Life Technologies Corporation (LIFE) reported an EPS of 56 cents in the third quarter of 2010 compared to 22 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 87 cents, surpassing the Zacks Consensus Estimate of 78 cents and 19% higher than 73 cents in the year-ago quarter.

Growth in all the divisions of Life Technologies helped adjusted revenues increase 8% year over year to $869 million, ahead of the Zacks Consensus Estimate of $857 million. Excluding the impact of currency, acquisitions and divestitures, revenues grew 6% and 9% after excluding the previous year’s impact of H1N1 and the large Japanese forensic order.

On a geographical basis, barring Japan where revenues declined 1%, revenue growth was witnessed across all other regions: Europe – 5%, Asia-Pacific – 7% and the Americas – 8%.

Although revenues increased 8%, EPS was higher by 19% due to an improvement in operating margin (29% compared to the year-ago quarter’s 27.3%), lower interest expense (27.7%), lower adjusted tax rate (25.8% versus 29.1%), partially offset by a 22.4% rise in the share count. While gross margin declined marginally by 20 basis points due to a minor impact from mix, improvement in operating margin was driven by acquisition-related synergies and cost controls.  

Life Technologies exited the quarter with $537 million in the form of cash and short-term investments, 17% lower than $648.1 million at the end of December 2009. We also note that over the same period, long-term debt declined 26.5% to $1,925.7 million from $2,620.1 million at the end of 2009. This led to a decline in interest expense.

Segments

Life Technologies earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems, which recorded adjusted revenues of $415 million (annualized growth of 2%), $227 million (12%) and $221 million (15%), respectively.

Revenues in the Molecular Biology Systems, the largest segment at Life Technologies, remained almost unchanged after excluding the impact of currency and acquisitions. While the segment witnessed robust demand for genomic assay products, this was offset by the PCR and molecular biology reagent business, which faced difficult comparisons due to the previous year’s H1N1 related sales.  

Double-digit growth in the next generation sequencing along with mid-single digit growth of capillary electrophoresis instruments and reagents helped boost Genetic Systems revenues. Moreover, Life witnessed strong growth in primary and stem cell, bio-production and the beads-based separation unit, which enabled Cell Systems to record the highest growth among the three segments.

In October 2010, Life Technologies completed the acquisition of privately held, Ion Torrent, a DNA sequencing company, for $375 million. Including the impact of cost saving initiatives, the transaction is expected to be dilutive to the company’s earnings in 2010 by 2 cents, neutral in 2011 and accretive in 2012 and beyond. We are pleased to note that Ion Torrent has developed a DNA sequencing approach through the use of semiconductor technology, which is expected to be an improved version compared to other sequencing technologies.

The company has witnessed strong demand for its 3500 series genetic analyzer with placement of more than 160 units during the quarter. It has experienced rapid customer adoption especially in forensic applications and in hospital clinics and laboratories. In addition, Life Technologies has placed more than 60 of the recently launched ViiA7 real-time PCR systems during the quarter, which helps in the understanding of molecular biology in the pharmaceutical discovery and clinical research markets. The company has also launched MicroSEQ E. coli assay to detect E. coli strains, which will enable effective monitoring of food supplies for contamination.

Guidance Increased

Following the release of third-quarter results, Life increased its EPS guidance for fiscal 2010 to $3.48–$3.52 from the previous guidance of $3.35–$3.50. In addition, organic revenue during the fourth quarter is expected to increase in the mid-single digits.

Recommendation

Life Technologies enjoys a strong position in the life sciences market and we believe robust performance from its core business along with new product launches will help drive revenues going forward. However, challenges remain in the form of integration risks, increased competition and declining demand due to the economic slowdown.

We are currently Neutral on the stock.

 
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