Haemonetics Corporation — Form 10-Q Summary
Business context and period. Haemonetics provides blood-management devices, proprietary disposable products, diagnostics and software. This report covers the fiscal third quarter and first nine months ended December 31, 2011; comparable periods ended January 1, 2011. Disposables represented approximately 82.2% of nine-month revenue. The company reported one operating segment.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $191.2 million, up 8.1% | $541.2 million, up 6.8% |
| Gross profit / margin | $95.9 million / 50.2%; margin down 270 bps | $274.6 million / 50.7%; margin down 210 bps |
| Operating income / margin | $25.3 million / 13.2%, down 11.3% | $67.8 million / 12.5%, down 17.0% |
| Net income | $18.3 million, down 7.5% | $49.1 million, down 16.8% |
| Diluted EPS | $0.72, down from $0.77 | $1.90, down from $2.32 |
| Operating cash flow | Not separately reported | $81.3 million, versus $91.3 million |
Revenue growth excluding foreign-exchange effects was 7.1% for the quarter and 4.8% year to date. U.S. revenue rose 15.4% and 11.3%, respectively; international revenue rose 2.2% and 2.8%. Nine-month product revenue included plasma disposables of $196.2 million (+13.9%), blood-center disposables of $159.6 million (+5.4%), hospital disposables of $89.0 million (−1.7%), software of $51.2 million (+4.2%), and equipment and other revenue of $45.2 million (+4.2%).
At December 31, cash and equivalents were $205.4 million, working capital was $357.8 million, and the current ratio was 4.3. Total debt was approximately $5.7 million; reported net cash was $199.7 million. Nine-month capital expenditures were $37.0 million. Cash increased by $8.7 million during the nine months, after $50.0 million of share repurchases.
Material changes and management commentary
- Revenue growth was led by plasma, blood-center and diagnostics products, and equipment sales. Plasma revenue benefited from increased collections by North American commercial fractionation customers.
- Profitability declined despite revenue growth. Management attributed lower margins to product-quality costs, sales mix (more lower-margin plasma and fewer higher-margin hospital products), higher freight costs, and costs from rapid plasma-disposable demand growth. Operating expenses also increased due to restructuring, research and development, and sales and marketing investment.
- OrthoPAT disposable revenue fell 13.9% year to date, reflecting a voluntary recall of devices manufactured before 2002. Management expected device replacements to be completed in fiscal Q4 2012.
- Operating cash flow fell by $10.0 million year over year, in part because of increased inventory to support plasma growth, the Cell Saver Elite launch and OrthoPAT replacements, as well as lower net income.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expected plasma collection growth to moderate, platelet-disposable growth to slow in fiscal Q4, and the cited margin pressures to continue through the balance of fiscal 2012.
- The company anticipated an additional $1–$2 million of restructuring charges in the remaining three months of fiscal 2012. It stated that cash, operating cash flow and option exercises should be sufficient for cash requirements over the next 12 months.
- European customers submitted approximately $10.1 million of claims related to a quality issue with the High Separation Core Bowl. The company’s estimated liability was $7.1 million, with at least $3.0 million deemed recoverable under insurance; it recorded $4.1 million of net expense for the nine months. It was assessing whether additional amounts could be recovered.
- A contract manufacturer’s Thailand facility was damaged by floods. Production was transitioned to other facilities; the company reported minimal transition costs and no material customer supply disruption.
- Foreign-exchange exposure remains significant: approximately 51% of nine-month sales were outside the U.S. Forward contracts hedge anticipated exposures but do not eliminate currency volatility. A hypothetical 10% dollar strengthening would increase contract fair value by $9.3 million; a 10% weakening would decrease it by $11.0 million. Long-term debt is at fixed rates.
- The U.S. Fenwal patent case ended in Fenwal’s favor following a 2011 summary judgment; a related German case continued. Final Italian convictions involving a former subsidiary and two former employees were affirmed in June 2011; the company reported no business impact to date. Management stated that other legal matters were not expected to materially affect results or financial position.
- The company repurchased 852,410 shares for approximately $50.0 million during the period, effectively completing its authorized fiscal 2012 program.
Important facts for investors to verify
- Whether the High Separation Core Bowl claims, insurance recoveries and resulting net costs ultimately differ from the December estimates.
- Completion and financial effects of the OrthoPAT device replacement program, and any related customer or regulatory developments.
- Whether plasma growth moderates as expected and whether product mix, quality costs and freight continue to pressure gross margins.
- Whether the additional restructuring charges remain within the estimated $1–$2 million and deliver anticipated benefits.
- Cash conversion and inventory levels, foreign-exchange exposure and the company’s capital-allocation plans following completion of the share-repurchase authorization.