual value guarantees
become operative at the end of the leases for up to a maximum of $147 million .
The terms of these leases end in 2020, 2023 and 2024.
A guarantee of pension plan obligations of a divested business has not been
included in the preceding table due to the inability to predict if and when the
guarantee may require payment. The purchaser of the divested business has agreed
to pay for the pension benefits, however the company was required to guarantee
payment of these pension benefits should the purchaser fail to do so. The amount
of the guarantee at December 31, 2019 was $41 million .
32
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THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
In disposing of assets or businesses, the company often provides
representations, warranties and/or indemnities to cover various risks including,
for example, unknown damage to the assets, environmental risks involved in the
sale of real estate, liability to investigate and remediate environmental
contamination at waste facilities, and unidentified tax liabilities and related
legal fees. The company does not have the ability to estimate the potential
liability from such indemnities because they relate to unknown conditions.
However, the company has no reason to believe that these uncertainties would
have a material adverse effect on its financial position, annual results of
operations or cash flows.
The company has recorded liabilities for known indemnifications included as part
of environmental liabilities. See Item 1. Business - Environmental Matters
for a discussion of these liabilities.
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