Haemonetics Corporation — Form 10-Q Summary
Business context and reporting period
Haemonetics provides products and software for plasma and blood collection, hospital transfusion, cell processing, and hemostasis management. This report covers the three months ended July 1, 2017, the first quarter of fiscal 2018, compared with the three months ended July 2, 2016.
Financial results and liquidity
| Metric | Q1 FY2018 | Comparable quarter |
|---|---|---|
| Net revenue | $211.0 million | $210.0 million |
| Gross profit / margin | $91.7 million / 43.5% | $91.1 million / 43.4% |
| Operating expenses | $75.1 million | $98.9 million |
| Operating income (loss) | $16.6 million | ($7.9 million) |
| Net income (loss) | $20.1 million; $0.38 diluted EPS | ($10.3 million); ($0.20) diluted EPS |
| Cash from operations | $38.4 million | $30.7 million |
Revenue grew 0.5% reported and 1.0% at constant currency. U.S. revenue rose 4.3%, while international revenue declined 5.2% reported, or 3.7% at constant currency. By business unit, Plasma grew 4.0% and Hemostasis Management 14.8%; Blood Center fell 7.6%, while Cell Processing grew 1.0%.
Operating expenses decreased 24.1%, chiefly reflecting lower restructuring and turnaround costs and savings from the prior-year program. The quarter also included an $8.0 million pretax gain on the SEBRA divestiture, reported below operating income; pretax income was $23.3 million and the tax provision was $3.1 million, for a 13.4% effective tax rate. Gross margin was nearly unchanged, with higher alternate-source liquid-solution costs offsetting other factors.
Cash and cash equivalents were $171.7 million at July 1, up from $139.6 million at April 1. Working capital was $322.6 million and the current ratio was 2.6. The company reported net cash of $131.3 million (cash less total debt). The term loan had $303.5 million outstanding; no revolving-credit borrowings were outstanding. The credit facilities mature July 1, 2019, and the company reported compliance with covenants. Capital expenditures were $13.7 million, and the company repaid $11.9 million of term-loan principal.
Material changes, outlook, and risks
- Management said the initial phase of its multi-year restructuring was substantially complete, but expects additional charges and benefits in fiscal 2018 and beyond. Current-quarter restructuring and turnaround costs were $2.5 million, versus $18.8 million in the comparable quarter.
- FDA clearance for the NexSys PCS plasma system was received in July 2017. Management expects limited production to begin and plans a broader rollout involving significant device placements, capital spending, and customer contracts with suitable pricing and volumes. No specific financial guidance was provided.
- Delays expanding liquid-solutions production continue to require purchases from alternate suppliers, increasing costs and reducing liquid-solutions revenue. Management expected this to continue until capacity expansion is complete.
- Blood Center demand faces pressure from lower transfusion rates, pricing competition, and more efficient platelet collection. Management expected continued whole-blood market declines and fiscal 2018 revenue pressure from the shift toward double-dose platelet collection in Japan.
- A material weakness in inventory-related internal controls remained unremediated at quarter-end; management concluded disclosure controls were not effective. Remediation efforts include increased oversight, improved reconciliation procedures, and better communication between inventory operations and the controller’s group.
- The 2016 whole-blood collection-kit recall had a recorded $3.4 million liability for customer claims against claims seeking $14.2 million; the company’s estimated loss range was $3.4 million to $14.2 million, with no best estimate within the range. It reported a $2.9 million insurance receivable and noted further charges could arise.
- Other contingencies include a $17 million SOLX arbitration claim, for which the company recorded a $0.4 million liability reflecting settlement discussions, and Italian employment litigation involving approximately $4.7 million in claimed damages; management considered losses in the Italian matters unlikely and had accrued no amount.
- Foreign exchange and variable-rate debt create market exposure. The company estimated a 10% U.S. dollar move would affect forward-contract fair value by $3.8 million; a 100-basis-point LIBOR increase would add about $3.0 million to annual interest expense.
Important facts for investors to verify
- Whether the inventory-control material weakness is remediated and controls operate effectively over time.
- Progress, timing, capital requirements, and customer economics for NexSys PCS placements and the liquid-solutions capacity expansion.
- Future recall-related claims, insurance recoveries, and exposure relative to the disclosed loss range.
- Whether restructuring savings persist and whether Blood Center declines or alternate-supply costs further affect revenue and margins.
- Developments in the SOLX arbitration, Italian litigation, and the company’s scheduled fiscal 2018 debt repayments.