Thermo Fisher Scientific, Inc. (TMO) reported solid second-quarter 2015 financial results. Adjusted earnings per share (EPS) in the quarter came in at $1.84, 6 cents ahead of the Zacks Consensus Estimate and higher than the year-ago quarter number by 6.9%. On a reported basis, second-quarter EPS of $1.27 showed a huge 84.1% surge year over year on account of charges associated with the acquisition of Life Technologies in the second quarter of 2014.

Thermo Fisher Scientific Inc. - Earnings Surprise | FindTheCompany

Revenues for the reported quarter reached $4.27 billion, down 1.15% year over year primarily due to severe currency-related headwind. However, the top line managed to steer ahead of the Zacks Consensus Estimate of $4.16 billion. Without considering divestitures that impacted revenues by 1% and currency translation which reduced the same by 6%, organic revenue growth in the reported quarter was 6% year over year.

Thermo Fisher currently operates in four business segments viz. Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.

Barring the Life Sciences Solutions Segment, which grew 2.7% year over year to $1.13 billion, the company reported disappointing quarterly sales in the other three segments. Analytical Instruments Segment sales were $777 million (down 2%). Specialty Diagnostics Segment recorded $817 million (down 4.4%) and Laboratory Products and Services Segment was down 0.6% at $1.69 billion. The year-over-year results were negatively affected by the impact of unfavorable foreign exchange rates.

Gross margin of 47.9% during the second quarter was up 260 basis points (bps) year over year. In addition, Thermo Fisher witnessed a 25.7% increase in adjusted operating income leading to an expansion of 474 bps year over year in adjusted operating margin to 22.1%.
 
The company exited the quarter with cash and cash equivalents and short-term investment of $770.4 million compared with $1.35 billion at the end of 2014. Year to date, operating cash flow was $844.million versus the year-ago figure of $989.9 million.

Guidance

Despite delivering a gloomy top line hurt by severe foreign exchange headwind, Thermo Fisher increased its 2015 revenue and earnings guidance reflecting its strong operational confidence. The company currently expects full year revenues in the range of $16.72−$16.86 billion, up from the earlier guided $16.67−$16.83 billion. The current Zacks Consensus Estimate for revenues is pegged at $16.74, approximately at the midpoint of the expected range.

The company has also raised its adjusted EPS guidance for the full year to the range of $7.28 to $7.41 (earlier $7.25 to $7.40), which translates into 5% to 6% growth over 2014. The current Zacks Consensus Estimate for EPS is pegged at $7.34, within the expected range.

Our Recommendation

Thermo Fisher reported a better-than-expected second-quarter 2015 with adjusted EPS and revenues exceeding the respective Zacks Consensus Estimate. However, the year-over-year top-line results were negatively affected by the impact of unfavorable foreign exchange rates and divestitures. Currency translation reduced revenues by 6% in the reported quarter. Despite a disappointing top line, Thermo Fisher increased its full year 2015 revenue and earnings guidance. This reflects its strong operational performance as well as a robust scope for improvement even amid the current challenging scenario.

Thermo Fisher remains optimistic about its recent developments which include a set of new product launches (Orbitrap Fusion LumosTribrid mass spectrometer for proteomics, Q Exactive GC-MS/MS for research and applied markets, cloud-enabled QuantStudio 3 and 5 real-time PCR systems for genomics applications); the impending acquisition of Alfa Aesar for $400 million to enhance its offering of laboratory chemicals, solvents and reagents for research applications and increased presence in emerging markets with the opening of a Customer Experience Center in Dubai.

Zacks Rank

Thermo Fisher currently carries a Zacks Rank #2 (Buy). Some other top-ranked stocks in the medical instrument sector are LDR Holding Corporation LDRH, RTI Surgical Inc. RTIX and Synergetics USA, Inc. SURG, all carrying a Zacks Rank #1 (Strong Buy).

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