Note to Reader: All new or revised material since the last report ishighlighted.
Reason for Report: Minor changes in estimates Prev. Ed. May 29, 2007
Recent Events
On May 23, 2007, HAE held its Investors meting where management reiterated its FY08 guidance and provided several data points to demonstrate where the company currently stands relative to its guided goals.
On May2, 2007, HAE announced 4Q07 and FY07 earnings results. Highlights are as follows:
- Total revenue was $116.9million and $449.6 million, up 5.9% y/yand 7.1% y/y, in 4Q07 and FY07 respectively.
- EPS was $0.72 and $1.78 respectively in 4Q07 and FY07 respectively.
Overview
Investors in HAE should make an investment decision only after an assessment of the following pertinent issues as highlighted by analysts.
Key Positive Arguments / Key Negative ArgumentsHAE is a pioneer and market leader in developing and manufacturing technology that helps ensure a safe and adequate blood supply. / HAE sells products and services to highly regulated markets. Regulatory bodies may impose regulations or issue guidelines that may affect the desirability of HAE’s products.
New product launches should drive internal sales leading to double-digit growth rates. / Price competition, primarily in manual collection, or market share losses, will likely make the company’s goals less attainable.
The price of a red blood cell unit to hospitals has increased considerably over the past few years and the use of HAE’s automated aphaeresis systems allows for collection of two units of blood from a single donor, rather than a single unit in a manual system, maximizing profitability and minimizing cost. / Acquisitions, which are a part of company strategy,might not be integrated successfully or might result in unrealized potential. Therefore, the greatest risk for HAE is executing its strategy and setting appropriate expectations.
The use of Arryx separation technology could provide HAE a competitive advantage in improved patient safety, greater automation and reduced cost compared to the use of individual collection and blood cleaning systems. / Japan is HAE’s single largest international market, and the company holds roughly a 70% market share in the Blood Bank segment there. If the company loses that market share, it could lead to lower earnings.
Demand for red cells continues to increase as supply continues to tighten.
Haemonetics Corp. (HAE) is the leading supplier of equipment and disposables to the automated blood collection industry, primarily the surgical, plasma, platelet and red cell markets. It engages in the design, manufacture, and marketing of automated systems and single-use disposables for the collection, processing, and surgical salvage of donor and patient blood. Its products include PCS brand systems, which automate the collection of plasma from donors; MCS, which automates the collection of platelets; and ACP that automates the process used to freeze, thaw, and wash red blood cells. The company has a strong international presence, with greater than 60% of sales outside the U.S. The company offers its products primarily through its direct sales force, independent distributors, and agents principally in the United States (U.S), Europe, Japan and other parts of Asia. Headquartered in Braintree, MA, the company has manufacturing facilities for its disposables in the U.S., Scotland and Japan. Additional information is available online at
NOTE: The company’s fiscal year ends onMarch 31; all fiscal year references are different from the calendar year.
Revenue
Total revenue totaled $116.9 million in 4Q07 and $449.6 million in FY07, up 5.9% y/y and 7.1 % y/y, respectively. The Zacks Digest average total revenue was $117.0 million and $449.9 million, up 6.0% y/y and 7.2% y/y, in 4Q07 and FY07, respectively.
One of the main highlights of the quarter was stabilization in the Japanese market where the company finally saw y/y growth, following several consecutive quarters of declines. 4Q07 was a solid quarter where revenue growth largely met expectations.
HAE derives its revenue from three divisions: Disposables, Equipment, Miscellaneous and Service.
Disposables:
The Disposablessegment includes blood donor and surgical patient products. Donor products include systems to collect plasma, platelets, and red cells from blood donors, and are primarily marketed to blood collectors comprised of both for-profit plasma collectors and not-for-profit blood banks. Patient products include systems to collect (during and after surgery), wash and filter unwanted substances from the blood, and preparing it for reinfusion to the surgical patient. These patient products are marketed to hospitals and hospital service providers.
Donor: Total Donor Product line revenue grew 1% to $74.2 million in 4Q07. In FY07, total Donor Product line revenue grew 6.2% to $296.6 million in FY07. The Zacks Digest average sales in this segment were $74.2 million and $296.7 million in 4Q07 and FY07, up 1.0% y/y and 6.2% y/y, respectively.
Plasma derived products treat a variety of illnesses and hereditary disorders such as hemophilia; red cells treat trauma patients or patients undergoing major surgeries involving high blood loss such as open heart surgery or organ transplant, and, platelets treat cancer patients undergoing chemotherapy. Automated plasma collection is a safe and cost-effective improvement to manual (non-automated) plasma collection which is time-consuming, labor-intensive, produces relatively poor yields, and poses risks to donors. Currently the majority of plasma collections worldwide are automated collections.
