Haemonetics Corporation — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2015, the three months ended September 27, 2014; the filing also reports six-month results. Comparisons are with the corresponding fiscal 2014 periods. Haemonetics provides blood-management products, equipment and software.
Financial performance
| Metric | Three months ended Sep. 27, 2014 | Six months ended Sep. 27, 2014 |
|---|---|---|
| Revenue | $227.6 million, down 3.5% | $452.1 million, down 0.7% |
| Gross profit / margin | $108.1 million / 47.5% (50.9% prior year) | $214.4 million / 47.4% (50.8% prior year) |
| Operating income / margin | $12.4 million / 5.5% (9.9% prior year) | $10.7 million / 2.4% (3.7% prior year) |
| Net income | $7.5 million, down 54.8%; diluted EPS $0.14 (prior year $0.32) | $3.8 million, down 55.7%; diluted EPS $0.07 (prior year $0.17) |
| Operating cash flow | Not separately reported for the quarter | $45.0 million (prior year $42.8 million) |
First-half investing cash flow was negative $70.5 million, including $70.9 million of capital expenditures; financing cash flow was negative $35.5 million, including $33.8 million of share repurchases. Cash declined $62.5 million from fiscal year-end to $130.0 million.
At September 27, 2014, working capital was $391.9 million and the current ratio was 3.4. Total debt was approximately $429.9 million and cash was $130.0 million; reported net debt was approximately $299.9 million. The company had $151.1 million of receivables and $209.4 million of inventory. It reported compliance with its credit covenants.
Material changes and operating drivers
- Whole-blood disposables revenue fell 28.6% in the quarter and 27.2% for the half year, driven by the loss of American Red Cross business, weaker demand, lower share, pricing and order timing. The company expects the lost contract to reduce annualized revenue by approximately $25 million.
- Plasma disposables grew 6.1% in the quarter and 13.1% year to date; diagnostics revenue grew 25.8% and 26.1%, respectively. Software revenue increased 6.0% in both periods.
- Gross margin fell 340 basis points year over year in both reported periods. Management attributed the decline mainly to lower whole-blood volume and pricing, which reduced manufacturing efficiency; VCC cost savings partly offset the pressure.
- Operating income declined 47.0% in the quarter and 36.1% year to date. Management cited lower whole-blood revenue, weaker manufacturing efficiency and higher variable compensation; lower restructuring and transformation costs partly offset these factors.
- International revenue represented approximately 45.8% of first-half sales. Management said Yen weakness negatively affected revenue and operating income and expected that pressure to continue through the remainder of fiscal 2015 and into fiscal 2016.
Outlook, risks and unusual items
- The company expects U.S. blood-center collection declines and the American Red Cross contract loss to weigh on revenue and operating cash flow through the remainder of fiscal 2015. It estimated U.S. blood-center collections would decline approximately 10% in fiscal 2015 and said the effect of lower U.S. transfusion rates may moderate in fiscal 2016.
- The ongoing Value Creation and Capture (VCC) program includes manufacturing changes and facility investments in Massachusetts, Italy, Scotland, Mexico and Malaysia. First-half restructuring and transformation charges totaled $38.3 million ($22.9 million restructuring and $15.4 million transformation costs).
- Management estimated approximately $74 million of restructuring and related expense and approximately $58 million of spending on these initiatives in fiscal 2015, plus $10–$15 million to complete initiatives through fiscal 2017. Elsewhere, it estimated $100 million of fiscal 2015 cash payments related to VCC; the filing does not clearly reconcile these differently scoped estimates.
- A June 2014 credit amendment extended the term-loan maturity to July 1, 2019, extended principal repayments, increased the revolving facility to $100 million and modified covenants. Borrowings were variable-rate; management estimated a 100-basis-point LIBOR increase would add $4.3 million of annual interest expense. Swaps fixed the rate on $250 million of borrowings.
- In October 2014, Haemonetics signed a long-term supply agreement with CSL Plasma for saline and sodium citrate, with deliveries and revenue expected to begin in fiscal 2016. It expects to expand its Union, South Carolina facility, requiring cash through fiscal 2016.
- Italian employment and union claims sought approximately $4.3 million in damages. The company said the claims were without merit, intended to defend them and recorded no accrual; potential loss could not be reliably estimated.
- The company repurchased approximately 1.0 million shares for $34.0 million under a $100 million authorization through September 27, 2014. No significant subsequent events were reported through issuance of the financial statements.
Important facts for investors to verify
- Whether plasma and diagnostics growth can offset continued whole-blood declines, contract losses and pricing pressure.
- Whether manufacturing transitions achieve planned savings without disrupting supply, product quality or customer relationships, and how VCC cash estimates reconcile.
- Whether cash generation can support high capital spending, restructuring commitments, the CSL-related expansion and share repurchases while managing debt.
- The sensitivity of results to foreign exchange, especially the Japanese Yen, and to variable interest rates.
- Developments in the Italian litigation and any changes to the estimated exposure or accrual.