Thermo Fisher Scientific (TMO) reported an adjusted EPS of 99 cents in the second quarter of fiscal 2011, a penny above the Zacks Consensus Estimate and 22% higher than earnings of 81 cents in the second quarter of 2010.
Revenues increased 12% year over year to reach $2.90 billion during the quarter, marginally beating the Zacks Consensus Estimate of $2.81 billion. The company has completed the acquisition of Dionex to strengthen its position in chromatography offering while the proposed Phadia deal is expected to complete in the third quarter.
Excluding the acquisition of Dionex, revenues increased 9% consisting of a 4% increase from favorable foreign currency movement and 1% increase from acquisitions other than Dionex.
While revenues increased 12%, Thermo Fisher’s EPS saw a higher rate of increase driven by improvement in operating margin and a 7.2% decline in share count, partially offset by a 54.5% rise in net interest expense. The company also benefited from other income of $22.1 million during the reported quarter compared to $15.9 million of expenses in the year-ago period.
Thermo Fisher’s two segments – Analytical Technologies and Laboratory Products and Services – recorded revenues of $1.28 billion (19% annualized growth) during the quarter and $1.76 billion (up 6%), respectively.
While gross margin remained unchanged at 41.6%, Thermo Fisher witnessed an expansion in operating and net margins in the second quarter. Adjusted operating and net margin increased 40 basis points (bps) to 17.6% and 20 bps to 13.2%, respectively. Adjusted figures exclude amortization of acquisition-related intangible assets and other acquisition-related costs; restructuring costs and related tax benefits.
The company exited the quarter with cash and cash equivalents of $1.4 billion compared with $917.1 million at the end of December 2010. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks. Thermo Fisher spent $225 million to buy back 3.8 million shares during the quarter.
Apart from Dionex and the yet to be acquired Phadia, the company acquired TREK Diagnostic Systems to broaden its microbiology offerings. Earlier this year, the company also sold two laboratory-testing services businesses – Athena Diagnostics to Quest Diagnostics (DGX) and Lancaster Laboratories resulting in total proceeds of $940 million.
Raises Guidance
Based on a strong quarter, Thermo Fisher raised its guidance for fiscal 2011. The company raised its revenue guidance by $80 million to $11.60−$11.70 billion and represented growth of 10−11% on the back of more favorable foreign exchange movement and recent acquisitions.
Moreover, the adjusted EPS was raised by 3 cents to $4.08−$4.18, representing an 18%−21% growth. While the Zacks Consensus Estimate of $4.13 is at the middle of the guidance, the revenue estimate of $11.6 billion is at the lower end of the company’s outlook.
Recommendation
A gradual improvement in the economic scenario along with the focus on emerging markets should drive Thermo Fisher’s top line in the forthcoming period. Moreover, banking on PPI and PPI-Lean projects and cost control, operating margin has been on an improving trend.
Moreover, the strong cash position should assist the company in making suitable acquisitions, reduce debt burden or repurchase shares. However, any kind of economic turbulence could negatively impact the company’s sales impacted by financial constraints and customers deferring their purchases.
We are currently Neutral on the stock.
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