Zacks_Analysts' Blog : Life Technologies Beats, Profit Up - Analyst Blog

Life Technologies Corporation (LIFE) reported an adjusted EPS of $1.06 in the fourth quarter of fiscal 2011, beating both the Zacks Consensus Estimate of $1.03 and the year-ago quarter’s adjusted EPS of 90 cents. For the fiscal, adjusted EPS came in at $3.73, ahead of the Zacks Consensus Estimate of $3.70 and $3.55 earned in the previous year.

Revenues increased 4% year over year (3% at constant exchange rates or CER) to $970 million, surpassing the Zacks Consensus Estimate of $965 million. The performance was marked by strong growth in the Ion Torrent franchise and Forensics.

On a geographical basis, organic revenue growth of 4% was witnessed across Europe, Asia-Pacific clocked 10% and Japan 4% while the Americas remained flat. Life Technologies is successfully pushing sales from the eCommerce platform. During the reported quarter revenue from orders transacted through this channel climbed 8%.

Full the full year, revenues increased 4% (3% at CER) to $3.74 billion, at par with the Zacks Consensus Estimate. The growth was driven by higher sales from Ion Torrent, BioProduction and Forensics while SOLiD products continued to record lower sales.

Segments

Life Technologies earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems – which recorded adjusted revenues of $441 million (down 2% year over year at CER), $278 million (up 11%) and $244 million (up 1%), respectively, during the quarter.

Revenues from Molecular Biology Systems dropped due to a decline in qPCR royalties and restrained spending from academic customers. The Cell Systems division experienced growth from cell culture products and the BioProduction business while Genetic Systems witnessed strong sales of Ion Torrent and double-digit growth of forensic instrument placements partially offset by lower sales of SOLiD products.

From the first quarter of fiscal 2012, Life Technologies plans to change its reporting segments. The three new business sub-groups are Research Consumables, Genetic Analysis and Applied Sciences.

Margin Trends

Adjusted gross margin during the quarter expanded 20 basis points (bps) to 64.8% on the back of realized prices and increased manufacturing productivity, partially offset by product mix and the termination of a supply agreement.

To prepare itself for the challenging scenario, Life Technologies over the past few quarters has been targeting reduction in operating expenses. Accordingly, adjusted operating margin reached an all time high of 31% in the reported quarter, 470 bps higher than the prior-year quarter.

Improved operating margin came on the back of lower expenses for both selling, general and administrative expenses (down 5% to $243.7 million) and research and development expenses (declined 14.2% to $84.6 million).

Balance Sheet

Life Technologies exited the fiscal with $881.9 million in the form of cash and short-term investments, nominally higher than $854.8 million at the end of December 2010.

Free cash flow during the year increased to $709.8 million ($614.3 million at the end of the previous fiscal) with $809.1 million of cash flow from operating activities and $99.3 million of capital expenditure. The company’s debt burden declined to $2.75 billion from $3.07 billion at the end of the previous year. 

Guidance

Life Technologies revealed its outlook for 2012. The company expects organic revenue growth of 2−4% (approximately $3.77−$3.84 billion) resulting in adjusted EPS of $3.90−$4.05. The current Zacks Consensus Estimates of $3.83 billion in revenues and $4.04 in EPS lie near the high end of the company’s projected range.

Operating margin is expected to improve approximately 50−100 bps in 2012 and the company reiterated that it is on track to achieve 31% operating margin by the end of 2013.

Our Take

We are encouraged by the company’s performance in the reported quarter amidst macroeconomic challenges and constrained budgets from customers. Life enjoys a strong position in the life sciences market.

Although the company witnessed several issues in the second quarter of 2011 that forced it to lower its outlook, it took certain proactive measures that have yielded results. Challenges, nevertheless, remain in the form of tighter budgets for academic and government funded research in both US and Europe. The stock retains a Zacks #4 Rank (Sell) in the short term.

Life Technologies experienced strong growth in its Ion Torrent franchise, which drove Genetic Systems sales. The company is also progressing on its next-generation sequencing technology. It has begun taking orders for its new Benchtop Ion Proton sequencer, scheduled for launch in mid-2012.

The latest offering is designed to sequence the entire human genome in a day for $1,000. The genetic sequencing market is of late witnessing a lot of activity with Life Technologies’ peer Illumina (ILMN) rejecting the $5.7 billion hostile takeover bid from Roche (RHHBY), considering it to be inadequate. 

On the whole, we are impressed with the cost control initiatives undertaken by the company that led to margin expansion during the quarter. Over the long term, we have a Neutral recommendation on Life Technologies.