Haemonetics Corporation (NYSE: HAE) — FY2019 Form 10-K
Reporting period: Fiscal year ended March 30, 2019 (52 weeks). The filing also reports fourth-quarter results for the three months ended March 30, 2019; this is not a calendar-year 2018 report. Amounts below are U.S. dollars.
Business context
Haemonetics supplies blood and plasma collection equipment and disposables, hemostasis diagnostics, surgical blood-salvage systems, and transfusion-management software. Management views Plasma and Hospital as growth businesses; Blood Center faces declining procedure volumes, intense pricing pressure, and planned product, contract, and cost reductions.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $967.6 million | $903.9 million | +7.0% |
| Gross profit / margin | $417.5 million / 43.2% | $411.9 million / 45.6% | Margin down 240 bps |
| Operating income / margin | $83.5 million / 8.6% | $56.2 million / 6.2% | +48.8% |
| Net income | $55.0 million | $45.6 million | +20.7% |
| Diluted EPS | $1.04 | $0.85 | +22.4% |
| Operating cash flow | $159.3 million | $220.4 million | Down $61.1 million |
| Capital expenditures | $119.0 million | $74.8 million | Up $44.2 million |
Approximate operating cash flow less capital expenditures was $40.3 million, versus $145.6 million in FY2018. Management attributed the cash-flow decline mainly to working-capital outflows, including higher receivables and inventory, and severance payments.
At year-end, cash and equivalents were $169.4 million; total debt was $350.1 million, implying net debt of approximately $180.8 million. Working capital was $340.4 million and the current ratio was 2.4. The company reported compliance with debt covenants and stated that available liquidity sources should cover requirements for at least the next 12 months. FY2019 capital expenditures supported the NexSys PCS launch and plasma capacity expansion.
Business trends and changes versus prior year
- Plasma: Revenue rose 15.1% to $501.8 million, driven mainly by U.S. disposable volume, NexSys PCS pricing, and liquid solutions.
- Blood Center: Revenue fell 5.5% to $269.2 million, reflecting whole-blood market declines, strategic exits, recalls, weaker U.S. software revenue, and lower Japanese platelet revenue amid a shift to double-dose collection.
- Hospital: Revenue rose 7.4% to $196.5 million, led by TEG diagnostic disposables, particularly in the U.S. and China. Hemostasis Management revenue increased 16.0% to $87.6 million.
- Operating income improved as higher volumes, favorable price and product mix, lower restructuring costs, and restructuring savings more than offset impairments, accelerated depreciation, freight costs, and increased investment.
- Gross margin declined despite revenue growth, principally due to higher depreciation—including plasma equipment—and the HDC line impairment.
Fourth-quarter FY2019 revenue was $249.3 million, operating income $23.9 million, and net income $20.8 million. The comparable FY2018 quarter reported revenue of $233.6 million, operating income of $14.3 million, and net income of $11.9 million. The filing says FY2018 fourth-quarter operating income and net income included immaterial misstatements, primarily from an over-accrual of professional fees in the prior quarter; the reported quarter was overstated by $2.8 million and $2.4 million, respectively.
Outlook, material items, and risks
- Outlook: The filing provides no specific consolidated FY2020 revenue or earnings guidance. Management expects the Blood Center business to decline at a low- to mid-single-digit rate. The Complexity Reduction Initiative is expected to generate approximately $80 million in annualized savings once completed; related actions and charges are expected to continue through FY2020.
- Products and investment: NexSys PCS and NexLynk DMS customer conversions require device placements, meaningful capital spending, sufficient manufacturing capacity, and contracts that support returns on investment. FDA clearance for TEG 6s use in adult trauma settings was received in May 2019, after fiscal year-end.
- Restructuring and unusual costs: FY2019 included $21.2 million of asset impairments, including a $19.8 million HDC line impairment, and $18.0 million of accelerated depreciation on PCS2 devices being replaced by NexSys. Restructuring and turnaround costs totaled $13.6 million.
- Post-year-end transaction: On May 21, 2019, the company transferred substantially all tangible assets associated with its Union, South Carolina anticoagulant and saline manufacturing operation to CSL for approximately $10 million and was released from a related supply obligation. It expects to continue supplying liquids through contract manufacturers. The transaction resulted in an approximately $49 million non-cash impairment charge in FY2020 Q1.
- Customer concentration: The ten largest customers generated approximately 52% of FY2019 revenue. CSL and Grifols together accounted for approximately 27%; each individually exceeded 10%. Two of the four largest Plasma customers had contracts subject to renewal before FY2021 ended.
- Other key risks: Plasma customer concentration and contract renewals; Blood Center market contraction and price pressure; product quality, recalls, and regulatory approval; dependence on suppliers and global manufacturing; cybersecurity and privacy; foreign exchange and variable-rate debt; and the ability to execute restructuring and NexSys placements.
- The board authorized a new share repurchase program of up to $500 million over two years in May 2019; activity was discretionary and intended to begin in FY2020. The company completed its prior $260 million authorization by March 30, 2019, including $160 million of repurchases in FY2019.
Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting. Management stated that substantial doubt about the company’s ability to continue as a going concern did not exist.
Important facts for investors to verify
- Plasma growth durability, NexSys placement volumes, customer conversion timing, pricing, and contract renewal terms.
- Whether Blood Center declines, customer exits, and recall-related effects continue, and whether planned cost reductions protect profitability and cash generation.
- Working-capital trends and the substantial year-over-year reduction in operating cash flow after higher capital expenditures.
- Debt amortization, variable-rate exposure, covenant headroom, and the funding implications of the new $500 million repurchase authorization.
- The final financial and operational effects of the CSL asset transfer, including the FY2020 Q1 impairment and ongoing liquid-solution supply arrangements.
- Potential incremental claims from the August 2018 whole-blood kit recall; the filing reports $1.9 million of cumulative charges and says further charges may be recorded.