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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the quarter ended: June 29, 2002 Commission File Number: 1-10730
------------- -------
HAEMONETICS CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No)
400 Wood Road, Braintree, MA 02184
----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
--------------
Indicate by check mark whether the registrant (1.) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) (2.) has been subject to the
filing requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
24,867,500 shares of Common Stock, $ 01 par value, as of
----------------------------------------------------------
June 29, 2002
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. Financial Information
Unaudited Consolidated Statements of Income- 2
Three Months Ended June 29, 2002 and June 30, 2001
Unaudited Consolidated Balance Sheets - June 29, 2002 3
and March 30, 2002
Unaudited Consolidated Statement of Stockholders' Equity - 4
Three Months Ended June 29, 2002
Unaudited Consolidated Statements of Cash Flows - 5
Three Months Ended June 29, 2002 and June 30, 2001
Notes to Unaudited Consolidated Financial Statements 6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-19
Quantitative and Qualitative Disclosures about Market Risk 19-20
PART II. Other Information 21
Signatures 22
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except share data)
Three Months Ended
---------------------
June 29, June 30,
2002 2001
-------- --------
Net revenues $81,935 $75,801
Cost of goods sold 43,288 39,490
------- -------
Gross profit 38,647 36,311
Operating expenses:
Research and development 4,939 4,814
Selling, general and administrative 24,016 21,965
------- -------
Total operating expenses 28,955 26,779
------- -------
Operating income 9,692 9,532
Interest expense (877) (982)
Interest income 441 1,088
Other income, net 563 973
------- -------
Income before provision for income taxes 9,819 10,611
Provision for income taxes 3,044 2,971
------- -------
Income before cumulative effect of change
in accounting principle 6,775 7,640
Cumulative effect of change in accounting
principle, net of tax -- 2,304
------- -------
Net income $ 6,775 $ 9,944
======= =======
Basic income per common share
Income before cumulative effect of change
in accounting principle $ 0.27 $ 0.29
Cumulative effect of change in accounting
principle, net of tax -- 0.09
Net income 0.27 0.38
Income per common share assuming dilution
Income before cumulative effect of change
in accounting principle $ 0.26 $ 0.28
Cumulative effect of change in accounting
principle, net of tax -- 0.09
Net income 0.26 0.37
Weighted average shares outstanding
Basic 25,318 25,979
Diluted 26,110 26,947
The accompanying notes are an integral part of these consolidated financial
statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share data)
June 29, March 30,
2002 2002
-------- ---------
ASSETS
Current assets:
Cash and short term investments $ 42,006 $ 34,913
Available-for-sale investments -- 32,636
Accounts receivable, less allowance of $1,347
at June 29, 2002 and $1,298 at March 30, 2002 69,417 63,743
Inventories 74,444 67,244
Current investment in sales-type leases, net 2,700 2,783
Deferred tax asset 23,046 18,943
Other prepaid and current assets 10,342 12,573
-------- --------
Total current assets 221,955 232,835
-------- --------
Property, plant and equipment 229,286 218,819
Less accumulated depreciation 143,440 133,942
-------- --------
Net property, plant and equipment 85,846 84,877
Other assets:
Investment in sales-type leases, net (long-term) 3,034 3,234
Other intangibles, less accumulated
amortization of $2,418 at June 29, 2002
and $1,977 at March 30, 2002 23,853 24,204
Goodwill, net 15,021 14,168
Deferred tax asset 1,842 2,275
Other long-term assets 3,521 3,328
-------- --------
Total other assets 47,271 47,209
-------- --------
Total assets $355,072 $364,921
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 36,369 $ 31,356
Accounts payable 12,309 12,536
Accrued payroll and related costs 10,684 12,696
Accrued income taxes 13,282 11,355
Other accrued liabilities 21,558 16,155
-------- --------
Total current liabilities 94,202 84,098
-------- --------
Long-term debt, net of current maturities 38,430 40,787
Other long-term liabilities 3,674 3,212
Stockholders' equity:
Common stock, $.01 par value; Authorized -
80,000,000 shares; Issued 31,535,811 shares
at June 29, 2002; 31,453,511 shares at
March 30, 2002 315 315
Additional paid-in capital 106,282 104,261
Retained earnings 271,367 264,592
Accumulated other comprehensive loss (17,473) (16,395)
-------- --------
Stockholders' equity before treasury stock 360,491 352,773
Less: treasury stock 6,668,311 shares at cost
at June 29, 2002 and 5,812,943 shares at
cost at March 30, 2002 141,725 115,949
-------- --------
Total stockholders' equity 218,766 236,824
-------- --------
Total liabilities and stockholders' equity $355,072 $364,921
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited data, in thousands)
Accumulated
Common Stock Additional Other Total Compre-
-------------- Paid-in Treasury Retained Comprehensive Stockholders' hensive
Shares $'s Capital Stock Earnings Loss Equity Income
------ --- ---------- -------- -------- ------------- ------------- -------
Balance, March 30, 2002 31,454 $315 $104,261 $(115,949) $264,592 $(16,395) $236,824
================================================================================
Employee stock purchase plan -- -- 105 256 -- -- 361
Exercise of stock options
and related tax benefit 82 -- 1,916 -- -- -- 1,916
Purchase of treasury stock -- -- -- (26,032) -- -- (26,032)
