Haemonetics Corporation (NYSE: HAE) — FY2015 Form 10-K
Reporting period: Fiscal year ended March 28, 2015 (52 weeks); comparative fiscal year ended March 29, 2014. This annual filing includes fourth-quarter results, but is not a standalone quarterly report. Amounts below are U.S. dollars.
Business context
Haemonetics develops blood-management devices, single-use disposables, software and services for plasma collectors, blood centers and hospitals, operating in approximately 100 countries. It reports one aggregated financial segment. Disposables are the core business; plasma disposables grew, while U.S. blood-collection demand, whole-blood products and certain hospital products weakened.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $910.4 million | $938.5 million | (3.0%) |
| Gross profit / margin | $434.4 million / 47.7% | $468.4 million / 49.9% | Margin down 220 bps |
| Operating income / margin | $40.5 million / 4.5% | $46.4 million / 4.9% | (12.7%) |
| Net income | $16.9 million | $35.1 million | (51.9%) |
| Diluted EPS | $0.32 | $0.67 | (52.2%) |
| Cash from operations | $127.2 million | $139.5 million | Down $12.3 million |
| Capital expenditures | $122.2 million | $73.6 million | Up $48.6 million |
Revenue excluding foreign-exchange effects fell 1.3%. Plasma disposables rose 9.4% to $319.2 million and diagnostic disposables rose 26.7% to $42.2 million. Whole-blood disposables fell 24.5% to $143.9 million; platelet disposables fell 2.6%, surgical disposables fell 6.5%, and OrthoPAT fell 18.9%. Software solutions increased 2.5% to $72.2 million. Lower whole-blood volumes and pricing reduced manufacturing efficiency and pressured gross margin.
The 45.8% effective tax rate, versus 3.4% in FY2014, reflected a valuation allowance against certain U.S. deferred tax assets after three years of cumulative U.S. book losses, primarily related to restructuring and transformation spending. Quarterly results were uneven: Q1 operating loss was $1.7 million and net loss $3.6 million; Q4 operating income was $11.5 million and net loss $2.9 million.
Liquidity, debt and capital allocation
At year-end, cash and equivalents were $160.7 million, working capital $381.2 million and the current ratio 3.0. Total debt was approximately $427.9 million on the selected-financial-data basis; the debt note reports $429.4 million gross debt before debt discounts. Net debt was approximately $267.2 million. The amended credit facility matures July 1, 2019; the company reported covenant compliance. The variable-rate debt carried a 1.5625% rate at year-end, with $250 million hedged through interest-rate swaps.
Operating cash flow less capital expenditures was approximately $5.0 million. Cash declined $31.8 million during the year. Capital spending included $44.9 million for the manufacturing-network transformation. The company repurchased 1.17 million shares for $39.0 million under a $100 million authorization and expected to complete the remaining approximately $61 million in FY2016, subject to loan covenants. It has not paid cash dividends and does not expect to do so in the foreseeable future.
Material changes, outlook and risks
- Management attributed the revenue decline chiefly to lower whole-blood disposables, including the loss of an American Red Cross supply contract that reduced annualized revenue by about $25 million beginning in Q2 FY2015, and price concessions under a multi-year HemeXcel agreement. U.S. blood-center collections declined approximately 10% in FY2015.
- Management expects the U.S. collection decline to moderate in FY2016, but still negatively affect red-cell and whole-blood revenue. It expects Russian business performance to be similar to FY2015, and a stronger U.S. dollar to remain a headwind to operating income in FY2016 and FY2017. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- The multi-year Value Creation and Capture program is relocating and consolidating manufacturing, including operations in Tijuana and Penang and use of Sanmina as sole manufacturer for certain equipment. Management said implementation was on plan, estimated approximately $45 million of FY2016 restructuring and restructuring-related expense, and approximately $27 million of remaining cash spending. FY2015 restructuring and transformation costs totaled $66.8 million.
- Key risks include execution, quality or supply disruption during factory transfers; reliance on sole-source suppliers; pricing pressure and customer consolidation; reduced blood-collection procedures; foreign exchange, Russia and other international-market exposure; variable-rate debt and covenant restrictions; regulatory clearance and product liability; cybersecurity and sensitive-data risks; and potential impairments. The ten largest customers represented approximately 48.1% of revenue, although no single customer exceeded 10% in FY2015.
- Italian employment litigation related to the closed Ascoli plant involved approximately $3.7 million in claimed damages; the company said the likelihood and amount of any loss could not yet be reliably assessed. It believed other legal matters would not materially affect its financial position or results.
Most important facts for investors to verify
- Whether U.S. blood-collection declines and whole-blood contract losses stabilize, and whether the expected moderation in FY2016 occurs.
- Whether plasma and TEG diagnostic growth can offset ongoing weakness in whole blood, OrthoPAT and other mature-market products.
- Actual FY2016 transformation charges, cash needs, savings and manufacturing-quality or delivery impacts against management’s estimates.
- Debt repayment capacity, interest-rate exposure, covenant headroom and the planned share repurchases amid limited cash generation after capital expenditures.
- The sustainability of reported earnings and taxes, including the U.S. deferred-tax-asset valuation allowance and potential future tax-rate changes.
- Developments in the Italian litigation and other disclosed legal, regulatory, supply-chain and cybersecurity exposures.