Thoratec Q2 Earnings Fall and Lag Estimates; Lowers View

Thoratec Corporation (THOR) posted a 34.1% fall in adjusted earnings per share to 29 cents for the second quarter of the year from 44 cents in the year-ago quarter and lagged the Zacks Consensus Estimate of 31 cents. Adjusted net earnings dipped 24.1% to $19.5 million from $25.7 million in the 2013-second quarter.

Reported earnings edged down about 25% to $17.4 million or 30 cents per share in the quarter from $23.2 million or 40 cents in the comparable quarter a year ago. The fall in earnings can be attributable to lower revenues in the quarter.

Thoratec Corporation - Earnings Surprise | FindTheBest

Revenues

THOR’s revenues in the quarter ebbed 9.5% to $118.1 million, missing the Zacks Consensus Estimate of $130 million. Revenues from the U.S. went down 4.7% to $94.2 million while the same from international business slid 24.6% to $23.9 million. The decline in international revenues was driven by difficult quarterly comparisons in the businesses across Europe and Japan.

The decreased revenues were driven by the decline in HeartMate II sales, partially offset by continued double-digit revenue growth in CentriMag business. PVAD revenues were also stronger than expected in the second quarter, mainly in the U.S., however that is not sustainable as per THOR.

Product Line Results

Revenues from the flagship HeartMate product line nosedived 11.8% to $102.0 million, as shipments of HeartMate pumps fell 16% to 863 units in the quarter. Domestically, sales volume of HeartMate II fell 10% while internationally, HeartMate unit volumes sagged 30% due to strong competition and adverse market dynamics throughout Europe and Japan.

CentriMag business continues to perform well. Revenues from the business upped 13.9% to $13.1 million. The business benefited from higher than expected non-pump sales in the U.S., related to increased console purchases and strong demand for pump units outside the U.S., mainly in the U.K. and Latin America.

However, revenues from PVAD and IVAD fell 7.4% to $2.5 million in the quarter. Revenues from Other business dipped 14.7% to $0.5 million.

Margins

Adjusted gross profit fell 7.0% to $84.8 million from $91.2 million a year ago. However, adjusted gross margin increased 190 basis points (bps) to 71.8% from 69.9% in the second quarter of 2013. The increase in gross margin was attributable to favorable manufacturing absorption variances and underlying efficiencies.

Adjusted operating earnings went down 25.7% to $27.4 million from $36.9 million a year ago as adjusted operating expenses upped 5.7% to $57.3 million. Consequently, adjusted operating margin shrank 510 bps to 23.2% from 28.3% in the second quarter of 2013.

Financial Position

THOR had cash and investments of $134.7 million as of Jun 28, 2014, down from $139.1 million as of Dec 28, 2013.

During the quarter under study, the company utilized $25 million in cash to finance share repurchase, bringing the total share repurchase funding to $38.5 million for the first half of the year.

Guidance Lowered

For fiscal 2014, THOR lowered its revenues guidance to the range of $455 to $470 million from the prior range of $520–$535 million due to lower assumptions for HeartMate II product line on the back of near-term challenges. The current Zacks Consensus Estimate of $526 million lies beyond the revised guided range.

Adjusted gross margin is now expected to be 70.5% compared with the prior view of 70.7% for the year.

THOR also lowered its adjusted earnings per share (excluding stock based compensation) guidance to $1.25–$1.35 from the prior band of $1.39–$1.49 for the year. The current Zacks Consensus Estimate of $1.30 million lies within the guided range.

Our Take

THOR develops, manufactures and markets proprietary medical devices used for circulatory support, vascular graft, blood coagulation and skin incision applications. We are disappointed with the company's lower earnings and revenues in the quarter, both of which missed the Zacks Consensus Estimate. We also look down on the company's prospects due to its tapered guidance for full year 2014.

Currently, THOR retains a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical instruments sector include Accuray Incorporated (ARAY), Alphatec Holdings, Inc. (ATEC) and RTI Surgical Inc. (RTIX). All of them sport a Zacks Rank #1 (Strong Buy).

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