Haemonetics Corporation — Form 10-Q Summary
Business context and reporting period. Haemonetics provides blood-management devices, disposable products, software and services to blood and plasma collectors, hospitals and patients. This report covers the 13 weeks and nine months ended December 26, 2015 (fiscal 2016 Q3), compared with the periods ended December 27, 2014. Fiscal 2016 has 53 weeks, including a 14-week fourth quarter; fiscal 2015 had 52 weeks. The company reports one operating segment.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $233.4 million | $231.8 million | $666.5 million | $683.9 million |
| Gross profit / margin | $108.9 million / 46.6% | $111.7 million / 48.2% | $316.7 million / 47.5% | $326.1 million / 47.7% |
| Operating income (loss) | $(61.2) million | $18.3 million | $(38.4) million | $29.0 million |
| Net income (loss) | $(59.4) million | $16.0 million | $(46.8) million | $19.8 million |
| Diluted EPS | $(1.17) | $0.31 | $(0.92) | $0.38 |
| Operating cash flow | — | — | $68.6 million | $71.9 million |
| Capital expenditures | — | — | $73.9 million | $100.5 million |
Q3 revenue increased 0.7% year over year, or 3.4% excluding foreign exchange; nine-month revenue declined 2.5%, or increased 0.6% excluding foreign exchange. Gross margin contracted 160 basis points in Q3 and 20 basis points for the nine-month period. Q3 operating expenses included $85.0 million of impairment charges, partly offset by a $4.9 million contingent-consideration gain.
Cash, debt and liquidity. Cash and cash equivalents were $105.2 million at December 26, 2015, down from $160.7 million at March 28, 2015. Working capital was $326.0 million and the current ratio was 2.9. Cash provided by operations less capital expenditures was approximately negative $5.3 million for the nine months. Total debt on the balance sheet was approximately $427.1 million; the company reported $422.3 million outstanding under its credit facilities, including a $50.0 million revolver balance. The facility rate was 1.625%, and the company reported compliance with its covenants. Cash less total debt was approximately negative $321.9 million.
Material changes and operating trends
- Q3 plasma disposable revenue rose 11.2%; diagnostics revenue rose 16.5%. These gains were offset by declines in blood-center products and OrthoPAT.
- For the first nine months, plasma disposables grew 6.0%, while blood-center disposables fell 10.8%. Whole-blood demand, lower U.S. collection volumes, pricing concessions and competitive conversions pressured blood-center results.
- International revenue fell 5.0% in Q3 and 8.6% year to date, with currency weakness and reduced Russian distributor orders contributing. U.S. revenue rose 5.5% in Q3 and 2.6% year to date.
- Q3 and nine-month net losses compare with profits in the prior-year periods, primarily because of the impairment charges. Lower restructuring and transformation costs partly offset the operating impact.
- Operating cash flow declined $3.3 million year over year, chiefly reflecting a working-capital outflow, including lower accounts payable and accrued expenses. Capital spending fell as manufacturing projects in Malaysia and Tijuana approached completion.
Outlook, risks and unusual items
- Impairments: The company recorded a preliminary $66.3 million goodwill impairment, representing all goodwill allocated to EMEA, amid weaker regional expectations, particularly in Russia. It also impaired $18.7 million of SOLX intangible assets after concluding expected customer pricing would not support production costs and further investment. The EMEA goodwill test was not final; management warned the year-end determination could materially change the estimate.
- Commercial and market risks: Management cited intense pricing and market-share competition, declining U.S. blood-center collections, blood-management practices reducing demand, and conversion by blood-center groups to competing red-cell technologies. The American Red Cross contract is expected to provide full share of its apheresis red-cell business at lower prices and still reduce revenue and gross profit.
- Foreign exchange: Approximately 43.1% of nine-month sales were generated outside the U.S. Management expected yen and euro weakness to pressure revenue and operating income into the remainder of fiscal 2016 and fiscal 2017. Hedging mitigates but does not eliminate currency exposure.
- Restructuring: Management estimated approximately $40 million of fiscal 2016 restructuring and transformation costs, net of contingent-consideration income. The manufacturing transformation was expected to conclude after transferring remaining activity from Bothwell, Scotland, by mid-fiscal 2017.
- Debt sensitivity: A 100-basis-point increase in LIBOR was estimated to add $4.2 million of annual interest expense, before considering the $250 million of borrowings covered by interest-rate swaps.
- Legal matters: Italian employment-related claims sought approximately $3.7 million in damages. The company had accrued no amount because potential loss could not be reliably estimated; management believed legal matters overall would not materially affect results or financial position.
- Tax and controls: The nine-month effective tax benefit rate was 3.8%; U.S. deferred tax assets remained subject to a valuation allowance because of a three-year cumulative loss position. Management disclosed immaterial corrections to prior-period tax and liability amounts; without them, nine-month net income would have been $1.1 million lower. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Final EMEA goodwill impairment and any further impairment exposure, particularly the Americas Blood Center and Hospital unit, whose estimated fair value exceeded carrying value by about 25.8%.
- Subsequent blood-center contract pricing, competitive conversions, and their effects on red-cell revenue and gross margin.
- Whether plasma and diagnostics growth can offset ongoing pressure in blood-center and OrthoPAT products, including the stated OrthoPAT supply-chain interruption.
- Cash generation, working-capital requirements, completion costs and timing of the manufacturing transformation, and progress toward reducing debt.
- Currency movements, Russian market conditions, and realization of tax benefits in jurisdictions carrying valuation allowances.