On July 28, 2016 Thermo Fisher Scientific Inc. (NYSE: TMO), the world leader in serving science, reported its financial results for the second quarter of 2016, ended July 2, 2016 (Press release, Thermo Fisher Scientific, JUL 28, 2016, View Source [SID:1234514102]).

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Second Quarter 2016 Highlights

Revenue increased 6% to $4.54 billion.
GAAP diluted earnings per share (EPS) increased 2% to $1.30.
Adjusted EPS grew 10% to $2.03.
Strengthened leadership in analytical instruments by launching a suite of software and Cloud-based solutions for research and applied markets, and introducing new products to accelerate drug discovery, including our flagship Q Exactive BioPharma mass spectrometer.
Delivered strong performance in emerging markets, led by China, South Korea and India.
Announced agreement to acquire FEI Company for $4.2 billion, adding leading electron microscopy technologies to significantly increase capabilities for structural biology applications and create new growth opportunities in attractive materials science markets.
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’re pleased to announce another quarter of strong financial results," said Marc N. Casper, president and chief executive officer of Thermo Fisher Scientific. "Our team executed well in the second quarter, contributing to an outstanding first half.

"We continued to build on our leadership position by executing our proven growth strategy. During the quarter, we launched new products that raise the bar on performance and productivity, delivered strong growth in emerging markets and enhanced our unique customer value proposition. We’re continuing to effectively deploy capital to strengthen our competitive position and drive growth. We’re excited about our pending acquisition of FEI, which will add leading capabilities in electron microscopy that complement our analytical instruments portfolio. We plan to leverage our industry leadership to expand the use of these technologies in life sciences and applied markets, creating significant value for our customers and our shareholders.

"In summary, we’re in a great position at the halfway point of the year and on track to deliver an excellent 2016."

Second Quarter 2016

For the second quarter of 2016, revenue grew 6% to $4.54 billion, versus $4.27 billion in the second quarter of 2015. Organic revenue growth was 4%; acquisitions increased revenue by 3% and currency translation decreased revenue slightly.

GAAP Earnings Results

GAAP diluted EPS increased to $1.30, versus $1.27 in the same quarter last year. GAAP operating income for the second quarter of 2016 increased 7% to $638 million, compared with $596 million in the second quarter of 2015. GAAP operating margin was 14.1%, compared with 14.0% in the second quarter of 2015.

Non-GAAP Earnings Results

Adjusted EPS in the second quarter of 2016 grew 10% to $2.03, versus $1.84 in the second quarter of 2015. Adjusted operating income for the second quarter of 2016 increased 9% compared with the year-ago quarter. Adjusted operating margin was 22.8%, compared with 22.3% in the second quarter of 2015.

2016 Guidance Update

Thermo Fisher is updating its revenue and adjusted EPS guidance for 2016 to reflect strong operating performance in the first half of the year, as well as a more unfavorable foreign exchange environment. The company now expects revenue to be in the range of $17.84 to $18.00 billion versus its guidance of $17.86 to $18.04 billion announced on April 28, 2016. This would continue to result in 5 to 6% revenue growth over the previous year. The company is raising its adjusted EPS guidance to a new range of $8.07 to $8.20 versus $8.05 to $8.19, for 9 to 11% growth year over year as previously announced.

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 second quarter of 2016, Life Sciences Solutions Segment revenue grew 13% to $1.28 billion, compared with revenue of $1.13 billion in the second quarter of 2015. Segment operating margin was 28.9% versus 28.6% in 2015.

Analytical Instruments Segment

Analytical Instruments Segment revenue increased 2% to $794 million in the second quarter of 2016, compared with revenue of $777 million in the second quarter of 2015. Segment operating margin was 18.3% versus 18.0% in the 2015 quarter.

Specialty Diagnostics Segment

Specialty Diagnostics Segment revenue in the second quarter increased 4% to $851 million in 2016, compared with revenue of $817 million in the second quarter of 2015. Segment operating margin was 27.9% versus 27.8% in the 2015 quarter.

Laboratory Products and Services Segment

In the second quarter of 2016, Laboratory Products and Services Segment revenue grew 6% to $1.80 billion, compared with revenue of $1.69 billion in the second quarter of 2015. Segment operating margin was 15.5% versus 15.4% 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 second quarter, our adjusted EPS will exclude approximately $2.29 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’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.