Haemonetics Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended March 30, 2013 (52 weeks). This is an annual filing, not a standalone “2012 Q4” report; the filing also reports the quarter ended March 30, 2013. Amounts below are in U.S. dollars.
Business context
Haemonetics supplies blood and plasma collection, processing, surgical blood salvage, diagnostic and blood-management software products and services. It operates as one reportable segment and serves customers in more than 97 countries. The August 1, 2012 acquisition of Pall’s blood collection, filtration and processing business expanded the company into manual whole-blood collection and added $138.4 million of FY2013 revenue.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $892.0 million | $727.8 million | +22.6% |
| Gross profit / margin | $428.1 million / 48.0% | $369.2 million / 50.7% | Margin down 2.7 percentage points |
| Operating income / margin | $56.4 million / 6.3% | $88.8 million / 12.2% | -36.4% |
| Net income | $38.8 million | $66.9 million | -42.0% |
| Diluted EPS | $0.74 | $1.30 | -43.1% |
| Operating cash flow | $85.1 million | $115.3 million | Down $30.2 million |
Revenue growth excluding foreign exchange was 22.2%; the acquired business contributed $138.4 million. U.S. revenue rose 29.2% and international revenue rose 16.4%. Disposables revenue increased 27.4%; software solutions declined 0.9%. Gross margin fell mainly because of acquisition-related inventory fair-value charges, a $7.0 million whole-blood inventory reserve, and the lower average margins of acquired whole-blood products. Operating expenses rose 32.5%, including $37.3 million of acquisition and integration costs. A change in estimated equipment useful lives reduced FY2013 depreciation expense by $4.5 million and increased diluted EPS by $0.09.
At year-end, cash and cash equivalents were $179.1 million, working capital was $416.9 million, and the current ratio was 3.3. Total debt was $480.1 million, versus $3.8 million a year earlier; net debt was $301.0 million. The $475.0 million acquisition term loan bears variable interest; $50.0 million of revolving credit capacity remained available. The company reported compliance with its debt covenants. Capital expenditures were $62.2 million. Investing cash outflow was $596.4 million, primarily reflecting the $535.2 million Pall acquisition.
Material changes and unusual items
- The Pall whole-blood acquisition materially increased revenue, assets, goodwill and debt. Acquisition-related inventory fair-value expense was $11.9 million, and acquisition/integration costs were $37.3 million.
- A quality issue involving a contract-manufactured Y connector led to a customer field action and a $7.0 million inventory reserve for affected whole-blood sets. Management said recovery efforts were being pursued but recorded no expected recovery.
- In March 2013, Haemonetics did not win renewal of a European whole-blood tender with annual sales of $12.2 million; management expected a FY2014 revenue impact. The contract’s gross margin was substantially below company averages.
- After year-end, the company announced a multi-year manufacturing network plan: discontinue manufacturing in Braintree, expand Tijuana and build a manufacturing facility in Asia. It estimated $23 million of FY2014 cash restructuring costs, another $8 million in later years, approximately $5 million of non-cash costs, and $36 million of FY2014 capital spending for facilities.
- After year-end, Haemonetics acquired Hemerus assets. It had paid $24 million by May 2013, with up to $17 million of additional contingent payments tied to FDA approval and future sales.
- Fiscal 2013 included a $4.2 million write-down related to exiting Arryx-derived technology activities. The company repurchased $50 million of shares during the year.
Outlook, management commentary and risks
Management stated that available cash, operating cash flow and financing were expected to cover requirements over the next 12 months, including approximately $88 million for value-creation and acquisition-integration activities, capital expenditures, debt payments and investments. The filing provides no consolidated revenue or earnings guidance. Management cited strong North American plasma demand, growth in TEG diagnostics and surgical products, and slower or declining demand in certain mature blood markets. Risks include integration and execution of the Pall acquisition and manufacturing plan, variable interest rates, product quality and regulatory matters, customer concentration, foreign exchange, competitive and pricing pressure, supply interruptions, and delayed collections from some government-supported healthcare systems. The Japanese Red Cross accounted for 10.1% of FY2013 revenue.
The company disclosed a German patent-infringement action involving Fenwal (now part of Fresenius), and a finalized Italian court conviction involving its subsidiary and two former employees, with a fine of €147,500 plus a share of proceeding costs. Management stated that pending legal actions were not expected to materially affect consolidated financial position or results. The independent auditor issued unqualified opinions on the financial statements and internal control; however, the acquired whole-blood business was excluded from management’s and the auditor’s internal-control assessment for FY2013.
Important facts for investors to verify
- How much of subsequent revenue and earnings growth is attributable to the Pall acquisition versus underlying organic performance, and whether acquired margins improve.
- The quality issue’s scope, any additional customer claims or product costs, and whether recoveries from suppliers are ultimately obtained.
- The revenue and profit impact of the lost European tender and any further customer or market-share changes.
- Execution, total cost and expected savings of the manufacturing network plan, including the stated facility investment and restructuring estimates.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the availability of cash held outside the United States.
- Integration of the acquired business into internal controls; management planned to assess those controls in FY2014.