Haemonetics Corporation — Form 10-Q Summary
Business context and period. Haemonetics provides blood-management devices, disposable products, software and services. This report covers the fiscal third quarter and first nine months ended December 27, 2014; comparisons are with the periods ended December 28, 2013. The company reports one operating segment.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $231.8; down 4.3% | $683.9; down 1.9% |
| Gross profit / margin | $111.7 / 48.2% (50.2% prior year) | $326.1 / 47.7% (50.6% prior year) |
| Operating income / margin | $18.3 / 7.9% (7.4% prior year) | $29.0 / 4.2% (5.0% prior year) |
| Net income | $16.0, down 1.9% | $19.8, down 20.6% |
| Diluted EPS | $0.31, unchanged | $0.38, down 20.8% |
| Operating cash flow | Not separately presented | $71.9, versus $88.1 |
Quarterly revenue fell mainly because of lower whole-blood disposables sales; plasma and diagnostics grew. For the nine months, reduced whole-blood volume and pricing, weaker manufacturing efficiency and higher variable compensation weighed on operating income. Lower restructuring and transformation costs and organizational savings partly offset these pressures. Foreign exchange reduced reported revenue: excluding FX, revenue declined 1.4% for the quarter and 0.6% year to date.
Cash, debt and liquidity. At December 27, cash was $125.2, working capital $385.5 and the current ratio 3.3. Total debt was approximately $429.4; the company reported net debt of $303.6. Nine-month investing cash outflow was $100.1, including $100.5 of capital expenditures; financing cash outflow was $35.7, including $38.7 of share repurchases. Cash declined $67.3 from fiscal year-end to $125.2. The company was compliant with its debt covenants. Its amended facilities mature July 1, 2019; $50.0 was drawn on the $100.0 revolving facility.
Material changes and outlook
- Disposables revenue fell 5.2% for the quarter and 2.5% year to date. Whole-blood disposables declined 27.8% and 27.4%, respectively; plasma disposables grew 8.4% and 11.5%, and diagnostics grew 27.1% and 26.5%.
- Management expects US blood-center collections to decline about 10% in fiscal 2015, with declines moderating in fiscal 2016. The American Red Cross contract loss is expected to reduce annualized revenue by about $25 million; the impact began in fiscal Q1 2015. Lower HemeXcel pricing also pressures results. These impacts are expected to anniversary in the first half of fiscal 2016.
- Russia represents about 3% of revenue. Weak economic conditions and reduced government healthcare spending are reducing distributor orders; management expects pressure through the rest of fiscal 2015 and into fiscal 2016.
- The Value Creation and Capture program includes plant closures and transfers, facility expansions and a new Penang manufacturing facility. Management estimated about $69 million of restructuring and related expense and approximately $59 million of initiative spending in fiscal 2015; it also estimated cash payments of $115 million in fiscal 2015 and about $25 million in fiscal 2016 to substantially complete the initiatives. The filing presents these as different expense and cash-spending estimates.
- Foreign currency remains a risk, particularly a weaker Japanese yen. A 100-basis-point increase in LIBOR would add an estimated $4.3 million of annual interest expense; $250 million of debt is covered by interest-rate swaps.
Risks, contingencies and unusual items
- The company disclosed a correction of prior-period expense overstatement relating to restructuring accruals and equipment-maintenance parts. Without the correction, operating expenses for both the quarter and nine-month period would have been $1.7 million higher.
- Nine-month restructuring costs were $29.1 million and transformation costs were $22.1 million. These charges and the ongoing manufacturing transition may disrupt employee relationships, supply continuity and product delivery.
- Employees and a union at the closed Ascoli-Piceno, Italy facility claim employment-related and union-rights violations, seeking approximately $4.1 million in damages. The company disputes the claims, has accrued no loss, and says the outcome cannot currently be estimated.
- Other stated risks include customer ordering and tender changes, competitive pricing, product acceptance and quality, regulatory uncertainty, contract-manufacturer performance, economic conditions and foreign-exchange movements.
- Management concluded disclosure controls were effective as of December 27, 2014, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether whole-blood revenue declines, pricing concessions and US collection trends track management’s expectations, and how the American Red Cross contract loss affects fiscal 2016 comparisons.
- Whether plasma and diagnostics growth can offset weakness in blood-center and other hospital products.
- Actual restructuring and transformation costs, cash outlays, capital spending, and execution of the manufacturing transfers.
- Cash generation, inventory levels, debt repayment and covenant headroom as the company funds its transformation and share repurchases.
- Developments in the Italian employment litigation and the effects of currency movements, especially the yen and LIBOR.
- The impact of the disclosed $1.7 million expense correction when assessing current-period comparability.