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LIFE Beats on Q3 Earnings, Awaits Sellout to Close

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Life Technologies Corporation recently reported its third-quarter 2013 adjusted earnings of $1.02 per share. The results were 10.9% ahead of the year-ago adjusted earnings per share (EPS) and 5 cents above the Zacks Consensus Estimate. Apart from improved revenues, a significant reduction in both effective tax rate and outstanding share count contributed to the bottom-line growth. On a reported basis, EPS was 67 cents, up a significant 81%.

Third-quarter revenues increased 3% year over year (up 4% at constant exchange rates or CER) on a reported basis to $936 million, comfortably beating the Zacks Consensus Estimate of $930 million. A stable performance in Research Consumablesand Applied Sciences, improved sales in Japan and in emerging markets such as China, and continued stability in the U.S. and Europe aided the outperformance.

On a regional basis, revenues in the quarter increased 2% year over year in Europe, 18% in the Asia-Pacific and 8% in Japan. Revenues from the Americas however, remained flat with the prior-year quarter.

Segments

The three divisions of Life Technologies posted modest third-quarter revenues.

Research Consumables recorded sales of $404 million, up 5% year over year and up 6% at CER. Growth came on the back of strong sales from fluorescent imaging, stem cell, synthetic biology and cell culture products. 

Genetic Analysis revenues stood at $388 million, down 4% year over year and down 3% at CER. The downfall was attributable to the decline in qPCR royalties and SOLiD instrument sales neutralizing the positive effect of the increase in Ion Torrent sales.

Applied Sciences posted revenues of $194 million, increasing 12% year over year and up 13% at CER. The improvement was owing to higher BioProduction sales.

Margin Trends

Adjusted gross margin expanded 550 basis points (bps) to 65.8%. Manufacturing productivity and higher realized price during the quarter were partially offset by a decline in royalties.

Adjusted operating profit came in at $263.7 million, up 35.8% year over year. Consequently, Life Technologies recorded a 688 bps expansion in adjusted operating margin to 28.2%. Increased expenses related to acquisitions and planned investments in Ion Torrent were more than offset by increased revenues and gross margin during the quarter.

Balance Sheet

Life Technologies exited the quarter with $368.2 million in the form of cash and short-term investments, higher than $276.4 million at the end of fiscal 2012.

Free cash flow in the quarter was $225 million (versus $196 million at the end of the prior quarter). Cash flow from operating activities stood at $250 million while capital expenditure amounted to $25.0 million.

Sellout Update

On Aug 21, 2013,in a special meeting, more than 98% of the shareholders of LIFE (representing more than 72% of the company’s outstanding shares) voted in favor of its impending takeover by Thermo Fisher Scientific (TMO - Analyst Report).

In April, Thermo Fisher had disclosed that it plans to acquire Life Technologies for roughly $13.6 billion (or $76 per share), plus the assumption of the latter’s net debt ($2.2 billion as of year-end 2012). The acquisition is expected to close in early 2014.

Guidance

Based on its impending acquisition, Life Technologies has not provided any quarterly guidance. However, the company still believes that the currency exchange headwind will affect its fiscal numbers. The company expects currency to have an impact of approximately $57 million (earlier prediction was $75 million) on revenues and 13 cents (17 cents) on its adjusted EPS in fiscal 2013. 

Our Take

We believe that, given Life Technologies’ expansive line of consumables for genomic and molecular and cell biology, the acquisition by Thermo Fisher will effortlessly strengthen the combined company’s global foothold and commercial reach. The merger will create a kingpin in the research, specialty diagnostics and applied markets, thereby giving the joint company a competitive edge over other players in the market.

The takeover should leverage Life Technologies’ attractive revenue profile. The company now carries a Zacks Rank #3 (Hold).

Nevertheless, some better-placed medical device stocks worth a look are Align Technologies Inc., (ALGN - Analyst Report) and Cardinal Health, Inc. (CAH - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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