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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: September 28, 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 Identification No.)
of incorporation or organization)
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.
24,390,900 shares of Common Stock, $ .01 par value, as of
---------------------------------------------------------
September 28, 2002
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income -
Three and Six Months Ended September 28, 2002
and September 29, 2001 2
Unaudited Consolidated Balance Sheets -
September 28, 2002 and March 30, 2002 3
Unaudited Consolidated Statement of Stockholders' Equity -
Six Months Ended September 28, 2002 4
Unaudited Consolidated Statements of Cash Flows -
Six Months Ended September 28, 2002 and September 29, 2001 5
Notes to Unaudited Consolidated Financial Statements 6-12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 24-25
ITEM 4. Controls and Procedures 25
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-29
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except share data)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net Revenues $87,025 $80,704 $168,960 $156,505
Cost of goods sold 48,135 40,903 91,423 80,393
----------------------------------------------------------
Gross profit 38,890 39,801 77,537 76,112
Operating expenses:
Research and development 5,110 4,988 10,049 9,802
Selling, general and administrative 23,954 21,859 47,970 43,824
----------------------------------------------------------
Total operating expenses 29,064 26,847 58,019 53,626
----------------------------------------------------------
Operating income 9,826 12,954 19,518 22,486
Interest expense (870) (981) (1,747) (1,963)
Interest income 345 1,089 786 2,177
Other income, net 525 755 1,088 1,728
----------------------------------------------------------
Income before provision for income taxes 9,826 13,817 19,645 24,428
Provision for income taxes 3,046 3,869 6,090 6,840
----------------------------------------------------------
Income before cumulative effect of
change in accounting principle 6,780 9,948 13,555 17,588
Cumulative effect of change in accounting
principle, net of tax - - - 2,304
----------------------------------------------------------
Net income $ 6,780 $ 9,948 $ 13,555 $ 19,892
==========================================================
Basic income per common share
Income before cumulative effect of
change in accounting principle $ 0.28 $ 0.38 $ 0.54 $ 0.67
Cumulative effect of change in accounting
principle, net of tax - - - $ 0.09
Net income $ 0.28 $ 0.38 $ 0.54 $ 0.76
Diluted income per common share
Income before cumulative effect of
change in accounting principle $ 0.27 $ 0.37 $ 0.53 $ 0.65
Cumulative effect of change in accounting
principle, net of tax - - - $ 0.09
Net income $ 0.27 $ 0.37 $ 0.53 $ 0.73
Weighted average shares outstanding
Basic 24,642 26,287 24,980 26,133
Diluted 25,163 27,239 25,462 27,093
The accompanying notes are an intergral part of these consolidated financial
statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share data)
September 28, March 30,
ASSETS 2002 2002
------------- ---------
Current assets:
Cash and short term investments $ 43,615 $ 34,913
Available-for-sale investments -- 32,636
Accounts receivable, less allowance of $1,340
at September 28, 2002 and $1,298 at March 30, 2002 77,842 63,743
Inventories 71,755 67,244
Current investment in sales-type leases, net 2,478 2,783
Deferred tax asset 22,093 18,943
Other prepaid and current assets 8,513 12,573
-----------------------
Total current assets 226,296 232,835
-----------------------
Property, plant and equipment 231,087 218,819
Less accumulated depreciation 148,161 133,942
-----------------------
Net property, plant and equipment 82,926 84,877
Other assets:
Investment in sales-type leases, net (long-term) 3,274 3,234
Other intangibles, less accumulated amortization of
$2,858 at September 28, 2002 and $1,977 at March 30, 2002 23,335 24,204
Goodwill, net 14,748 14,168
Deferred tax asset 1,897 2,275
Other long-term assets 3,404 3,328
-----------------------
Total other assets 46,658 47,209
-----------------------
Total assets $355,880 $364,921
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 40,598 $ 31,356
Accounts payable 11,927 12,536
Accrued payroll and related costs 13,196 12,696
Accrued income taxes 15,618 11,355
Other accrued liabilities 19,347 16,155
-----------------------
Total current liabilities 100,686 84,098
-----------------------
Long-term debt, net of current maturities 38,290 40,787
Other long-term liabilities 3,508 3,212
Stockholders' equity:
Common stock, $.01 par value; Authorized - 80,000,000
shares; Issued 31,613,561 shares at September 28, 2002;
31,453,511 shares at March 30, 2002 316 315
Additional paid-in capital 107,862 104,261
Retained earnings 278,147 264,592
Accumulated other comprehensive loss (16,203) (16,395)
-----------------------
Stockholders' equity before treasury stock 370,122 352,773
Less: treasury stock 7,222,661 shares at cost at
September 28, 2002 and 5,812,943 shares at cost
at March 30, 2002 156,726 115,949
