Luminex Lags on EPS and Revs, Guides Down

Luminex Corporation’s (LMNX) third-quarter 2013 adjusted earnings per share of a penny missed the Zacks Consensus Estimate of 12 cents per share by a whopping 91.7%. Adjusted earnings were also down from the year-ago level of 10 cents per share.

LMNX reported net income of $0.8 million or 2 cents per share, compared with net income of $1.7 million or 4 cents per share in the year-ago quarter. Molecular diagnostic-related reimbursement changes implemented by CMS have been adversely affecting the entire industry. This issue delayed an order from one of its largest assay customers.

Revenues inched up a mere 1% to $50.8 million, but were lower than the Zacks Consensus Estimate of $55 million. The year-over-year growth was mainly dampened by unexpected delay in completion of the aforementioned assay customer’s order.

Gross margin in the quarter plunged 940 basis points (bps) to 60.6% due to pricing pressure, decline in the percentage contribution of higher-margin Luminex Madison Assay sales, and continued investment in customer and technical support functions.

Selling, general and administrative (SG&A) expenses grew 10.3% to $21.5 million, mainly on account of assuming full charge of the molecular diagnostics channel. However, research and development (R&D) expenses dropped 7.5% to $10.3 million.

Reported operating expenses were up 10.4% to $35.0 million. As a result, LMNX reported operating loss of $4.2 million in the third quarter compared with an operating income of $3.4 million in the year-ago quarter.

Quarter in Details

On a disappointing note, Assay revenues declined 2% to $16.1 million, mainly due to the delay in customer order execution. We note that revenues dropped 25.8% on a sequential basis. Infectious disease sales comprised approximately 64% of total assay sales, with genetic testing representing 36% of the latter.

Revenues from the System segment dropped 11% to $7.6 million. The company shipped 280 multiplexing analyzers during the quarter, resulting in total life-to-date dispatches of 10,410 analyzers.

Consumable sales remained flat year over year at $12.8 million, as stable purchase volume from Luminex’s largest customer was partially offset by headwinds from LSR focused partners. Royalty and All Other revenues surged 17% and 18% to $9.0 million and $5.3 million, respectively.

Balance Sheet

Luminex ended third-quarter 2013 with cash and cash equivalents of $57.2 million, compared with $42.8 million at the end of 2012. Long-term debt was $0.8 million, down from $1.7 million at the end of 2012.

Guidance Lowered

Luminex lowered its 2013 revenue guidance to the range of $212−$217 million from the earlier guided range of $220−$230 million. The company remains cautious about the life science research market given that LSR focused partners have now agreed upon lower research budgets in the U.S. The current Zacks Consensus Estimate is pegged at $222 million, which lies above the guided range.

Our View

Following a strong second quarter, the sudden turn of events in the third quarter is a significant cause of concern. Although the company did warn of an adverse impact from the reimbursement changes in the U.S., the significant miss at both fronts demonstrates that the huge downfall was quite unexpected. However, management views this reimbursement issue as a transient phase and is confident that reimbursement rates for 2014 will eventually improve.

Luminex presently carries a Zacks Rank #4 (Sell). While we choose to avoid this stock due to regulatory issues in the underlying molecular research industry, other medical instrument companies such as CryoLife Inc. (CRY), Natus Medical Inc. (BABY) and Cynosure, Inc. (CYNO) are expected to do well. All these stocks carry a Zacks Rank #1 (Strong Buy).

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