ILMN Illumina Inc

Life Technologies Corporation (LIFE) reported an EPS of 89 cents in the second quarter of fiscal 2011, missing the Zacks Consensus Estimate by 5 cents and reporting 2 cents lower than the year-ago quarter. Shares of the company were down by 9.11% in pre-market trading.

Revenues increased 4% year over year to $945 million, missing the Zacks Consensus Estimate of $961 million. Excluding the impact of foreign exchange movement, revenue growth for the quarter was 3%. On a geographical basis, revenue growth was witnessed across all regions: Europe – 2%, Asia-Pacific – 3% and the Americas – 3% and Japan 8%.

According to the company, second quarter results were lower than expectation on the back of tighter budget for academic and government funded research in both the US and Europe, delays in the launch of the 5500 Genetic Analyzer in Japan due to earthquake and temporary slack in business in China.

However, the company is addressing these challenges and expects to recover in the second half of 2011. Life Technologies is also adopting a number of cost saving initiatives.  

Adjusted gross margin during the quarter was 64.2%, down 350 basis points (bps) from the year-ago quarter due to the negative impact from currency and mix that got partially offset by the positive impact of price. Moreover, adjusted operating margin was 27.8% in the reported quarter, 230 bps lower than the prior year quarter due to lower sales and gross margin.

Operating expenses (adjusted basis) were $343.9 million compared to $340.6 million in the year-ago quarter, owing to a 1% rise in selling, general and administrative expenses to $253.3 million though research and development expenses declined by the same magnitude to $90.6 million.

Although revenues increased 4% during the quarter, EPS dropped by 2% due to lower margins, higher interest expense (up 21.3% to $33.9 million), a 34% fall in interest income, partially offset by lower effective tax rate (27.9% versus 29.5%) and a 6.3% decline in share count.

Earnings of Life Technologies were also affected by other expense of $3.6 million during the quarter compared to other income of $2 million in the corresponding period of last year.

Life Technologies exited the quarter with $565.1 million in the form of cash and short-term investments, lower than $854.8 million at the end of December 2010. Free cash flow during the reported quarter was $187 million with $204 million of cash flow from operating activities and $17 million of capital expenditure.

Segments

Life Technologies earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems, which recorded adjusted revenues of $432 million (less than 1% decline compared to the year-ago quarter), $265 million (up 12%) and $243 million (up 5%), respectively.

In the Cell Systems division, while BioProduction business saw mid-teens growth, the other areas were affected by slower growth due to funding pressure in the US and Europe and temporary slowdown in China. The same scenario prevailed in the other divisions as well.  

In case of Molecular Biology systems, strong sales of qPCR consumables and molecular testing kits sold in applied markets were offset by sluggish growth in government funded accounts in US and Europe. Similarly, in Genetic Systems, strong sales of Ion Torrent PGM and 5500 series Genetic Sequencer were partially offset by lower demand for CE instruments.

Revises Guidance

Life Technologies revised its outlook for 2011. The company expects its revenues to increase by 3-5% (previous guidance of mid-single digit growth) at constant exchange rates resulting in adjusted EPS of $3.70-$3.80 (previous guidance of $3.80–$3.95). Revenues in the second half of 2011 is expected to improve based on higher growth in China, and continued high sales of the Ion Torrent PGM. For fiscal 2012, Life Technologies expects mid-single digit growth of revenues (at CER) resulting in double- digit rise in its earnings.

Recommendation

Life Technologies enjoys a strong position in the life sciences market. The company was impacted by funding pressures in US and Europe. Moreover, lower margins over the recent past leaves us further perturbed. However, the company is undertaking several strategies to address these challenges. The company also faces increased competition from players like, Thermo Fisher Scientific (TMO), Illumina (ILMN) among others.

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

 
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