Haemonetics Corporation — Form 10-Q Summary
Business context and period: Haemonetics develops blood and plasma collection, processing, diagnostic and related software products. This unaudited report covers the three months ended June 30, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended July 1, 2017. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended June 30, 2018 | Prior comparable quarter |
|---|---|---|
| Revenue | $229.3 million | $211.0 million |
| Gross profit / margin | $83.2 million / 36.3% | $91.7 million / 43.5% |
| Operating income / margin | $5.3 million / 2.3% | $16.6 million / 7.9% |
| Net income (loss) | $(2.8) million | $20.1 million |
| Diluted earnings (loss) per share | $(0.05) | $0.38 |
| Cash from operating activities | $23.1 million | $38.4 million |
| Capital expenditures | $27.5 million | $13.7 million |
- Revenue rose 8.7% as reported and 7.2% excluding foreign-exchange effects. Plasma revenue grew 15.2% (14.0% constant currency), Hospital grew 9.3% (6.3% constant currency), and Blood Center declined 1.7% (3.1% constant-currency decline).
- Gross margin fell 720 basis points, chiefly from $21.2 million of asset impairments and $3.9 million of accelerated depreciation on PCS2 devices. Operating income also reflected restructuring and turnaround costs, deal amortization and legal charges.
- The $6.1 million income tax provision produced a 185% effective tax rate, primarily because no tax benefit was recognized on the impairment in a jurisdiction with a deferred-tax valuation allowance; U.S. tax-reform provisions also weighed on the rate.
- Operating cash flow decreased by $15.3 million year over year, mainly from inventory build for the NexSys PCS launch and payments of bonuses and restructuring-related severance. Cash increased by $11.9 million to $192.1 million.
Balance sheet, debt and liquidity
- At June 30, 2018, cash was $192.1 million, total debt was approximately $347.9 million, working capital was $357.0 million and the current ratio was 2.8. The company reported net cash of $155.8 million under its cash-minus-debt measure.
- On June 15, the company refinanced with a $350 million term loan and a $350 million revolving facility, both maturing in 2023. The term loan was fully drawn at quarter-end at an effective rate of 3.625%; the revolving facility had no borrowings. The company reported compliance with debt covenants.
- Financing cash flows included $80 million paid for share repurchases. The company had $80 million of authorization remaining as of August 7, 2018.
Material changes, outlook and risks
- Restructuring: The company expects total charges of $50–$60 million through fiscal 2020, substantially all in cash, and estimates annualized savings of approximately $80 million when the program is complete. Cumulative charges under the 2018 program were $40.0 million at June 30.
- Products and capacity: The NexSys PCS rollout began after FDA clearance, with significant device placements expected to require capital spending and new customer contracts. Management reported ongoing delays expanding liquid-solutions production capacity, requiring continued use of alternative suppliers.
- Impairment and supply arrangement: A long-term Pall supply agreement means Haemonetics does not expect to use the HDC filter-media manufacturing line; it recorded a $19.8 million impairment and agreed to a final $9 million payment for the line.
- Recall and contingencies: The March 2018 voluntary recall of certain Acrodose Plus and PL Systems lots interrupted supply for nine weeks. Cumulative charges were $1.7 million at June 30; additional customer-claim charges may arise. The filing does not provide a clear estimate of any ultimate exposure.
- Share repurchases: The June $80 million accelerated repurchase was completed on August 1, with approximately 0.9 million shares repurchased at an average final price of $93.83. The broader authorization runs through March 30, 2019.
- The filing gives no specific quarterly revenue or earnings guidance. Management stated that existing liquidity sources should fund expected requirements for at least the next 12 months. Risks include foreign-exchange and variable-rate debt exposure, execution of the NexSys launch and restructuring, supply constraints, recall claims, customer ordering patterns and regulatory or market changes. No material changes to previously disclosed risk factors were reported.
- Haemonetics adopted the revenue standard ASC 606 on April 1, 2018, using the modified retrospective method; opening retained earnings increased by $1.5 million, with no significant impact on individual current-period financial statement lines.
Important facts for investors to verify
- Whether revenue growth in Plasma and Hospital can continue while Blood Center remains under pressure, and whether liquid-solutions capacity constraints ease.
- How much of the gross-margin decline is temporary launch-related depreciation and impairment versus ongoing operating cost or mix pressure.
- Actual restructuring charges, timing and realized savings compared with the $50–$60 million cost and approximately $80 million annualized-savings estimates.
- Future recall-related claims and costs, as well as execution and customer adoption of NexSys PCS and NexLynk.
- Debt repayment, interest-rate sensitivity and cash use for capital spending and share repurchases.