Haemonetics Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended September 28, 2019; comparisons are to the corresponding periods of fiscal 2019. Amounts below are in U.S. dollars.
Business context and results
Haemonetics supplies products and services for plasma and blood collection, hospital transfusion, and hemostasis management. It reports three global business units: Plasma, Blood Center, and Hospital. Management describes Plasma and Hospital as growth businesses; Blood Center faces challenging markets and cost and contract pressures.
- Second quarter: Revenue was $252.6 million, up 4.5% reported and 5.1% at constant currency. Gross profit was $127.0 million; gross margin was 50.3%, versus 46.3%. Operating income was $49.7 million, versus $26.1 million; net income was $37.5 million, versus $18.7 million. Diluted EPS was $0.72, versus $0.35.
- First half: Revenue was $491.0 million, up 4.3% reported and 5.1% at constant currency. Gross profit was $242.9 million; gross margin was 49.5%, versus 41.4%. Operating income was $36.4 million, versus $31.4 million; net income was $29.0 million, versus $15.9 million. Diluted EPS was $0.56, versus $0.30.
- Business-unit revenue, first half, constant currency: Plasma grew 10.2%; Hospital grew 3.8%; Blood Center declined 1.0%. Plasma growth was attributed principally to NexSys PCS pricing and U.S. disposable volume. Hospital growth reflected TEG disposables; the TEG 6s system received FDA clearance for adult trauma use in May 2019.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $32.5 million, down from $80.5 million. Management cited working-capital outflows, notably a $59.4 million increase in inventory to support NexSys PCS launches and lower accounts payable and accrued expenses.
- Investing activities provided $7.8 million, compared with $75.3 million used in the prior-year period. Capital expenditures were $17.7 million, down from $76.0 million; divestiture and property-sale proceeds contributed to current-period cash inflows.
- Financing activities used $96.4 million, including $125.0 million of share repurchases. Cash declined by $57.3 million to $112.0 million from March 30, 2019. Working capital was $327.7 million and the current ratio was 2.4.
- At September 28, cash was $112.0 million; reported net debt was $258.9 million. The company reported $332.5 million outstanding on its term loan and $40.0 million on its revolver; the balance sheet showed $56.9 million of current debt and $314.0 million of long-term debt, net. The effective interest rate was 3.4%. The company was in compliance with credit-facility covenants.
- The board authorized up to $500 million of repurchases over two years. $125 million had been repurchased during the first half; $375 million of authorization remained at quarter-end.
Material changes, outlook, and risks
- A May 2019 transfer of substantially all tangible assets used to manufacture anticoagulant and saline at the Union, South Carolina facility to CSL generated $9.8 million of proceeds and released Haemonetics from its prior supply obligation to CSL. The company recorded a $48.7 million non-cash impairment charge in the first quarter. It continues supplying liquids through contract manufacturers.
- The July 2019 Operational Excellence Program is expected to incur $60–$70 million of charges, most of which are expected to be cash costs, and to be substantially completed by fiscal year-end 2023. Management targets $80–$90 million of annualized savings when complete. First-half restructuring and turnaround costs under the program were $2.9 million.
- Management expects plasma liquids revenue to decline beginning in the second half of fiscal 2020 amid pricing pressure and market commoditization. It also anticipates Blood Center revenue declines as some apheresis customers move to alternative suppliers.
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said available cash, operating cash flow, and credit facilities should fund requirements for at least the next 12 months. Planned cash uses include investment, capital expenditures, repurchases, debt payments, and restructuring.
- Other notable items: sale of the Braintree headquarters assets generated a $8.1 million gain and $15.0 million of net cash proceeds; relocation to the Boston headquarters was expected in fiscal Q3. A new Boston office lease, including renewal options, may extend up to 22 years and was disclosed at $98.6 million. The company had recorded $1.9 million of cumulative charges for the 2018 whole-blood-kit recall, with substantially all outstanding claims paid.
- Key risks include execution and realization of restructuring savings; pricing, customer concentration and customer conversions; product quality, regulatory and recall exposure; supply continuity and raw-material costs; foreign-exchange and interest-rate movements; and the ability to meet debt obligations. Management reported no substantial doubt about the company’s ability to continue as a going concern.
Important facts for investors to verify
- Whether Plasma and Hospital growth can offset anticipated Blood Center and plasma-liquids declines, and how much of reported growth reflects constant-currency effects.
- Whether operating cash flow recovers as inventory build and other working-capital demands ease.
- Actual cash costs, timing, and realized savings from the $60–$70 million restructuring program versus the $80–$90 million annualized savings target.
- The continuing impact of the CSL transfer, including contract-manufacturing arrangements and any further costs or revenue effects.
- Debt balances, covenant headroom, variable-rate exposure, and the pace of share repurchases relative to cash generation and investment needs.