Haemonetics Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended October 1, 2011 (fiscal 2012); comparisons are to the periods ended October 2, 2010. Unless stated otherwise, financial amounts are in U.S. dollars and millions.
Business context and financial performance
Haemonetics provides blood-management medical devices, related disposable products, software and services. Disposables accounted for about 82% of revenue in the first six months. The company reports one operating segment.
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $179.4; +7.6% | $350.0; +6.1% |
| Gross profit / margin | $89.9 / 50.1% | $178.7 / 51.1% |
| Operating income / margin | $18.6 / 10.3% | $42.5 / 12.1% |
| Net income | $13.9 | $30.8 |
| Diluted EPS | $0.54 | $1.18 |
| Operating cash flow | Not separately stated | $52.5 |
| Capital expenditures | Not separately stated | $23.8 |
Liquidity, debt and cash flow
- Cash and cash equivalents were $183.4 million, down from $196.7 million at April 2, 2011. Working capital was $330.3 million; the current ratio was 4.0.
- Total debt was approximately $6.4 million, comprising $3.1 million current and $3.3 million long-term. Net cash was $177.0 million.
- Six-month operating cash flow rose to $52.5 million from $44.3 million. Investing used $23.7 million; financing used $41.8 million, including $50.0 million of share repurchases. Cash declined $13.3 million over the period.
- Management said available cash, operating cash flow and option exercises should fund requirements over the next 12 months, primarily capital expenditures.
Changes versus prior comparable periods
- Quarterly and six-month revenue grew, but net income fell 35.0% and 21.5%, respectively. Diluted EPS declined from $0.85 to $0.54 for the quarter and from $1.54 to $1.18 for six months.
- Operating income declined 35.8% for the quarter and 20.0% for six months. Gross margin fell 250 basis points in the quarter and 170 basis points over six months; operating expenses increased 21.3% and 12.5%, respectively.
- Growth was led by plasma disposables (+14.0% quarterly; +13.1% six-month) and diagnostics (+21.8%; +20.5%). Hospital disposable revenue was nearly flat for the quarter and down 1.2% for six months; OrthoPAT revenue fell 11.9% and 12.7%.
- Revenue excluding foreign-exchange effects grew 5.3% in the quarter and 3.6% in six months. Management attributed weaker profitability mainly to quality-related costs, product mix and higher operating expenses.
Outlook, commentary and risks
- Management expected strong commercial plasma-collection growth to moderate during the rest of fiscal 2012; platelet disposable sales were expected to remain relatively flat.
- Management expected quality and product-mix pressures to continue affecting gross profit over the balance of fiscal 2012. It anticipated an additional $5–6 million of restructuring charges in the remaining six months.
- A voluntary recall of OrthoPAT devices manufactured before 2002 reduced sales; replacement-device production was expected to be completed in the fourth quarter.
- Customer complaints over a European HS Core plasma disposable quality issue generated about $8.5 million in claims submitted to date. The company accrued $2.4 million as its best estimate, but said the ultimate liability could be higher; insurance recovery was still under evaluation.
- Flood damage at a contract manufacturer in Thailand prompted production transfers. The company did not expect material supply disruption but warned of higher transition costs and possible lost sales or margin if customers shifted to other suppliers.
- Foreign-exchange exposure is significant: about 51% of six-month sales were outside the U.S. The company uses forward contracts; a modeled 10% dollar strengthening would increase contract fair value by $10.2 million, while a 10% weakening would decrease it by $11.9 million.
- Other unusual items included $1.6 million of contingent-consideration income related to Neoteric and a $0.7 million settlement paid to release future claims. The Fenwal U.S. patent case ended with summary judgment in Fenwal’s favor; the German action continued. Italian convictions related to a 2004 matter became final in June 2011.
Important facts for investors to verify
- Whether HS Core customer claims exceed the $2.4 million accrual and whether insurance provides recovery.
- Progress and cost of the OrthoPAT replacement program, and whether hospital-product demand stabilizes.
- Whether the Thailand manufacturing transition avoids supply interruptions, customer shifts and further margin pressure.
- Whether plasma growth moderates as expected and whether operating costs and gross margins improve.
- Execution of the planned additional restructuring and its effect on cash flow and results.