Haemonetics Corporation (10-Q) — Fiscal 2011 Q3
Business context and period. Haemonetics provides blood-management devices, consumables, software and related services. This unaudited report covers the quarter and nine months ended January 1, 2011; comparisons are with the corresponding periods ended December 26, 2009. Balance-sheet comparisons are with April 3, 2010. Amounts below are U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $176.8 million, up 7.0% | $506.7 million, up 6.4% |
| Gross profit / margin | $93.5 million / 52.9% (51.7% prior year) | $267.7 million / 52.8% (52.4% prior year) |
| Operating income / margin | $28.6 million / 16.2% (15.6% prior year) | $81.7 million / 16.1% (16.6% prior year) |
| Net income | $19.7 million, up 7.9% | $59.0 million, up 8.4% |
| Diluted EPS | $0.77, versus $0.71 | $2.32, versus $2.08 |
| Operating cash flow | Not presented for the quarter | $91.3 million, versus $94.0 million |
For the nine months, investing activities used $41.0 million, including $35.0 million of capital expenditures and $6.2 million for the ACCS acquisition. Financing activities used $22.2 million, including $50.0 million of share repurchases, partly offset by stock-option and employee-plan proceeds and debt repayments. Cash increased $28.0 million to $169.5 million.
At January 1, 2011, working capital was $300.5 million and the current ratio was 3.8, versus 2.9 at April 3, 2010. Total debt was $12.4 million, giving a reported net cash position of $157.1 million. DSO increased to 62 days from 59; disposable finished-goods inventory turnover improved to 7.7 from 5.4.
Material changes and operating drivers
- Software-solutions revenue more than doubled in the quarter to $16.6 million and rose 90.4% for the nine months, mainly reflecting Global Med services and BloodTrack growth.
- Disposables were broadly flat: up 0.8% in the quarter and down 0.2% year to date. Nine-month plasma disposables fell 2.9%; platelet disposables rose 5.2%; hospital disposables declined 0.4%. Diagnostics revenue grew 22.6% year to date.
- Management attributed growth to acquisitions, emerging markets, software sales and manufacturing cost improvements. Higher R&D and SG&A reflected acquired businesses, restructuring and Global Med integration; operating margin declined year to date.
- Foreign exchange contributed 1.3 percentage points to quarterly revenue growth and reduced nine-month growth by 0.1 point. Excluding FX, revenue grew 5.7% for the quarter and 6.5% for the nine months.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management stated that cash, internally generated funds, borrowings and option proceeds should fund expected needs—including capital spending, Salt Lake City manufacturing expansion, repurchases, development and working capital—for at least the next 12 months.
- Management expects the Japan Red Cross’s increased plasma sourcing from whole-blood collections to continue, though moderate. Plasma customer collection slowdowns, a customer product withdrawal, competition, and lower surgical/procedure volumes pressured certain product lines; hospital capital spending remained constrained.
- Fiscal 2011 restructuring included $3.4 million of recorded costs, a $1.7 million stock-compensation charge from accelerated vesting, and $1.5 million of Global Med integration costs. A $1.9 million reduction in Neoteric contingent consideration was recorded as income; the liability was $2.0 million at quarter end.
- The $60.4 million Global Med acquisition purchase-price allocation remained preliminary; revisions could change goodwill, identifiable intangibles and amortization. ACCS was acquired for $6.2 million in December 2010, with allocation still under review.
- Key risks cited include foreign-exchange movements, product demand and acceptance, competition and pricing, regulatory uncertainty, healthcare-market conditions, customer ordering patterns, industry consolidation, and international-market uncertainty. About 53% of nine-month sales were generated outside the U.S.; the company uses forward contracts but does not eliminate FX exposure.
- Haemonetics’ patent litigation against Fenwal remained unresolved after an appellate reversal and remand; related U.S. and German proceedings were ongoing. The company stated that its other legal matters were not expected to materially affect results or financial position, based on counsel’s advice.
Investor verification priorities
- Check whether software growth and acquisition contributions translate into sustained organic growth and operating-margin improvement.
- Track plasma, surgical and orthopedic consumables for recovery or further weakness, and assess market-share and customer-concentration exposure.
- Review the final Global Med and ACCS purchase-price allocations, amortization expense, and remaining restructuring and integration costs.
- Assess cash conversion and working-capital trends, particularly the decline in operating cash flow and increase in DSO.
- Monitor the Fenwal litigation, contingent consideration, tax-audit exposures and the company’s sensitivity to currency movements.