-----------------------
Total stockholders' equity 213,396 236,824
-----------------------
Total liabilities and stockholders' equity $355,880 $364,921
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited data,in thousands)
Accumulated
Common Stock Additional Other Total
-------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive
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 160 1 3,496 3,497
Purchase of treasury stock (41,033) (41,033)
Net income 13,555 13,555 $13,555
Foreign currency
translation adjustment 4,787 4,787 4,787
Unrealized loss on
derivatives (4,595) (4,595) (4,595)
-------
$13,747
------------------------------------------------------------------------------------------------
Balance, September 28, 2002 31,614 $316 $107,862 $(156,726) $278,147 $(16,203) $213,396
==============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Six Months Ended
----------------------
Sept. 28, Sept. 29,
2002 2001
--------- ---------
Cash Flows from Operating Activities:
Net income $ 13,555 $ 19,892
Adjustments to reconcile net income to
net cash provided by operating activities:
Non cash items:
Depreciation and amortization 14,253 15,487
Deferred income taxes (330) 76
Tax benefit related to the exercise of stock options 470 --
Gain from exchange activities (794) (1,697)
Change in operating assets and liabilities:
Increase in accounts receivable - net (10,213) (6,721)
Increase in inventories (8,888) (10,658)
Decrease in sales-type leases (current) 368 951
Decrease (increase) in prepaid income taxes 402 (291)
Decrease (increase) in other assets 101 (4,119)
Increase in accounts payable, accrued
expenses and other current liabilities 3,133 4,160
---------------------
Net cash provided by operating activities 12,057 17,080
Cash Flows from Investing Activities:
Purchases of available-for-sale investments (11,670) (40,251)
Gross proceeds from sale of available-for-sale investments 44,306 27,489
Capital expenditures on property, plant and equipment,
net of retirements and disposals (3,172) (11,948)
Net decrease in sales-type leases (long-term) 22 1,995
---------------------
Net cash provided (used) by investing activities 29,486 (22,715)
---------------------
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (205) (174)
Net increase in short-term revolving
credit agreements 7,207 10,889
Net (decrease) increase in long-term credit agreements (2,563) 216
Employee stock purchase plan purchases 361 250
Exercise of stock options 3,027 10,562
Purchase of treasury stock (41,033) --
---------------------
Net cash (used) provided by financing activities (33,206) 21,743
Effect of exchange rates on cash and cash equivalents 365 298
---------------------
Net increase in cash and cash equivalents 8,702 16,406
Cash and cash equivalents at beginning of period 34,913 41,441
---------------------
Cash and cash equivalents at end of period $ 43,615 $ 57,847
=====================
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for Haemonetics
placement equipment $ 6,843 $ 2,824
Supplemental disclosures of cash flow information:
Interest paid $ 1,620 $ 1,846
Income taxes paid $ 1,270 $ 5,090
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 of
Haemonetics Corporation and subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles ("GAAP") 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 GAAP 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. Operating results for the six-month period ended September 28,
2002 are not necessarily indicative of the results that may be expected for
the full fiscal year ending March 29, 2003. 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 and
second quarters 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 $1.1 million and $1.2 million
for three months ended September 28, 2002 and September 29, 2001,
respectively and $2.5 million and $2.2 million for the six months ending
September 28, 2002 and September 29, 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.
At September 28, 2002, the Company had 28 forward contracts
outstanding, all maturing in less than twelve months, to exchange Euro and
Japanese yen primarily for U.S. dollars totaling $113.6 million. Of these
contracts, six, totaling $31.7 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 September 28, 2002, the fair value of the forward contract
liability was $2.8 million. For the six months ended September 28, 2002, a
$4.6 million loss related to changes in the spot rates for the hedge
contracts was recorded in accumulated other comprehensive loss,
($7.3 million loss less tax benefit of $2.7 million.) The change in the fair
value attributable to points on forward contracts totaled approximately $0.7
million for the six months ended September 28, 2002. This $0.7 million of
income was excluded from the assessment of hedge effectiveness and was
recorded as part of other income, net for the six
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
months ended September 28, 2002 in the Company's unaudited consolidated
statement of income. For the six months ended September 29, 2001, income
from points on forward contracts, included in other income, net was $1.9
million.
