Haemonetics Corporation — Fiscal 2016 Form 10-K
Reporting period: Fiscal year ended April 2, 2016. This is an annual report, not a standalone 2015 fourth-quarter filing. Fiscal 2016 included 53 weeks; fiscal 2015 included 52 weeks.
Business context and results
Haemonetics makes blood and plasma collection, processing, diagnostic and transfusion-management products and software. It identified Plasma and Hemostasis Management as its strongest growth opportunities, Cell Processing as an opportunity to expand, and Donor as a business requiring cost and product-line reductions.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $908.8 million | $910.4 million |
| Gross profit / margin | $405.9 million / 44.7% | $434.4 million / 47.7% |
| Operating income (loss) | $(43.9) million | $40.5 million |
| Net income (loss) | $(55.6) million | $16.9 million |
| Diluted EPS | $(1.09) | $0.32 |
| Cash from operations | $121.9 million | $127.2 million |
| Capital expenditures | $102.4 million | $122.2 million |
Revenue, margins and material changes
- Reported revenue was down 0.2%; management said revenue increased 2.9% excluding foreign-exchange effects. The extra fiscal week contributed about 1.7% of revenue.
- Plasma disposables grew 9.3% to $348.8 million, and diagnostic disposables grew 20.6% to $50.9 million. Blood center disposables declined 8.3%; whole-blood disposables declined 10.7%, and OrthoPAT declined 32.0%.
- Gross margin fell 300 basis points. Management cited foreign exchange, $9.4 million of inventory charges, asset impairments in cost of goods sold, unfavorable product mix and blood-center pricing; productivity savings partly offset these pressures.
- The $43.9 million operating loss included $92.4 million of asset impairment expense. Major items included a $66.3 million EMEA goodwill impairment, an $18.7 million SOLX intangible impairment and additional impairments following the strategic review. The EMEA charge eliminated that reporting unit’s goodwill.
- Fiscal 2016 fourth-quarter revenue was $242.3 million, gross profit $89.2 million, operating loss $5.6 million and net loss $8.7 million. The quarter had 14 weeks, versus 13 in the prior-year fourth quarter.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $115.1 million; working capital was $302.5 million and the current ratio was 2.6, down from 3.0.
- Total debt was approximately $408.1 million: $358.1 million under the term loan and $50.0 million drawn on the $100 million revolving facility. The facilities mature July 1, 2019; the company reported covenant compliance at year-end.
- Operating cash flow was $121.9 million. Investing cash outflow was $104.8 million, primarily reflecting $102.4 million of capital expenditures; financing cash outflow was $62.6 million, including $61.0 million of share repurchases.
- Management believed available cash, operating cash flow and other sources would cover requirements for at least the next 12 months. The filing notes that some foreign cash may not be immediately available to repay debt.
Outlook, risks and unusual items
- A first-phase fiscal 2017 restructuring was expected to incur about $26 million of charges ($17 million termination benefits and $9 million other exit costs), substantially in cash. Management estimated approximately $40 million of fiscal 2017 savings; further phases could bring additional charges. The broader strategic implementation is expected to extend beyond fiscal 2017.
- Management expected further declines in U.S. blood-center collections in fiscal 2017. New apheresis red-cell arrangements were expected to reduce fiscal 2017 operating income by about $12 million; competitive technology selections by blood-center purchasing groups may also reduce sales.
- Management expected continued fiscal 2017 operating-income pressure from U.S.-dollar strength. It also forecast continued OrthoPAT revenue declines.
- Key risks include execution and supply disruption from manufacturing changes, pricing and customer consolidation, regulatory and product-quality issues, foreign-exchange exposure, reliance on certain suppliers, and uncertainty in international markets.
- Financial reporting controls: Management identified a material weakness in income-tax accounting controls; disclosure controls were deemed ineffective. Ernst & Young issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the financial statements. Management said remediation work was underway.
- The company suspended further SOLX investment after concluding expected customer pricing would not support production costs and required investment; it reversed $4.9 million of related contingent consideration. Italian employment litigation involved approximately $4.6 million in claimed damages; the company had not accrued an amount because loss likelihood and amount could not be estimated.
- Leadership was changing: a new CEO joined in May 2016, and the CFO had announced retirement effective June 3, 2016.
Important facts for investors to verify
- Progress in remediating the income-tax control weakness and whether controls are independently tested and found effective.
- Whether restructuring charges, timing and estimated savings track management’s fiscal 2017 expectations.
- Actual effects of blood-center tenders, collection declines and price concessions on revenue and gross margin.
- Cash availability, debt repayment and covenant headroom, particularly given variable-rate borrowing and foreign cash balances.
- Assumptions behind impairment valuations, including the risk of further impairment in Americas Blood Center and Hospital, which had approximately 25.8% fair-value cushion and $175.9 million of allocated goodwill.