Thermo Fisher Scientific (TMO) reported an EPS of 66 cents in the third quarter of fiscal 2010 compared to 53 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 90 cents, way above the Zacks Consensus Estimate of 83 cents and 15% higher than 78 cents of the third quarter of 2009.
The company reported a 6% annualized growth in revenues to $2.68 billion, which surpassed the Zacks Consensus Estimate of $2.59 billion. Strong growth in instruments, equipment and clinical diagnostics and biosciences businesses led to the growth.
Acquisitions had a positive impact of 3% on revenues while unfavorable currency movement brought down revenues by 1%. EPS growth overtook the growth in revenues because of improvement in both gross and operating margins, 35% lower interest expense and a 3.7% decline in the share count.
Thermo Fisher’s two segments – Analytical Technologies and Laboratory Products and Services – recorded revenues of $1.16 billion (14% annualized growth) and $1.65 billion (1%), respectively.
Thermo Fisher witnessed an expansion in margins in the third quarter. Gross margin increased 100 basis points (bps) annually to 42.2%. Adjusted operating and net margin increased 30 bps and 60 bps to 17.6% and 13.6%, respectively. Adjusted figures exclude amortization of acquisition-related intangible assets and other acquisition-related costs; restructuring costs and related tax benefits.
Thermo Fisher has grown through several acquisitions, the latest being Fermentas International (for $260 million), a manufacturer and global distributor of enzymes, reagents and kits for molecular and cellular biology research. The acquisition, completed during the quarter, will enable the company to expand its offering in the field of genomics research and polymerase chain reaction based testing.
The company exited the third quarter with cash and cash equivalents of $930.2 million, down 40.5% from $1.6 billion at the end of December 2009. The cash balance depleted as 10.1 million shares amounting to $475 million were repurchased during the quarter.
Subsequent to the second quarter results, Thermo Fisher had provided a detailed outlook for the second half of 2010, which was supposed to be difficult due to the presence of certain issues. Headwinds consist of the termination of the Biosite contract (effective July 1, 2010), which is likely to hit second half revenues by approximately $55 million.
The flu season was strong in 2009 compared to expectations in 2010 ($20 million impact). Both of these items were supposed to impact the third quarter more than the fourth. Given these issues, the growth recorded by Thermo Fisher becomes more significant.
Increases Guidance
A strong quarter ensures that Thermo Fisher will be able to meet its earnings growth outlook for 2010. The company increased its revenue and adjusted EPS guidance to $10.72-$10.80 billion, representing an annualized growth of 6%-7% (previous guidance of $10.60-$10.75 billion) and $3.47-$3.53, representing a 14%-16% growth ($3.40-$3.50 earlier), respectively.
Recommendation
After a drop in revenues during 2009, Thermo Fisher is back on the growth trajectory. A gradual improvement in the economic scenario along with its focus on emerging markets should drive its top line in the forthcoming period. However, any kind of economic turbulence resulting from financial constraints or deferrals in buying decisions of customers could negatively impact the company’s sales. We are currently Neutral on the stock.
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