Alere Q2 Earnings and Revenues Miss, Deteriorate Y/Y

Zacks

Alere Inc. (ALR) posted a 29.0% decline in 2014-second-quarter adjusted earnings per share to 44 cents from 62 cents in the same quarter of 2013. With this, adjusted earnings also missed the Zacks Consensus Estimate of 58 cents by a wide margin of 24.1%.

Adjusted earnings were impacted by several factors during the quarter, including costs associated with two product recalls, gross margin pressure due to weak results in higher margin geographies and increased spending within the company’s Connected Health unit.

However, Alere reported a narrower net loss of $55.0 million or 67 cents per share in the second quarter, versus a net loss of $65.9 million or 81 cents per share in the same quarter last year.

Revenues

Net revenues came in at $737.9 million, down 3.4% from $764.0 million in the year-ago quarter and missed the Zacks Consensus Estimate of $744 million by 0.8%. Meanwhile, adjusted net revenues declined 3.4% to $738.3 million from $764.6 million in the year-earlier quarter.

The downside in revenues was mainly led by weak U.S. influenza sales and wider-than-expected decline in U.S. healthcare utilization, which primarily impacted Alere’s U.S. infectious disease revenues.

Margins

Adjusted gross profit fell 11.5% to $357.0 million while adjusted gross margin contracted 440 basis points (bps) to 48.4% in the quarter. The deterioration in gross margin reflects weak results in higher margin geographies, lower U.S. influenza sales and costs associated with two product recalls during the quarter.

Adjusted operating income deteriorated 25.7% to $103.4 million while adjusted operating margin reduced 420 bps to 14.0% in the quarter under review.

Segment Results

Net revenues from Professional Diagnostics dipped 3.4% to $583.4 million and adjusted net revenues decreased 3.4% to $583.7 million. The company’s recent professional diagnostics acquisitions contributed $8.4 million to net revenues, partially offset by a $6.8 million reduction in revenues from the disposition of Spinreact in 2013. Adjusted operating income deteriorated 26.9% to $108.8 million while adjusted operating margin contracted 600 bps to 18.6% in the quarter.

Net revenues from Health Information Solutions fell 6.6% to $125.8 million due to a weak contracting season in the second half of 2013. However, Alere posted narrower operating losses (on a reported basis) during the quarter as compared to the prior-year quarter which can be accredited to lower operating expenses. Adjusted operating income, however, dipped 1.3% to $6.2 million while adjusted operating margin expanded 20 bps to 4.9%.

Net revenues from Consumer Diagnostics scaled up 13.0% to $28.8 million, reflecting continued success from the company’s joint venture with Procter & Gamble. Adjusted operating income spiked 24.3% to $4.8 million while adjusted operating margin increased 150 bps to 16.7%.

Financial Position

Alere exited the quarter with cash and cash equivalents of $398.8 million, up 10.2% from $361.9 million as of Dec 31, 2013. Total long-term debt and capital lease obligations decreased marginally by 0.9% to $3,807.3 million from $3,843.2 million as of Dec 31, 2013. As a result, the long-term debt-to-capitalization ratio declined by 10 bps to 64.8% from 64.9% as of Dec 31, 2013.

For the first six months ended Jun 30, 2014, operating cash flow increased 26.7% to $125.2 million from $98.6 million in the same period of 2013. Capital expenditures (net) declined 9.2% to $54.4 million from $60.0 million in the first half of 2013. This resulted in an 82.4% rise in free cash flow to $70.7 million.

Our Take

Alere reported dismal second-quarter results with both earnings and revenues missing our expectations and deteriorating year over year. Margins and segmental results were also disappointing in the quarter.

Alere continues to face unforeseen business challenges as well as macroeconomic headwinds that affect the industry in general. Despite growth across international markets, revenues during the quarter lacked luster.

Nevertheless, Alere continues to focus on international markets with strong potential, particularly in Africa and India. Given its focus on global market development in addition to its diverse product portfolio, Alere is positioned to perform well going forward.

Currently, Alere carries a Zacks Rank #2 (Buy). Other well-placed medical product stocks worth considering include Symmetry Medical, Inc. (SMA), Abaxis, Inc. (ABAX) and AtriCure, Inc. (ATRC). Symmetry Medical sports a Zacks Rank #1 (Strong Buy) while both Abaxis and AtriCure carry a Zacks Rank #2 (Buy).

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