Haemonetics Corporation — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2016, quarter ended September 26, 2015; fiscal year ends April 2, 2016. Comparisons are with the quarter ended September 27, 2014, and the corresponding six-month periods.
Business context
Haemonetics provides blood-management devices, disposable products, software and services. It reports one operating segment. Disposable products generated 85.8% of second-quarter revenue. The company continued its manufacturing-network transformation and began the U.S. commercial launch of its TEG 6s diagnostic system following regulatory clearance.
Financial performance
| Metric | Quarter ended Sep. 26, 2015 | Year-over-year | Six months ended Sep. 26, 2015 | Year-over-year |
|---|---|---|---|---|
| Revenue | $219.7 million | Down 3.5% | $433.1 million | Down 4.2% |
| Gross profit | $105.3 million | Down 2.6% | $207.8 million | Down 3.1% |
| Gross margin | 47.9% | Up 0.4 percentage points | 48.0% | Up 0.6 percentage points |
| Operating income | $19.2 million | Up 54.6% | $22.8 million | Up 112.1% |
| Net income | $12.9 million | Up 71.8% | $12.6 million | Up 228.1% |
| Diluted EPS | $0.25 | Compared with $0.14 | $0.24 | Compared with $0.07 |
| Operating cash flow | Not provided for quarter | — | $36.8 million | Down $8.2 million |
Revenue was flat on a constant-currency basis in both the quarter and six-month period. Lower international revenue, including weakness in Russia and Japan, and declining U.S. blood-center product sales were key pressures. Plasma and diagnostics disposables grew; blood-center disposables declined. Operating income improved mainly because restructuring and transformation expenses were lower by $8.7 million in the quarter and $16.9 million year to date. Productivity savings supported margin improvement, partly offset by product mix, price reductions and underused production capacity.
Cash, debt and liquidity
- Cash and cash equivalents were $100.2 million at September 26, 2015, down from $160.7 million at fiscal year-end.
- Working capital was $312.6 million and the current ratio was 2.7, versus $381.2 million and 3.0, respectively, at March 28, 2015.
- The company reported net debt of $334.1 million. Debt under its credit facilities was approximately $429.4 million, with a 1.625% interest rate; the facilities mature in 2019. The company reported compliance with its covenants.
- Six-month investing cash outflow was $52.8 million, including $50.1 million of capital expenditures. Financing cash outflow was $44.0 million, including $61.0 million of share repurchases.
- Operating cash flow fell year over year, primarily due to a working-capital outflow, including annual bonus payments and lower accounts payable and accrued expenses.
Outlook, management commentary and risks
- Management expects approximately $45 million of restructuring and restructuring-related expense in fiscal 2016. The manufacturing transformation is expected to be completed in fiscal 2017, with transfers from Braintree expected by the end of fiscal 2016 and from Bothwell, Scotland, by early fiscal 2017.
- The American Red Cross contract is expected to deliver all of its apheresis red-cell collection business to Haemonetics, but at lower prices; management expects the arrangement to reduce revenue and gross profit overall. Two blood-center purchasing groups selected competing technologies, creating additional expected revenue pressure.
- Management expects weakness in the euro and yen against the U.S. dollar to pressure revenue and operating income in the second half of fiscal 2016 and into fiscal 2017. Currency hedges mitigate, but do not eliminate, exposure.
- Declines in Russia and U.S. blood-center markets have reduced revenue and EBITDA in certain reporting units. Management did not then consider goodwill impairment more likely than not, but said future declines could cause reporting units to fail the initial impairment test.
- Italian employment-related claims seek approximately $3.8 million in damages. The company had not accrued amounts because potential losses could not be reliably assessed; similar claims may arise.
- The six-month income-tax provision included a $1.0 million expense related to a Puerto Rico deferred-tax rate change and correction of an immaterial prior-period tax-provision understatement. Without the correction, the current-period provision would have been $1.0 million lower.
- The $100 million share-repurchase program was completed during the quarter; 2.66 million shares were repurchased at an average price of $37.57.
The filing provides no specific revenue or earnings guidance. Management cautions that results are subject to risks including transformation execution, product demand and pricing, competition, regulatory approvals, customer ordering patterns, foreign exchange and international economic conditions.
Key facts for investors to verify
- Whether growth in plasma and TEG diagnostics can offset ongoing declines in blood-center products and international markets.
- The actual revenue, margin and volume effects of the American Red Cross agreement and competing blood-center technologies.
- Whether the manufacturing transformation meets its timetable and the estimated fiscal 2016 restructuring and related-cost level.
- Cash generation, capital spending and debt levels following completion of the share-repurchase program.
- Developments in goodwill impairment indicators, Italian litigation and the company’s foreign-exchange exposure.
- The effect of the $1.0 million tax correction when comparing reported tax expense and earnings across periods.