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Thermo Fisher Scientific (TMO - Analyst Report) reported adjusted earnings per share (“EPS”) of $1.32 in the second quarter of fiscal 2013. This was 2 cents ahead of the Zacks Consensus Estimate and surpassed the year-ago adjusted EPS by 8.2%.

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 $3.24 billion during the quarter, higher than the Zacks Consensus Estimate of $3.17 billion, based on 2% organic growth.

Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $1.01 billion (4% annualized growth), $794 million (up 8%) and $1.58 billion (up 3%), during the second quarter, respectively.

Gross margin contracted 43 basis points (bps) to 43.8% during the quarter. Thermo Fisher witnessed a 2.2% increase in adjusted operating income for the second quarter of 2013 to $588.1 million.

However, adjusted operating margin came in at 18.2%, down 37 bps year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and restructuring costs and related tax benefits.

The company exited the quarter with cash and cash equivalents of $1.41 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.

Guidance

Thermo Fisher updated its fiscal 2013 guidance. The company tightened its revenue guidance to $12.83−$12.95 billion from the earlier $12.84−$13.00 billion, reflecting annualized growth rate of 3%−4%.

The company also expects adjusted EPS in the band of $5.29−$5.39 from the earlier provided range of $5.27−$5.39 for 2013. This will result in annualized growth rate of 7%−9% (unchanged).

The raising of the low end 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 and revenues of $5.34 and $12.92 billion, respectively, fall within the guided range.

Life Technologies Acquisition

In April, Thermo Fisher disclosed that it will acquire Life Technologies 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).

From the financial perspective, the buyout is expected to be immediately accretive to Thermo Fisher’s adjusted earnings by 90 cents to $1.00 per share 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.

Recommendation

For most of the last 7 years, Thermo Fisher has supported its business momentum by acquiring several entities. Nevertheless, the impending acquisition of Life Technologies is the biggest ever deal for Thermo Fisher, since its inception in 2006. This deal proves the company’s ability to grow via acquisitions.

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.

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 Health Net, Inc. (HNT - Analyst Report) and WellPoint Inc. (WLP - Analyst Report), which carry a Zacks Rank #1 (Strong Buy) are worth considering.

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