A summary of the accounting discussed above is as follows (in thousands):
- ------------------------------------------------------------------------------------------
Accumulated
(Income)/ Expense Comprehensive
Cash Flow Hedges- Asset (Liability)- (Income) Loss, Other Income,
Debit (Credit) Forward Contracts net of tax Net
- ------------------------------------------------------------------------------------------
Balance as of March 30, 2002 $ 3,983 $(2,287)
- ----------------------------
Change in fair value for the six-
months ended September 28, 2002 (6,791) 4,595 (748)
--------------------------------------------
Total $(2,808) $ 2,308 $(748)
4. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-
owner changes in stockholders' equity. For the Company, all other non-owner
changes are primarily foreign currency translation and with the Company's
adoption of SFAS No. 133, as amended, the changes in fair value of the
effective portion of the Company's outstanding cash flow hedge contracts.
For the three months ended September 28, 2002 and September 29, 2001,
comprehensive income was $8.1 million and $7.3 million, respectively. For the
six months ended September 28, 2002 and September 29, 2001, comprehensive
income was $13.7 million and $21.0 million respectively. The increase in
comprehensive income for the three months ended September 28, 2002 as
compared to the three months ended September 29, 2001 was primarily due to
favorable changes in the fair value of the outstanding cash flow hedge
contracts offset by a decline in net income and the unfavorable effects of
currency translation as the Japanese yen and Euro weakened in relation to the
US dollar. For the six months ended September 28, 2002, comprehensive income
decreased as compared to the six months ended September 29, 2001 due to a
decrease in net income. Unfavorable changes in the fair value of the
outstanding cash flow hedge contracts were offset by favorable effects from
currency translation as the Japanese yen and Euro strengthened more in the
current period than in the comparable period a year ago.
5. NEW PRONOUNCEMENTS
In May 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145 ("SFAS 145"), "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". Among other things, SFAS 145 rescinds Statement
of Financial Accounting Standards No. 4 ("SFAS 4"), "Reporting Gains and
Losses from Extinguishment of Debt" and eliminates the requirement that
gains and losses from the extinguishment of debt be classified as an
extraordinary item, net of related income tax effects, unless the criteria
in Accounting Principles Board 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" are met. Adoption of this statement is generally required in
fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of this statement to have a material impact on its consolidated
financial statements.
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
In June 2002, the FASB issued Statement of Financial Accounting
Standard No. 146 ("SFAS 146"), "Accounting for Costs Associated With Exit or
Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force Issue
No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Therefore, SFAS 146 eliminates the definition and
requirements for recognition of exit costs in EITF 94-3. The provisions of
SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will adopt the provisions of SFAS 146
for all exit activities, if any, initiated after December 31, 2002.
6. ACQUIRED OTHER INTANGIBLE ASSETS
As of September 28, 2002
- ------------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
- ---------------------
Patents $ 6,371 $ 882 14
Developed technology 7,992 1,007 17
Customer contracts and related relationships 11,360 969 15
----------------------------------
Subtotal $25,723 $2,858 15
Indefinite Life Intangibles
- ---------------------------
Trade name 470 -- Indefinite
------------------------
Total Intangibles $26,193 $2,858
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
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
The only change to the net carrying value of the Company's intangible
assets from March 30, 2002 to September 28, 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 six months ended September 28, 2002 and for the twelve months ended
March 30, 2002 is $0.9 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.
7. GOODWILL
During the six months ended September 28, 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 six
months ended September 28, 2002 is attributable solely to the effects of
rate changes in the translation of the goodwill contained in the financial
statements of foreign subsidiaries.
