Thermo Fisher Scientific (TMO) reported adjusted earnings per share (“EPS”) of $1.37 in the first quarter of fiscal 2013. This was 6.2% ahead of the Zacks Consensus Estimate of $1.29 and surpassed the year-ago adjusted EPS by 17.1%. Amid a challenging global economic environment, the company is encouraged with this performance and expects to continue with this growth momentum for the rest of 2013.
Revenues increased 4% year over year to reach $3.19 billion during the quarter, higher than the Zacks Consensus Estimate of $3.17 billion, based on 3% organic growth.
Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services. These three segments recorded revenues of $978 million (0.2% annualized growth), $806 million (up 10%) and $1.54 billion (up 5%), during the first quarter, respectively.
Gross margin contracted 36 basis points (bps) to 43.6% during the quarter. However, Thermo Fisher witnessed a 7.7% increase in adjusted operating income for the first quarter of 2013 to $600.6 million leading to an adjusted operating margin of 18.8%, up 58 bps year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and restructuring costs and related tax benefits.
The company exited the fiscal with cash and cash equivalents of $1.0 billion compared with $851 million at the end of Dec 2012. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks. During the reported quarter, the company deployed $90 million to repurchase 1.3 million shares.
Life Technologies Acquisition
Earlier this month, Thermo Fisher disclosed that it will acquire Life Technologies (LIFE) for roughly $13.6 billion (or $76 per share), plus the assumption of Life Technologies’ net debt ($2.2 billion as of year-end 2012).
Life Technologies preferred Thermo Fisher as a potential buyer against the consortium of private equity firms. Thermo Fisher was not willing to lose its chance to become an unparalleled industry leader to other potential buyers.
From the financial perspective, the buyout is expected to be immediately accretive to Thermo Fisher’s adjusted earnings by 90 cents to $1.00 within the first full year of the takeover. Further, the acquisition is expected to create significant cost and revenue synergies for the company with adjusted operating income synergies of $85 million in the first year.
Within three years of completion of the acquisition, Thermo Fisher envisages adjusted operating income synergy of $275 million, comprising $250 million and $25 million of cost and revenue synergies, respectively. Apart from strong cash flow, the company also expects adjusted return on invested capital (ROIC) to surpass the cost of capital by the fourth year.
Thermo Fisher expects to close the acquisition in early 2014, subject to standard closing conditions and Life shareholder vote. The total price of the purchase of $13.6 billion includes cash and debt of $9.5–$10.0 billion and as much as $4.0 billion in equity.
Guidance
Accordingly, Thermo Fisher provided an update to its fiscal 2013 guidance. The company tightened its revenue guidance to $12.84−$13.00 billion from the earlier $12.80−$13.00 billion reflecting annualized growth rate of 3%−4%.
The company also expects adjusted EPS in the band of $5.27−$5.39 from earlier provided range of $5.32−$5.46 for 2013. This will result in annualized growth rate of 7%−9% (earlier range being 8%−11%). The lowering of EPS guidance reflects its decision to suspend share buybacks for the rest of the year and tighten its revenue guidance range. The 2013 guidance does not include the effect of the proposed acquisition of Life Technologies or the impact of related financing activities.
The current Zacks Consensus Estimates for EPS $5.41 falls outside the guided range. The current revenue estimate of $12.98 billion, however, is within the projected range.
Recommendation
For most of the last 7 years, Thermo Fisher has supported its business momentum by acquiring several entities. Nevertheless, the acquisition of Life Technologies is the biggest ever deal for Thermo Fisher, since its inception in 2006. This acquisition has helped the company prove its strength to continue with acquisitions and grow further.
Given Life Technologies’ expansive line of consumables for genomic, and molecular and cell biology, the buyout will complement Thermo Fisher’s market-leading portfolio of analytical technologies and specialty diagnostic. The takeover will seamlessly strengthen Thermo Fisher’s global foothold and commercial reach.
The acquisition will create a kingpin in the 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.
In addition, substantial expansion in the Asia-Pacific market, mainly China, is in the cards for the company. Given the huge potential in the region and 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.
Thermo Fisher retains a Zacks Rank #3 (Hold). Medical devices stocks such as Cyberonics Inc. (CYBX) and Health Net Inc. (HNT), which carry a Zacks Rank #1 (Strong Buy) are worth considering.
