PerkinElmer Inc (PKI) reported fourth-quarter 2014 EPS of 85 cents, which surpassed the Zacks Consensus Estimate by 7 cents. EPS increased almost 15% year over year driven by 2.7% increase in revenues, which totaled $608.6 million. The revenue figure is also much better than the Zacks Consensus Estimate of $602 million.
Moreover, operating margin expansion of 200 basis points (bps), which was primarily attributed to 110 bps and 50 bps drop in selling, general & administrative (SG&A) expenses and research & development (R&D) expenses, respectively, drove the bottom line.
SG&A expense reduction came on the back of the positive impact of productivity initiatives. Meanwhile, the R&D improvement can be attributed to efficiencies resulting from the consolidation of PerkinElmer’s R&D activities and research Center for Innovation in Hopkinton.
Segment Details
Organic revenue growth stood at 5% while acquisitions added 1%, partially offset by unfavorable foreign exchange impact of 3% in the quarter. Organic revenues increased high-single digits in the Americas and mid-single digits in both Europe and Asia. China revenues also grew at a mid-single digit rate.
Human health segment revenues remained almost flat at $336.4 million, while Environmental health increased 5.8% to $272.2 million in the quarter.
In early January, PerkinElmer announced that OneSource service group will now be part of Human Health business. With the predominant OneSource customer base being in the pharma and biotech markets, this realignment will help the company efficiently serve its life science customers going forward.
Diagnostics grew in mid-single-digits as PerkinElmer continues to benefit from higher demand for the company’s newborn and prenatal screening and infectious disease testing solutions in the emerging markets.
Research business increased low single digits driven by a number of new product introductions like Opera Phenix, EnSight and Touch, as well as improved demand for innovative automation, quantitative technology and informatics platforms.
Environmental Health organic revenues increased high-single digits in the quarter, driven by strong demand in both food and safety end markets, with particular strength from the ICP-MS product portfolio and continued strength at other service offerings.
During the quarter, the company announced the opening of PerkinElmer's state-of-the-art clinical testing lab in Suzhou, China. This new facility will offer a complete solution for hospitals and patients and support the country's investments toward detection and prevention of birth defects and infectious diseases.
Human health segment’s operating margin expanded 300 bps, while Environmental health margin remained flat on a year-over-year basis in the quarter. Productivity initiatives, volume leverage and prudent sales mix drove the margin improvement.
Product/Clinical Update
During the quarter, PerkinElmer received approval from both the FDA and Health Canada to offer the first commercially available newborn screening test for SCID in the U.S. and Canada.
Acquisitions
During the fourth quarter, the company announced the acquisition of Perten Instruments Group, a leading supplier of analytical instruments for quality control of food, grain, flour and feed.
Outlook
At cc, PerkinElmer forecasts top-line growth of 6% to 8%, with organic revenue growth of 3% to 5% for 2015. Acquisitions are expected to contribute 3% to revenues. The company expects the impact of the stronger dollar to reduce revenues by about $100 million. Consequently, PerkinElmer’s reported revenue guidance is pegged at $2.28 billion to $2.32 billion, which reflects 2% to 4% growth over 2014.
On a geographic basis, APAC is stable, with China experiencing continued growth in diagnostics and modest recovery in the research, environmental and industrial markets. Weak European economy continues to be a challenge for 2015. The U.S. economy, on the other hand, is improving, although the stronger dollar is creating new challenges, especially in emerging markets.
Regarding end markets, pharma is stabilizing as customers move back into development mode. Management expects to see strong biotech growth for Europe and the U.S. in 2015.
PerkinElmer is well positioned to benefit from investments in the area of cancer immunotherapy as well as the rising trend of outsourcing instrument maintenance and scientific services. The academic and government sectors are most likely to stay flat with the 2014 level, owing to soft funding in the U.S. and severity in Europe.
In the environmental and industrial markets, revenue growth is expected to remain flat similar to the second half of 2014, depending on impending global environmental regulations and macro GDP growth rates.
PerkinElmer is optimistic about the rapidly expanding food market, which has become one of the fastest-growing segments of the analytical instruments sector. Additionally, the global diagnostics markets continue to be significant revenue drivers, owing to higher U.S. birth rates, prenatal and neonatal screening menu expansion and the long-term emerging market demand, especially in China.
In 2015, Environmental Health business is forecasted to benefit from a robust pipeline, products from which will be launched in the first half and gain scale in the second half of 2015.
Management expects modest increases in R&D spending throughout 2015 as the company continues to invest in innovative product development.
For 2015, PerkinElmer believes that it can grow adjusted EPS in the range of 11% to 13% at cc. However, a stronger dollar is expected to hurt EPS by 15 cents. Consequently, PerkinElmer provided adjusted EPS range of $2.58 to $2.64, which represents growth of roughly 5% to 7% over 2014.
For the first quarter of 2015, management forecasts reported revenues in the range of $530 million to $540 million or essentially flat year-over-year, but projects organic revenue growth of 3% to 4%.
Taking into account the flat revenue guidance, combined with the impact of the timing of sales recognized in the fourth quarter, PerkinElmer expects adjusted EPS in the range of $0.44 to $0.46 for the quarter.
Our Take
Owing to the strengthening of the U.S. dollar in the second half of 2014, year-over-year comparisons in the first half of 2015 will be significantly difficult for PerkinElmer. Moreover, unfavorable foreign exchange and product mix are near-term concerns. Additionally, sluggish European macro-environment and headwinds in China will hurt top-line growth in the near term.
Nevertheless, the company continues to execute its business strongly across several product lines aided by rebounding markets and cost containment efforts. With an increased focus on product innovation and improving end-market trends, PerkinElmer has potential upside going forward. Accretive acquisitions and strategic collaborations are also expected to drive growth in 2015 and beyond.
Zacks Rank
Currently, PerkinElmer has a Zacks Rank #3 (Hold). Better-ranked stocks in the broad medical sector are AmerisourceBergen (ABC), Bio-Reference Laboratories (BRLI) and Halyard Health (HYH). All these companies sport a Zacks Rank #1 (Strong Buy).
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