Haemonetics Corporation — Form 10-Q Summary
Reporting period: Fiscal 2017 third quarter and first nine months ended December 31, 2016; comparisons are with periods ended December 26, 2015. Amounts are in U.S. dollars.
Business context and financial performance
Haemonetics develops and sells blood-processing, plasma-collection, cell-processing and hemostasis-management products and software. It reported lower revenue but returned to profitability, compared with prior-year periods burdened by substantial impairment charges.
| Metric | Three months | Nine months |
|---|---|---|
| Net revenue | $227.8 million, down 2.4% (down 0.6% at constant currency) | $658.1 million, down 1.3% (up 0.2% at constant currency) |
| Gross profit / margin | $101.1 million / 44.4%, versus 46.6% | $296.4 million / 45.0%, versus 47.5% |
| Operating income (loss) | $21.2 million, versus $(61.2) million | $38.1 million, versus $(38.4) million |
| Net income (loss) | $15.4 million; diluted EPS $0.30 | $24.9 million; diluted EPS $0.48 |
| Operating cash flow | Not separately reported for the quarter | $125.2 million, versus $68.6 million |
Revenue by franchise for the nine months: Plasma increased 9.8%, Hemostasis Management increased 13.3%, Blood Center decreased 14.0%, and Cell Processing decreased 6.8%. Results include foreign-exchange headwinds; international revenue declined 7.8% reported and 4.3% at constant currency.
Liquidity, debt and cash flow
- Cash was $129.6 million at December 31, 2016, up from $115.1 million at April 2, 2016. Working capital was $280.3 million and the current ratio was 2.3.
- Total debt was approximately $336.3 million on the balance sheet; the company cited debt fair value/current value of $337.2 million. Reported net debt was $(206.6) million, indicating net cash under its calculation.
- Nine-month investing cash outflow was $58.7 million, including $60.5 million of capital expenditures. Financing cash outflow was $50.0 million, including $30.8 million of term-loan repayments and a $40.0 million reduction in revolving borrowings.
- The revolving facility’s remaining $10.0 million borrowing was repaid January 31, 2017. Scheduled term-loan principal payments were $11.9 million for the remainder of fiscal 2017 and $61.7 million in fiscal 2018. The credit facilities mature July 1, 2019; the company reported covenant compliance at quarter end.
Material changes and management commentary
- Gross margin fell 220 basis points in the quarter and 250 basis points year to date. Management cited inventory reserves, growth in lower-margin plasma liquid solutions, Blood Center price reductions, recall-related costs, software impairment, and underutilized capacity. Cost savings partly offset these pressures.
- Operating expenses fell substantially from the prior year, which included $85.0 million of goodwill and intangible-asset impairments. Current-period savings from cost initiatives also supported the return to operating income.
- A global restructuring and turnaround program was launched in fiscal 2017. Initial expected restructuring and turnaround costs were approximately $26 million, with savings initially estimated at approximately $40 million in fiscal 2017. The company recorded $22.9 million of program charges in the first nine months and continued evaluating underperforming assets and businesses.
- Management estimated the American Red Cross contract and Blood Center GPO market-share losses would reduce fiscal 2017 operating income by approximately $9 million. The impact was expected to continue through the first half of fiscal 2018, with stabilization anticipated in the second half of fiscal 2018.
- Management expected continued declines in U.S. blood transfusion rates and a price-focused, highly competitive whole-blood market. Increased double-dose platelet collection, particularly in Japan, was also weighing on demand. TEG 6s was in full market release in Australia, Europe and Japan; full U.S. release was expected in fiscal 2018, subject to additional regulatory clearances.
Risks, contingencies and unusual items
- Product recall: A June 2016 voluntary recall of certain U.S. whole-blood collection kits resulted in $4.3 million of recorded charges through December 31. Customer claims totaled $14.6 million; the company recorded $0.6 million, the low end of its estimated loss range, and said additional charges could follow. Returns were not expected to conclude until the fourth quarter of fiscal 2017.
- SOLX arbitration: H2 Equity sought $17 million in alleged milestone and royalty payments. Haemonetics disputed the claims, asserted it had defenses, and recorded no accrual because the potential loss could not be accurately evaluated.
- Other litigation: Italian employment-related claims totaled approximately $4.3 million; the company considered losses unlikely and accrued no amount.
- Controls: Disclosure controls were deemed ineffective because a material weakness in income-tax accounting had not been fully remediated. Management described remediation steps and said additional procedures were performed to support the financial statements.
- Tax and currency exposure: The nine-month tax provision included a $1.4 million discrete reserve related to a potential foreign tax assessment. Approximately 40% of sales were generated outside the U.S.; management said dollar strength, especially against the yen and euro, could negatively affect revenue and operating income.
The filing does not provide a comprehensive full-year revenue or earnings forecast. The outlook items above are the specific expectations and estimates disclosed by management.
Key facts investors should verify
- Whether recall returns and customer claims exceed the $4.3 million recorded charge and $0.6 million recorded claims liability, and whether insurance provides recovery.
- Progress on the restructuring, realized savings versus the initial estimate, and any further asset or business-unit charges.
- Whether Blood Center declines, contract pricing and market-share effects, and lower gross margins persist as management described.
- Resolution and potential financial exposure from the SOLX arbitration and Italian litigation.
- Remediation of the income-tax accounting material weakness and any resulting changes to reported tax balances.
- Debt repayment, covenant compliance, and cash generation relative to capital spending and restructuring needs.