PerkinElmer Inc. (PKI) reported earnings of 57 cents per share in the third quarter of 2014, in line with the Zacks Consensus Estimate, but up 14% on a year-over-year basis. The earnings improvement was driven by strong margin expansion.
Revenue Details
Revenues in the quarter scaled up 3.8% to $542 million, which lagged the Zacks Consensus Estimate of $550 million. Human health segment revenues increased almost 4%, while Environmental health climbed 3.7% in the quarter.
Diagnostics grew in low double digits as PerkinElmer continues to benefit from improving birth-rates and increasing purchasing power among the middle class in the International markets. Management believes this is creating a healthy tailwind for its newborn and prenatal screening and infectious disease testing solutions.
During the quarter, these 3 product lines generated higher revenues outside the U.S. Management expects this trend to continue as the company recently secured a number of new international customers and are focusing on expanding its diagnostics business deeper into new markets.
Revenue growth was positively driven by SYM-BIO business, as infectious disease testing in China grew in double digits organically. PerkinElmer’s Haoyuan business experienced another solid quarter, capturing a number of new tenders in the Chinese blood-screening market.
Medical Imaging organic revenue growth was up in double digits in the quarter, driven by growth in new wireless cassette detector using diagnostic imaging and veterinary applications and an easier year-over-year comparison.
Service business grew in high single digits in the quarter, driven by continuous customer wins on strong demand for OneSource solution.
Research business declined in low single digits in the reported quarter. Low single-digit growth in pharma and biotech was offset by continued softness in academic end markets, which declined in low single digits.
Geographically, all the regions performed better on a sequential basis as organic revenues increased in high single digits in Asia, mid-single digits in the Americas and were up in low single digits in Europe.
Across China, organic revenues increased in high single digits, driven by strong demand in diagnostics business and renewed strength in research business.
Operational Details
Gross margin contracted 20 basis points (bps) year over year to 47.3%.
Selling, general and administrative (SG&A) and research and development (R&D) expenses as percentage of revenues decreased 90 bps and 40 bps respectively, on a year-over-year basis, driven by productivity initiatives.
Adjusted operating margin expanded 110 bps on a year-over-year basis to 16.8% due to lower operating expenses. Human health segment operating margin spiked 50 bps, while Environmental health margin improved 140 bps in the quarter. Productivity initiatives, volume leverage and prudent sales mix drove the margin improvement.
Financial Position
At the end of the third quarter, PerkinElmer had cash and cash equivalents of $203.7 million. Long-term debt was $858.6 million. The company exited the quarter with debt-to-adjusted-EBITDA ratio of 2.0x and a net debt-to-adjusted-EBITDA ratio of 1.6x.
Operating cash flow from continuing operations was $63 million at the end of third quarter. PerkinElmer’s board approved a new share repurchase program worth 8.0 million shares that will expire in Oct 2016.
Guidance
PerkinElmer revised its fiscal 2014 guidance. The company expects fiscal 2014 non-GAAP earnings to be in the range of $2.39 to $2.41 (down from the earlier guided band of $2.42 to $2.46), primarily due to unfavourable foreign currency headwind in the second half of 2014.
Management expects to see a sequential improvement in its research business driven by new product introductions, focused on High Content Screening and microfluidics.
For the fourth quarter, foreign currency is expected to negatively impact adjusted revenue by approximately $13 million. The company expects revenues to range from $595 to $605 million, bolstered by improved demand in the U.S. and a slightly weaker market in Europe, the latter being the result of a difficult year-ago quarter comparison.
Outlook for APAC is consistent with the third quarter performance as strength in Human Health business is expected to be offset by soft environmental safety demand, which continues to be negatively impacted by longer government funding cycles.
PerkinElmer continues to believe its product portfolio is well positioned for further growth in China. The company expects to see high single to low double-digit organic revenue growth in China for the year.
In addition, PerkinElmer retained its operating margin guidance of 130 bps improvement annually.
Our Take
PerkinElmer continues to execute its business strongly across several product lines aided by rebounding markets and cost containment efforts. With an increased focus on product innovations and improving end market trends, PerkinElmer has a potential upside going forward.
The recent acquisition of Ceiba Solutions will expand PerkinElmer’s multivendor software and services offering with enhanced information technology focused on lab computing, applications management and scientific applications development.
Currently, PerkinElmer carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical instruments sector include Harvard Bioscience (HBIO), Newport Corp (NEWP) and Alphatec Holdings (ATEC). All three stocks hold a Zacks Rank #2 (Buy).
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