Haemonetics Corporation — Form 10-Q Summary
Business context and reporting period. Haemonetics provides blood-management products, devices, software and services. This filing covers fiscal 2013’s second quarter, the 13 weeks ended September 29, 2012, and the six-month period then ended; comparisons are to the corresponding fiscal 2012 periods. On August 1, 2012, the company acquired Pall Corporation’s whole-blood business, adding manual blood collection, filtration and processing products. The acquired business contributed seven weeks of sales in the quarter.
Financial performance
| Metric | Three months ended Sep. 29, 2012 | Year-over-year change | Six months ended Sep. 29, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $218.2 million | +21.6% | $394.7 million | +12.8% |
| Gross profit / margin | $101.8 million / 46.6% | +13.1%; margin down 3.5 points | $191.9 million / 48.6% | +7.4%; margin down 2.5 points |
| Operating income / margin | $9.9 million / 4.5% | Down 46.7%; margin was 10.3% a year earlier | $23.0 million / 5.8% | Down 45.9%; margin was 12.1% a year earlier |
| Net income | $6.5 million | Down 52.8% | $16.3 million | Down 47.0% |
| Diluted EPS | $0.25 | Down from $0.54 | $0.63 | Down from $1.18 |
Revenue drivers. Quarterly revenue growth included $28.6 million from the acquired whole-blood business, along with growth in plasma, surgical and diagnostics products. Six-month disposable revenue rose 14.8%; software revenue was essentially flat, and equipment and other revenue increased 6.9%. Management noted that the prior-year comparison was affected by Japan Red Cross purchases in March 2012, which shifted ordering and weighed on the June 2012 quarter.
Cash flow and liquidity. For the six months, operating cash flow was $33.6 million, versus $52.5 million a year earlier; investing cash outflow was $570.2 million, including the $535.1 million acquisition payment; financing cash inflow was $494.8 million, primarily from the acquisition loan. Cash declined to $187.1 million from $228.9 million at fiscal year-end. Working capital was $420.6 million and the current ratio was 3.7. Capital expenditures were $34.4 million.
Debt. The company had $475.0 million outstanding under a five-year, variable-rate term loan, plus $3.3 million of mortgage debt and $3.3 million under a bank overdraft facility. The term loan’s effective interest rate, including fees, was 2.0%; a 100-basis-point LIBOR increase was estimated to raise annual interest expense by $4.8 million. The $50 million revolving facility was undrawn. Haemonetics reported compliance with its leverage and interest-coverage covenants at quarter-end.
Material changes, outlook and risks
- Acquisition and earnings effects: The Pall whole-blood acquisition cost $535.1 million, funded mainly with the term loan. The preliminary purchase-price allocation included $207.1 million of goodwill and $206.8 million of intangible assets; valuations remained provisional. The acquired business generated $28.6 million in revenue and reduced reported quarterly net income by an estimated $3.5 million. The quarter included $8.3 million of acquired-inventory fair-value expense and $11.5 million of acquisition and integration costs; six-month acquisition and integration costs were $17.4 million.
- Margins and expenses: Management attributed lower gross margin partly to the acquired inventory step-up and the lower-than-company-average margin mix of whole-blood products. It expected the inventory step-up to run off by the quarter ending December 31, 2012. Selling, general and administrative expense also included about $8.0 million of incremental operating costs for the acquired business during the two months after closing.
- Guidance and planned spending: Management expected fiscal 2013 whole-blood revenue of $135 million to $145 million and approximately $1 million to $2 million of additional restructuring charges during the remaining six months of the fiscal year. It expected fiscal 2013 depreciation expense to decline by about $4.5 million due to a change in estimated equipment useful lives, increasing after-tax income by about $3.3 million. Management said available liquidity sources were sufficient for expected requirements over the next 12 months.
- Other developments: The company invested $1.0 million in Hemerus and said it expected that acquisition to close in the first half of fiscal 2014; additional contingent payments and royalties may apply. On October 29, 2012, the board approved a two-for-one stock split, to be distributed November 30 to holders of record November 9.
- Risks and contingencies: Risks include currency movements, variable-rate debt, customer ordering patterns, competition, regulatory and product-demand changes, and economic uncertainty. Management cited potential payment delays in government-supported healthcare systems and noted $20.8 million of net receivables in Italy at quarter-end. For a European HS Core product-quality matter, the company had recorded a $10.3 million liability and $8.3 million in insurance receivables, and did not expect additional material claims or recoveries. The filing also describes ongoing Fenwal patent litigation in Germany; the U.S. case had ended in Fenwal’s favor after prior damages and an injunction were vacated.
Important facts for investors to verify
- Whether the Pall acquisition achieves the projected fiscal 2013 revenue range and expected integration benefits, and how final purchase accounting changes the preliminary goodwill and intangible-asset values.
- Whether margins recover after the acquired-inventory step-up expires, given the acquired business’s lower gross-margin mix and ongoing integration costs.
- Debt repayment capacity, variable-rate interest exposure and covenant headroom as the company integrates the acquisition.
- Whether operating cash flow improves after acquisition-related costs and working-capital investment, and whether capital spending and share repurchases remain consistent with liquidity needs.
- Progress on Hemerus, the HS Core claims and insurance recovery, and the German Fenwal litigation.