Thermo Fisher Scientific (TMO) reported an adjusted EPS of $1.07 cents in the third quarter of fiscal 2011, in line with the Zacks Consensus Estimate and higher than earnings of 87 cents in the third quarter of 2010.
Revenues increased 13% year over year to reach $2.973 billion during the quarter, marginally missing the Zacks Consensus Estimate of $2.989 billion. The company completed the acquisition of Phadia in the third quarter, adding allergy and autoimmunity diagnostic tests and strengthening position in the high-growth specialty diagnostics markets.
Revenue growth on a pro forma basis (considering Dionex and Phadia acquisitions were owned for the entire third quarter in both years) was 7% with a 3% favorable effect of currency and 1% increase from acquisitions other than Dionex and Phadia. The company continued to witness challenges in government and academic funded projects.
While revenues increased 12%, Thermo Fisher’s EPS saw a higher rate of increase (23%) driven by improvement in operating margin and a 5.4% decline in share count, partially offset by higher net interest expenses ($42.7 million, up 172% year over year).
Thermo Fisher’s reported revenues under three segments — Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $1.01 billion (22% annualized growth), $615 million (up 20%) and $1.48 billion (up 5%), during the quarter, respectively.
Gross margin increased 120 basis points (bps) to 42.8%. In addition, Thermo Fisher witnessed higher operating and net margins in the reported quarter. Adjusted operating and net margin increased 120 bps to 18.4% and 40 bps to 13.8%, 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 $890.3 million 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 4 million shares during the quarter.
Lowers Guidance
Thermo Fisher lowered its outlook for fiscal 2011 to reflect current challenges in government and academic markets, and less favorable foreign exchange movement. The company now expects to report revenues of $11.62−$11.70 billion (previous guidance of $11.79−$11.89 billion) and represented growth of 10−11%.
Moreover, the adjusted EPS is now expected to be in the range of $4.11−$4.17 ($4.15−$4.25), representing a 19%−21% growth. The Zacks Consensus Estimate of $4.20 on revenues of $11.82 billion is lower than the company’s forecast.
Recommendation
Thermo Fisher’s lowered outlook for fiscal 2011 is disappointing. However, the company is undertaking several strategies to overcome the challenges in the academic and government markets. The same challenges have been faced by its peer, Life Technologies Corporation (LIFE) that reported earnings yesterday after the market close.
Banking on PPI and PPI-Lean projects and cost control, Thermo Fisher’s operating margin has been on an improving trend. Besides, the strong cash position should assist the company in making suitable acquisitions or repurchase shares.
We are currently Neutral on Thermo Fisher, in line with Life Technologies. Both stocks retain the short-term Zacks #3 Ranks (Hold).
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