Net income -- -- -- -- 6,775 -- 6,775 $ 6,775
Foreign currency translation
adjustment -- -- -- -- -- 5,409 5,409 5,409
Unrealized loss on derivatives (6,487) (6,487) (6,487)
--------
Comprehensive income -- -- -- -- -- -- -- $ 5,697
-------------------------------------------------------------------------------- =======
Balance, June 29, 2002 31,536 $315 $106,282 $(141,725) $271,367 $(17,473) $218,766
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Three Months Ended
----------------------
June 29, June 30,
2002 2001
-------- --------
Cash Flows from Operating Activities:
Net income $ 6,775 $ 9,944
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Non cash items:
Depreciation and amortization 7,064 5,837
Deferred tax expense 134 1,868
Tax benefit related to the exercise of
stock options 356 --
Gain from exchange activities (1,803) (3,420)
Change in operating assets and liabilities:
Increase in accounts receivable - net (907) (2,167)
Increase in inventories (7,394) (4,556)
Decrease in sales-type leases (current) 153 64
Increase in prepaid income taxes (229) (122)
(Increase) decrease in other assets (1,117) (3,447)
Decrease in accounts payable, accrued
expenses and other current liabilities (1,764) (1,415)
-------- --------
Net cash provided by operating activities 1,268 2,586
Cash Flows from Investing Activities:
Purchases of available-for-sale investments (11,670) (23,580)
Gross proceeds from sale of available-for
-sale investments 44,306 11,167
Capital expenditures on property, plant and
equipment, net of retirements and disposals (2,762) (3,999)
Net decrease in sales-type leases (long-term) 270 1,581
-------- --------
Net cash provided (used) by investing
activities 30,144 (14,831)
-------- --------
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (314) (86)
Net increase in short-term revolving
credit agreements 2,107 5,844
Net (decrease) increase in long-term credit
agreements (2,384) 89
Employee stock purchase plan purchases 361 250
Exercise of stock options 1,560 5,805
Purchase of treasury stock (26,032) --
-------- --------
Net cash (used) provided by financing
activities (24,702) 11,902
Effect of exchange rates on cash and cash
equivalents 383 (139)
-------- --------
Net increase (decrease) in cash and cash
equivalents 7,093 (482)
Cash and cash equivalents at beginning of period 34,913 41,441
-------- --------
Cash and cash equivalents at end of period $ 42,006 $ 40,959
======== ========
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for
Haemonetics placement equipment $ 3,133 $ 1,767
Supplemental disclosures of cash flow information:
Interest paid $ 1,415 $ 1,628
Income taxes paid $ 778 $ 2,480
The accompanying notes are an integral part of these consolidated financial
statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated. For further information,
refer to the audited consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the fiscal year
ended March 30, 2002.
Certain amounts in the prior year financial statements have been
reclassified to conform to the fiscal year 2003 presentation.
The Company's fiscal year ends on the Saturday closest to the last day
of March. Both fiscal year 2003 and 2002 include 52 weeks with the first
quarter of each fiscal year including 13 weeks.
2. ACCOUNTING FOR SHIPPING AND HANDLING COSTS
In accordance with Emerging Issues Task Force No. 00-10, ("EITF 00-
10",) "Accounting for Shipping and Handling Fees and Costs," amounts billed
to the Company's customers in sale transactions for shipping and handling
are recorded as revenue. All other shipping and handling costs are included
in costs of goods sold with the exception of $1.3 million and $1.0 million
for three months ended June 29, 2002 and June 30, 2001, respectively that
are included in selling, general and administrative expenses.
3. FOREIGN CURRENCY
The Company enters into forward exchange contracts to hedge the
anticipated cash flows from forecasted foreign currency denominated
revenues. The purpose of the Company's foreign hedging activities is to
minimize, for a period of time, the unforeseen impact on the Company's
results of operations of fluctuations in foreign exchange rates. The Company
also enters into forward contracts that settle within 35 days to hedge
certain inter-company receivables denominated in foreign currencies. These
derivative financial instruments are not used for trading purposes. The
cash flows related to the gains and losses on these foreign currency hedges
are classified in the consolidated statements of cash flows as part of cash
flows from operating activities.
On April 1, 2001, in accordance with SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138 "Accounting for Certain Derivative Instruments and Hedging Activities,
an Amendment of FASB Statement No. 133," (collectively, SFAS No. 133, as
amended) effective April 1, 2001. These standards were adopted as a change
in accounting principle and cannot be applied retroactively to financial
statements of prior periods.
At adoption, the Company recorded the fair value of these contracts of
$9.2 million as an asset on the balance sheet. At adoption, the change in
the fair value of the contracts associated with changes in the spot rate as
of April 1, 2001 of $4.6 million was recorded in other comprehensive income
($6.4 million less taxes of $1.8 million). At adoption, the change in the
fair value of the points associated with forward contracts, which are
excluded from the Company's assessment of hedge effectiveness, totaled $2.3
million ($3.2 million less taxes of $0.9 million). This amount was recorded
as a cumulative effect of a change in accounting principle.
