Haemonetics Corporation (HAE) reported adjusted earnings of 47 cents per share in the second quarter of fiscal 2015, which decreased a significant 28.8% from the year-ago level. However, adjusted earnings beat the Zacks Consensus Estimate by 2 cents. On a reported basis, Haemonetics posted earnings per share of 14 cents, down 56.3% year over year.
Total Revenue
Revenues dropped 3.5% year over year (down 2.6% at constant exchange rate or CER) to $227.6 million. The top line also lagged the Zacks Consensus Estimate of $229 million.
Revenues by Product Categories
Under the Disposables product category (85.4% of revenues) comprising Plasma, Blood center and Hospital Disposables, Haemonetics reported revenues of $194.2 million, down 4.7% from the year-ago quarter. This decline is attributable to the dismal performance of Blood center disposables (down 14.5%) and flat hospital disposables, which outweighed the growth of Plasma disposables (6.1%).
Software Solutions revenues grossed $18.1 million, up 6% year over year, attributable to strong BloodTrack orders during the quarter. On the other hand, Equipment and Other revenues were $15.2 million, up 1.8% year over year, driven by increase in purchased and placed devices.
Margins
Haemonetics reported a 350 basis points (bps) contraction in adjusted gross margin to 48.8% during the quarter. Despite productivity programs including Value Creation & Capture
(VCC) initiatives, lower U.S. whole blood disposables pricing, lower volume in certain manufacturing facilities, product mix and currency accounted for the decline.
Adjusted operating income declined 14.1% to $35.1 million. Consequently, adjusted operating margin also dropped 540 bps to 15.4%.
Financial Position
Haemonetics exited the quarter with cash and cash equivalents of $129.9 million, down from $192.5 million as of Mar 29, 2014. Capital expenditure in the second quarter was $33.8 million, significantly up from the year-ago equivalent of $15.1 million. Haemonetics reported free cash flow (before transformation, restructuring costs and VCC capital expenditures) of $27.4 million in the reported quarter, down from $34.9 million a year ago.
Fiscal 2015 Outlook
Haemonetics reaffirmed its fiscal 2015 outlook. The company continues to expect adjusted EPS in the range of $1.85–$1.95. The Zacks Consensus Estimate of $1.90 lies at the midpoint of the guided range.
Total revenue for the fiscal is still estimated to decline in the range of 0–2% on a year-over-year basis. In addition, $40–$50 million of revenue growth from identified growth drivers is expected to be more than offset by $50–$55 million of revenue headwind from net volume and pricing declines in the U.S. blood center business and weakness in the Japanese yen. The Zacks Consensus Estimate of $932 million lies within the projected growth guidance range.
Haemonetics continues to project adjusted gross margin of 50% with adjusted operating income of $140−$150 million. However, free cash flow guidance has been reduced to $100–$110 million adjusting for funding restructuring and capital investment for transformation activities, as against the earlier guided $120–$130 million.
Prelim Fiscal 2016 Outlook
Haemonetics also reiterated its preliminary outlook for fiscal 2016. The company continues to expect to gain traction and return to mid-single-digit revenue growth and double-digit growth in adjusted EPS. The company also expects double-digit growth in adjusted operating income in fiscal 2016. The VCC investments are still expected to be completed in fiscal 2016 with a nominal amount of $10–$15 million in investments likely to be made that year.
Our Take
We are disappointed with Haemonetics’ second quarter fiscal 2015 performance. Although earnings topped the Zacks Consensus Estimate, it demonstrated a huge slash year over year. With the dismal performance of Blood center disposables, the top line too failed to meet our expectation. In addition, the hospital disposables business remained flat year over year as growth in TEG offset declines in surgical and orthopedics cell salvage.
However, the company’s plasma disposables continue to be a profitable business, with particular strength in North America. Management firmly expects strong growth to continue in this business segment owing to current and anticipated trends in surgical ongoing OrthoPAT market headwinds, and constant strong growth observed in TEG.
Haemonetics continues to consider fiscal 2015 a transition year for the company. It expects growth in Plasma, TEG and emerging markets to be offset by three major factors: unfavorable currency trend; the weak performance of the U.S blood collection market and fiscal 2014 bonus funding program that is expected to escalate the operating costs through the remainder of fiscal 2015. We believe Haemonetics has significant potential to overcome existing difficulties and achieve improved financials in the next fiscal.
Zacks Rank
Currently, Haemonetics has a Zacks Rank #3 (Hold). Some better-ranked stocks that warrant a look in the medical products industry are Abaxis, Inc. (ABAX), Boston Scientific Corporation (BSX) and ICU Medical, Inc. (ICUI). All the three stocks hold a Zacks Rank #2 (Buy).
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