Second Quarter Highlights
• Adjusted earnings per share (EPS) grew 23% to a second quarter record of $1.22.
• Revenue increased 9% to a second quarter record of $3.11 billion.
• Adjusted operating income rose 16% to $590 million.
• Adjusted operating margin expanded by 110 basis points to 19.0%.
• Year-to-date free cash flow increased by 38% to $782 million.
• Expanded leading mass spectrometry and FT-IR spectroscopy platforms by launching innovative new products at ASMS and ACHEMA global industry conferences.
• Acquired specialty chemicals channel Doe & Ingalls to expand presence in the production market and, after quarter end, agreed to acquire One Lambda, the leader in transplant diagnostics.
• Deployed $100 million to repurchase 2 million shares and, after quarter end, announced new $500 million buyback authorization.
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.” Results for the company’s Laboratory Workstations business are reported as a discontinued operation for all periods presented and have also been removed from the company’s 2012 guidance.
“We executed well to deliver another strong quarter of revenue and earnings growth,” said Marc N. Casper, president and chief executive officer of Thermo Fisher Scientific. “Our ongoing share gain initiatives and cost actions resulted in excellent bottom-line results, leading to 23% growth in adjusted EPS.
“We are intensely focused on driving growth by continuously innovating to meet our customers’ needs in life sciences, environmental and process applications. In the quarter, we launched new Thermo Scientific technologies across our leading analytical instrument platforms, including our Exactive™ Plus mass spectrometry system, the TSQ 8000 triple quad and the Nicolet iS™50 FT-IR spectrometer.
“We also strengthened our leading portfolio by deploying our capital on strategic M&A. In the quarter, we increased our capabilities in the production market with the acquisition of a premier chemicals channel, Doe & Ingalls. Last week, we announced our agreement to acquire the global leader in transplant diagnostics, One Lambda, to expand our specialty diagnostics offering. We also announced an additional $500 million share buyback authorization, which gives us $750 million for share buybacks in the second half of the year.”
For the second quarter of 2012, adjusted EPS grew 23% to a record $1.22, versus $0.99 in the second quarter of 2011. Revenue for the quarter grew 9% to $3.11 billion in 2012, versus $2.85 billion in 2011. On a pro forma basis, as if Dionex and Phadia were owned for the entire second quarter of 2011, revenue increased 1%. The effect of currency translation decreased pro forma revenues by 3%, and the impact of acquisitions other than Dionex and Phadia was 1%, resulting in organic revenue growth of 4%. Adjusted operating income for the second quarter of 2012 increased 16% compared with the year-ago period, and adjusted operating margin expanded 110 basis points to 19.0%, compared with 17.9% in the second quarter of 2011.
GAAP diluted EPS for the second quarter of 2012 was $0.63, versus $1.36 in the same quarter last year, due primarily to gains from sales of businesses in the 2011 period. GAAP operating income for the second quarter of 2012 increased 39% to $368 million, compared with $265 million in 2011. GAAP operating margin was 11.8%, compared with 9.3% in the second quarter of 2011.
Annual Guidance for 2012
Thermo Fisher is updating its full year 2012 guidance to reflect the Laboratory Workstations business as a discontinued operation, the acquisition of Doe & Ingalls and more unfavorable foreign exchange. As a result, it now expects to generate revenue of $12.14 to $12.26 billion in 2012, resulting in 5% to 6% revenue growth year-over-year. The company is raising its adjusted EPS guidance to a new range of $4.74 to $4.84, primarily to include the factors above as well as the new stock buyback authorization, leading to 14% to 16% adjusted EPS growth over 2011.
Casper concluded, “We delivered a strong first half, thanks to excellent execution by our teams, and this puts us in a great position to meet our growth goals for the year.”
The 2012 guidance does not include the impact of the pending acquisition of One Lambda nor any future acquisitions. It reflects the Laboratory Workstations business as a discontinued operation, but does not contemplate any other potential divestitures. The guidance is based on current foreign exchange rates. In addition, the adjusted EPS estimate excludes amortization expense for acquisition-related intangible assets and certain other items detailed later in this press release under the heading “Use of Non-GAAP Financial Measures.”
Management uses adjusted operating results to monitor and evaluate performance of the company’s three business segments, as highlighted below.
Analytical Technologies Segment
In the second quarter of 2012, Analytical Technologies Segment revenue increased 8% to $1.00 billion, compared with revenue of $929 million in the second quarter of 2011. Segment adjusted operating income increased 10% in the second quarter of 2012, and adjusted operating margin increased to 17.5%, versus 17.1% in the 2011 quarter.
Specialty Diagnostics Segment
Specialty Diagnostics Segment revenue in the second quarter increased 28% to $732 million in 2012, compared with revenue of $571 million in the second quarter of 2011. Segment adjusted operating income increased 47% in the second quarter of 2012, and adjusted operating margin increased to 27.2%, versus 23.8% in the 2011 quarter.
Laboratory Products and Services Segment
In the second quarter of 2012, Laboratory Products and Services Segment revenue increased 2% to $1.52 billion, compared with revenue of $1.48 billion in the second quarter of 2011. Segment adjusted operating income increased slightly in the second quarter of 2012, and adjusted operating margin was 14.2%, versus 14.5% in the 2011 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 restructuring and other costs/income and amortization of acquisition-related intangible assets. Adjusted EPS also excludes certain other gains and losses, tax provisions/benefits related to the previous items, benefits from tax credit carryforwards, the impact of significant tax audits or events and 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 excludes operating cash flows from discontinued operations and deducts net capital expenditures. 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.
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. Our adjusted EPS estimate for 2012 excludes approximately $1.34 of expense for the amortization of acquisition-related intangible assets for acquisitions completed through the end of the second quarter of 2012. 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 one-time effect on deferred tax balances of enacted changes in tax rates), which are either isolated or cannot be expected to occur again with any regularity or 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’s earnings guidance, however, is only provided on an adjusted basis. It is not feasible to provide GAAP EPS guidance because the items excluded, other than the amortization expense, are difficult to predict and estimate and are primarily dependent on future events, such as acquisitions and decisions concerning the location and timing of facility consolidations