On October 27, 2016 Thermo Fisher Scientific Inc. (NYSE: TMO), the world leader in serving science, reported its financial results for the third quarter of 2016, ended October 1, 2016 (Press release, Thermo Fisher Scientific, OCT 27, 2016, View Source [SID1234516086]).
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Third Quarter 2016 Highlights
Revenue increased 9% to $4.49 billion.
GAAP diluted earnings per share (EPS) increased 1% to $1.19.
Adjusted EPS grew 13% to $2.03.
Strengthened presence in clinical markets by receiving FDA clearance to launch new DRI Hydrocodone assay and two new EliA IgG thyroid tests as well as extend use of BRAHMS PCT sepsis test to the emergency room.
Increased capabilities to support biopharma growth in Asia-Pacific markets with new clinical packaging and supplies facility in Seoul, South Korea, and expansion of cryogenic storage and logistics operations in Tokyo, Japan.
Completed acquisition of FEI Company, adding leading electron microscopy products that strengthen offerings for attractive structural biology and materials science markets, and significantly enhance our customer value proposition.
Adjusted EPS, adjusted operating income, adjusted operating margin and free cash flow are non-GAAP measures that exclude certain items detailed later in this press release under the heading "Use of Non-GAAP Financial Measures."
"We delivered another great quarter, with excellent earnings growth on solid top-line results," said Marc N. Casper, president and chief executive officer of Thermo Fisher Scientific. "We drove strong operational performance while successfully executing our growth strategy to position Thermo Fisher for an even brighter future.
"In the quarter, we strengthened our offering for clinical customers by expanding our menu of tests for detecting sepsis, opioids and thyroid disease, and launching new quality control software to ensure the accuracy of results in the clinical laboratory. In Asia-Pacific, we increased our biopharma services capabilities in South Korea and Japan to support the growing number of clinical trials and continue our strong growth momentum in the region.
"We were also pleased to complete our acquisition of FEI earlier than expected. We look forward to the new opportunities we have to create value for our customers, including broadening the use of FEI’s leading imaging technologies in the life science research markets that we serve."
Third Quarter 2016
For the third quarter of 2016, revenue grew 9% to $4.49 billion, versus $4.12 billion in the third quarter of 2015. Organic revenue growth was 4%; acquisitions increased revenue by 5% and currency translation decreased revenue slightly.
GAAP Earnings Results
GAAP diluted EPS increased to $1.19, versus $1.18 in the same quarter last year. GAAP operating income for the third quarter of 2016 was $541 million, compared with $563 million in the third quarter of 2015. GAAP operating margin was 12.0%, compared with 13.7% in the third quarter of 2015. GAAP operating results reflect acquisition-related charges in the 2016 period.
Non-GAAP Earnings Results
Adjusted EPS in the third quarter of 2016 grew 13% to $2.03, versus $1.80 in the third quarter of 2015. Adjusted operating income for the third quarter of 2016 increased 11% compared with the year-ago quarter. Adjusted operating margin was 23.0%, compared with 22.6% in the third quarter of 2015.
2016 Guidance Update
Thermo Fisher is raising its revenue and adjusted EPS guidance for 2016 to reflect the addition of FEI, strong operational performance in the first nine months and a more favorable foreign exchange environment. The company now expects revenue to be in the range of $18.25 to $18.39 billion versus its previous guidance of $17.84 to $18.00 billion, which would result in revenue growth of 8% over 2015. The company is also raising its adjusted EPS guidance to a new range of $8.19 to $8.30 versus the $8.07 to $8.20 previously announced, which now results in 11% to 12% growth year over year.
Segment Results
Management uses adjusted operating results to monitor and evaluate performance of the company’s four business segments, as highlighted below. Since these results are used for this purpose, they are also considered to be prepared in accordance with GAAP.
Life Sciences Solutions Segment
In the third quarter of 2016, Life Sciences Solutions Segment revenue grew 14% to $1.23 billion, compared with revenue of $1.08 billion in the third quarter of 2015. Segment operating margin was 30.1% versus 30.8% in 2015.
Analytical Instruments Segment
Analytical Instruments Segment revenue grew 15% to $0.90 billion in the third quarter of 2016, compared with revenue of $0.78 billion in the third quarter of 2015. Segment operating margin was 21.2% versus 18.8% in the 2015 quarter.
Specialty Diagnostics Segment
Specialty Diagnostics Segment revenue in the third quarter increased 3% to $0.80 billion in 2016, compared with revenue of $0.78 billion in the third quarter of 2015. Segment operating margin was 26.8% versus 26.4% in the 2015 quarter.
Laboratory Products and Services Segment
In the third quarter of 2016, Laboratory Products and Services Segment revenue grew 7% to $1.75 billion, compared with revenue of $1.64 billion in the third quarter of 2015. Segment operating margin was 14.8% versus 15.2% in the 2015 quarter.
Use of Non-GAAP Financial Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margin, which exclude certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition and significant transaction costs; restructuring and other costs/income; and amortization of acquisition-related intangible assets. Adjusted EPS also excludes certain other gains and losses that are either isolated or cannot be expected to occur again with any regularity or predictability, tax provisions/benefits related to the previous items, benefits from tax credit carryforwards, the impact of significant tax audits or events and the results of discontinued operations. We exclude the above items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. We also use a non-GAAP measure, free cash flow, which is operating cash flow, net of capital expenditures, and also excludes operating cash flows from discontinued operations to provide a view of the continuing operations’ ability to generate cash for use in acquisitions and other investing and financing activities. We believe that the use of non-GAAP measures helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company’s performance, especially when comparing such results to previous periods or forecasts.
For example:
We exclude costs and tax effects associated with restructuring activities, such as reducing overhead and consolidating facilities. We believe that the costs related to these restructuring activities are not indicative of our normal operating costs.
We exclude certain acquisition-related costs, including charges for the sale of inventories revalued at the date of acquisition and significant transaction costs. We exclude these costs because we do not believe they are indicative of our normal operating costs.
We exclude the expense and tax effects associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of 5 to 20 years. In 2016, based on acquisitions closed through the end of the third quarter, our adjusted EPS will exclude approximately $2.42 of expense for the amortization of acquisition-related intangible assets. Exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.
We also exclude certain gains/losses and related tax effects, benefits from tax credit carryforwards and the impact of significant tax audits or events (such as the effect on deferred tax balances of enacted changes in tax rates), which are either isolated or cannot be expected to occur again with any predictability and that we believe are not indicative of our normal operating gains and losses. For example, we exclude gains/losses from items such as the sale of a business or real estate, gains or losses on significant litigation-related matters, gains on curtailments of pension plans, the early retirement of debt and discontinued operations.
We also report free cash flow, which is operating cash flow, net of capital expenditures, and also excludes operating cash flows from discontinued operations to provide a view of the continuing operations’ ability to generate cash for use in acquisitions and other investing and financing activities.
Thermo Fisher’s management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring the company’s core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. Such measures are also used by management in their financial and operating decision-making and for compensation purposes.
The non-GAAP financial measures of Thermo Fisher’s results of operations and cash flows included in this press release are not meant to be considered superior to or a substitute for Thermo Fisher’s results of operations prepared in accordance with GAAP. Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in the accompanying tables. Thermo Fisher does not provide GAAP financial measures on a forward-looking basis because we are unable to predict with reasonable certainty and without unreasonable effort items such as the timing and amount of future restructuring actions and acquisition-related charges as well as gains or losses from sales of real estate and businesses, the early retirement of debt and the outcome of legal proceedings. The timing and amount of these items are uncertain and could be material to Thermo Fisher’s results computed in accordance with GAAP.