Haemonetics Corporation — Form 10-Q Summary
Reporting period: Quarter ended June 27, 2015, the first quarter of fiscal 2016. Comparisons are with the quarter ended June 28, 2014. Haemonetics provides blood management products and services, including devices, disposable products, diagnostics and software.
Financial performance and position
| Metric | Quarter ended June 27, 2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $213.4 million | $224.5 million | Down 4.9%; down 1.9% excluding foreign exchange |
| Gross profit / margin | $102.5 million / 48.0% | $106.3 million / 47.3% | Profit down 3.5%; margin up 70 basis points |
| Operating expenses | $98.9 million | $107.9 million | Down 8.3% |
| Operating income (loss) | $3.6 million | $(1.7) million | Improved |
| Net loss / diluted loss per share | $(0.3) million / $(0.01) | $(3.6) million / $(0.07) | Loss narrowed |
| Operating cash flow | $9.3 million | $13.7 million | Down $4.5 million |
- Cash and liquidity: Cash was $112.2 million at June 27, down from $160.7 million at March 28, 2015. Working capital was $338.6 million and the current ratio was 3.0.
- Debt: The filing cites approximately $429.4 million outstanding under the credit facility, including $379.4 million of term loans and $50.0 million drawn on the revolving facility. The stated rate was 1.5625%; the amended facility matures July 1, 2019. The company reported compliance with its covenants.
- Investing and financing cash flow: Investing used $27.1 million, including $24.2 million of capital expenditures and $3.0 million for other acquisitions and investments. Financing used $29.8 million, including $39.0 million of cash share repurchases. Cash declined $48.5 million in the quarter.
- Margins and costs: Gross margin improved primarily from productivity savings, including VCC initiatives, partly offset by product mix. Restructuring and transformation costs totaled $14.8 million, versus $23.0 million a year earlier.
Material changes and operating drivers
- International revenue fell 10.6%, while U.S. revenue was essentially flat. Foreign exchange reduced reported revenue; approximately 43.4% of sales were generated outside the U.S.
- Disposables revenue declined 5.3%. Plasma disposables grew 2.2% and diagnostics disposables grew 22.5%; declines included platelets (18.7%) and whole blood (14.6%).
- Management attributed pressure to Russian economic conditions and distributor inventory management, reduced North American whole-blood market share, and the prior loss of the American Red Cross business. Growth in U.S. plasma and TEG products partly offset declines.
- Software revenue decreased 5.1%; equipment and other revenue increased 2.7%. OrthoPAT revenue fell 26.0%, reflecting reduced use amid improved blood-management practices and adoption of tranexamic acid.
- Operating income improved year over year mainly because restructuring and transformation expense was lower. The net loss narrowed, but a higher tax provision partly offset the operating improvement.
Outlook, risks and unusual items
- Management expected U.S. blood-center collection declines to moderate in fiscal 2016, while continuing to weigh on red-cell and whole-blood revenue. It warned that competition and pricing pressure in apheresis red-cell business could reduce future revenue and gross margins.
- The company expected Russian business performance to improve in the second half of fiscal 2016 and full-year Russian performance to be similar to fiscal 2015. Russia represented 1% of revenue in this quarter, versus 3% in the prior-year quarter.
- Management expected adverse yen and euro movements to continue affecting results through the rest of fiscal 2016 and into fiscal 2017. Hedging reduces, but does not eliminate, currency exposure.
- The VCC manufacturing transformation was proceeding, with production started at expanded Tijuana and new Penang facilities and Sanmina engaged to manufacture certain equipment. The company estimated approximately $45.0 million of restructuring and related expense in fiscal 2016.
- The TEG 6s diagnostic system received final U.S. 510(k) clearance during the quarter; the U.S. launch was beginning, with sales already reported in Europe, Australia and Japan. Management expected growth to benefit from the launch.
- The reported tax rate was 116.7%, reflecting losses in certain restructuring jurisdictions without recognized tax benefits and a $1.0 million deferred-tax charge related to Puerto Rico’s capital gains tax-rate increase. The quarter also included correction of an immaterial prior-period tax-provision understatement; without the correction, current-quarter tax provision would have been $1.0 million lower.
- Italian employment-related claims involved approximately $3.7 million in damages sought. The company had accrued no amount because the likelihood and amount of potential losses could not be reliably assessed; management said broader legal liabilities were not expected to materially affect results or financial position.
- Key stated risks include manufacturing-transition disruption and costs, product quality and regulatory matters, customer ordering and single-source tenders, competition and pricing, blood-product demand, foreign exchange, and economic conditions in international markets.
Important facts for investors to verify
- Whether revenue trends in Russia, U.S. blood centers and whole-blood disposables stabilize as management anticipated, and whether plasma and TEG growth continues.
- Progress, costs and supply reliability under the VCC manufacturing transition, including the fiscal 2016 estimate of $45.0 million in restructuring and related expense.
- Whether currency movements, customer pricing and product mix continue to pressure reported revenue and gross margins.
- Cash generation and liquidity after capital expenditures, debt service and planned share repurchases; the company intended to use the remaining approximately $20.1 million of its $100 million repurchase authorization in fiscal 2016.
- Developments in the Italian employment litigation and any changes to the company’s assessment of potential losses.
- The effect of the unusually high effective tax rate and the disclosed immaterial tax correction on subsequent-period comparability.