Haemonetics Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended July 2, 2011, compared with the three months ended July 3, 2010. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where indicated.
Business context and results
Haemonetics supplies blood-management devices and related single-use disposables, software and services. Disposables and equipment-use fees represented approximately 82.7% of revenue in the quarter. The company reports one operating segment.
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $170.6 million | $163.0 million | +4.6% |
| Gross profit / margin | $88.7 million / 52.0% | $86.5 million / 53.0% | Margin down 1.0 percentage point |
| Operating expenses | $64.8 million | $62.3 million | +4.1% |
| Operating income | $23.9 million | $24.2 million | -1.2% |
| Net income / net margin | $16.9 million / 9.9% | $17.9 million / 11.0% | Net income -5.4% |
| Diluted EPS | $0.65 | $0.70 | -7.3% |
| Operating cash flow | $27.1 million | $13.5 million | +$13.6 million |
Revenue mix and material changes
- Revenue growth excluding the reported foreign-exchange contribution of 2.7% was 1.9%. U.S. revenue grew 8.9%; international revenue grew 0.5%.
- Plasma disposables rose 12.2%, reflecting increased commercial plasma collections; management expected this growth to moderate through the rest of FY2012.
- Software solutions revenue increased 10.3%. Diagnostics revenue increased 19.3%, supported by TEG adoption and emerging-market business.
- Hospital disposables declined 3.0%; OrthoPAT revenue fell 13.4%, and surgical disposables fell 3.7%. Equipment and other revenue declined 12.7%, partly due to timing of distribution orders and a key contract award deferred beyond the quarter.
- Gross margin fell to 52.0%. Management attributed the decline to product quality costs and sales mix, including lower hospital-product sales, higher plasma-disposable sales, and higher-cost substitute plasma products shipped in Europe following customer complaints.
- Operating expenses rose 4.1%, including greater R&D and investment in the worldwide selling organization. Foreign exchange accounted for much of the reported increase; planned Global Med integration savings and lower cash bonus expense partly offset costs.
- Net income also reflected lower non-operating income, primarily increased foreign-exchange transaction losses. The effective tax rate was 28.5%, versus 26.5%; the prior-year rate benefited from a $0.8 million foreign-reserve release.
Cash flow, liquidity and debt
- Cash and cash equivalents were $216.9 million at July 2, 2011, up from $196.7 million at April 2, 2011. Working capital was $365.3 million; the current ratio was 4.5.
- Net cash (cash less total debt) was $212.4 million. Total reported debt was approximately $4.5 million, including $0.9 million current and $3.6 million long-term debt. Long-term debt was fixed-rate.
- Operating activities provided $27.1 million; investing activities used $11.8 million, including $11.8 million of capital expenditures; financing activities provided $4.5 million. Cash increased $20.2 million during the quarter.
- Management said cash, operating cash flow and option exercises should be sufficient for requirements over the next 12 months, including capital spending, business development and potential repurchases under a newly authorized $50 million FY2012 program. No shares had been repurchased through July 2, 2011.
- Operating cash flow improved year over year primarily because of lower annual-bonus and restructuring/transformation payments. DSO improved to 64 days from 68; disposables finished-goods inventory turnover remained 6.1.
Outlook, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided in the filing. Management expected plasma growth to moderate, OrthoPAT weakness to continue in the near term, and product-quality and mix pressures to affect gross profit through the balance of FY2012. Replacement OrthoPAT devices were expected to be built in Q4 FY2012.
- The OrthoPAT recall concerned devices manufactured before 2002. Plasma customer complaints prompted use of a higher-cost substitute product in Europe; the company said it was working with customers and regulators and did not expect a significant effect on the plasma business.
- Foreign-exchange exposure is material: approximately 49% of sales were outside the U.S. The company uses forward contracts, but hedging does not eliminate currency volatility. A modeled 10% U.S. dollar strengthening would increase forward-contract fair value by $9.0 million; a 10% weakening would decrease it by $10.5 million.
- In Italy, a final appeals court affirmed convictions in June 2011 involving the company’s subsidiary and two former employees over alleged improper payments and product tender pricing. No further appeals were available; the company reported no business impact in Italy to date.
- The company reported various legal actions but said, based on counsel, that ultimate liability was not expected to materially affect financial position or results. No material recognized subsequent events were recorded. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the European plasma-product complaints, substitute-product costs and related regulatory discussions affect sales, costs or customer retention beyond management’s stated expectations.
- The pace and financial consequences of the OrthoPAT recall, including replacement-device timing and recovery of affected revenue.
- Whether plasma collection growth moderates as expected and whether hospital, blood-center and equipment trends improve or weaken.
- The sustainability of cash generation and the intended timing and scale of any share repurchases under the $50 million authorization.
- Potential exposure, if any, from the final Italian convictions and other legal or regulatory matters.