Haemonetics Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 28, 2013; comparisons are with the periods ended September 29, 2012. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and financial results
Haemonetics provides blood-management products and services, including plasma, blood-center and hospital disposables, equipment, and software. The company reports one operating segment. Revenue growth reflected the acquired whole-blood business and strength in plasma and diagnostics, while several other product lines declined.
| Metric | Three months ended Sep. 28, 2013 | Year-over-year | Six months ended Sep. 28, 2013 | Year-over-year |
|---|---|---|---|---|
| Revenue | $235.8 | +8.1% | $455.3 | +15.4% |
| Gross profit / margin | $119.9 / 50.9% | Margin +4.3 pts | $231.3 / 50.8% | Margin +2.2 pts |
| Operating income / margin | $23.4 / 9.9% | +136.6% | $16.8 / 3.7% | -26.8% |
| Net income | $16.5 | +152.8% | $8.7 | -46.9% |
| Diluted EPS | $0.32 | Prior year $0.13 | $0.17 | Prior year $0.31 |
| Operating cash flow | Not reported separately | — | $42.8 | Prior year $33.6 |
Second-quarter gross margin improved with manufacturing efficiencies and the absence of an $8.3 million acquired-inventory step-up charge recorded in the prior-year quarter. Lower-margin whole-blood and plasma sales and VCC-related costs partly offset those benefits. Six-month operating income and net income fell as higher restructuring and transformation expenses more than offset gross-profit growth; interest expense also rose following the financing for the prior-year whole-blood acquisition.
Revenue trends and material changes
- Six-month disposable revenue increased 19.2% to $394.8 million, led by whole blood, plasma and diagnostics. Whole-blood revenue rose 244.3%, largely because the prior-year comparison included only two months of acquired-business sales.
- Six-month plasma disposables revenue rose 6.4% and diagnostics revenue rose 15.9%. Platelet, red-cell, surgical and OrthoPAT disposable revenue declined 7.6%, 15.7%, 12.5% and 17.2%, respectively. Software revenue fell 4.2%.
- Management attributed pressure on red-cell and whole-blood demand to hospital blood-management practices and lower collections. It estimated U.S. blood-center collections would decline approximately 8% annually in fiscal 2014 and fiscal 2015. Tranexamic-acid use was also reducing demand for orthopedic cell salvage.
- Reported six-month revenue growth was 15.4%; excluding foreign-exchange effects, management reported growth of 17.3%. International sales represented approximately 45.6% of six-month revenue.
Cash, debt and liquidity
- At September 28, cash and cash equivalents were $159.1 million, versus $179.1 million at March 30. Working capital was $393.9 million; the current ratio was 3.0, compared with 3.3.
- Total balance-sheet debt was approximately $464.4 million, including $43.7 million current and $420.7 million long-term. Management reported net debt of negative $305.3 million, meaning cash exceeded total debt by that amount.
- Six-month operating cash flow was $42.8 million; investing cash outflow was $59.4 million and financing cash outflow was $3.9 million. Cash decreased by $20.0 million. Investing included $23.1 million for Hemerus and $28.2 million of capital expenditures.
- The $475 million term loan had $455 million outstanding under the credit facility at quarter-end; the full $50 million revolving facility was available. The company reported compliance with financial covenants. The facility matures in August 2017 and bears variable-rate interest; $250 million was covered by interest-rate swaps.
- Management said cash, operating cash flow and other sources were sufficient for expected cash requirements over the next twelve months.
Outlook, risks and unusual items
- Value Creation and Capture (VCC): The multi-year plan includes closing manufacturing activities in Braintree, Massachusetts, and Ascoli-Piceno, Italy; expanding Tijuana; creating a nearby technology center; using Sanmina for certain equipment; and building a Penang facility. For the six months, restructuring charges were $30.3 million and total restructuring and transformation expenses were $52.4 million.
- Management estimated approximately $82 million of fiscal 2014 restructuring and transformation expense for VCC and completion of whole-blood integration, of which $72 million was expected to be cash. It also presented an approximately $109 million fiscal 2014 estimate covering restructuring/transformation costs and capital expenditures, including $37 million of network-transformation capital. The filing gives separate estimates with different scopes; investors should confirm their reconciliation.
- Research and development expense is expected to continue rising above prior-year levels for the rest of fiscal 2014. Second-quarter R&D included a $3.6 million in-process R&D charge related to acquired technology and manufacturing rights.
- On April 30, 2013, Haemonetics acquired certain Hemerus assets for $24.1 million cash, with a further $3 million payable upon specified FDA approval and up to $14 million tied to future SOLX sales. The contingent-consideration liability was $6.9 million at quarter-end.
- Key risks include execution and supply disruption from manufacturing changes, customer consolidation and single-source tenders that may pressure prices, declining blood collections, competition, foreign-exchange and variable-interest-rate exposure, and collection delays from government-supported healthcare systems. The company reported ongoing Fenwal patent litigation in Germany and no material developments in the period; it believed other legal matters would not materially affect results or financial position.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No significant subsequent events were reported.
Important facts for investors to verify
- Whether growth from the acquired whole-blood business can offset continued declines in red-cell, platelet, surgical and OrthoPAT products.
- The timing, cash cost and execution risks of VCC restructuring and facility transitions, and how the $82 million and $109 million fiscal 2014 estimates reconcile.
- Whether management’s forecast of approximately 8% annual U.S. blood-center collection declines and resulting pricing pressure proves accurate.
- Debt repayment capacity and sensitivity to LIBOR changes, given variable-rate borrowings and the partial interest-rate hedge.
- Hemerus contingent payments, including the FDA approval milestone and sales-based consideration, and the commercial prospects for SOLX.