Worldwide Plasma Disposables revenue was $127.0 million in FY07, up 16.4% y/y. U.S. Plasma Disposables revenue was $72 million, up 30.4% y/y, in FY07. Plasma Disposable sales benefited from continued growth in U.S. and European plasma collections. The Zacks Digest average total revenue in this segment was $30.9 million and $127.1 million, up 8.6% y/y and 16.5% y/y, in 4Q07 and FY07, respectively. HAE continued to benefit from an acute shortage of capacity in the plasma market in the U.S., and the Japanese market seems to have stabilized, but did not grow materially.
Management believes the plasma market has exciting growth prospects for the next few years. The company has strong market share, particularly in the U.S., and is well positioned to capitalize on the collection growth being driven by demand for plasma-derived pharmaceuticals. The company anticipates placing 1,500 incremental devices globally to meet the collection demand in FY08.
HAE announced a new contract with Talecris Plasma Resources in 4Q07, which would incrementally benefit HAE over the next 18 months. Talecris is planning to significantly expand the number of collections centers, and the size of the new opportunity to HAE is estimated to be about $60 million.
Blood Bank products are used by blood collectors to collect the platelet component of a donor’s whole blood. Platelets are transfused to cancer patients whose platelets have been depleted as a result of chemotherapy. The MCS line of products allows the collection of a sufficient number of platelets from only one donor to produce one or two therapeutic doses. ACP cell processing systems are used in freezing, thawing and washing of red cells, which enables blood collectors to better manage their red cell inventories. Intravenous solutions are used with the blood processing technology, and include generic drugs and other custom drug products.
Blood Bank performed in line with most firms’ expectations. The platelet market, while not in an apparent decline, has been a source of volatility for HAE in the recent quarters, primarily as the result of acompetitor (Terumo) regaining some of the market share it lost to Haemonetics. HAE has now leveled at approximately 70% marketshare. Lookingforward, HAE’s reputation for high quality plateletsprovides reasonable assurance that maintaining share is likely. The Zacks Digest average revenue in this segment was $32.1 million and $126.1 million, down 5.4% y/y and 4.8% y/y in 4Q07 and FY07 respectively.
Red Cell products are used to automate the collection of red cells from blood donors with protocols that allow for the collection of two units of red cells, a unit of red cells and a unit of plasma, or a unit of red cells and a unit of platelets. The systems improve the blood collector’s operational efficiency by increasing the volume of blood components collected per donation event and number of red cells than the traditional (non-automated) collection method, and helps blood systems address red cell shortages.
Worldwide Red Cell Disposables revenue was $43.0 million for FY07, up 14.7% y/y. U.S. Red Cell Disposables revenue was $36 million, up 18.6% y/y in FY07. Red cell disposables revenue benefited from unit growth in both the U.S. and Europe.
Late in 4Q07, HAE received FDA clearance of the Cymbal blood collection system, its next generation red cell technology, to collect two units of red cells from one donor. The Cymbal system, which is about half the size of HAE's current red cell technology and is battery operated, is specifically designed to meet the needs of mobile blood collections, which represent over 60% of all blood donations globally. The Cymbal system is currently being evaluated at customer sites in the U.S. and Europe.
In FY07, HAE signed a multi-year agreement with the American Red Cross to continue to penetrate the large, untapped whole blood collection market by converting manual, whole blood donations to HAE's automated red cell systems.
Patient: Total Patient Product line revenue increased 13.2% to $25.6 million in 4Q07, and increased 10.6% to $97.1 million in FY07. In the latter part of FY07 and into FY08, HAE is expected to benefit from salesof new products: CardioPAT, SmartSuctionHARMONY, SmartSuctionSOLO and itsfilter bags.
Surgical blood salvage, also known as auto-transfusion, involves the collection of a patient’s own blood during and after surgery, for reinfusion to that patient. It comprises of Cell Saver brand systems targeted for higher blood loss procedures such as cardiovascular surgeries. The cardioPAT brand system is the newest product in this segment, targeted at beating heart and other cardiovascular surgeries that result in bleeding during and after surgery.
Surgical disposables revenuewas $17.3 million in the quarter, up 3.9%, and FY07 surgical disposables revenue was $66.6 million in the quarter, up 1%y/y.
OrthoPAT brand system is targeted for lower blood loss orthopedic surgeries. The company reported strong progress in its transition to direct U.S. sales of the OrthoPAT system. Worldwide OrthoPAT Disposables revenue was $31 million in FY07, up 39.6% y/y. U.S. OrthoPAT annual Disposables revenue grew 60.7% y/y in FY07. OrthoPAT revenue growth was driven by U.S. price improvement and new customers. In 4Q07, sales gained momentum with sequential unit growth of more than 10%. HAE continues to see significant opportunity for growth at existing accounts with low penetration. The Zacks Digest average total revenue in this segment was $8.4 million and $30.2 million, up 40.0% y/y and 36.7% y/y, in 4Q07 and FY07, respectively.
