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Haemonetics Corporation (HAE - Analyst Report) reported net income of $9.8 million or earnings of 38 cents per share in the first quarter of fiscal 2013, down 42% year over year. After taking into account certain one-time items, adjusted EPS came in at 55 cents, lagging both the Zacks Consensus Estimate of 71 cents and the year-ago quarter’s adjusted EPS of 65 cents.

Revenues increased 3.5% year over year (2.6% at constant exchange rates or CER) to $176.5 million, missing the Zacks Consensus Estimate of $180 million. Revenues from the domestic and international market increased 1.8% to $87.9 million and 5.2% to $88.6 million, respectively. Barring Japan where revenues declined 5% year over year, growth was recorded across the other regions – North America (1%), Asia (19%) and Europe (7%).

Revenue Details

Haemonetics earns about 82% of its revenues from the sale of disposables – plasma, blood center, and hospital disposables. Revenues from these segments stood at $63.9, (up 1.8% year over year), $49.3 million (unchanged) and $32.3 million (up 11%), respectively. The company’s hospital disposables business returned to the growth path in the last quarter.

The rest of the revenue was derived from software solutions and equipment, which recorded respective sales of $17.3 million (down 4.7% year over year) and $13.6 million (up 20.4%).

Maintaining the momentum from the last two quarters, Plasma revenues recorded mid-single digit growth in the North American market. During the last quarter, the company witnessed strong growth as the Japanese Red Cross ("JRC") increased its inventories of disposables by more than $1 million in anticipation of a system conversion. Consequently, growth in Japan during the reported quarter was weak, excluding which Plasma growth would have been 4%.

Haemonetics still expects 4−6% growth in plasma revenues in fiscal 2013, consistent with end-market growth rates for plasma derived biopharmaceuticals, despite lower business in Japan in the first quarter.

Within blood center disposables, revenues from platelets remained unchanged at $37.2 million, while red cell disposables inched up 1.7% to $12.1 million. Platelet revenues benefited from strong sales in emerging markets and were offset by $2.5 million due to the build-up of inventory related to JRC system conversion. Excluding this event, platelet growth was 7% in the first quarter. Despite clinical demand for blood remaining flat, the growth in red cell disposables was due to the company’s focus on penetration of the Impact accounts to advance blood management solutions. The company still expects its blood center business to grow 0−2% in fiscal 2013, with continued growth in both platelet and red cell disposables as the year progresses.

OrthoPAT recorded a 2.7% drop in revenues in the reported quarter to $7.5 million, an improvement from the 12% decline recorded in fiscal 2012. We are impressed to note that the impact of the voluntary recall of the pre-2002 devices has almost minimized and it was back on the growth path in both June and July.

Revenues from Surgical disposables and Diagnostics increased 16% to $18.3 million and 15.7% to $6.5 million, respectively. While the former benefited from the successful launch of the Cell Saver Elite, growth of the Diagnostics business resulted from the company's Impact initiative that benefited the TEG Thrombelastograph Hemostasis Analyzer business.  Strong sales of Cell Saver Elite and TEG equipments signify disposables revenue growth in the forthcoming period. During the reported quarter, TEG disposables sales increased 70% in China.  

The company expects its hospital business to grow 12−15% in fiscal 2013, which will be supported by growth in surgical and diagnostics disposables, and recovery of OrthoPAT disposables.

Margin Trends

Despite the growing top line, the company’s bottom line was affected by a challenging margin scenario. Gross margin declined by 90 basis points (bps) year over year to 51.1% during the quarter. In addition, increase in adjusted research and development (3% year over year to $8.9 million) and selling, general and administrative expenses (10.4% to $61.7 million) led to a 310 bps decline in the adjusted operating margin to 11.1%. The rise in operating expenses was due to investments in global growth initiatives, emerging markets and infrastructure development.  

Outlook

Haemonetics reiterated its organic revenue growth forecast of 4−6% for fiscal 2013. The company has completed the acquisition of blood collection, filtration and processing product lines of  Pall Corporation (PLL - Analyst Report), which is expected to generate revenues of approximately $135−$145 million for the remainder of fiscal 2013. As a result, total revenue is estimated to be in the range of $890−$915 million, up 23−26%. Adjusted EPS guidance of $3.30−$3.40 was reiterated, which includes the results of Pall Transfusion Medicine and Hemerus Medical.

The company expects to report gross margin in the range of 50−51% (previous guidance being 52−53%) with adjusted operating income of $127−$130 million ($117−$119 million). Besides, free cash flow is still expected to be around $85 million. The two acquisitions, excluding one-time costs, are expected to have a neutral impact on the bottom line in fiscal 2013 and be accretive in fiscal 2014 and beyond.

The company also issued its outlook for fiscal 2014 with organic revenue growth of 5-7%. The company expects to report revenues of over $1 billion during the said fiscal resulting in adjusted EPS of $3.90−$4.10 (representing 20% growth over fiscal 2013 expected EPS), higher than the current Zacks Consensus Estimate of $3.87.

Recommendation

Haemonetics began fiscal 2013 on a disappointing note with both revenues and EPS, lagging the Zacks Consensus Estimates. This was due to some headwinds as discussed earlier along with higher operating expenses. The stock retains a Zacks #4 Rank (Sell) in the short term.

However, low global penetration and positive demand dynamics provide an encouraging long-term thesis for investing in the blood processing and supply chain management industry. We are encouraged by the company’s recent acquisitions, which are expected to further strengthen its foothold in the whole blood collection market. Besides, gradual improvement of the plasma business should further aid the growth of the company.

Over the long term, we have a Neutral recommendation on Haemonetics.

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