PerkinElmer Inc PKI reported first-quarter 2015 earnings of 50 cents per share, which surpassed the Zacks Consensus Estimate by 4 cents. Earnings per share (EPS) increased almost 6.4% year over year driven by margin expansion.
Revenues decreased almost 1% to $527.2 million and lagged the Zacks Consensus Estimate of $537 million. The year-over-year decline can be primarily attributed to sluggish performance by the Human Health segment. At constant currency (cc), revenues increased 5% on a year-over-year basis.
However, gross margin expanded 80 basis points (bps) to 47.7% in the quarter, due to favorable product mix and cost improvements related to Asia supply chain initiatives and OneSource business.
Operating margin expanded 80 bps to 15.7%, driven by a 60 bps decline in selling, general & administrative (SG&A) expenses. This was partially offset by a 60 bps increase in research & development (R&D) expenses.
The SG&A expense reduction came on the back of synergies from productivity initiatives. Meanwhile, the R&D expense increase can be attributed to the ongoing investments in innovative product development.
Segment Details
Organic revenue growth stood at 3% while acquisitions added 3%, partially offset by unfavorable foreign exchange impact of 6% in the quarter. Organic revenues increased mid-single digits in the Americas and low-single digits in both Europe and Asia. China revenues grew at a high-single digit rate.
Human Health segment revenues declined 1.6% year over year to $326.3 million, while Environmental health revenues remained almost flat at $200.8 million in the quarter.
In early January, PerkinElmer announced that OneSource service group will be part of the 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.
Diagnostics revenues grew in mid-single-digits as PerkinElmer continues to benefit from higher demand for the company’s newborn and infectious disease testing solutions in the emerging markets. Medical imaging reported organic revenue growth of mid-single digits in the quarter.
Research business increased low single digits driven by a number of new product introductions like Opera Phenix as well as improved demand for innovative automation, quantitative technology and informatics platforms.
Environmental Health organic revenues increased 2% in the quarter, driven by strong demand in the industrial end market.
The Human Health segment’s operating margin expanded 70 bps, while Environmental Health margin declined 270 bps on a year-over-year basis in the quarter.
Product/Clinical/Partnership Updates
PerkinElmer launched a number of new innovative products during the quarter, including the new PinAAcle 500 Flame Atomic Absorption Spectrometer, fast flame autosampler, Spotlight 150 and 200 series microscope IR analyzers, among others.
The company entered into a partnership with Waters Corp during the quarter, which will strengthen its chromatography portfolio. PerkinElmer will also standardize on liquid chromatography and gas chromatography portfolio on Waters Empower Software. This will enable customers to simplify their workflow by unifying chromatography data onto one platform, providing greater confidence in their analysis.
PerkinElmer won market approval from the China Food and Drug Administration to offer its automated high throughput Genetic Screening Processor (GSP) and an assay for the detection of congenital hyperthyroidism.
In the conference call, PerkinElmer announced that there are additional GSP assays in the pipeline that are pending approval from the CFDA. Approval of these pipeline products will expand the company’s portfolio for newborn screening in China, and will help it to test life threatening disorders in newborns.
PerkinElmer’s penetration in emerging markets is strong. Based on recent contract wins in India, the company expects to screen nearly one million babies in 2015. The company also won a contract in Mexico, which has helped it gain significant traction within a short span of time.
During the quarter, PerkinElmer announced a partnership with Johnson & Johnson under which the former will outfit the latter’s life science incubator labs or J-lab in South San Francisco, CA.
Outlook
At cc, PerkinElmer forecasts top-line growth of 7% to 8%, with organic revenue growth of 3% to 5% for 2015. The company expects the impact of the stronger dollar to impact revenues by about $137 million. Consequently, PerkinElmer’s revenue guidance is pegged at $2.24 billion to $2.29 billion.
For 2015, management continues to forecast adjusted gross margin expansion of 70 bps to 80 bps at cc. Adjusted operating margins are expected to grow in the range of 80 bps to 100 bps for the rest of 2015 at cc. PerkinElmer expects Environmental Health adjusted operating margins to expand 80 bps to 100 bps for 2015.
On a geographical basis, APAC is stable, despite weak macro-environments in Japan and Korea. Although the China economy is slowing down, management expects revenues to grow in the high single digits going forward. Meanwhile, though the European economy is stabilizing, it will remain quite a challenge in 2015. The U.S. economy, on the other hand, is improving, although the stronger dollar is a major headwind.
For 2015, PerkinElmer expects adjusted EPS growth in the range of 12% to 15% to $2.54 to $2.60 (prior guided range 11% to 13%) at cc. However, a stronger dollar is expected to hurt EPS by 23 cents.
For the second quarter of 2015, management forecasts revenues in the range of $550 million to $560 million (up 7% at cc) with organic revenue growth of 3% to 4%. PerkinElmer expects adjusted EPS in the range of 57 cents to 59 cents (10% at cc).
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 innovation and improving end-market trends, PerkinElmer has considerable potential upside. Accretive acquisitions and strategic collaborations are also expected to drive growth in 2015 and beyond.
However, owing to the strengthening of the U.S. dollar, year-over-year comparisons in the first half of 2015 will be significantly difficult for PerkinElmer. Additionally, sluggish European macro-environment and headwinds in China will hurt top-line growth in the near term.
Stocks to Consider
Currently, PerkinElmer has a Zacks Rank #4 (Sell). Better-ranked stocks in the broad medical sector are Waters Corp WAT, Inogen INGN and Abiomed ABMD. All these companies carry a Zacks Rank #2 (Buy).
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