Equipment
Equipment incorporates centrifugal drives, ultrasonic sensors, optical systems, pneumatics and various electromechanical assemblies. The Equipment is programmed to control the blood processing procedure and assure patient and donor safety. In other products, Equipment sales were $7 million, down 2.6%, in 4Q07 and $22.2 million in FY07, up 13.7% y/y.
Miscellaneous & Service
Miscellaneous and Service revenue includes revenue generated from equipment repairs performed under preventive maintenance contracts or emergency service billings, as well as revenue from software sales. In FY07, worldwide software and services revenue grew to $34 million, up 25.4% y/y. U.S. software and services sales revenue was $26 million, up 44% y/y in FY07. Software and services sales growth has been driven largely by HAE' 5D Information Management division, and was bolstered in 4Q07 with the addition of the IDM product portfolio. The Zacks Digest average revenue in this segment was $10.0 million and $34.0 million, up 37.4% y/yand 25.1%,y/y in 4Q07 and FY07, respectively.
In FY07, HAE made significant progress in its efforts to expand the business of the company for an improved growth profile. The highlights from FY07 are:
1) A restructuring of its Japanese and other Asian businesses
2) An agreement with Canadian Blood Services to convert its plateletcollection systems to HAE’s technology from a competitivetechnology.
3) The acquisition of Information Data Management, Inc. (IDM) tostrengthen HAE's position in management information products and services for blood collection and laboratory processes. IDM is a leading developer of software for blood collection agencies.
4) Successful launch of an enterprise resource planning system (ERP)
The company expects revenue to grow between 7% and 9% from $449.6 million in FY07, amounting to a range of $481.1 million to $490.1 million in FY08. Plasma Disposables sales are expected to grow between 10% and 13%, while Red Cell Disposables are expected to grow between 15% and 20%, with software services to grow between 18-22% and Blood Bank being flat. The company expects OrthoPAT revenues to increase by 10-15% in fiscal 2008, primarily driven by unit growth. CardioPAT and SmartSuction, a surgical fluid clearing product, are expected to contribute roughly $4 million to revenue in FY08.
Provided below is a summary of total sales for the quarter, as compiled by the Zacks Digest:
Total Rev. ($ in m) / 2006A / 4Q07A / 2007A / 1Q08E / 2Q08E / 3Q08E / 4Q08E / 2008EDigest High / $419.7 / $117.0 / $450.0 / $120.0 / $120.0 / $124.0 / $128.0 / $491.0
Digest low / $419.7 / $116.9 / $449.6 / $119.0 / $117.2 / $123.2 / $126.7 / $486.0
Digest Average / $419.7 / $117.0 / $449.9 / $119.3↔ / $118.4↔ / $123.7↔ / $127.6↔ / $489.3↑
Provided below is a summary of segment revenues as compiled by Zacks Digest:
Segments ($ in millions) / FY05A / FY06A / FY07A / FY08E / FY09EDisposables / $342.7 / $366.8 / 393.7 / $424.4↔ / $463.4↔
Equipment / $20.7 / $25.8 / $22.1 / $22.5↔ / $23.2↔
Miscellaneous & Service / $20.2 / $27.2 / $34.0 / $40.0↔ / $47.0↔
The analysts’ quarterly projections are included in the accompanying spreadsheet on HAE.
Margins
HAE’s relevant margins are its gross margin and its operating margin. Gross margin declined to 50.0% in 4Q07 from 53.1% in 4Q06, and operating margin decreased to 20.0% in 4Q07 from 21.6% in 4Q06. In FY07, gross margin declined to 50.6% from 52.5% in FY06, and operating margin increased 50 bps to 17.8% from 17.3% in FY06. The Zacks Digest average gross margin in 4Q07 and FY07 was 49.7% and 50.6%, down 0.7% y/y and up 3.3% y/y, respectively. The Zacks Digest average operating margin in 4Q07 and FY07 was 17.4% and 15.4%, down 14.8% y/y and 29.9% y/y, respectively.
SG&A expense, as a percentage of sales, decreased 230 bps to 24.4% in 4Q07. R&D expense increased, as a percentage of sales, to 5.5% from 4.7% in the quarter. In FY07, SG&A expense, as a percentage of sales, decreased 140 bps to 27.5%, and R&D expense decreased, as a percentage of sales, to 5.2% from 6.3%.
