PerkinElmer Inc PKI reported second-quarter 2015 earnings of 60 cents per share, which surpassed the Zacks Consensus Estimate by a penny. Earnings per share (EPS) also increased 1.7% year over year driven by modest revenue growth and margin expansion. At constant currency (cc), EPS surged almost 12% on a year-over-year basis.
Revenues increased 1.3% to $564.1 million and beat the Zacks Consensus Estimate of $555 million. The year-over-year upside was primarily backed by robust performance at its Environmental Health segment. At constant currency (cc), revenues increased 8% on a year-over-year basis.
Gross margin expanded 20 basis points (bps) to 47% in the quarter, due to favorable product mix, higher volumes and productivity gains.
Operating margin expanded 20 bps to 17%, driven by a 40 bps decline in selling, general & administrative (SG&A) expenses. This was partially offset by a 40 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
In the reported quarter, revenues from top 20 global pharma and biotech customers grew in double-digits as compared with the year-ago quarter figure.
Organic revenue growth stood at 4% while acquisitions added 4%, partially offset by unfavorable foreign exchange impact of 7% in the quarter. Organic revenues increased mid-single digits across most of the geographies. European results improved, while demand was stable in the Chinese market.
Human Health segment revenues declined 0.4% year over year to $341.7 million, while Environmental health revenues increased 4.1% year over year to $222.4 million in the quarter. Environmental Health organic revenues advanced 3% in the quarter, while Human health increased 5%.
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.
On an organic basis, diagnostics business (28% of Human Health revenues) increased mid-single digits driven by robust demand for newborn and infectious disease testing solutions. This was partially offset by a low-single digit organic decline in medical imaging.
PerkinElmer’s diagnostic business continues to grow in countries like Egypt and China. The Egyptian Neonatal Screening Laboratory recently decided to expand its screening menu by including PKU testing. In China, PerkinElmer achieved sequential growth at its Haoyuan blood screening business.
PerkinElmer believes that the conversion of ELISA base testing to nucleic acid testing for the screening of blood represents a significant opportunity in China.
Research (33% of Human Health revenues) organic revenues increased in high single-digits in the quarter. PerkinElmer products like upper Phoenix high content imager and labchip touch Microfluidics offering for NGS sample prep – which are primarily designed for the research market – continue to gain traction. Meanwhile, robust performance by the OneSource services business has also been a key catalyst for the company in recent times.
The Human Health segment’s operating margin expanded 60 bps, while Environmental Health margin increased 20 bps on a year-over-year basis in the quarter under review.
Product/Clinical/Partnership Updates
In June, Albany Molecular Research AMRI and PerkinElmer announced a partnership that will work toward discovering new drugs. PerkinElmer will provide cellular imaging solutions, analytical and visualization software and onsite technical and service support to Albany Molecular scientists.
Outlook
At cc, PerkinElmer forecasts top-line growth of 7%, with organic revenue growth of 3% to 5% for 2015. Revenues are forecasted in the range of $2.25 billion to $2.3 billion (up from the previous guided range of $2.24 billion to $2.29 billion). For 2015, adjusted operating margins are expected to increase in the range of 30 bps to 50 bps.
Management continues to believe that research sales within the Human Health division will grow at low-single digits owing to challenges in Japan. The company expects diagnostics business to grow at double-digit in China. However, uncertain ordering patterns and sluggish government tenders are major headwinds. PerkinElemer also expects the second half to continue to pose challenges for the medical imaging business.
For 2015, PerkinElmer forecasts adjusted EPS growth in the range of 13% to 15%, reaching the figure to $2.55 to $2.60 (prior guided range 12% to 15%), at cc. However, a stronger dollar is expected to hurt EPS by 23 cents.
For the third quarter of 2015, management forecasts revenues in the range of $550 million to $560 million (up 7% at cc) with organic revenue growth of 4% to 5%. PerkinElmer also anticipates adjusted EPS in the range of 58 cents to 60 cents (12% at cc).
Our Take
PerkinElmer continues to execute its business strongly across several product lines aided by rebounding markets and effective cost-containment efforts. With an enhanced focus on product innovation and improving end-market trends, PerkinElmer has considerable potential upside. Strategic collaborations with the likes of Johnson & Johnson JNJ and Albany Molecular as well as accretive acquisitions are also expected to drive growth in 2015 and beyond.
However, owing to the strengthening of the U.S. dollar, sluggish European macro-environment, challenges in Japan and headwinds in China will hurt top-line growth in the near term.
Stocks to Consider
Currently, PerkinElmer has a Zacks Rank #2 (Buy). Another favorably-ranked stock in the broader medical sector is Bruker Corp BRKR, which sports a Zacks Rank #1 (Strong Buy).
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