Masimo Corporation (MASI - Analyst Report), a leader in non-invasive monitoring technology for patient care, reported second quarter 2012 adjusted earnings per share of 27 cents, missing both the Zacks Consensus Estimate and the year-ago earnings of 28 cents per share.

Adjusted earnings exclude an income tax benefit of 3 cents from the prior year. Reported profit moved up 3.9% year over year to $17.7 million (or 30 cents per share).

Revenues

Sales for the quarter rose 12% year over year to $122.8 million, beating the Zacks Consensus Estimate of $120 million.

Product revenues were up 12% to $115.3 million in the reported quarter. Masimo’s global end-user business (85% of product revenue) increased 16% year over year, but revenues from Original Equipment Manufacturer (OEM) (15% of product revenue) were down 5%. Sales of Rainbow products increased 7% year over year to $9.7 million and included a 48% hike in total hemoglobin (SpHb) revenues.

During the quarter, Masimo shipped about 37,300 Masimo SET pulse oximetry and Masimo Rainbow SET pulse co-oximetry units, excluding hand-held sets, flat year-over-year. The company’s worldwide installed base grew 12% year over year to about 1,033,000 units at the end of the second quarter.

Margins

Gross margin fell to 66.3% from 68.7% in the year-ago quarter due to higher cost of sales. Operating margin declined to 18.5% from 20.2% a year ago.

Balance Sheet

The company exited the quarter with cash and cash equivalents of $121.5 million, down 3.3% year over year.

Recent Developments

On August 1, 2012, Masimo announced that it has taken over PHASEIN AB, of Sweden, which is a maker of multi-gas analysers, sidestream and mainstream capnography and capnometry offerings. The company views multi-gas measurements as a major opportunity. Masimo paid about $30.4 million of cash to acquire PHASEIN.

Guidance

Masimo updated its guidance for 2012. The company forecasts total sales of $494 million (earlier $486 million) comprising of product sales of $466 million (earlier $458 million) and $28 million of royalty (earlier $28 million).

Due to the dilutive impact of the PHASEIN acquisition and certain other assumptions, Masimo forecasts reported earnings per share of $1.11 for 2012 compared with $1.15 earlier.

Our Take

Masimo is a market leader in the pulse oximetry monitoring equipment industry. The company’s prospects are encouraging, given the sizeable global market opportunity, adoption of pulse oximetry in non-critical areas of the hospital and growing barriers to entry due to additional non-invasive parameters.

Shipments have been growing at a steady rate fueled by new contracts. However, the renewal of the royalty agreement with Covidien (COV - Analyst Report) provides little or no benefit due to lower rates. Further, competition is intense and Masimo partly depends upon its OEM partners for sales as well as royalty. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).