PerkinElmer Q2 Earnings Meet but Revenues Miss Estimates - Analyst Blog

PerkinElmer Inc. (PKI) posted adjusted earnings per share of 59 cents in the second quarter of 2014 ended Jun 29, 2014, up from the the year-ago level of 51 cents by 15.7%. Adjusted earnings were in line with the Zacks Consensus Estimate.

Reported earnings escalated 90.7% to $52.0 million from $27.3 million in the second quarter of 2013. On a per share basis, earnings came in at 46 cents, up 91.7% from the year-ago level of 24 cents.

Revenues in the quarter went up 2.9% to $556.2 million but fell short of the Zacks Consensus Estimate of $571 million. Including purchase accounting adjustments, total revenue increased 2.2% to $556.6 million in the quarter.

Margins and Expenses

Adjusted gross profit rose marginally by 1% to $260.7 million from $258.0 million in the prior-year quarter. However, adjusted gross margin declined 60 basis points (bps) to 46.8% in the quarter.

Adjusted operating earnings increased 9.3% to $93.3 million in the quarter from $85.4 million in the second quarter of 2013. Adjusted operating margin expanded 110 bps to 16.8% from 15.7% a year ago.

Adjusted selling, general and administrative (SG&A) expenses declined marginally by 0.7% to $137.2 million in the second quarter. Adjusted research and development (R&D) expenses declined 12% to $30.2 million in the quarter. SG&A expenses and R&D expenses, as a percentage of sales, deteriorated 70 bps and 90 bps respectively, thus contributing to operating margin improvement.

Segment Results

Revenues at the Human Health segment hiked 3.4% to $307.5 million from $297.3 million a year ago. Organic revenues grew 1% year over year. Adjusted operating income spiked 9.6% to $70.8 million compared with $64.6 million in the same quarter a year ago. Adjusted operating margin improved 150 bps to 23% in the quarter primarily on the back of sales mix, synergies from productivity initiatives implemented in the previous year and restructuring activities.

Within Human Health, diagnostics business contributed significantly to organic revenues growth, primarily driven by demand for the company's newborn screening and infectious disease solutions and strength in emerging markets. Medical imaging revenues also posted high single-digit growth, buoyed by strength in industrial applications and strong demand for the company's new wireless cassette detector.

Revenues from Environmental Health inched up 2.2% to $248.7 million from $243.4 million in the same quarter a year ago. Organic revenues rose 2% during the quarter driven by continued strength in the service offerings, which increased by mid-single digits.

Adjusted operating income rose 7.8% to $32.9 million from $30.5 million in the second quarter of 2013. Adjusted operating margin expanded 70 bps to 13.2% in the quarter led by savings from prior-year restructuring activities and improved operating expense controls.

Financial Position

PKI had cash and cash equivalents of $205.3 million as of Jun 29, 2014, highlighting an increase of 18.5% from $173.2 million as of Dec 29, 2013. Long-term debt declined approximately 4.1% to $894.3 million as of Jun 29, 2014 from $932.1 million as of Dec 29, 2013. Consequently, the debt-to-capitalization ratio decreased 150 bps to 30.3% from 31.8% a year ago.

In the first six months ended Jun 29, 2014, operating cash flow more than tripled to $122.6 million from $39.9 million in the same period a year ago. Capital expenditures fell 36.8% to $14.4 million from $22.9 million in the first half of 2013.

Guidance

For the third quarter of 2014, PKI expects adjusted earnings per share in the range of 55 to 57 cents. The current Zacks Consensus Estimate of 59 cents lies above the guided range. Meanwhile, adjusted revenues are expected in the range of $545 to $555 million. The current Zacks Consensus Estimate of $555 million coincides with the higher end of the guided range.

For 2014, PKI lowered its reported earnings per share guidance to a range of $1.89 to $1.93 from the prior range of $1.91 to $1.95. On an adjusted basis, PKI reiterated its earnings per share guidance in the range of $2.42 to $2.46, which represents a rise of 15 to 17% over 2013. The current Zacks Consensus Estimate of $2.45 lies within the guided range.

For 2014, PKI forecasts organic revenue to increase in the mid-single digit range relative to 2013.

Our Take

PKI's second-quarter earnings met our expectations but revenues lagged our estimates. Though the company reaffirmed its adjusted earnings per share guidance for 2014, we remain cautious regarding the lowered reported earnings guidance for the year.

PKI witnessed several timing-related issues in China as well as a weaker-than-expected global academic demand during the quarter. The company also continues to face flat growth in Europe.

Nevertheless, PKI reported strong operating results for the second quarter and continues to execute well across several product lines aided by rebounding markets and cost containment efforts. The company ended the quarter with a healthy financial position as reflected by an improved cash balance as well as decreased debt-to-capitalization ratio. With an increased focus on product innovations and improving end market trends, PKI has a potential upside going forward.

Currently, PKI carries a Zacks Rank #4 (Sell). Better-ranked stocks in the medical instruments sector include Accuray Inc. (ARAY), Heartware International Inc. (HTWR) and Bruker Corp. (BRKR). While Accuray and Heartware International sport a Zacks Rank #1 (Strong Buy), Bruker carries a Zacks Rank #2 (Buy).