The changes in the carrying amount of the Company's goodwill during
the six months ended September 28, 2002 are as follows (in thousands):
Carrying amount as of March 30, 2002 $14,168
Effect of change in rates used for translation 580
-------
Carrying amount as of September 28, 2002 $14,748
=======
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
8. 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:
September 28, 2002 March 30, 2002
------------------ --------------
(in thousands)
Raw materials $21,640 $16,808
Work-in-process 4,472 4,700
Finished goods 45,643 45,736
---------------------------
$71,755 $67,244
===========================
9. 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
----------------------------------------
September 28, 2002 September 29, 2001
------------------ ------------------
Basic EPS
Net income $ 6,780 $ 9,948
Weighted average shares 24,642 26,287
-----------------------------
Basic income per share $ 0.28 $ 0.38
-----------------------------
Diluted EPS
Net income $ 6,780 $ 9,948
Basic weighted average shares 24,642 26,287
Effect of stock options 521 952
-----------------------------
Diluted weighted average shares 25,163 27,239
-----------------------------
Diluted income per share $ 0.27 $ 0.37
-----------------------------
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
For the six months ended
----------------------------------------
September 28, 2002 September 29, 2001
------------------ ------------------
Basic EPS
Net income $13,555 $19,892
Weighted average shares 24,980 26,133
-----------------------------
Basic income per share $ 0.54 $ 0.76
-----------------------------
Diluted EPS
Net income $13,555 $19,892
Basic weighted average shares 24,980 26,133
Effect of stock options 482 960
-----------------------------
Diluted weighted average shares 25,462 27,093
-----------------------------
Diluted income per share $ 0.53 $ 0.73
-----------------------------
10. 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.
11. 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.
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
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.
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 and solutions
that perform apheresis for the separation of whole blood components and
subsequent collection of plasma. The devices used in automated plasma
collection are the PCS(R)2 plasma collection system and the Superlite(TM).
Three months ended (in thousands)
September 28, 2002
------------------
t Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
Revenues from external customers $29,385 3,717 17,963 31,617 4,343 $ 87,025
September 29, 2001
------------------
Revenues from external customers $29,279 2,569 17,432 29,633 1,791 $ 80,704
Six months ended (in thousands)
September 28, 2002
------------------
Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
Revenues from external customers $56,126 7,341 36,298 61,110 8,085 $168,960
September 29, 2001
------------------
Revenues from external customers $55,317 5,000 34,899 56,656 4,633 $156,505
12
ITEM 2. 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:
Three Months Ended
Percentage of Net Revenue Percentage
---------------------------------------- Increase/(Decrease)
Three Months Ended (in actual dollars)
September 28, 2002 September 29, 2001 2002/2001
------------------ ------------------ -------------------
Net revenues 100.0% 100.0% 7.8%
Cost of goods sold 55.3 50.7 17.7
-------------------------------------------------
Gross Profit 44.7 49.3 (2.3)
Operating Expenses:
Research and development 5.9 6.2 2.4
Selling, general and administrative 27.5 27.1 9.6
-------------------------------------------------
Total operating expenses 33.4 33.2 8.3
-------------------------------------------------
Operating income 11.3 16.1 (24.1)
Interest expense (1.0) (1.2) (11.3)
Interest income 0.4 1.3 (68.3)
Other income, net 0.6 0.9 (30.5)
-------------------------------------------------
Income before provision for income taxes 11.3 17.1 (28.9)
Provision for income taxes 3.5 4.8 (21.3)
-------------------------------------------------
Net income 7.8% 12.3% (31.8%)
=================================================
Percent Increase/(Decrease)
-----------------------------
Actual dollars At constant
By geography: 2002 2001 as reported currency
- ------------- ---- ---- -------------- -----------
United States $33,632 $29,897 12.5% 12.5%
International 53,393 50,807 5.1 6.2
------------------------------------------------
Net revenues $87,025 $80,704 7.8% 8.6%
13
Percent Increase/(Decrease)
-----------------------------
Actual dollars At constant
By product type: 2002 2001 as reported currency
- ---------------- ---- ---- -------------- -----------
Disposables $75,299 $74,233 1.4% 2.5%
Misc. & service 4,343 1,791 142.5 143.3
Equipment 7,383 4,680 57.8 52.2
------------------------------------------------
Net revenues $87,025 $80,704 7.8% 8.6%
Percent Increase/(Decrease)
-----------------------------
Disposable revenue Actual dollars At constant
By product line: 2002 2001 as reported currency
- ------------------ ---- ---- -------------- -----------
Surgical $16,623 $16,377 1.5% 1.1%
Blood bank 25,091 26,558 (5.5) (3.5)
Red cells 3,441 2,569 34.0 31.9
Plasma 30,144 28,729 4.9 5.8
------------------------------------------------
Disposable revenues $75,299 $74,233 1.4% 2.5%
Three months ended September 28, 2002 (fiscal 2003) compared to three months
ended September 29, 2001 (fiscal 2002)
Net Revenues
Net revenues in fiscal 2003 increased to $87.0 million from $80.7
million in fiscal 2002. With currency rates held constant, net revenues
increased 8.6%. The increase in revenues was reduced by spot rate losses
realized on forward contracts recorded in revenues as compared to gains
realized for the same period in the prior year.
