Haemonetics Disappoints in 2Q

Haemonetics Corporation (HAE - Analyst Report) reported an adjusted EPS of 72 cents in the second quarter of fiscal 2012, way below the Zacks Consensus Estimate of 77 cents and the year-ago quarter’s adjusted EPS of 80 cents. Headwinds that plagued the first quarter, such as the OrthoPAT devices recall and HS core bowl (to collect plasma for transfusion), continued to mar the current quarter performance. The company is working on remediation plans and expects to resolve the issues by the end of the current fiscal.

The company reported an 8% year-over-year growth in revenues to $179.4 million in the quarter, lower than the Zacks Consensus Estimate of $183 million. Revenues from the domestic and international market increased 9.7% to $86.3 million and 5.7% to $93.1 million, respectively.

Haemonetics earns about 82% of its revenues from the sale of disposables – plasma, blood bank and hospital disposables. Revenues from plasma and blood bank disposables recorded robust growth of 14% (to $64.4 million) and 5.5% (to $53.8 million), respectively. Sales of hospital disposables were marginally down to $29.2 million. The remaining revenues were derived from software solutions and equipment, which recorded sales of $17.2 million (up 6.7% year-over-year) and $14.8 million (up 4.4%), respectively.

Despite growth in Plasma revenues, the business continues to be negatively affected by a change in collection practices in Japan. Within blood bank disposables, revenues from platelets increased 6.2% ($42.2 million) while Red cell disposables recorded a 3.1% growth to $11.6 million. Platelet revenues benefited from strong sales in emerging markets with Red cell disposables experiencing increased demand for red cells.

Barring OrthoPAT, which slipped 11.9% to $7.3 million, revenues from Surgical disposables and Diagnostics increased 1.2% to $16.2 million and 21.8% to $5.6 million, respectively. As mentioned earlier, OrthoPAT revenues were impacted by the voluntary recall of pre-2002 devices.

Gross margin declined by 250 basis points (bps) to 50.1%. A 30.1% rise in research and development expenses coupled with an 18.6% higher selling, general and administrative expenses led to a huge 670 bps decline in operating margin to 9.5%.

Outlook

Haemonetics revised its outlook for fiscal 2012. The company now expects revenue growth of 6−7% (previous guidance of 4−6%) with EPS in a band of $3.00−$3.10 ($3.35−$3.45). The operating income outlook now stands in a range of $110−112 million ($124−$125 million).

The revised guidance takes into account the impact of quality related issues, which is expected to be around $13 million (37 cents per share) compared to the previous forecast of $10 million (25 cents per share).

Recommendation

Low global penetration and positive demand dynamics provide a positive long-term thesis for investing in the blood processing and supply chain management industry. However, Haemonetics continued to witness challenges with respect to quality issues in the reported quarter. Although the company is working on it, the recall would remain a headwind for the remainder of the year.

We are currently Neutral on Haemonetics.

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