Haemonetics Corporation — Form 10-Q Summary
Business context and reporting period
Global healthcare company focused on plasma collection, blood-center products and hospital products. This report covers the quarter and six months ended September 29, 2018, corresponding to fiscal 2019 Q2 and first half. Dollar figures below are in millions except per-share data.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $241.6, up 7.2% | $470.9, up 7.9% reported and 7.2% constant currency |
| Gross profit / margin | $111.9 / 46.3%, versus 46.4% | $195.2 / 41.4%, versus 45.0% |
| Operating income / margin | $26.1 / 10.8%, up 7.5% | $31.4 / 6.7%, down 23.2% |
| Net income | $18.7, down 6.8%; diluted EPS $0.35 versus $0.38 | $15.9, down 60.5%; diluted EPS $0.30 versus $0.76 |
| Operating cash flow | Not presented by quarter | $80.5 versus $97.3 |
| Capital expenditures | Not presented by quarter | $76.0 versus $29.1 |
At September 29, cash was $199.8; total debt outstanding under the term loan was $345.6, with no revolver borrowings. The company reported net debt of $143.9, working capital of $363.6 and a 2.9 current ratio. The $350 million term loan and $350 million revolving facility mature in 2023; the term loan’s effective rate was 3.5%. Interest-rate swaps fixed the rate on 70% of term-loan exposure at 4.05%. The company was covenant-compliant and said available liquidity was sufficient for at least 12 months. Management reported no substantial doubt about its ability to continue as a going concern.
Material changes versus the prior comparable period
- Quarter revenue growth was led by Plasma (+13.3%) and Hospital (+11.6%); Blood Center declined 4.8%. For the six months, Plasma rose 14.2%, Hospital 10.4%, and Blood Center fell 3.3%.
- First-half operating income and net income fell materially. Results included $21.2 million of asset impairment charges, principally for the HDC manufacturing line, and $8.4 million of accelerated depreciation on PCS2 devices. The prior-year first half included an $8.0 million divestiture gain.
- First-half gross margin declined 360 basis points, principally from impairment and accelerated depreciation. Quarter operating income improved on volume, pricing, mix, currency and prior restructuring savings, partly offset by freight costs, investment and accelerated depreciation.
- Operating cash flow fell $16.8 million, with working-capital outflows, including receivables and inventory build to support NexSys PCS, and bonus and severance payments. Investing cash outflow increased, mainly because capital expenditures rose.
- The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $1.5 million; management said the effect on reported line items was not significant.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided in the filing. Management expects the company-wide 2018 restructuring program to continue through fiscal 2020, with total charges of $50–$60 million and approximately $80 million of annualized savings once complete. Cumulative charges were $41.9 million at quarter-end.
- NexSys PCS and NexLynk DMS rollout began with plasma customers under new long-term contracts. Management expects significant device placements and related capital spending. It also reported ongoing delays in expanding liquid-solutions capacity, requiring alternate supply sources.
- The company agreed to continue sourcing leukoreduction-filter media from Pall and recorded a $19.8 million impairment on the HDC line it does not expect to use.
- A voluntary recall of specified Acrodose Plus and PL System lots followed reports of low platelet pH and, in some cases, bag discoloration. Cumulative charges were $2.0 million; additional customer-claim charges may arise.
- Management cited U.S. tax reform and deferred-tax valuation allowances as factors affecting the tax rate. The six-month effective tax rate was 39.6%, partly because no tax benefit was recognized for the impairment expense in the affected jurisdiction.
- Market risks include foreign exchange and variable-rate debt. The company estimated a 100-basis-point LIBOR increase would add $3.5 million of annual interest expense before considering the swaps. It also identified demand, regulation, product quality, competition, customer ordering, supply capacity and foreign-market conditions as risks.
Important facts for investors to verify
- Whether Plasma growth, Hospital performance and NexSys customer placements continue, and whether rollout spending converts to durable revenue and cash flow.
- Progress on liquid-solutions capacity expansion and reliance on alternative suppliers.
- Remaining restructuring costs, timing and realization of the stated annualized savings.
- Any further recall-related claims or charges, and the effect of the Pall supply arrangement and HDC impairment.
- Debt repayment, interest-rate exposure, covenant headroom and cash needs alongside capital expenditures and the remaining $80 million share-repurchase authorization.
- Final accounting for U.S. tax reform and the effect of deferred-tax valuation allowances on future tax expense.