Haemonetics Corporation — Form 10-Q Summary
Business context and reporting period. Haemonetics provides blood-management devices, disposables, and software. This report covers fiscal third quarter and nine months ended December 28, 2013; comparisons are with the periods ended December 29, 2012. The company reports one operating segment.
Financial results
| Metric | Fiscal Q3 2014 | Fiscal Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $242.1 million | $247.4 million | $697.4 million | $642.0 million |
| Gross profit / margin | $121.6 million / 50.2% | $113.1 million / 45.7% | $352.9 million / 50.6% | $305.0 million / 47.5% |
| Operating income / margin | $17.9 million / 7.4% | $15.7 million / 6.4% | $34.7 million / 5.0% | $38.7 million / 6.0% |
| Net income | $16.3 million | $9.9 million | $25.0 million | $26.2 million |
| Diluted EPS | $0.31 | $0.19 | $0.48 | $0.50 |
| Operating cash flow | — | $88.1 million | $57.5 million |
Quarterly revenue fell 2.1%, while nine-month revenue rose 8.6%, reflecting a full nine months of acquired whole-blood business revenue versus five months in the prior-year period, as well as plasma and diagnostics growth. Quarterly gross margin improved mainly because prior-year whole-blood inventory charges were lower this year; nine-month operating income declined as increased restructuring, transformation, and other operating costs more than offset gross-profit growth. The quarter’s net income also benefited from a tax benefit; the nine-month effective tax rate was 6.3% versus 25.5%.
Liquidity, debt, and financial position
- Cash and cash equivalents were $177.8 million at December 28, 2013, versus $179.1 million at March 30, 2013. Working capital was $414.3 million and the current ratio was 3.2.
- Total debt on the balance sheet was approximately $447.2 million, including $40.8 million current and $406.4 million long-term. The company reported $446.5 million outstanding under its credit facility; its $50 million revolving facility was fully available and it was compliant with financial covenants.
- The company’s stated net-debt measure (cash less total debt) was negative $269.4 million, indicating net cash under that convention. Credit-facility debt was variable-rate; a 100-basis-point LIBOR increase was estimated to add $4.5 million in annual interest expense. Swaps fixed the rate on $250 million of borrowings.
- Nine-month investing cash use was $75.0 million, including $23.1 million for Hemerus and $43.7 million of capital expenditures. Financing cash use was $14.7 million, including $28.5 million of term-loan repayments. Cash declined by $1.3 million over the period.
Material changes, outlook, and risks
- Product and market trends: Nine-month plasma disposable revenue increased 8.5% and diagnostics revenue increased 19.5%; whole-blood revenue rose 74.7%, largely due to the acquisition comparison. Red-cell revenue declined 15.8%, surgical disposables 12.0%, and OrthoPAT 14.8%. Management attributed pressure in part to lower blood collections, competitive conditions, and blood-management practices, including increased use of tranexamic acid.
- Demand and pricing outlook: Management expected U.S. blood-center collections to decline approximately 8%–10% annually in fiscal 2014 and 2015. A whole-blood supply agreement was expected to reduce fiscal 2015 gross margins; another major tender was pending, with price reductions required to win and revenue downside if Haemonetics was not selected.
- Transformation: The manufacturing-network plan through fiscal 2016 includes ceasing manufacturing in Braintree, Massachusetts, and Ascoli-Piceno, Italy; expanding Tijuana; establishing a Penang facility; and using a contract manufacturer for certain equipment. Nine-month restructuring charges were $40.8 million and restructuring plus transformation expenses were $69.9 million. Management estimated about $82 million of fiscal 2014 restructuring and transformation expenses related to VCC initiatives and whole-blood integration, and about $100 million of fiscal 2014 cash costs and capital expenditures for those activities. It had paid about $45 million through the first nine months toward the latter estimate.
- Acquisition and contingencies: The Hemerus acquisition involved $24.1 million cash paid, up to $3 million contingent on FDA approval for 24-hour storage, and up to $14 million based on future sales. The contingent-consideration liability was $8.8 million at quarter-end. Management said ongoing legal matters were not expected to materially affect consolidated financial position or results; no material developments were reported in the Fenwal patent litigation during the fiscal year.
- Other exposures: Foreign-exchange movements reduced operating income by approximately 20% in the quarter and 12% year to date; management expected yen weakness to remain a headwind through the rest of fiscal 2014 and into fiscal 2015. The filing also identifies manufacturing-transition execution, product quality and supply, competition and pricing, customer tenders, regulatory uncertainty, and international-market conditions as risks.
Important facts for investors to verify
- Whether blood-center collection declines and tender-related pricing pressure match management’s fiscal 2014–2015 expectations.
- Progress, timing, cash spending, and realized savings from the manufacturing transformation and whole-blood integration.
- Whether growth in plasma and diagnostics can offset weakness in red-cell, whole-blood, and hospital products.
- The durability of reported earnings excluding the quarter’s tax benefit and the effects of restructuring, transformation, and acquisition-related costs.
- Hemerus FDA approval milestones, future-sales contingent payments, and the company’s ability to maintain credit-facility covenant compliance.