Thermo Fisher Scientific, Inc. (TMO - Analyst Report) reported its first-quarter 2015 financial numbers. Adjusted earnings per share (EPS) in the quarter came in at $1.63. Earnings steered 2 cents ahead of the Zacks Consensus Estimate and improved from the year-ago quarter number by 6.5%. On a reported basis, third-quarter EPS of 96 cents showed a huge 29.4% slash year over year as the first quarter of 2014 had contained gains from divestitures.

Revenues inched up a mere 0.5% year over year to $3.918 billion during the quarter but fell short of the Zacks Consensus Estimate of $4.002 billion. The year-over-year increase was owing to 2% organic growth and 5% increase in revenues due to acquisition (net of divestitures). However, this was, to a large extent, offset by currency translation which had a 6% negative impact on revenues.

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.

Barring the Life Sciences Solutions Segment which grew 22% year over year to $1.02 billion, the company reported disappointing quarterly sales in the other three segments. Analytical Instruments Segment sales were $727 million (down 5.6%). Specialty Diagnostics Segment recorded $785 million (down 3.6%) and Laboratory Products and Services Segment was down 5% at $1.51 billion. We take note that the growth in the Life Sciences Solutions Segment was due to the inclusion of the Life Technologies acquisition for the entire quarter.

Gross margin of 49.3% during the first quarter of 2015 was up 540 basis points (bps) year over year. In addition, Thermo Fisher witnessed a 46.4% increase in adjusted operating income leading to an expansion of 681 bps year over year in adjusted operating margin to 21.6%.
 
The company exited the quarter with cash and cash equivalents and short-term investment of $873 million compared with $1.35 billion at the end of 2014. For the quarter, operating cash flow was $80 million versus the year-ago figure of $101.2 million.

ASI Buyout

During the first quarter earnings call, Thermo Fisher declared that it has acquired Advanced Scientifics (ASI) for $300 million. According to the company, the addition of ASI to its business will expand its portfolio with complementary single-use systems and bioprocess equipment to provide customers with greater flexibility in vaccine and biotherapeutic drug production.

Guidance

Disappointed with the quarter’s performance, Thermo Fisher reduced its fiscal 2015 revenue guidance. This updated guidance takes into consideration a higher unfavorable change in foreign currency exchange rates and the acquisition of ASI. The company currently expects its 2015 revenues in the range of $16.67−$16.83 billion, a significant reduction from the earlier guided $16.80−$17.0 billion.

However, the company has raised the lower end of its adjusted EPS guidance for the full year. It now expects EPS in the range of $7.25 to $7.40 (earlier $7.22–$7.40), which translates into 4% to 6% growth over 2014. The current Zacks Consensus Estimate for EPS is pegged at $7.32, within the expected range.

Our Recommendation

With another full quarter of operation post the Life Technologies acquisition, Thermo Fisher reported a mixed first-quarter 2015 with adjusted EPS exceeding the Zacks Consensus Estimate and revenues missing the same by a significant margin. According to the company, 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. This has resulted in a reduction in the company’s 2015 revenue guidance that there is a rare chance of improvement given the current challenging scenario.

Nevertheless, Thermo Fisher remains optimistic about its recent developments which include a set of new product launches (Gemini handheld chemical analyzer, Q Exactive Focus mass spectrometer and Sample Manager LIMS, PDM3700 personal coal dust monitor, TSX ultralow-temperature freezer and the Ion Torrent AmpliSeq RNA Fusion panel) and acquisition of Advanced Scientifics, Inc.

Zacks Rank

Thermo Fisher currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical instrument sector are Luminex Corporation (LMNX - Analyst Report), ABIOMED, Inc. (ABMD - Analyst Report) and Fluidigm Corporation (FLDM -Snapshot Report), all carrying a Zacks Rank #2 (Buy).