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
At June 29, 2002, the Company had 28 forward contracts outstanding,
all maturing in less than twelve months, to exchange Euro and the Japanese
yen primarily for U.S. dollars totaling $116.1 million. Of these contracts,
six, totaling $35.3 million, represented contracts with zero fair value
relating to inter-company receivables established at quarter-end, that
settle within 35 days after quarter-end. The Company has designated the
remainder of these contracts as cash flow hedges intended to lock-in the
expected cash flows of forecasted foreign currency denominated revenues at
the available spot rate. The fair value of the forward contracts associated
with changes in points on forward contracts is excluded from the Company's
assessment of hedge effectiveness.
At June 29, 2002, the fair value of the forward contract liability was
$5.6 million. For the three months ended June 29, 2002, a $6.5 million loss
was recorded in accumulated other comprehensive loss, ($10.3 million loss
less tax benefit of $3.8 million.) The change in the fair value
attributable to points on forward contracts totaled approximately $0.5
million for the three months ended June 29, 2002. This $0.5 of income was
excluded from the assessment of hedge effectiveness and was recorded as part
of other income, net for the three months ended June 29, 2002 in the
Company's unaudited consolidated statement of income. For the three months
ended June 30, 2001, income from points on forward contracts, included in
other income, net was $1.0 million.
A summary of the accounting discussed above is as follows (in
thousands):
Accumulated
(Income)/Expense Comprehensive
Cash Flow Hedges-Debit Asset (Liability)- (Income) Loss, Other Income,
(Credit) Forward Contracts net of tax net
---------------------- ------------------ -------------- -------------
Balance as of March 30, 2002 $ 3,983 $(2,287)
Change in fair value for the
3 months ended June 29, 2002 (9,554) 6,487 (463)
------- ------- -----
Total $(5,571) $ 4,200 $(463)
4. NEW PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management believes the adoption of SFAS No. 143 will not
have a material impact on the Company's results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 retains many of the fundamental provisions of
SFAS No. 121 and establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed
of by sale, whether previously held and used or
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
newly acquired, and it broadens the presentation of discontinued operations
to include more disposal transactions. SFAS No. 144 is not applicable to
goodwill or intangible assets that are not being amortized, and certain
other long-lived assets. The provisions of SFAS No. 144 are effective for
the Company on March 31, 2002, the beginning of its 2003 fiscal year. Upon
adoption, this statement did not have a significant impact on the Company's
financial position or results of operations.
5. Acquired Other Intangible Assets
A breakdown of the Company's intangible assets by asset class is as
follows:
As of June 29, 2002
- -------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
- ---------------------
Patents $ 6,370 $ 763 14
Developed technology 7,994 874 17
Customer contracts and related
relationships 11,433 781 15
------- ------ --
Subtotal $25,797 $2,418 15
Indefinite Life Intangibles
- ---------------------------
Trade name 474 -- Indefinite
------- ------
Total Intangibles $26,271 $2,418
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
As of March 30, 2002
- --------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
- ---------------------
Patents $ 6,370 $ 647 14
Developed technology 7,991 741 17
Customer contracts and related
relationships 11,350 589 15
------- ------ --
Subtotal $25,711 $1,977 15
Indefinite Life Intangibles
- ---------------------------
Trade name 470 -- Indefinite
------- ------
Total Intangibles $26,181 $1,977
The only change to the net carrying value of the Company's intangible
assets from March 30, 2002 to June 29, 2002 was amortization expense and the
effect of rate changes in the translation of the intangibles contained in
the financial statement of the Company's Canadian subsidiary.
Aggregate amortization expense for amortized other intangible assets
for the three months ended June 29, 2002 and for the twelve months ended
March 30, 2002 is $0.4 million and $1.4 million, respectively.
Additionally, the anticipated annual amortization expense on other
intangible assets approximates $1.8 million for fiscal years 2003 through
2007 and $1.7 million for fiscal year 2008.
With the adoption of SFAS No. 142, there were no changes to
amortization expense on acquired other intangible assets.
6. GOODWILL
During the three months ended June 29, 2002, no event or circumstance
change occurred to impair the Company's goodwill or indefinite life assets.
The change in the carrying value of goodwill during the three months ended
June 29, 2002 is attributable solely to the effects of rate changes in the
translation of the goodwill contained in the financial statements of foreign
subsidiaries.
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
The changes in the carrying amount of the Company's goodwill during
the three months ended June 29, 2002 are as follows (in thousands):
Carrying amount as of March 30, 2002 $14,168
Effect of change in rates used for translation 853
-------
Carrying amount as of June 29, 2002 $15,021
=======
7. INVENTORIES
Inventories are stated at the lower of cost or market and include the
cost of material, labor and manufacturing overhead. Cost is determined on
the first-in, first-out method.
Inventories consist of the following:
June 29, 2002 March 30, 2002
------------- --------------
(in thousands)
Raw materials $20,037 $16,808
Work-in-process 4,971 4,700
Finished goods 49,436 45,736
------- -------
$74,444 $67,244
======= =======
8. NET INCOME PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations, as
required by SFAS No. 128, "Earnings Per Share." Basic EPS is computed by
dividing reported earnings available to stockholders by weighted average
shares outstanding. Diluted EPS includes the effect of potential dilutive
common shares.
