ILMN Illumina Inc

Life Technologies Corporation (LIFE) reported an EPS of 50 cents in the first quarter of 2011 compared to 48 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 85 cents, in line with the Zacks Consensus Estimate,but down 2.3% compared to 87 cents in the year-ago quarter.

Revenues increased 1% year over year to $897 million, missing the Zacks Consensus Estimate of $920 million. While foreign exchange movement had a negative impact of 1 point, prior acquisitions and divestitures contributed approximately 2 points to the reported revenue growth.

Organic revenue growth for the quarter was flat due to difficult year over year comparisons and the recent disaster in Japan. Excluding these items, organic growth for the quarter was 5%.

On a geographical basis, barring Japan where revenues declined 16% compared to the first quarter of fiscal 2010, revenue growth was witnessed across all other regions: Europe – 2%, Asia-Pacific – 7% and the Americas – 1%.

Adjusted gross margin during the quarter was 66.3%, down 200 basis points (bps) from the year-ago quarter due to the negative impact from currency and mix partially offset by the positive impact of price. Moreover, operating margin (adjusted) was 28.2% in the reported quarter, 130 bps lower than the prior year quarter due to lower gross margins, partially offset by lower operating expenses.

Operating expenses were $342 million compared to $343.4 million in the year-ago quarter due to a 2.8% decline in selling, general and administrative expenses to $250.5 million, though research and development expenses increased 6.7% to $91.5 million.

Although revenues increased 1% during the quarter, EPS dropped by 2.3% due to lower margins, higher interest expense (up 13.4% to $34.4 million), a 34% fall in interest income, partially offset by lower effective tax rate (27.6% versus 30%) and a 1.9% decline in share count.

Life Technologies exited the quarter with $735.2 million in the form of cash and short-term investments, lower than $854.8 million at the end of December 2010.

Segments

Life Technologies earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems, which recorded adjusted revenues of $426 million (down 1% compared to the year-ago quarter), $228 million (down 4%) and $238 million (up 11%), respectively.

The strong growth for the Cell Systems division was a result of strong demand across the portfolio, led by double-digit growth in the Beads Based Separation and BioProduction businesses.  

However, in case of Molecular Biology systems, strong demand for TaqMan assay products was offset by the PCR and Molecular Biology Reagents businesses, both of which faced difficult year-over-year comparisons. Moreover, revenue of Genetic Systems declined primarily due to delayed shipment of the new 5500 sequencer owing to the Japan disaster.

Guidance

Life Technologies reiterated its outlook for 2011. The company expects its organic revenues to grow in mid-single digits resulting in an adjusted EPS of $3.80–$3.95.

Recommendation

Life Technologies enjoys a strong position in the life sciences market. During the quarter the company was affected by the recent disaster in Japan and difficult year-over-year comparisons. However, we believe new product launches and focus on emerging markets will help drive revenues going forward.

Moreover, the situation in Japan is expected to improve gradually. However, the company could face challenges such as increased competition from players like, Thermo Fisher Scientific (TMO), Illumina (ILMN) among others and unfavorable currency movement.

We are currently Neutral on the stock, which also corresponds to the Zacks #3 Rank (Hold) in the short term.

 
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