Thermo Fisher Scientific, Inc. (TMO) reported its second-quarter 2014 financial results, accounting for the inclusion of Life Technologies and excluding divestures related to the acquisition.
Adjusted earnings per share (EPS) in the reported quarter came in at $1.72. The figure remained well ahead of the Zacks Consensus Estimate of $1.62 and surpassed the year-ago adjusted EPS number by a formidable 30%. On a reported basis, second-quarter EPS of 69 cents showed a year-over-year decline of 9.2% largely due to higher acquisition-related charges in 2014.
Revenues increased 33% year over year to $4.32 billion during the quarter. The increase was owing to 5% organic growth, 27% increase in revenues due to acquisition and 1% due to currency translation.
With the acquisition of Life Technologies, Thermo Fisher currently operates in four business segments viz. Life Sciences Solutions Segment, Analytical Instruments Segment, Specialty Diagnostics Segment, and Laboratory Products and Services Segment.
The four aforementioned segments recorded second-quarter revenues of $1.10 billion (508% annualized growth), $793 million (up 4.0%), $855 million (up 8%) and $1.70 billion (up 7%), respectively. The stupendous growth in the Life Sciences Solutions Segment was due to the inclusion of the Life Technologies acquisition for the entire quarter.
Gross margin of 45.4% during the second quarter was up 154 basis points (bps) year over year. In addition, Thermo Fisher witnessed a 48.1% increase in adjusted operating income to $923.6 million. Adjusted operating margin came in at 21.4%, an expansion of huge 210 bps year over year.
The company exited the quarter with cash and cash equivalents and short-term investment of $605.9 million compared with $5.83 billion at the end of 2013. Operating cash flow for the quarter was $991.8 million versus the year-ago figure of $778.4 million.
Guidance
Taking into consideration a solid first-half performance in 2014, increased synergies from the Life Technologies acquisition and the impending divestiture of the Cole-Parmer business, Thermo Fisher updated its fiscal 2014 guidance.
The company now expects to report adjusted EPS for the year in the range of $6.85 to $6.97 (implying annualized growth of 26% to 29%), an increase from the earlier announced range of $6.80 to $6.95 (25% to 28%). The Zacks Consensus Estimate of $6.89 remains within the guidance range.
On the other hand, the company narrowed its 2014 revenue expectation to the range of $16.86 to $16.98 billion (annualized growth of 29% to 30% from 2013) from the earlier range of $16.84 to $17.00 billion (same).
Our Recommendation
With a full quarter of operation post the Life Technologies acquisition, Thermo Fisher posted a better-than-expected second-quarter 2014 with adjusted earnings per share ahead of the Zacks Consensus Estimate. The top-and-bottom-line results also sailed past the year-ago numbers.
According to the company, the takeover has led to the emergence of an unrivaled market leader serving research, Specialty Diagnostics and applied markets. As per management at Thermo Fisher, the acquisition supports its three-pronged growth strategy of technological innovation, a unique customer value proposition and expansion in emerging markets.
Thermo Fisher expects this acquisition to help expand its commercial infrastructure and global presence. The company is currently working on the growth opportunities in Asia Pacific and emerging markets. Given the huge potential in the region and the high growth rate in China, Thermo Fisher is likely to exceed its goal of garnering 25% revenues from the high-growth Asia-Pacific region and emerging markets by 2016.
We take a note that earlier this month Thermo Fisher had inked a definitive agreement with private equity firm GTCR, LLC whereby the latter has agreed to buy the Cole-Parmer channel business of Thermo Fisher for a deal value of $480 million. Thermo Fisher expects the deal, which is likely to be closed in the third quarter, to have immaterial impact on the company’s 2014 EPS. This sellout decision is consistent with Thermo Fisher’s strategy to focus on its core segment.
Thermo Fisher currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader healthcare sector that warrant a look are Accuray Incorporated (ARAY), Sirona Dental Systems Inc. (SIRO) and IDEXX Laboratories, Inc. (IDXX), carrying a Zacks Rank #2 (Buy).
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