For the three months ended
--------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Basic EPS
Net income $ 6,775 $ 9,944
Weighted average shares 25,318 25,979
------- -------
Basic income per share $ 0.27 $ 0.38
======= =======
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Diluted EPS
Net income $ 6,775 $ 9,944
Basic weighted average shares 25,318 25,979
Effect of stock options 792 968
------- -------
Diluted weighted average shares 26,110 26,947
Diluted income per share $ 0.26 $ 0.37
9. COMMITMENTS AND CONTINGENCIES
The Company is presently engaged in various legal actions, and
although ultimate liability cannot be determined at the present time, the
Company believes, based on consultation with counsel, that any such
liability will not materially affect the consolidated financial position of
the Company or its results of operations.
Through its acquisition of Fifth Dimension Information Systems, Inc.
(Fifth Dimension), as well as its agreement with Baxter Healthcare
Corporation (Baxter) related to pathogen inactivation technology, the
Company is contingently obligated to make certain payments. The Fifth
Dimension acquisition involves certain earn-out payments of up to $4.1
million based upon Fifth Dimension reaching certain performance milestones
prior to fiscal 2006. The Baxter agreement calls for the Company to make
additional milestone payments of up to $14.5 million over the next several
years as regulatory approvals are received in various markets.
10. SEGMENT INFORMATION
Segment Definition Criteria
The Company manages its business on the basis of one operating
segment: the design, manufacture and marketing of automated blood processing
systems. Haemonetics' chief operating decision-maker uses consolidated
results to make operating and strategic decisions. Manufacturing processes,
as well as the regulatory environment in which the Company operates, are
largely the same for all product lines.
Product and Service Segmentation
The Company's principal product offerings include blood bank, red
cell, surgical and plasma collection products.
The blood bank products include machines, single use disposables and
solutions that perform "apheresis," (the separation of whole blood into its
components and subsequent collection of certain components, including
platelets and plasma), as well as the washing of red blood cells for certain
procedures. In addition, the blood bank product line includes solutions
used in non-apheresis applications. The main devices used for these blood
component therapies are the MCS(R)+, mobile collection system and the
ACP(TM) 215 automated cell processing system.
Red cell products include machines and single use disposables and I.V.
solutions that perform apheresis for the collection of red blood cells.
Devices used for the collection of red blood cells are the MCS(R)+, mobile
collection systems.
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Surgical products include machines, and single use disposables that
perform surgical blood salvage in orthopedic and cardiovascular surgical
applications. Surgical blood salvage is a procedure whereby shed blood is
collected, cleansed and made available to be transfused back to the patient.
The devices used in the surgical area are the OrthoPAT(R) System, and a
full line of Cell Saver(R) autologous blood recovery systems.
Plasma collection products are machines, disposables, solutions and
software that perform apheresis for the separation of whole blood components
and subsequent collection of plasma. The device used in automated plasma
collection is the PCS(R)2 plasma collection system.
Three months ended (in thousands)
June 29, 2002
- -------------
Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
Revenues from external customers $26,741 3,624 18,332 29,495 3,743 81,935
June 30, 2001
- -------------
Revenues from external customers $26,038 2,431 17,467 27,023 2,842 75,801
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The table outlines the components of the consolidated statements of
income from operations as a percentage of net revenues:
Percentage Increase/(Decrease)
Percentage of Net Revenues Three Months Ended
Three Months Ended (in actual dollars)
June 29, 2002 June 30, 2001 2001/2000
------------- ------------- ------------------------------
Net revenues 100.0% 100.0% 8.1%
Cost of goods sold 52.9 52.1 9.6
--------------------------------------------------
Gross Profit 47.1 47.9 6.4
--------------------------------------------------
Operating Expenses:
Research and development 6.0 6.3 2.6
Selling, general and administrative 29.3 29.0 9.3
--------------------------------------------------
Total operating expenses 35.3 35.3 8.1
--------------------------------------------------
Operating income 11.8 12.6 1.7
Interest expense (1.1) (1.3) (10.7)
Interest income 0.6 1.4 (59.5)
Other income, net 0.7 1.3 (42.1)
--------------------------------------------------
Income before provision for income taxes 12.0 14.0 (7.5)
Provision for income taxes 3.7 3.9 2.5
--------------------------------------------------
Income before cumulative effect of change
in accounting principle, net of tax 8.3 10.1 (11.3)
--------------------------------------------------
Cumulative effect of change in accounting
principle, net of tax --- 3.0 (100.0)
--------------------------------------------------
Net income 8.3% 13.1% (31.9)%
==================================================
Three Months Ended June 29, 2002 Compared to
Three Months Ended June 30, 2001
Percent Increase / (Decrease)
-----------------------------
Actual dollars At constant
By geography: 2002 2001 as reported currency
- ------------- ---- ---- -------------- -----------
United States $30,935 $28,888 7.1% 7.1%
International 51,000 46,913 8.7 13.7
------------------------------------------------
Net revenues 81,935 $75,801 8.1% 11.1%
13
Percent Increase / (Decrease)
-----------------------------
Actual dollars At constant
By product type: 2002 2001 as reported currency
- ---------------- ---- ---- -------------- -----------
Disposables $73,433 $70,525 4.1% 7.2%
Misc. & service 3,743 2,842 31.7 32.5
Equipment 4,759 2,434 95.5 93.4
------------------------------------------------
Net revenues $81,935 $75,801 8.1% 11.1
Percent Increase / (Decrease)
-----------------------------
Actual dollars At constant
By product line: 2002 2001 as reported currency
- ---------------- ---- ---- -------------- -----------
Surgical $17,200 $16,505 4.2% 5.5%
Blood bank 24,185 24,731 (2.2) 3.1
Red cells 3,381 2,403 40.7 39.6
Plasma 28,667 26,886 6.6 8.9
------------------------------------------------
Disposable revenues $73,433 $70,525 4.1 7.2
Three months ended June 29, 2002(fiscal 2003) compared
to three months ended June 30, 2001 (fiscal 2002)
Net Revenues
Net revenues in fiscal 2003 increased 8.1% to $81.9 million from $75.8
million in fiscal 2002. With currency rates held constant, net revenues
increased 11.1%. The increase in revenues was partially offset by a
reduction in the spot rate gains realized on forward contracts recorded in
revenues.
