Haemonetics Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended March 29, 2014 (52 weeks). This is an annual report, not a standalone fourth-quarter filing. Haemonetics supplies blood and plasma collection, processing, hospital diagnostics, surgical blood salvage and related software and services.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net revenue | $938.5 million | $892.0 million | +5.2% (+6.9% excluding foreign exchange) |
| Gross profit / margin | $468.4 million / 49.9% | $428.1 million / 48.0% | Margin +190 basis points |
| Operating income / margin | $47.3 million / 5.0% | $56.4 million / 6.3% | -16.1% |
| Net income | $35.1 million | $38.8 million | -9.4% |
| Diluted EPS | $0.67 | $0.74 | -9.5% |
| Operating cash flow | $139.5 million | $85.1 million | +$54.5 million |
| Capital expenditures | $73.6 million | $62.2 million | +$11.5 million |
Disposables generated $806.8 million, up 6.5%; software revenue was $70.4 million, up 0.7%; and equipment and other revenue was $61.2 million, down 4.7%. Whole blood sales benefited from a full year of acquired-business results, while plasma and diagnostics disposables also grew.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $192.5 million; working capital was $406.0 million and the current ratio was 2.9, compared with 3.3 a year earlier.
- Total debt was approximately $437.7 million. The $475 million acquisition term loan had $437.9 million outstanding before debt discount; the $50 million revolving facility was undrawn. The term loan is variable-rate, matures August 2017, and the company reported compliance with its covenants.
- Stockholders’ equity was $837.9 million. Net cash provided by operating activities was $139.5 million; net cash used in investing activities was $105.8 million.
- Management said available cash, operating cash flow and borrowing capacity were expected to cover requirements for at least the next 12 months.
Material changes and drivers
- Revenue growth reflected a full year of the Pall whole blood business, acquired in August 2012, versus eight months in FY2013, as well as growth in plasma and diagnostic products. Foreign exchange reduced FY2014 sales growth by 1.7 percentage points.
- Blood management practices and lower-blood-loss procedures reduced red-cell demand. U.S. blood-center collections declined about 10% in FY2014; red-cell disposables revenue fell 14.8%, while platelet disposables declined 7.6%.
- Hospital surgical disposables fell 9.0% and OrthoPAT disposables fell 17.2%; diagnostic disposables grew 21.7%, driven by TEG analyzer adoption.
- Operating income fell despite higher gross profit because restructuring and transformation costs and whole-blood business expenses increased. Gross margin improved partly because FY2013 included whole-blood inventory step-up charges and a $7.0 million inventory reserve related to a quality matter.
- Restructuring and transformation costs totaled $84.8 million in FY2014, including $49.1 million of restructuring charges and $35.7 million of transformation costs. FY2014 net income also benefited from a low 3.4% reported tax rate, versus 22.2% in FY2013.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management expected U.S. blood-center collections to decline about 10% again in FY2015, with related pressure on revenue and operating cash flow.
- The American Red Cross selected another supplier for certain whole-blood products; Haemonetics estimated an annualized revenue reduction of approximately $25 million beginning in FY2015. A HemeXcel purchasing alliance agreement also includes lower average selling prices and was expected to negatively affect FY2015 results.
- The multi-year manufacturing-network transformation includes facility closures or changes, Tijuana expansion, a Malaysia facility and contract manufacturing. Management estimated approximately $74 million of FY2015 restructuring and related expense and $58 million of initiative spending; elsewhere it estimated approximately $100 million of FY2015 cash expenditures for VCC activities. These are different disclosed measures. An additional $10–$15 million was estimated to complete initiatives through FY2017.
- Key risks include execution disruption and product-quality issues during manufacturing transfers; customer consolidation, tenders and pricing pressure; competition; supplier concentration; variable-rate debt; foreign-exchange exposure; regulatory and product-liability risks; and international political, economic and collection risks.
- Italian employee litigation related to the Ascoli-Piceno facility involved approximately $3.5 million of claimed damages. The company had not accrued a liability because potential losses could not be reliably assessed. The German patent case against Fenwal effectively ended after a January 2014 ruling narrowed Haemonetics’ patent claims.
- On April 28, 2014, the board authorized share repurchases of up to $100 million. No shares were repurchased in FY2014. The company did not expect to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether collection declines, the American Red Cross contract loss and lower-price customer agreements produce the expected FY2015 revenue and margin impact.
- Actual FY2015 cash outlays, restructuring charges, savings and operating performance as the manufacturing-network plan proceeds.
- Term-loan repayment, variable interest expense, covenant headroom and access to cash held in foreign subsidiaries.
- Whether growth in plasma and TEG diagnostics can offset weakness in red-cell, whole-blood and orthopedic salvage products.
- Developments in the Italian employment claims and Hemerus contingent payments, including the potential $3.0 million regulatory payment and up to $14.0 million tied to future sales.
The financial statements received an unqualified audit opinion, and the auditor also reported an unqualified opinion on internal control over financial reporting.