Haemonetics Beats Estimates

Haemonetics Corporation (HAE - Analyst Report) reported an adjusted EPS of 86 cents in the third quarter of fiscal 2012, surpassing the Zacks Consensus Estimate of 81 cents. However, the adjusted EPS fell short of the comparable year-ago figure of 89 cents. Revenues increased 8% year over year (7% at constant exchange rates) to $191.2 million, higher than the Zacks Consensus Estimate of $185 million. Revenues from the domestic and international market increased 15.4% to $92.1 million and 2.2% to $99.1 million, respectively.

Revenue Details

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 15.4% (to $69 million) and 7.2% (to $56.5 million), respectively. Sales of hospital disposables were still weak, declining at a clip of 2.6% to $30.8 million. The sequential rise in hospital disposables sales however reflect the company’s progress on quality issues that were curbing growth. The company expects this business to return to the growth curve by the fourth quarter.

The balance revenue was derived from software solutions and equipment, which recorded respective sales of $15.8 million (down 4.4% year over year) and $18.9 million (up 17.8%).

Despite growth in Plasma revenues especially in the North American market, the business continues to be negatively affected by a change in collection practices in Japan. However, it is encouraging to note that Haemonetics has signed multi-year extensions of equipment and disposables supply agreements with several of its major plasma collection customers.  Banking on these contract extensions, 75% of Haemonetics’ current commercial plasma business is under contract through the third quarter of fiscal 2017 and over 90% through the third quarter of fiscal 2015.

Within blood bank disposables, revenues from platelets increased 8.1% ($44.4 million) while red cell disposables recorded a 4.2% growth to $12.2 million. Platelet revenues benefited from strong sales in emerging markets with red cell disposables experiencing increased demand for red cells despite clinical demand for blood remaining flat.

Barring OrthoPAT, which slipped 16.1% to $7.8 million, revenues from Surgical disposables and Diagnostics increased 1.3% to $17.3 million and 8.8% to $5.7 million, respectively. For the past few quarters, OrthoPAT revenues were impacted by the voluntary recall of pre-2002 devices. The company has already replaced 900 such devices and is on track to replenish the entire OrthoPAT fleet by the end of the current fiscal.

Margin Trends

Despite the growing top line, the company’s bottom line was affected by a challenging margin scenario. Gross margin (adjusted) declined by 270 basis points (bps) year over year to 50.2% during the quarter. An 8.6% rise in research and development expenses to $8.7 million coupled with an 8.2% higher selling, general and administrative expenses to $57.5 million led to a 280 bps decline in adjusted operating margin to 15.5%. Margins continue to remain under pressure due to the recall of OrthoPAT devices and the quality issues associated with the HS Core disposable in Europe.  

Outlook

Haemonetics reiterated its outlook for fiscal 2012. The company still expects revenue growth of 6−7% with EPS in a band of $3.00−$3.10. The operating income outlook has been lowered marginally by $2 million to $108−$110 million with 51−52% gross margin. Besides, free cash flow is expected to be more than $70 million.

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 current fiscal.

We are currently Neutral on Haemonetics. In the short term, the stock retains a Zacks #4 Rank (Sell).

Read the full analyst report on HAE