Disposable sales increased 4.1% year over year at actual rates and
with currency rates held constant, disposable sales increased 7.2%. Year
over year constant currency disposable sales growth was a result of growth
in worldwide Surgical (up 5.5%), worldwide Bloodbank (up 3.1%) worldwide Red
Cell (up 39.6%), and worldwide Plasma sales (up 8.9%). The constant
currency growth in the worldwide Surgical disposable sales is mainly
attributed to volume increases of existing products and from the Company's
OrthoPAT(R) product in the U.S. orthopedic market. Worldwide Bloodbank
disposable sales increased as compared to 2002 as a result of volume
increases in platelet disposable sales in Japan and Asia. The growth in
worldwide Red Cell sales is attributed to volume increases in the U.S. as
the supply of red cells continues to tighten due to blood shortages and
recently adopted donor deferral regulations mandated by the U.S. Food and
Drug Administration. The growth in worldwide Plasma disposables sales is
attributed to volume increases of products sold in Japan, Asia and Europe.
In the U.S., plasma disposable sales decreased 4.4% due to declining sales to
one customer as a result of industry consolidation while industry collection
continued to grow.
At actual rates, sales of disposable products, excluding service and
other miscellaneous revenue, accounted for approximately 89.6% and 93.0% of
net revenues for fiscal 2003 and 2002, respectively. Constant currency
sales of disposable products, excluding service and other miscellaneous
revenue, accounted for approximately 89.5% and 92.8 % of net revenues for
fiscal 2003 and 2002, respectively.
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues, including software revenue from the Company's newly
14
acquired software company, Fifth Dimension, accounted for 4.6% and 3.7% of
the Company's net revenues, at actual rates, for fiscal year 2003 and 2002,
respectively. At constant currency, these sales accounted for 4.6% and 3.9%
of the Company's net revenues for fiscal 2003 and 2002, respectively. This
increase is due to the software revenues of Fifth Dimension in 2003.
Equipment revenues increased 95.5% from $2.4 million in fiscal 2002 at
actual rates and increased 93.4% year over year with currency rates held
constant. The 93.4% constant currency increase is primarily attributable to
sales of platelet and plasma machines in Japan and Europe and the new ACP
215 system domestically. Most of our equipment sales occur in our
international markets, as in the U.S. we generally place equipment with a
customer, in exchange for an agreement by the customer to purchase our
disposables. Due to the variable nature of equipment sales, the Company
gives no assurance as to whether or not these significant increases will
continue in the foreseeable future.
At actual rates, international sales as reported accounted for
approximately 62% of net revenues for both fiscal 2003 and 2002. As in the
U.S., sales outside the U.S. are susceptible to risks and uncertainties from
regulatory changes, the Company's ability to forecast product demand and
market acceptance of the Company's products, changes in economic conditions,
the impact of competitive products and pricing and changes in health care
policy.
Gross profit
Gross profit of $38.6 million for fiscal 2003 increased $2.3 million
from $36.3 million for fiscal 2002. With currency rates held constant,
gross profit increased by 16.1%, or $5.3 million, and increased as a
percentage of sales by 2.0%. The $5.3 million constant currency gross
profit increase from fiscal 2002 was a result of the 11.1% or $8.1 million
increase in constant currency revenues and cost reductions.
In 1998, the Company initiated the Customer Oriented Redesign for
Excellence ("CORE") Program to increase operational effectiveness and
improve all aspects of customer service. The CORE Program is based on Total
Quality of Management, ("TQM") principals, and the program aims to increase
the efficiency and the quality of processes and products, and to improve the
quality of management at Haemonetics. For the first three months of fiscal
2003, the CORE program generated $1.3 million of cost savings benefiting the
Company's gross profit from initiatives to lower product costs by automating
and redesigning the way certain products are made and by negotiating reduced
raw material prices from suppliers.
