Haemonetics Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended June 30, 2012; comparison period ended July 2, 2011. Haemonetics develops and sells blood management devices, disposables and related software and services. Approximately 82% of revenue came from disposables and related equipment-use fees.
Financial performance and liquidity
| Metric | Q1 FY2013 | Comparable period | Change |
|---|---|---|---|
| Net revenue | $176.5 million | $170.6 million | +3.5% |
| Gross profit / margin | $90.1 million / 51.1% | $88.7 million / 52.0% | Margin down 0.9 percentage points |
| Operating expenses | $77.0 million | $64.8 million | +18.8% |
| Operating income / margin | $13.1 million / 7.4% | $23.9 million / 14.0% | Operating income down 45.3% |
| Net income | $9.8 million | $16.9 million | Down 42.2% |
| Diluted EPS | $0.38 | $0.65 | Down 41.5% |
| Operating cash flow | $0.6 million | $27.1 million | Down $26.6 million |
Revenue growth reflected strength in hospital products and equipment sales, partly offset by lower Japan revenue. Hospital disposables rose 11.0%, including surgical disposables up 16.0% and diagnostics up 15.7%; software revenue fell 4.7%. International sales were about 50% of revenue. The prior-year comparison benefited from Japanese Red Cross purchases in March 2012 that shifted orders out of this quarter.
Gross margin declined mainly due to costs at the Salt Lake City facility, defective contract-manufactured product write-offs, product mix and pricing. Operating expenses included $5.9 million of acquisition and integration costs, higher variable compensation, and planned investments in emerging markets and technology/infrastructure. The reported tax rate was 27.0%, versus 28.5%.
At June 30, cash and equivalents were $236.0 million, working capital $418.3 million, current ratio 4.4, and net cash $231.0 million. Debt was approximately $5.1 million. Cash increased $7.2 million during the quarter, supported by $16.2 million of financing cash flow, including $13.2 million from option exercises. Operating cash flow was reduced by acquisition-related payments, increased inventory and tax-payment timing. Investing cash use was $9.2 million, including $8.4 million of capital expenditures and a $1.0 million Hemerus payment.
Material changes, outlook and notable items
- Pall acquisition: Closed August 1, 2012, after quarter-end. Haemonetics paid $536 million at closing toward the announced $550 million purchase price, funded with a $475 million term loan and cash; up to $15 million is payable upon delivery of specified assets, expected by 2016. Pall’s product lines and approximately 1,300 employees were acquired.
- New financing: The August 1 credit agreement provides a five-year, $475 million variable-rate term loan and a $50 million revolving facility, maturing July 31, 2017. The term loan’s current spread was 1.375% over one-month LIBOR. Covenants require leverage no higher than 3.0:1 and interest coverage of at least 4.0:1. Breach could restrict borrowing or trigger default and acceleration.
- Hemerus: The company expected to complete this acquisition in Q2 FY2013. It had paid $1 million and could pay up to $26 million subject to regulatory approvals, plus royalties. Management expected $30–$35 million of FY2013 integration costs for the acquisitions.
- Management expectations: Management said existing cash, operating cash flow, option proceeds and term-loan proceeds should fund requirements for at least 12 months. It anticipated $1–$2 million of additional restructuring charges during the remaining nine months of FY2013, higher capital expenditures for Pall integration, and up to $50 million of share repurchases during the remainder of FY2013. OrthoPAT sales growth and higher TEG disposable growth were expected over the balance of the fiscal year; no consolidated revenue or earnings guidance was provided.
- Accounting estimate: Longer estimated useful lives for certain equipment, effective April 1, 2012, were expected to reduce FY2013 depreciation by $4.5 million and increase net income by $3.3 million, or about $0.13 per share for the year.
- Contingencies and risks: The company reported no expected additional material claims or insurance recoveries for the HS Core product-quality matter; it recorded a $1.1 million net benefit in the quarter and had a $3.4 million insurance receivable. Fenwal patent litigation continued in Germany; the U.S. case had effectively ended in Fenwal’s favor. Risks include foreign-exchange exposure, customer order timing, product demand and acceptance, regulation, competition, economic conditions and acquisition integration. About $20.0 million of receivables were from Italy, where economic conditions could delay collections.
Important facts for investors to verify
- Whether revenue momentum and hospital-product growth can offset the Japan ordering comparison and slower software and blood-center trends.
- Whether operating cash flow recovers from $0.6 million and inventory levels normalize; inventory rose to $126.8 million from $117.2 million.
- The Pall acquisition’s final purchase accounting, integration costs, realized synergies and effect of variable-rate debt on interest expense and covenant headroom.
- Completion terms and contingent payments for Hemerus, and the planned capital expenditures and share repurchases.
- The extent to which the useful-life estimate change affects reported earnings, alongside underlying operating performance and product-quality costs.
- Foreign-exchange movements and hedging outcomes, product liability and litigation developments, and collection risk in international markets.