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Life Technologies Corporation reported earnings per share (“EPS”) of 67 cents in the second quarter of fiscal 2012 compared with 52 cents in the year-ago period. However, after taking into account certain one-time items, adjusted EPS came in at 96 cents, missing the Zacks Consensus Estimate by a penny, but were ahead of the year-ago quarter’s adjusted EPS of 89 cents.

Revenues increased 1% year over year (same at constant exchange rates or CER) to $950 million, beating the Zacks Consensus Estimate of $944 million. On a regional basis, Europe and Asia-Pacific witnessed revenue growth of 1% and 17%, respectively, while Americas and Japan recorded respective declines of 2% and 6%.

Management expected revenues to remain flat year over year. However, reported revenues were slightly ahead of the company’s guidance due to strength in BioProduction and Ion Torrent businesses. The company witnessed some headwinds during the quarter, which though envisioned earlier, adversely impacted revenues due to decline in sales of SOLiD 5500 products ($30 million) and qPCR royalties ($8 million). Excluding these, revenues growth came in at 5%.

Segments

Life Technologies now books revenues under Research Consumables, Genetic Analysis and Applied Sciences. These three divisions recorded revenues of $403 million (up 1% year over year), $353 million (down 6%) and $194 million (up 15%), respectively, during the quarter.

Research Consumables witnessed growth in cell culture products, benchtop instruments and molecular biology consumables while Genetic Analysis experienced lower qPCR royalties and lower sales of SOLiD products, partially offset by the robust growth of Ion Torrent franchise. At Applied Sciences, sales bounced on the back of strong uptake of BioProduction and Forensics.

Margin Trends

Adjusted gross margin during the reported quarter expanded 120 basis points (bps) to 65.4% due to the rollout of currency hedges, lower SOLiD instrument sales, partially offset by lower royalty revenue. On a sequential basis, however, gross margin decreased by 120 bps resulting from increased sales of Ion Torrent and BioProduction products that carry a lower margin than the corporate average.

The company recorded operating expenses of $350 million, up 1.5% year over year due to a 4.4% rise in selling, general and administrative expenses resulting from expenses related to employee’s promotion and merit  (effective April) and continued investments in Greater China and Ion Torrent business. This was, however, partially offset by a 7% decline in research and development expenses. Despite the rise in operating expenses, Life Technologies recorded an 80 bps increase in adjusted operating margin to 28.6% due to a better gross margin.

Balance Sheet

Life Technologies exited the quarter with $303.4 million in the form of cash and short-term investments, up from $264 million at the end of the first quarter.

Free cash flow during the quarter was $232 million ($79 million at the end of the prior quarter) with $256 million of cash flow from operating activities and $24 million of capital expenditure. The company’s debt burden declined to $2.4 billion (including $100,000 short term debt) from $2.75 billion at the end of fiscal 2011. With return on invested capital of 9% at the end of the quarter, Life Technologies is targeting the 10% level by the end of 2012.

Guidance

Life Technologies now expects organic revenue growth for 2012 to be at the low end of the previously guided range of 2−4% due to slower growth in Europe. The company also lowered the top end of the original adjusted EPS guidance by 5 cents to $3.90−$4.00. Factors such as currency headwinds (3 cents per share), dilution from recently announced acquisitions of Navigenics and Pinpoint Genomics, and lower organic growth led to the lowering of the EPS outlook.   

The company, however, plans to offset a portion of these factors through lower discretionary spending and marginally lower tax rate. A continuous share buyback program will also benefit it by lowering the outstanding share count. Year-to-date 7.6 million shares were repurchased for approximately $335 million. The Board of Directors also announced a $750 million share repurchase program which augments the remaining authorization of $62 million under the current program.

Our Take

Economic uncertainties in Europe and currency were the major headwinds for Life Technologies during the reported quarter. These issues adversely impacted performance of many players.

Life Technologies enjoys a strong position in the life sciences market and we are impressed with the strong momentum of its Ion Torrent franchise. Besides, the company is working on expanding its portfolio and launched Ion AmpliSeq clinical research products for cancer and inherited diseaseduring the quarter. The recent acquisitions of Navigenics and Pinpoint Genomics would enable the company strengthen its diagnostics franchise.

However, the competitive landscape is tough with the presence of players such as Illumina (ILMN - Analyst Report), Thermo Fisher Scientific (TMO - Analyst Report) among others.

Over the long term, we have a Neutral recommendation on Life Technologies. The stock retains a Zacks #3 Rank (Hold) in the short term.

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