Haemonetics Corporation — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended December 29, 2012; comparisons are with the periods ended December 31, 2011. Fiscal Q3 covers 13 weeks. Amounts below are in millions except per-share data. Share and per-share figures reflect the company’s two-for-one stock split.
Business context and key financial results
Haemonetics provides blood-management products, equipment and software. On August 1, 2012, it acquired substantially all of Pall Corporation’s whole blood business, expanding its blood-center products. The acquisition materially affects year-over-year comparisons.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $247.4 | $191.2 | $642.0 | $541.2 |
| Gross profit / margin | $113.1 / 45.7% | $95.9 / 50.2% | $305.0 / 47.5% | $274.6 / 50.7% |
| Operating income / margin | $15.7 / 6.4% | $25.3 / 13.2% | $38.7 / 6.0% | $67.8 / 12.5% |
| Net income | $9.9 | $18.3 | $26.2 | $49.1 |
| Diluted EPS | $0.19 | $0.36 | $0.50 | $0.95 |
| Operating cash flow | Not separately presented for the quarter | $57.5 | $81.3 |
Material changes and liquidity
- Revenue grew 29.4% in Q3 and 18.6% year to date; excluding foreign exchange, growth was 28.7% and 17.8%. Acquired whole blood products contributed $54.9 million in Q3 and $83.5 million year to date. Surgical and diagnostics growth also contributed; the nine-month comparison was partly affected by prior-year Japan Red Cross purchases.
- Profitability fell despite higher revenue. Gross margin declined 446 basis points in Q3 and 324 basis points year to date. Management cited acquired inventory fair-value charges of $2.8 million in Q3 and $11.1 million year to date, lower-margin whole blood sales, and a $6.1 million reserve for affected collection sets. Acquisition and integration costs were $11.7 million in Q3 and $29.1 million year to date; interest expense also increased following acquisition financing.
- Nine-month investing cash use was $584.5 million, including $535.1 million for the acquisition and $49.7 million of capital expenditures. Financing provided $491.0 million, principally from the $475.0 million term loan. Cash declined $35.7 million to $193.2 million.
- At December 29, cash was $193.2 million, working capital $421.3 million and the current ratio 3.4. Total debt was approximately $482.4 million; management reported net debt of $289.3 million. The $475 million term loan is variable-rate, with $250 million covered by interest-rate swaps. No revolving-facility borrowings were outstanding.
- The company reported compliance with its debt covenants. Its $50 million revolving facility matures with the term loan on August 1, 2017; the loan agreement includes leverage, interest-coverage and other restrictions.
Outlook, risks and unusual items
- Management stated that cash, operating cash flow and other sources should be sufficient for requirements over the next 12 months. The filing provides no specific revenue or earnings guidance. It anticipates further restructuring charges in the remaining quarter of FY2013.
- A change in estimated equipment useful lives is expected to reduce FY2013 depreciation expense by approximately $4.5 million and increase after-tax income by approximately $3.3 million.
- A field action asked customers to visually inspect certain whole blood collection sets because of a low-frequency potential leak at a contract-manufactured Y connector. The company reserved $6.1 million for affected inventory destruction or rework; it recorded no expected recovery.
- For the Pall acquisition, purchase-price allocation remains provisional. The company expects to pay an additional $15 million by 2016 for replicated manufacturing assets, subject to delivery. Hemerus consideration could reach $26 million upon regulatory approvals, plus royalties; approvals were expected in Q1 FY2014, and the agreement’s April 30, 2013 expiration could require an extension.
- Risks include foreign-exchange exposure, variable interest rates, product quality and regulatory matters, customer ordering patterns, market acceptance and competition. Approximately 49.4% of nine-month sales were outside the U.S. Management estimated that a 100-basis-point LIBOR increase would add $4.8 million in annual interest expense before the effect of hedging.
- The company said existing legal proceedings were not expected to materially affect its financial position or results. Its U.S. Fenwal patent case had ended in Fenwal’s favor; the related German action continued without material developments reported in the quarter.
Important facts for investors to verify
- How much future revenue and profit growth comes from the acquired whole blood business versus existing operations, and how provisional acquisition accounting may change.
- Whether whole blood margins improve and whether further quality-related costs or recoveries arise from the Y-connector field action.
- Progress on integration, restructuring, and the expected remaining acquisition-related expenses.
- Debt reduction, covenant headroom and the effect of LIBOR changes after considering the $250 million interest-rate hedge.
- Hemerus regulatory approvals, any agreement extension, and potential contingent payments and royalties.