LIFE Beats Earnings, Margins Low (HLS) (LIFE) (NUVA) (TMO)

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Following the announcement of the proposed acquisition deal with Thermo Fisher (TMO), Life Technologies Corporation (LIFE) reported its first-quarter 2013 earnings per share (EPS) of 69 cents, down 4.25 year over year. However, after taking into account certain one-time items adjusted EPS came in at $1.07, up 8.1% from the year-ago quarter’s adjusted EPS and 2 cents ahead of the Zacks Consensus Estimate.

Revenues were up 2.5% year over year (up 4.4% at constant exchange rates or CER) on a reported basis to $963 million, surpassing the Zacks Consensus Estimate of $961 million. After a sluggish fourth quarter, the reported quarter witnessed improved sales on the back of strong sales in Ion Torrent, Bioproduction and Forensics businesses. However, this was partially offset by declines in SOLiD sales and lower Research Consumables and capital equipment sales primarily due to the anticipated slowdown in the U.S. as the threat of sequestration influenced customer’s buying patterns.

On a regional basis, during the quarter, Europe witnessed revenue growth of 3%, Asia-Pacific witnessed revenue growth of 10% and Japan witnessed revenue growth of 1%, while revenues from the Americas grew 5% year over year.

Segments

The three divisions of Life Technologies, viz. Research Consumables, Genetic Analysis and Applied Sciences recorded revenues of $409 million (down 3% year over year and 1% at CER), $365 million (up 3%year over year and 5% at CER) and $189 million (up 17% year over year and 19% at CER), respectively, during the reported quarter.

Revenues from Research Consumables declined due to limited spending in the U.S. and Europe and tough comparison in Japan, as the year-ago quarter had benefited from stimulus spending. Genetic Analysis experienced growth in the Ion Torrent franchise and royalties including licensing agreements, partially offset by lower CE instrument sales and an expected decline in SOLiD instrument sales. At Applied Sciences, there were strong sales of BioProduction and Forensics products.

Margin Trends

On a reported basis, adjusted gross margin, during the reported quarter, contracted 47 basis points (bps) to 66.1%. A higher mix of Ion Torrent instrument sales, Bioproduction sales and unfavorable exchange rate, partially offset by manufacturing productivity and royalties including licensing agreements, primarily drove this downside.

The company recorded operating expenses of $354.8 million, up 3.7% year over year with a 7.0% rise in selling, general and administrative expenses, partially offset by a 5.7% decline in research and development expenses. Life Technologies, during the quarter, recorded a 91 bps contraction in adjusted operating margin to 29.3%.

Balance Sheet

Life Technologies exited the quarter with $292.6 million in the form of cash and short-term investments, lower than $276.4 million at the end of fiscal 2012.

Free cash flow for the quarter was $147.8 million ($78.9 million at the end of the prior quarter), while cash flow from operating activities were $134.7 million and capital expenditure was $23.6 million.

Guidance

Life Technologies provided its second-quarter 2013 outlook. The company’s adjusted EPS is in the range of 94–97 cents on revenues of $950−$955 million. The Zacks Consensus Estimate for earnings of $1.08 per share remains way above the guidance range. In addition, the Zacks Consensus Estimate for revenues of $982 million exceeds the expected range.

As per LIFE’s fiscal 2013 guidance, revenue growth is expected in the range of 3%–5% over 2012 revenues of $3.8 billion with an expected increase in the Ion Torrent franchise sales for the third consecutive year and expansion in applied and emerging markets. However, based on Mar 31, 2013 rates, currency is expected to have a negative impact of $62 million on fiscal 2013 revenues and 15 cents on the yearly-adjusted EPS.

Life Technologies Acquisition

Earlier in April, Thermo Fisher disclosed that it will acquire Life Technologies for roughly $13.6 billion (or $76 per share), plus the assumption of Life Technologies’ net debt ($2.2 billion as of year-end 2012). The acquisition is expected to close in early 2014.

Life Technologies preferred Thermo Fisher as a potential buyer against the consortium of private equity firms. Given Life Technologies’ expansive line of consumables for genomic, and molecular and cell biology, the buyout will complement Thermo Fisher’s market-leading portfolio of analytical technologies and specialty diagnostic. The takeover should leverage Life Technologies’ attractive revenue profile. It also looks forward to being able to gain a competitive edge over other players in the market. The company now carries a Zacks Rank #3 (Hold).

However, other medical device stocks worth a look are HEALTHSOUTH Corp. (HLS) and Nuvasive Inc. (NUVA). All these stocks carry a Zacks Rank #1 (Strong Buy).

HEALTHSOUTH CP (HLS): Free Stock Analysis Report

LIFE TECHNOLOGS (LIFE): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

THERMO FISHER (TMO): Free Stock Analysis Report

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