Haemonetics Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended April 1, 2017 (52 weeks). The filing is an annual report, not a standalone “2016 Q4” filing; the fourth-quarter results below are for FY2017.
Business context
Haemonetics develops blood and plasma collection, processing, hemostasis-management and transfusion-management products and software. Management identified Plasma and Hemostasis Management as the strongest growth opportunities, while seeking to reduce costs and narrow the scope of the challenged Blood Center business. The company launched a multi-year restructuring and strategic turnaround.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $886.1 million | $908.8 million |
| Gross profit / margin | $378.5 million / 42.7% | $405.9 million / 44.7% |
| Operating income (loss) | $(19.4) million | $(43.9) million |
| Net income (loss) | $(26.3) million | $(55.6) million |
| Diluted EPS | $(0.51) | $(1.09) |
| Operating cash flow | $159.7 million | $121.9 million |
| Capital expenditures | $76.1 million | $102.4 million |
| Cash and cash equivalents | $139.6 million | $115.1 million |
| Total debt | $314.6 million | $408.0 million |
| Working capital / current ratio | $298.9 million / 2.4 | $302.5 million / 2.6 |
FY2017 revenue fell 2.5% reported and 1.2% at constant currency. FY2016 included an extra week, estimated to have added about 2% to revenue versus FY2017. Gross margin declined 200 basis points, reflecting inventory charges and impairments, losses on Plasma liquid solutions, Blood Center pricing pressure and foreign exchange, partly offset by cost savings. Operating and net losses narrowed, principally due to lower impairments and spending and restructuring savings.
By product line, Plasma revenue rose 7.6% to $410.7 million and Hemostasis Management rose 11.2% to $66.1 million. Blood Center revenue declined 14.4% to $303.9 million and Cell Processing declined 6.3% to $105.4 million. Net debt was approximately $175.1 million. The $100 million revolving facility had no borrowings; the term loan matures July 1, 2019, and the company reported compliance with its debt covenants.
FY2017 fourth-quarter revenue was $228.1 million; gross profit was $82.1 million; operating loss was $57.5 million; net loss was $51.1 million; diluted loss per share was $0.98.
Material changes and unusual items
- In the fourth quarter, Haemonetics recorded a $57.0 million goodwill impairment for North America Blood Center, the full goodwill balance of that reporting unit. It also recorded $18.1 million of charges on certain long-lived assets following its strategic review; additional impairment amounts were classified in cost of goods sold.
- The company incurred $28.7 million in charges for the initial phase of its new restructuring initiative and $5.6 million under a prior program. Management said the initial phase was substantially complete and that it had exceeded the phase’s $40 million savings target. Further charges and benefits were expected in FY2018 and beyond.
- A June 2016 voluntary recall of U.S. whole-blood collection kits resulted in $7.1 million of FY2017 charges. Customer claims sought $14.2 million; the company accrued $3.4 million at the low end of its estimated loss range and recorded a $2.9 million insurance receivable. Further charges or recoveries remained possible.
- On April 27, 2017, after year-end, the company sold its SEBRA sealers product line for net proceeds of $9 million, subject to adjustment; it expected a preliminary pretax gain of $8 million. The line generated about $6 million of FY2017 revenue.
- Financial statements received an unqualified audit opinion, but management and the auditor reported a material weakness in inventory accounting controls related to manufacturing variances. The auditor issued an adverse opinion on internal control over financial reporting. Management said year-end inventory and related accounts were accurate and remediation was ongoing. The tax-accounting material weakness reported previously was considered remediated.
- The filing notes corrected prior-period and current-period misstatements related in part to inventory manufacturing variances. The corrections were considered immaterial to the affected periods, but the control weakness was not yet remediated.
Outlook, commentary and key risks
- The PCS 300 plasma collection device was submitted to the FDA for 510(k) clearance in April 2017. Rollout plans called for significant device placements, requiring meaningful capital expenditures and new customer contracts; regulatory clearance and acceptable contract terms were not assured.
- Management expected continued U.S. blood-center market pressure, including lower transfusion rates, price competition and declines in red-cell and whole-blood demand. American Red Cross pricing and competitor selections by blood-center purchasing groups continued to pressure red-cell revenue and margins; management anticipated the impact would persist into the first half of FY2018 and stabilize in the second half.
- Delays expanding liquid-solutions production capacity required alternate supply sources and could reduce revenue, raise costs or lead to contractual penalties. Management expected alternate sourcing to continue until capacity was available.
- Plasma and Hemostasis Management showed growth, but plasma customer concentration and upcoming contract expirations were significant exposures: one plasma customer represented about 14% of FY2017 revenue, and four major Plasma customer contracts expired before the end of FY2019.
- Other notable risks include variable-rate debt, foreign-exchange exposure, reliance on sole-source suppliers, regulatory and product-quality risks, customer consolidation and pricing pressure, and the possibility of further asset impairments. The company expected the U.S. dollar’s relative strength against the euro to pressure FY2018 operating income.
Investor verification priorities
- Review the inventory-control material weakness, the adverse ICFR audit opinion, the corrected misstatements and evidence of remediation and testing.
- Track Blood Center revenue, gross-margin trends, U.S. collection demand and the effect of Red Cross and purchasing-group contracts.
- Verify FDA clearance, customer contracts, device placements and capital requirements for PCS 300, alongside progress on liquid-solutions capacity.
- Monitor Plasma customer renewals and concentration, restructuring costs versus realized savings, and any further impairments.
- Assess the recall claim exposure and insurance recovery, the SOLX arbitration claim (up to $17 million asserted), and the $4.4 million Italian employment claims, for which no accrual was recorded because losses were considered unlikely.
- Confirm debt repayment and covenant capacity, given $314.6 million of debt and the July 2019 credit-facility maturity.