Expenses
The Company expended $4.9 million, 6.0% of net revenues, on research
and development for fiscal 2003 and $4.8 million, 6.3% of net revenues, for
fiscal 2002. At constant currency rates, research and development as a
percentage of sales decreased 0.3% from fiscal 2002 to fiscal 2003 remaining
relatively flat in dollars.
Selling, general and administrative expenses increased $2.0 million in
fiscal 2003 to $24.0 million from $22.0 million in fiscal 2002. At constant
currency rates, selling, general and administrative expenses increased $2.1
million, however decreased as a percent of net revenues by 0.4% to 29.6% due
to the Company's higher sales. The increased spending behind the Company's
new product sales and marketing activities contributed to the dollar
increase in selling, general and administrative dollars.
Operating Income
Operating income for the first quarter of fiscal 2003, as a percentage
of net revenues, decreased 0.8 percentage points to 11.8% in fiscal 2003
from 12.6% in fiscal 2002. At constant currency rates, operating income
increased by $3.1 million. The $3.1 million increase in operating income
resulted largely from the constant currency improvements in gross profit
year over year partially offset by the increases in selling, general and
administrative expenses.
Foreign Exchange
The Company generates 62% of its revenues outside the U.S. in foreign
currencies. As such, the Company uses a combination of business and
financial tools comprised of various natural hedges (offsetting exposures
from local production costs and operating expenses) and forward contracts to
hedge its balance sheet and P&L exposures. Hedging through the use of
forward contracts does not eliminate the volatility of foreign exchange
rates, but
15
because the Company generally enters into forward contracts one year out,
rates are fixed for a one-year period, thereby facilitating financial
planning and resource allocation.
The Company computes a composite rate index for purposes of measuring,
comparatively, the change in foreign currency hedge spot rates from the
hedge spot rates of the corresponding period in the prior year. The
relative value of currencies in the index corresponds to the value of sales
in those currencies. The composite was set at 1.00 based upon the weighted
rates at March 31, 1997.
For the first quarter of fiscal 2003, the indexed hedge spot rates
depreciated 8.9% and for the first quarter of fiscal 2004, the indexed hedge
spot rates depreciated 3.6% over the corresponding quarter of the preceding
years. These indexed hedge rates represent the change in spot value (value
on the day the hedge contract is undertaken) of the Haemonetics specific
hedge rate index. These indexed hedge rates impact sales in the Company's
financial statements. The final impact of currency fluctuations on the
results of operations is dependent on the local currency amounts hedged and
the actual local currency results.
Composite Index Favorable / (Unfavorable)
Hedge Spot Rates Change vs Prior Year
---------------- -------------------------
FY2001 Q1 1.04 5.4%
Q2 1.00 8.2%
Q3 0.92 12.9%
Q4 0.97 10.2%
2001 Total 0.98 9.1%
FY2002 Q1 0.99 5.2%
Q2 0.97 3.3%
Q3 1.01 (8.6%)
Q4 1.05 (7.5%)
2002 Total 1.00 (2.0%)
FY2003 Q1 1.09 (8.9%)
Q2 1.08 (10.3%)
Q3 1.10 (8.1%)
Q4 1.17 (11.0%)
2003 Total 1.11 (9.5%)
FY2004 Q1 1.13 (3.6%)
2004 Total 1.13 (1.5%)
Other Income, Net
Interest expense for fiscal 2003 was relatively flat as compared to
fiscal 2002 as nearly 100% of the Company's long-term debt is at fixed
rates. Interest income decreased $0.7 million from 2002 to 2003, due
primarily to lower average balances of cash available to invest and lower
investment yields. Other income, net decreased $0.4 million from fiscal
2002 to fiscal 2003 due to decreases in income earned from points on forward
contracts, which was partially offset by an increase in foreign exchange
transaction gains. Points on forward contracts are amounts, either paid or
earned, based on the interest rate differential between two foreign
currencies in a forward hedge contract.
Taxes
The income tax provision, as a percentage of pretax income, was 31.0%
for the first quarter of fiscal 2003 and 28.0% for the first quarter of
fiscal 2002. The increase in the effective tax rate is primarily
attributable to reduced export tax benefits.
16
Cumulative Effect of Accounting Change, Net of Tax
In accordance with Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No. 133,"
(collectively, SFAS No. 133, as amended) effective, April 1, 2001, the
beginning of the Company's 2002 fiscal year. As required, these standards
were adopted as a change in accounting principle and accordingly, the effect
at adoption of $3.2 million was shown net of taxes of $0.9 million as a
cumulative effect of a change in accounting principle on the face of the
consolidated statements of operations in the three months ended June 30,
2001.
Liquidity and Capital Resources
The Company's primary sources of capital include cash and short term
investments, internally generated cash flows and bank borrowings. The
Company believes these sources to be sufficient to fund its requirements,
which are derived primarily from capital expenditures, acquisitions, new
business development, share repurchase and working capital.
During the first quarter of fiscal 2003, the Company funded its
activities primarily with $1.3 million of cash flows generated by
operations, $44.3 million of gross proceeds from the sale of available-for-
sale securities and $1.6 million in stock option proceeds.
