Haemonetics Corporation — Fiscal 2017 Second-Quarter 10-Q
Reporting period: Quarter and six months ended October 1, 2016; comparisons are with periods ended September 26, 2015. Haemonetics develops blood collection, processing, storage, and diagnostic products and software. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Oct. 1, 2016 | Prior-year quarter | Six months ended Oct. 1, 2016 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $220.3 million | $219.7 million | $430.2 million | $433.1 million |
| Gross profit / margin | $104.2 million / 47.3% | $105.3 million / 47.9% | $195.3 million / 45.4% | $207.8 million / 48.0% |
| Operating income / margin | $24.8 million / 11.3% | $19.2 million / 8.7% | $16.9 million / 3.9% | $22.8 million / 5.3% |
| Net income | $19.8 million | $12.9 million | $9.5 million | $12.6 million |
| Diluted EPS | $0.38 | $0.25 | $0.18 | $0.24 |
| Operating cash flow | Not presented separately for the quarter | $70.0 million | $36.8 million |
Quarterly revenue rose 0.3% reported and 1.0% at constant currency; six-month revenue declined 0.7% reported but increased 0.7% at constant currency. Quarterly operating income and net income improved, while six-month operating income and net income declined. Six-month prior-year net income included an immaterial tax-provision correction; absent that correction, it would have been $1.0 million higher.
Quarter revenue growth in Plasma (+11.3%) and Hemostasis Management (+15.0%) was offset by declines in Blood Center (-11.8%) and Cell Processing (-7.6%). For the six-month period, the respective changes were +10.8%, +12.2%, -13.2%, and -7.0%. Management attributed margin pressure to product mix, blood-center pricing, foreign exchange, the whole-blood filter recall, Japan platelet declines, software impairment, and underutilized capacity; productivity savings and lower restructuring costs partly offset these factors.
Liquidity, debt, and cash flow
- At October 1, cash and cash equivalents were $138.9 million, versus $115.1 million at fiscal year-end. Working capital was $313.7 million; the current ratio was 2.6.
- Total debt was approximately $389 million, including $51.5 million of current maturities and $336.5 million of long-term debt. The company reported net cash of approximately $249.2 million (cash less total debt).
- Six-month operating cash flow was $70.0 million; capital expenditures were $41.6 million; investing cash outflow was $41.4 million; financing cash outflow was $4.6 million. Term-loan repayments were $19.0 million.
- The credit facility matures July 1, 2019. The company reported covenant compliance at October 1, 2016. It paid down $20 million of revolving borrowings on October 31, after quarter-end; scheduled principal payments of $23.7 million remained for the balance of fiscal 2017.
Outlook, material developments, and risks
- Restructuring: The fiscal 2017 program is expected to incur approximately $26 million in restructuring and turnaround costs, largely cash costs, and management estimated approximately $40 million of fiscal 2017 savings. Management was evaluating underperforming assets and business units, which could lead to additional cash outlays or noncash charges. No formal overall earnings or revenue guidance is provided in the filing.
- Blood Center headwinds: Management expects continued U.S. whole-blood market decline and pricing competition. The American Red Cross contract and Blood Center GPO technology choices are expected to reduce fiscal 2017 operating income by approximately $12 million. Increased double-dose platelet collection in Japan also pressured sales.
- Product recall: A June 2016 voluntary recall of certain U.S. whole-blood collection kits followed filter failures to adequately remove leukocytes. The company recorded $4.3 million in charges through October 1 and may record additional amounts. Customer claims totaled $14.5 million; the company accrued $0.6 million, the low end of its estimated loss range, because it could not identify a better estimate. Returns and claims were still being assessed; insurance may cover some claims.
- Other contingencies: H2 Equity sought $17 million in a SOLX arbitration over alleged milestone and royalty obligations; the company asserted it had meritorious defenses and accrued no amount because the potential loss could not be estimated. Italian employment-related claims totaled approximately $4.6 million; management considered losses unlikely and recorded no accrual.
- Tax and controls: A foreign subsidiary’s loss of eligibility for a negotiated tax holiday resulted in a $1.4 million discrete tax provision and increased uncertain tax benefits. A material weakness in income-tax accounting controls remained unremediated; management concluded disclosure controls were ineffective as of October 1, 2016 and described ongoing remediation steps.
- Other exposures: Approximately 40.6% of six-month sales were outside the U.S.; management said yen and euro weakness could adversely affect fiscal 2017 revenue and operating income. A 100-basis-point increase in LIBOR would add approximately $3.9 million of annual interest expense. The filing also identifies competitive, regulatory, demand, customer-ordering, and foreign-market risks.
- Full U.S. market release of the TEG 6s device was expected in fiscal 2018, subject to additional clearances. The impact of adopting the new revenue-recognition standard was still under assessment.
Investor verification points
- Track whether restructuring delivers the estimated $40 million in fiscal 2017 savings and whether additional charges or asset impairments arise.
- Monitor recall returns, resolution of the $14.5 million in customer claims, recorded accruals, and any insurance recoveries.
- Assess whether Blood Center pricing and market-share pressures, including the estimated $12 million operating-income impact, and Japan platelet declines persist.
- Review progress remediating the income-tax accounting material weakness and developments in the foreign tax assessment and SOLX arbitration.
- Check cash conversion, inventory levels, debt repayments, covenant compliance, and sensitivity to foreign exchange and interest rates.