Haemonetics Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018 (52 weeks). The filing also reports fiscal Q4, ended March 31, 2018. Unless otherwise noted, amounts are U.S. dollars.
Business context
Haemonetics supplies plasma collection systems and software, blood collection products, hospital hemostasis diagnostics, cell salvage systems, and transfusion-management software. Plasma was the largest business, representing 48.2% of revenue; Blood Center represented 31.5%, Cell Processing 11.9%, and Hemostasis Management 8.4%. Management identifies Plasma and Hemostasis Management as its strongest growth opportunities; Blood Center faces declining demand and price pressure.
Key financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $903.9 million | $886.1 million |
| Gross profit / margin | $411.9 million / 45.6% | $378.5 million / 42.7% |
| Operating income (loss) | $56.2 million / 6.2% of revenue | $(19.4) million / (2.2)% |
| Net income (loss) | $45.6 million | $(26.3) million |
| Diluted EPS | $0.85 | $(0.51) |
| Cash from operations | $220.4 million | $159.7 million |
| Capital expenditures | $74.8 million | $76.1 million |
Revenue rose 2.0% reported and 1.1% excluding foreign exchange. Gross margin improved 290 basis points. Operating results benefited from higher gross profit and the absence of the prior-year impairment charges, partly offset by restructuring costs and increased R&D and commercial investment. FY2018 included an $8.0 million gain on the SEBRA divestiture. Fiscal 2017 included $58.6 million of asset impairment expense.
Revenue by business unit: Plasma $436.0 million, up 6.1%; Blood Center $284.9 million, down 6.2%; Cell Processing $107.6 million, up 2.1%; and Hemostasis Management $75.5 million, up 14.2%. Management attributed Plasma and Hemostasis growth largely to U.S. demand and TEG disposables, respectively. Blood Center declines reflected lower whole-blood and platelet revenue, customer and contract changes, and market pressures.
Fiscal Q4: Revenue was $233.6 million, gross profit $104.4 million, operating income $14.3 million, and net income $11.9 million. The prior-year quarter reported revenue of $228.1 million, operating loss of $57.5 million, and net loss of $51.1 million. The filing says Q4 FY2018 results included an immaterial error that understated operating income by $2.0 million and net income by $1.8 million; Q4 FY2017 also included an immaterial error that overstated the reported loss.
Cash, debt and liquidity
At March 31, 2018, cash and cash equivalents were $180.2 million, total debt was $253.7 million, working capital was $136.5 million, and the current ratio was 1.4, down from 2.4 a year earlier. Cash less debt was positive $73.5 million. Operating cash flow less capital expenditures was approximately $145.6 million. Debt was variable-rate; the term loan carried an approximately 3.19% rate and matures July 1, 2019. About $194.3 million of principal was scheduled within one year. The company reported compliance with loan covenants at year-end and stated that available liquidity was sufficient for at least the next twelve months.
Outlook, material developments and risks
- Restructuring: The company expects total charges of $50–$60 million for its 2018 Complexity Reduction Initiative, substantially cash costs, through fiscal 2020. It expects approximately $80 million in annualized savings when complete; $36.6 million of program costs were incurred in FY2018.
- Products and markets: NexSys PCS received U.S. FDA clearance, including for YES yield-enhancing software, and limited production began. Management expected commercial-launch ramp-up in the second half of FY2019; adoption, manufacturing capacity, customer contracts and returns on device investment remain execution risks. Management expected Blood Center declines in the low-to-mid single digits.
- Concentration and supply: One plasma customer accounted for about 14% of revenue, and the ten largest customers about 45%. Several major Plasma customer contracts were due to expire before FY2020. The company cited reliance on key suppliers, overseas contract manufacturing, and delays expanding liquid-solutions capacity.
- Capital allocation: The company authorized up to $260 million of repurchases through March 30, 2019 and paid $100 million under an accelerated repurchase in FY2018. The agreement settled in May 2018 at an average $73.36 per share; $160 million of authorization remained as of May 23, 2018.
- Tax and subsequent event: FY2018 tax expense included a provisional $2.0 million net impact from U.S. tax reform; the company had not completed its accounting analysis. In May 2018, a Pall supply agreement led to a $9.0 million final payment and a $12.5 million impairment of the filter-media manufacturing line, for $21.5 million of FY2019 charges.
- Other risks: Risks include price competition and healthcare consolidation, regulation and product quality/recalls, foreign exchange, cyber and privacy exposure, and the substantial near-term debt repayment requirement. The 2016 whole-blood-kit recall produced cumulative net charges of $7.2 million, with substantially all claims paid by year-end.
Investor verification checklist
- Review the term-loan repayment, refinancing plans, covenant headroom, and access to cash held outside the U.S.
- Track NexSys PCS customer adoption, production capacity, capital requirements, and contract renewals with major Plasma customers.
- Compare realized restructuring savings and cash costs with management’s $80 million annualized-savings target and $50–$60 million charge estimate.
- Monitor Blood Center revenue trends, pricing, customer concentration, and liquid-solutions supply constraints.
- Verify the final tax-reform accounting and the timing and financial effects of the Pall-related charges.
- Consider the disclosed quarterly misstatements and the inventory-control material weakness, which management said was remediated by year-end; the auditor issued unqualified opinions on the financial statements and internal controls.