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Luminex Corporation’s (LMNX - Analyst Report) second-quarter 2013 adjusted earnings per share of 12 cents beat the Zacks Consensus Estimate of 10 cents per share and were up 50% year over year. Adjusted earnings in the reported quarter exclude one-time charges such as amortization, acquisition and severance costs along with legal expenses.

The company reported net income of $3.7 million (or 9 cents per share) in the quarter compared with a net income of $3.0 million (or 7 cents per share) in the year-ago quarter.

Revenues

Revenues surged 12% year over year in the reported quarter to $54.3 million, marginally beating the Zacks Consensus Estimate of $54 million.

Revenues were driven by higher assay sales, which grew 24% to $21.7 million in the quarter. Double-digit sales growth in the infectious disease and genetic testing businesses led to the revenue growth. Each segment benefited from new products such as the gastrointestinal pathogen panel (GPP) in the U.S. and lab-developed tests (LDT) assay portfolio.

Revenues from the System segment dropped 9% year over year to $7.6 million in the quarter. The company shipped 266 multiplexing analyzers during the quarter, resulting in total life-to-date dispatches of 10,130 analyzers, up 11% year over year. The shipment of its 10,000th multiplexing instrument marks a major milestone for Luminex

Consumable sales grew 9% year over year to $11.8 million, led by continued stabilization of purchase volume of Luminex’s largest customer, partially offset by headwinds from LSR focuser partners. Management forecasts recent tightening of research budgets in the U.S. and some other nations to adversely impact consumable utilization in the second half of 2013.

Royalty and All Other revenues increased 11% and 20% to $8.6 million and $4.6 million, respectively.

Margins

Gross margin in the quarter declined 120 basis points (bps) to 70% due to negative product mix. However, management is confident about maintaining gross margins in the 70% range through 2013.

Selling, general and administrative expenses jumped 21% to $20.2 million in the reported quarter, mainly on account of taking full charge of the molecular diagnostics channel. Research and development expenses were up 16% to $11.8 million due to expenses related to the development of the Aries project.

As a result reported operating expenses were up 18% to $33.0 million. Adjusted operating margin (excluding amortization expenses) dropped a whopping 450 bps to 11.2%.

Balance Sheet

Luminex ended second quarter 2013 with cash and cash equivalents of $37.5 million compared with $42.8 million at the end of 2012. Long-term debt was $1.1 million, down from $1.7 million at the end of 2012.

Guidance  

Luminex reiterated its 2013 revenue guidance in the range of $220−$230 million, up 9%–14% year over year. However, the company expects revenues to be at the lower end of the guidance due to reimbursement-related changes implemented by the Centers for Medicare and Medicaid Services (CMS) from Jan 1, 2013.The current Zacks Consensus Estimate is pegged at $225 million, which lies within the guided range.

Our View

Despite declining margins, we are impressed with Luminex’ strong second quarter results with beats on both fronts,. Solid sales of core assay products along with healthy adoption of new offerings encourage us. The company possesses an extensive product portfolio and a healthy pipeline of novel assays, which are expected to support growth going ahead. Although Luminex’ efforts to develop innovative platforms by combining resources from its latest acquisitions is pressurizing margins in the short term, it will likely benefit the company in the longer term.

However, Luminex operates in a highly competitive life sciences industry. Moreover, the underlying market is anticipated to be negatively affected in the near term by the current molecular diagnostic related reimbursement changes implemented by CMS. This might result in sluggish sales of certain assays.

The stock carries a Zacks Rank #2 (Buy). Medical instrument companies, such as IDEXX Laboratories (IDXX - Snapshot Report), Thoratec (THOR - Analyst Report) and Globus Medical (GMED - Snapshot Report) are expected to do well. All these stocks carry a Zacks Rank #2 (Buy).
 

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