Working capital for the first quarter of fiscal 2003 was $127.8
million. This reflects a decrease of $30.2 million in working capital from
the first quarter of fiscal 2002, largely due to increases in short-term
borrowings and accrued expenses and decreases in available-for-sale
investments, offset by an increase in inventories and accounts receivable.
The increase of $6.7 million in cash and short term investments during
the first quarter of fiscal 2003 from operating, investing and financing
activities before the effect of exchange rates represents an increase in
cash flow of $7.0 million compared to the $0.3 million in cash generated
during the first quarter of fiscal 2002. The $7.0 million increase was a
result of more cash generated from the net proceeds of available-for-sale
investments offset by purchases of treasury stock.
Operating Activities:
The Company generated $1.3 million in cash from operating activities
during the first quarter of fiscal 2003 as compared to $2.6 million
generated during the first quarter of fiscal 2002. The $1.3 million
decrease in operating cash flow from fiscal 2003 to fiscal 2002 was a result
of a $2.8 million increase in inventories due to higher raw material, work
in process and finished good levels needed to support new product sales, a
$2.3 million increase in other assets, a $0.3 million decrease in accounts
payable, accrued expenses and other current liabilities in 2003 offset by
$1.3 million less cash utilized by accounts receivable increases and a $1.7
million increase in net income adjusted for depreciation, amortization and
other non-cash items.
The Company measures its performance using an operating cash flow
metric defined as net income adjusted for depreciation, amortization and
other non-cash items; capital expenditures for property, plant and equipment
together with the investment in Haemonetics equipment at customer sites,
including sales-type leases; and the change in operating working capital,
including change in accounts receivable, inventory, accounts payable and
accrued expenses, excluding tax accounts and the effects of currency
translation. This alternative measure of operating cash flows is a non-
GAAP measure that may not be comparable to similarly titled measures
reported by other companies. It is intended to assist readers of the report
who employ "free cash flow" and similar measures that do not include tax
assets and liabilities, equity investments and other sources and uses that
are outside the day-to-day activities of a company.
17
As measured by the Company's operating cash flow metric, the Company
generated $0.7 million and $4.8 million of operating cash during the first
quarter of fiscal 2003 and fiscal 2002, respectively. The $0.7 million of
operating cash flow for the first quarter of fiscal 2003 resulted from $7.6
million of net income adjusted for non-cash items and $3.9 million from the
reduction of the Company's net investment in property, plant and equipment
and sales-type leases. Offsetting these was $10.8 million from increased
working capital investment, primarily an increase in inventories of $7.4
million, a $0.9 million increase in accounts receivable and a decrease in
accounts payable and accrued expenses of $2.5 million. The $4.7 million of
operating cash flow generated for first quarter of fiscal 2002 resulted from
$11.0 million of net income adjusted for non-cash items and $3.3 million
from the reduction of the Company's net investment in property, plant and
equipment and sales-type leases offset by $9.6 million from increased
working capital investment, primarily due to higher inventories, higher
accounts receivable and lower accrued payables and payroll. The working
capital and capital investment components of the Company's operating cash
flow metric have been adjusted by non-cash transfers (transfers from
inventory to property, plant and equipment), which amounted to approximately
$3.1 million and $1.8 million for the first quarter of fiscal 2003 and 2002,
respectively.
Investing Activities:
Net cash provided by investing activities totaled $30.1 million for
the first quarter of fiscal 2003, as compared to net cash utilized of $13.8
million during the first quarter of fiscal 2002. This change of $43.9
million was primarily due to the liquidation of the Company's available-for-
sale investments. The Company sold its available-for-sale investments due
to changes in the interest rate environment.
Financing Activities:
Net cash used for financing activities totaled $24.7 million for the
first quarter of fiscal 2003 as compared to net cash provided of $11.9
million for the first quarter of fiscal 2002. The $36.6 million decrease in
cash from financing activities was a result of an additional $26.0 million
spent in the first quarter of fiscal 2003 to repurchase Company stock, $6.2
million from changes in debt and $4.2 million from fewer stock option
exercises in fiscal 2003 than in fiscal 2002. In the first quarter of fiscal
2003, the Company repurchased 868,200 shares of outstanding common stock for
approximately $26.0 million, which is an average market price of $29.98 per
share. The Company expects any repurchased shares to be made available for
issuance pursuant to its employee benefit and incentive plans and for other
corporate purposes. The $6.2 million change in cash from 2002 to 2003
associated with debt was a result of significant changes in foreign exchange
rates in fiscal 2003 and fiscal year 2002 increases in Japan debt.
Inflation
The Company does not believe that inflation has had a significant
impact on the Company's results of operations for the periods presented.
Historically, the Company believes it has been able to minimize the effects
of inflation by improving its manufacturing and purchasing efficiency, by
increasing employee productivity and by reflecting the effects of inflation
in the selling prices of new products it introduces each year.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements made
by the Company that are prefaced with the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed" and
similar expressions, are intended to identify forward looking statements
regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of
operations and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which the Company can give no firm assurance. Further,
any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon
as a prediction of actual future financial condition or results. These
forward-looking statements, like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Such risks and uncertainties include
technological advances in the medical field and the Company's ability to
successfully implement products that incorporate such advances, product
demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of
18
competitive products and pricing, foreign currency exchange rates, changes
in customers' ordering patterns and the effect of uncertainties in markets
outside the U.S. (including Europe and Asia) in which the Company operates.
