Haemonetics Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2018, ended September 30, 2017. Comparisons are with the quarter and six months ended October 1, 2016. Haemonetics provides blood and plasma collection, processing, transfusion-management and hemostasis products and software.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $225.4 million, up 2.3% | $436.3 million, up 1.4% |
| Gross profit / margin | $104.6 million / 46.4%; margin down 0.9 percentage point | $196.2 million / 45.0%; margin down 0.4 percentage point |
| Operating income / margin | $24.3 million / 10.8%, versus $24.8 million / 11.3% | $40.9 million / 9.4%, versus $16.9 million / 3.9% |
| Net income | $20.1 million, up 1.4% | $40.2 million, versus $9.5 million |
| Diluted EPS | $0.38, versus $0.38 | $0.76, versus $0.18 |
The six-month improvement in operating income and earnings reflects lower restructuring and turnaround costs than in the prior-year period, reduced R&D spending, and an $8.0 million divestiture gain. The second-quarter operating-income decline was attributed mainly to higher restructuring and turnaround costs and variable compensation. Prior-year comparative net income was overstated by an amount management deemed immaterial: absent the correction, it would have been lower by $0.9 million for the quarter and $1.2 million for the six-month period.
Cash flow and liquidity: First-half operating cash flow was $97.3 million, versus $70.0 million; capital expenditures were $29.1 million, versus $41.6 million. Cash increased by $64.1 million to $203.6 million. Working capital was $298.4 million and the current ratio was 2.2 at September 30. Total debt was approximately $286.6 million, implying net debt of approximately $83.0 million. The company reported compliance with its credit covenants and no revolving-facility borrowings.
Other metrics: The effective tax rate was 12.1% for the quarter and 12.7% for the six months, compared with 13.2% and 25.8%. The six-month prior-year rate included a $1.4 million discrete tax expense. International sales were 38.4% of quarterly revenue and 38.2% of first-half revenue.
Business trends and changes
- Plasma revenue grew 6.0% for the quarter and 5.0% for the half year, supported by U.S. disposable sales. Hemostasis Management grew 10.1% and 12.4%, respectively, led by TEG disposables.
- Blood Center revenue declined 3.4% for the quarter and 5.5% for the half year. Red-cell pricing, lower platelet demand and weaker software/equipment sales were cited. Cell Processing revenue declined 0.7% for the quarter and was roughly flat for the half year; management cited reduced OrthoPAT demand amid improved blood-management practices.
- Gross margin pressure reflected manufacturing challenges, SEBRA divestiture effects, alternative sourcing costs amid liquid-solutions capacity delays, foreign exchange and underused manufacturing capacity.
- On April 27, 2017, Haemonetics sold the SEBRA sealer business for net proceeds of $9.0 million and recorded an $8.0 million pretax gain. The business generated about $6.5 million of revenue in fiscal 2017.
Outlook, risks and unusual items
- On November 1, 2017, the company launched a new Complexity Reduction Initiative. It expects $50–$60 million of charges, mostly cash, through fiscal 2020, and approximately $80 million of annualized savings once complete. Management cautioned that execution may be delayed or fail to deliver expected savings. No revenue or EPS guidance is provided in the filing text.
- Management expects alternative liquid-solutions sourcing to continue until capacity expansion is complete, with lower related revenue and higher customer-service costs in the interim. Capital spending is expected to rise in the second half of fiscal 2018 and fiscal 2019. The NexSys PCS received FDA 510(k) clearance in July 2017; rollout will require meaningful capital expenditures and suitable customer contracts.
- Management expects the Japanese shift toward double-dose platelet collection to pressure fiscal 2018 revenue. It also expects continued U.S. declines in whole-blood disposable demand and ongoing price competition.
- The company reported that disclosure controls were ineffective at September 30 because a material weakness in inventory controls had not been fully remediated. Management performed additional procedures for this filing and was continuing remediation.
- Contingencies include Italian employment claims (about $4.8 million claimed; $0.8 million liability recorded), the SOLX arbitration ($17 million sought; $0.4 million liability recorded), and a whole-blood-kit recall with a recorded $3.4 million customer-claims liability against a stated loss range of $3.4–$14.2 million. A $2.9 million insurance receivable was recorded for the recall. A separate customer contract demand was $4.6 million; the company recorded $2.8 million for probable damages and retained $1.8 million as deferred revenue.
- Variable-rate debt exposes the company to interest-rate risk: management estimated a 100-basis-point LIBOR increase would add about $2.9 million to annual interest expense. Foreign-exchange hedges reduce, but do not eliminate, currency exposure.
Investor verification points
- Track whether the inventory-control material weakness is remediated and whether financial reporting remains reliable.
- Compare actual restructuring charges, timing and savings with the announced $50–$60 million cost and approximately $80 million annualized savings targets.
- Monitor liquid-solutions capacity expansion, alternative-sourcing costs and NexSys PCS placement investment and customer contract economics.
- Assess whether Plasma and Hemostasis growth can offset continuing Blood Center and Cell Processing pressures, including Japanese collection-method changes.
- Follow the outcomes and potential additional costs or recoveries for the recall, SOLX arbitration, Italian litigation and customer contract matter.
- Reconcile cash generation, capital spending and term-loan repayments with the debt maturity in July 2019 and covenant compliance.