HAE expects gross margins to improve approximately 51% y/y, and operating income to improve approximately 10% y/y in FY08. Despite strong leverage in 4Q07, SG&A is expected to increase as a percentage of revenue in FY08. Essentially, the company plans to spend about 65% of gross profit increases versus about 50% historically. The increased spending reflects the ongoing investment in ERP as well as the Arryx and IDM acquisitions. It seems additional investment in OrthoPAT sales infrastructure will be limited in fiscal 2008, and management is comfortable with the current headcount.
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 4Q07A / 2007A / 1Q08E / 2Q08E / 3Q08E / 4Q08E / 2008EGross / 49.7% / 50.6% / 51.0%↔ / 50.3%↔ / 51.1%↔ / 51.9%↔ / 51.0%↔
Operating / 17.4% / 15.4% / 15.3%↔ / 15.0%↔ / 16.0%↔ / 16.9%↔ / 15.8%↔
Net / 14.4% / 12.2% / 12.3%↔ / 12.2%↔ / 12.8%↔ / 13.2%↔ / 12.3%↔
Please refer to the HAE Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings per Share
HAE reported FY07 GAAP EPS of $1.78, versus $2.49 in FY06. GAAP financial results, to which the company is comparing, include non-operating litigation related benefits of $0.14 per share in FY07. The Zacks Digest average FY07 pro forma EPS was $1.91, down 23.9% y/y.
In4Q07, the company reported GAAP EPS of $0.72, up 18.3% over 4Q06. 4Q07 adjusted earnings per sharewas $0.65, up 6.9% y/y. The Zacks Digest average 4Q07 proforma EPS was $0.58, down 6.5% y/y.
For FY08, the company provided GAAP earnings per share guidance of $1.91-$2.01, including the impact of restructuring costs. The company also provided adjusted EPS guidance of $2.02-$2.12 for FY08. FY08 guidance is adjusted to exclude approximately $4-5 million, or approximately $0.11 per share, of anticipated costs to restructure Haemonetic's European business. FY08 guidance includes stock compensation expense of $0.29 per share, which compares to $0.26 per share of stock compensation expense in FY07. Excluding stock compensation expense, the company provided FY08 guidance of $2.31-$2.41.
2006A / 4Q07A / 2007A / 1Q08E / 2Q08E / 3Q08E / 4Q08E / 2008EDigest High / $2.21 / $0.58 / $1.91 / $0.50 / $0.50 / $0.54 / $0.65 / $2.10
Digest Low / $2.17 / $0.58 / $1.91 / $0.47 / $0.45 / $0.52 / $0.57 / $2.08
Digest Avg. / $2.20 / $0.58 / $1.91 / $0.49↓ / $0.47↓ / $0.53↔ / $0.59↑ / $2.09↑
Mgmt Guidance
(Before FAS 123) / $2.31-$2.41
Mgmt Guidance
(After FAS 123) / $2.02-$2.12
Mgmt GAAP Guidance / $1.91-$2.01
Please refer to the Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Rating DistributionPositive / 50.0%
Neutral / 50.0%
Negative / 0.0%
Avg. Target Price / $55.00↑
The average Zacks Digest target price is $55.00↑(5.3% upfrom the current price). Only two firms have provided price targets. The firm giving lowest target price of $47 (Zacks Investment Research) has assigned a Hold rating on the stock while the firm providing highest target price of $63 (Sidoti) has assigned a Buy rating on the stock.
Of the brokerage firms assigning ratings to HAE, 2 have assigned neutral ratings, while2 firmshaveassignedpositive ratings. It is to be noted that none of the brokerage firms has assigned a negative rating to the stock.
Please refer to the Zacks Research Digest spreadsheet on HAE for further details on valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
HAE ended FY07 with a cash balance of $229 million, and $29 million of short and long term debt. During 2007, the company completed a share repurchase program, under which the company spent $40 million to repurchase 853,000 shares of its common stock. HAE generated $42 million in free cash flow for FY07, and reduced days sales outstanding by six days from 4Q06.
The company also announced plans to initiate a new $75 million share repurchase program, which will begin in the near future.
For FY08, the company expects to generate over $30 million of free cash flow. The company continues to make investments in the business, including ERP and plant expansion.
At the Investors meting, HAE highlighted the progress made by the company after Arryx acquisition and discussed the possibility of deploying substantial cash balance of $230 million to make further acquisitions.
On April 3, 2007, HAE announced it plans to consolidate its customer support functions in Europe into its European headquarters in Signy, Switzerland. The cost related to such consolidation is estimated to be around $4 million to $5 million.
Potentially Severe Problems
Thereare none other than those discussed in other sections of this report.
Long-Term Growth