The foregoing list should not be construed as exhaustive.
Quantitative and qualitative disclosures about market risk
The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.
Foreign exchange risk
Approximately 62% of the Company's revenues are generated outside the
U.S., yet the Company's reporting currency is the U.S. dollar. Foreign
exchange risk arises because the Company engages in business in foreign
countries in local currency. Exposure is partially mitigated by producing
and sourcing product in local currency. Accordingly, whenever the US dollar
strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations and alternatively, whenever
the U.S. dollar weakens relative to the other major currencies there is a
positive effect on the Company's results of operations.
It is the Company's policy to minimize for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments known as forward
contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated revenues. The Company enters into forward contracts
that mature one month prior to the anticipated timing of the forecasted
foreign currency denominated revenues. These contracts are designated as
cash flow hedges intended to lock in the expected cash flows of forecasted
foreign currency denominated revenues at the available spot rate. Actual
spot rate gains and losses on these contracts are recorded in revenues, at
the same time the offsetting gains and losses on the underlying transactions
being hedged are recorded. The fair value of these contracts associated
with the change in forward points is recorded in other income. The Company
also enters into forward contracts that settle within 35 days to hedge
certain intercompany receivables denominated in foreign currencies. These
derivative financial instruments are not used for trading purposes. The
Company's primary foreign currency exposures in relation to the U.S. dollar
are the Japanese Yen and the Euro.
At June 29, 2002, the Company had the following significant foreign
exchange contracts to hedge the anticipated cash flows from forecasted
foreign currency denominated revenues outstanding:
Hedged (BUY) / SELL Weighted Spot Weighted Forward
Currency Local Currency Contract Rate Contract Rate Fair Value Maturity
-------- -------------- ------------- ---------------- ---------- --------
Euro 7,600,000 $0.890 $0.885 (769,426) Jul-Sept 2002
Euro 8,250,000 $0.879 $0.871 (903,235) Oct-Dec 2002
Euro 8,450,000 $0.880 $0.870 (892,796) Jan-Mar 2003
Euro 5,850,000 $0.900 $0.890 (482,947) Apr-Jun 2003
Japanese Yen 1,850,000,000 122.3 per US$ 118.7 per US$ 14,709 Jul-Sept 2002
Japanese Yen 1,825,000,000 125.6 per US$ 123.0 per US$ (578,600) Oct-Dec 2002
Japanese Yen 1,850,000,000 131.8 per US$ 128.8 per US$ (1,319,101) Jan-Mar 2003
Japanese Yen 1,200,000,000 128.6 per US$ 125.2 per US$ (639,889) Apr-Jun 2003
----------
Total: (5,571,285)
==========
The Company estimated the change in the fair value of all forward
contracts assuming both a 10% strengthening and weakening of the U.S. dollar
relative to all other major currencies. In the event of a 10% strengthening
of the U.S. dollar, the change in fair value of all forward contracts would
result in a $10.4 million increase in the fair value of the forward
contracts; whereas a 10% weakening of the U.S. dollar would result in a
$11.8 million decrease in the fair value of the forward contracts.
19
Interest Rate Risk
All of the Company's long-term debt is at fixed rates. Accordingly, a
change in interest rates has an insignificant effect on the Company's
interest expense amounts. The fair value of the Company's long-term debt,
however, would change in response to interest rates movements due to its
fixed rate nature. At June 29, 2002, the fair value of the Company's long-
term debt was approximately $3.0 million higher than the value of the debt
reflected on the Company's financial statements. This higher fair market is
entirely related to the Company's $28.6 million, 7.05% fixed rate senior
notes and the $9.1 million, 8.41% fixed rate mortgage.
Using scenario analysis, the Company changed the interest rate on all
long-term maturities by 10% from the rate levels, which existed at June 29,
2002. The effect was a change in the fair value of the Company's long-term
debt, of approximately $0.7 million.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement between the Company and James L.
Peterson.
10.2 Employment Agreement between the Company and Ronald J.
Ryan.
10.3 Employment Agreement between the Company and Stephen C.
Swenson.
10.4 Employment Agreement between the Company and Timothy
Surgenor.
10.5 Employment Agreement between the Company and Thomas D.
Headley.
(b) Reports on Form 8-K
Registrant filed a Report on Form 8-K dated June 18, 2002
reporting a change in the Company's certifying accountant.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Pursuant to Section 1350 of Chapter
63 of Title 18, United States Code, the undersigned hereby certify that this
report fully complies with the requirements of Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 and that information contained in this
report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant for the periods presented.
HAEMONETICS CORPORATION
Date: August 7, 2002 By: s/James L. Peterson
--------------------------------
James L. Peterson, President
and Chief Executive Officer
Date: August 7, 2002 By: s/Ronald J. Ryan
--------------------------------
Ronald J. Ryan, Senior Vice
President and Chief Financial
Officer
22