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Thermo Fisher Scientific (TMO - Analyst Report) reported adjusted earnings per share (EPS) of $1.30 in the third quarter of fiscal 2013. The figure remained ahead of the Zacks Consensus Estimate by 2 cents and surpassed the year-ago adjusted EPS by 9.2%.

On a reported basis, third-quarter EPS of 86 cents showed a year-over-year improvement of 8.9%. The company has performed reasonably well amid a challenging global economic environment, and expects to continue with this growth momentum for the rest of 2013.

Revenues increased 3% year over year to $3.19 billion during the quarter, higher than the Zacks Consensus Estimate of $3.18 billion. The increase was owing to an organic growth of 2%. During the quarter, acquisition-related sales growth was a mere 1% with currency translation having a nominal impact.

Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $997 million (1% annualized growth), $759 million (up 7%) and $1.58 billion (up 4%), during the third quarter, respectively.

Gross margin expanded 11 basis points (bps) to 43.9% during the quarter.

Thermo Fisher witnessed an increase of 8.3% in adjusted operating income to $583.1 million.

Adjusted operating margin came in at 18.2%, up 82 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 $1.84 billion compared with $805.6 million at the end of Dec 2012. Operating cash flow for the quarter was $505.5 million, up from the year-ago figure of $479.9 million. 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 $12.87−$12.95 billion from the earlier $12.83−$12.95 billion, reflecting annualized growth rate of 3% to 4% (unchanged).

The company also expects adjusted EPS in the band of $5.31−$5.39 from the earlier provided range of $5.29−$5.39 for 2013. This will result in annualized growth rate of 7% to 9% (unchanged).

The raising of the lower end of the EPS guidance reflects its decision to suspend share buybacks for the rest of the year and narrow 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 Estimate for EPS and revenues of $5.35 and $12.92 billion, respectively, fall within the guided range.

Recommendation

For most of the last 7 years, Thermo Fisher has supported its business momentum by acquiring several entities. Nevertheless, its 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.

Life Technologies provides innovative products and services to customers conducting scientific research and genetic analysis, as well as in applied markets. The company’s revenues totaled $3.8 billion in 2012. According to Thermo Fisher, the successful completion of this transaction will lead to emergence of an unrivaled market leader serving research, Specialty Diagnostics and applied markets. Thermo Fisher also expects this transaction to help expand its commercial infrastructure and global presence.

Notably, the recent overwhelming approval (in Aug 2013) from the shareholders of Life Technologies for this impending takeover came as a sigh of relief for both the companies. This can be considered as a major boost and a big step forward for the deal to finally get through. Thermo Fisher expects the transaction to be completed in early 2014.

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 on 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 currently carries a Zacks Rank #3 (Hold). Better-performing medical devices stocks such as Align Technologies Inc., (ALGN - Analyst Report) and Mindray Medical International Ltd (MR - Analyst Report), which carry a Zacks Rank #1 (Strong Buy) are worth considering.

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