CMD Cantel Medical Corp

Haemonetics Corporation (HAE) reported net income of $9.9 million or earnings of 19 cents per share in the third quarter of fiscal 2013, down 46% and 47% year over year, respectively. However, after taking into account certain one-time items, adjusted earnings came in at 50 cents per share, surpassing both the Zacks Consensus Estimate of 47 cents and the year-ago quarter’s adjusted earnings of 43 cents per share.

Revenues increased 29% year over year (up 31% at CER) to $247.4 million, missing the Zacks Consensus Estimate of $252 million. After taking into account the recently acquired whole blood business from Pall Corporation (PLL), the company recorded organic net revenue of $192.5 million, up 1% year over year.

Revenues from the US and the international market increased 36.1% and 23.2% to $125.4 million and $112.0 million, respectively. Barring North Americaand Japan,where organic revenues declined a respective 1% and 2% year over year, growth was recorded across the other regions namely, Asia (11%) and Europe(2%).

Revenue Details

Haemonetics earns about 86% of its revenues from the sale of disposables – plasma, blood center, and hospital disposables. Revenues from these segments stood at $68.1 million, (down 1.4% year over year), $111.8 million (up 97.7%) and $32.8 million (up 6.4%), respectively. The rest of the revenue was derived from software solutions and equipment, which recorded respective sales of $16.0 million (up 1% year over year) and $18.7 million (down 1.1%).

Haemonetics expects its plasma business growth to be at the low end of its earlier projection of 4−6% growth in fiscal 2013. Within blood center disposables, revenues from platelets disposables inched up 2% to $45.1 million while red cell disposables were down 3% at $11.8 million. Subsequent to the completion of the acquisition, whole blood was inducted in the company’s portfolio in the earlier quarter and recorded $54.9 million of sales in the reported quarter. The company restated that this business is expected to gross $135−$145 million in fiscal 2013.

Platelet revenues continued to benefit from strong sales in emerging markets. The decline in red cell disposables was a result of the company’s focus on penetration of the Impact accounts to advance blood management solutions. The company expects its blood center business to remain flat organically in fiscal 2013 (0−2% expected previously).

OrthoPAT (orthopedic perioperative autotransfusion system)was down 9% year over year at $7.1 million. However, the company expects the impending launch of its new OrthoPAT Advance system in thefirst half of fiscal 2014 followed by its recent 510(k) approval will start driving growth in OrthoPAT in fiscal 2014.

Revenues from Surgical disposables and Diagnostics increased 9% to $56.0 million and 19% to $6.8 million, respectively. While the former benefited from the 6^th consecutive quarter of growth from 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 growth in disposables revenue in the forthcoming quarter. During the reported quarter, TEG disposables sales increased over 50% in China.

The company expects its hospital business to grow 11% (versus 12−15% expected previously) in fiscal 2013, which will be supported by growth in surgical, diagnostics and disposables, mostly in emerging markets.

Margin Trends

The company reported a 29.9% increase in adjusted gross profit to $124.6 million accompanied by 20 basis points (bps) expansion in gross margin to 50.4% during the quarter. Margin improvement in the core business offset the impact of revenue mix toward low-margin whole blood disposables.

Despite an increase in adjusted operating expenses (up 26.4% to $83.7 million), the adjusted operating margin expanded 100 bps to 16.5%. The rise in operating expenses was due to inclusion of $14 million in the new whole blood collection business andinvestments in global growth initiatives, emerging markets and infrastructure development.

Shareholder Rewards

Haemonetics completed its earlier approved a two-for-one split in the form of a 100% stock dividend. On a post-split basis, the company continued with its stock buyback program and repurchased 393.100 shares for $40.24 per share. The board of directors had previously approved the repurchase of up to $50 million of shares during the remainder of fiscal 2013.

Outlook

Haemonetics now expects its organic revenue to grow 4%, at the low end of its earlier growth forecast of 4−6% for fiscal 2013, resulting in total revenue of $888–$898 million(earlier guidance was $890−$915 million), up 22−23% (23−26%) year over year. Adjusted EPS guidance of $1.65–$1.70was reiterated.

The company still expects to report adjusted gross margin in the range of 50−51% with adjusted operating income of $127−$130 million. The outlook for gross margin takes into account the low-margin whole blood product line. Besides, free cash flow is still expected to be around $80 million ($80 million).

The company also reiterated its outlook for fiscal 2014, with organic revenue growth of 5–7% (more than $1 billion of total revenue) resulting in adjusted EPS of $1.95–$2.05(representing 20% growth over the expected EPS for fiscal 2013.

Recommendation

Haemonetics reported a mixed quarter with earnings beating the Zacks Consensus Estimate and revenues falling short. The improvement in margins during the quarter was encouraging. Low global penetration and positive demand dynamics provide an encouraging long-term thesis for investing in the blood processing and supply chain management industry.

The stock holds a Zacks Rank #2 (Buy). Other medical device stocks worth a look are Cantel Medical Corp. (CMN) and ResMed Inc. (RMD). Both the stocks carry a Zacks Rank #1 (Strong Buy).

 
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