Business context and reporting period
Haemonetics Corporation, a blood-management solutions company, reported its unaudited fiscal first quarter ended June 29, 2013 (13 weeks), compared with the quarter ended June 30, 2012. The company operates as one segment. This quarter includes revenue from the whole-blood business acquired from Pall in August 2012 and the Hemerus assets acquired April 30, 2013; reported growth is therefore not directly comparable to organic growth.
Key financial results
| Metric | Quarter ended June 29, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $219.5 million | $176.5 million |
| Gross profit / margin | $111.4 million / 50.7% | $90.1 million / 51.1% |
| Operating income (loss) / margin | $(6.6) million / (3.0)% | $13.1 million / 7.4% |
| Net income (loss) | $(7.9) million | $9.8 million |
| Diluted EPS | $(0.15) | $0.19 |
| Operating cash flow | $13.4 million | $0.6 million |
| Capital expenditures | $13.1 million | $8.4 million |
Revenue increased 24.4% (26.4% excluding foreign exchange); the acquired whole-blood business contributed $51.3 million. Gross margin declined 32 basis points, partly due to the acquired product mix and restructuring and integration costs. Operating expenses rose 53.2%, including $25.1 million of VCC restructuring-related charges ($23.9 million in SG&A and $1.2 million in cost of goods sold). Management excludes these charges when evaluating operating performance. Higher interest expense following the Pall acquisition also weighed on results.
Liquidity, debt and cash flows
Cash and equivalents were $166.3 million at June 29, 2013, down from $179.1 million at March 30. Working capital was $403.6 million and the current ratio was 3.1. Total balance-sheet debt was approximately $480.6 million; net debt was $314.2 million. The $50 million revolving facility was fully available, and the company reported compliance with its financial covenants. The $475 million term loan carried a 1.625% rate; swaps fixed the rate on $250 million of borrowings, reducing but not eliminating interest-rate exposure.
Operating activities generated $13.4 million; investing activities used $35.6 million, including the $23.1 million Hemerus payment and $13.1 million of capital expenditures. Financing activities provided $9.5 million. Cash declined by $12.8 million during the quarter. Operating cash flow less capital expenditures was approximately $0.3 million.
Material changes and business developments
- Disposables revenue rose 31.3%, led by $51.3 million in whole-blood sales. Plasma disposables increased 2.3% and diagnostics increased 16.8%.
- Platelet, red-cell, surgical and OrthoPAT disposables declined 7.5%, 17.1%, 11.9% and 16.2%, respectively; software revenue declined 3.2% and equipment and other revenue declined 14.1%.
- U.S. revenue increased 38.9%; international revenue increased 10.0%. Foreign exchange reduced reported revenue growth by about 220 basis points, primarily due to yen weakness.
- Hemerus consideration included $23.1 million cash, a further $3 million contingent on FDA approval for 24-hour whole-blood storage, and up to $14 million based on future sales. The purchase-price allocation was preliminary.
Outlook, risks and contingencies
Management said cash, operating cash generation and other sources were expected to meet requirements for the next 12 months, including restructuring, integration, capital spending and scheduled principal payments. For fiscal 2014, it expected approximately $119 million of VCC and whole-blood integration costs, capital expenditures and non-cash expenses, including $37 million of network-transformation capital; it separately anticipated approximately $60 million of total VCC restructuring charges during fiscal 2014. The manufacturing plan includes exiting Braintree, Massachusetts and Ascoli-Piceno, Italy; expanding Tijuana, Mexico; and building a facility in Penang, Malaysia.
Risks include execution and cost of the manufacturing transformation and acquisition integration, demand and competitive pressures in blood-product markets, customer order timing, foreign exchange, variable-rate debt, and delayed payment by some government-supported healthcare customers. The company had $23.1 million of net receivables in Italy. It maintained a $7.3 million inventory reserve for affected whole-blood collection sets subject to a field action related to a low-frequency potential leak. Management stated that pending legal matters were not expected to materially affect financial position or results; the Fenwal patent case in Germany continued, with no material developments reported. No significant subsequent events were identified.
Important facts for investors to verify
- How much of revenue growth reflects acquired businesses versus underlying organic growth, and whether declines in several legacy product lines continue.
- Actual cash restructuring, integration and network-transformation spending versus the fiscal 2014 estimates, and resulting operating margins.
- Progress and costs of the Pall integration and manufacturing moves, including the expected timing of facility transitions.
- Performance of the Hemerus SOLX products and potential FDA-related and sales-based contingent payments.
- Whether the field action reserve is sufficient and whether any product-quality or regulatory developments arise.
- Debt reduction, covenant headroom, interest-rate exposure and collections from international and government-supported customers.