Disposable sales increased 1.4% year over year at actual rates and
with currency rates held constant, disposable sales increased 2.5%. Year
over year constant currency disposable sales growth was a result of growth
in worldwide Surgical (up 1.1%), worldwide Red Cell (up 31.9%), and
worldwide Plasma sales (up 5.8%) partly offset by a decline in worldwide
Bloodbank (down 3.5%). The leveling off of the constant currency growth in
worldwide Surgical disposable sales is mainly attributed to a modest
increase in the Company's OrthoPAT(R) product worldwide and by increases in
cardiovascular products in the U.S. and Europe. The slow down in the growth
rate from the preceding quarter and the same quarter a year ago is due to a
temporary leveling off of the growth in the OrthoPAT(R) business. The growth
in worldwide Red Cell sales is attributed to volume increases in the U.S. as
customers (new and current) react to the supply of red cells shrinking 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., while industry collection continued to
grow, the Company's plasma disposable sales decreased 2.7% due to declining
sales to one customer as a result of industry consolidation. Worldwide
Bloodbank disposable sales decreased as compared to 2002 as a result of
volume decreases in platelet disposable sales in Europe and in the U.S.
reflecting the efficiency of automated technology in collecting multiple
platelet units rather than a single unit from a single donor.
At actual rates, sales of disposable products, excluding service and
other miscellaneous revenue, accounted for 86.5% and 92.0% of net revenues
for fiscal 2003 and 2002, respectively.
14
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues, including revenue from the Company's software
company, Fifth Dimension, acquired on January 1, 2002, accounted for 5.0%
and 2.2% of the Company's net revenues, at actual rates, for fiscal year
2003 and 2002, respectively. The increase in constant currency revenue of
$2.5 million reflects $1.1 million of software revenue from Fifth Dimension.
Equipment revenues increased 57.8% from $4.7 million in fiscal 2002 at
actual rates and increased 52.2% year over year with currency rates held
constant. The 52.2% constant currency increase is primarily attributable to
sales in Japan and the new ACP 215 system in the U.S. Most of our equipment
sales occur in markets outside the U.S., as in the U.S. the Company generally
places equipment with a customer in exchange for an agreement to purchase
disposables or to pay a rental fee. 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.
International sales as reported accounted for 61.4% and 63.0% of net
revenues for fiscal 2003 and 2002, respectively. 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 $38.9 million for fiscal 2003 decreased $0.9 million
from $39.8 million for fiscal 2002. As a percentage of sales, gross profit
decreased 4.6% in fiscal 2003 to 44.7%. With currency rates held constant,
gross profit increased by 3.9%, or $ 1.4 million, but decreased as a percentage
of sales by 2.1%. The $1.4 million increase in constant currency gross profit
from fiscal 2002 was a result of the additional contribution from the
increase in constant currency revenues and cost reductions generated from
the Company's Customer Oriented Redesign for Excellence ("CORE") Program
partially offset by a manufacturing provision for quality enhancements to
the Company's OrthoPAT(R) surgical blood salvage system. Equipment revenues,
which have a lower gross profit contribution, were a significant component
of the increase in constant currency revenue.
During the three months ended September 28, 2002, the CORE program
generated $0.4 million of cost reductions, which benefited gross profit.
These cost reductions relate to 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 $5.1 million, 5.9% of net revenues, on research
and development for fiscal 2003 and $5.0 million, 6.2% of net revenues, for
fiscal 2002. At constant currency rates, research and development as a
percentage of sales decreased 0.4% from fiscal 2002 to fiscal 2003 remaining
relatively flat in dollars.
Selling, general and administrative expenses increased $2.1 million in
fiscal 2003 to $24.0 million from $21.9 million in fiscal 2002. At constant
currency rates, selling, general and administrative expenses increased $1.2
million or 5.5%, however, decreased as a percent of net revenues by 0.8% to
27.3% due to the Company's higher sales. Increased spending behind the
Company's new product sales and related marketing activities contributed to
the dollar increase in selling, general and administrative dollars.
Operating Income
Operating income for the first quarter of fiscal 2003 decreased $3.1
million from the first quarter of fiscal 2002 and decreased to 11.3% of sales
in fiscal 2003 from 16.1% in fiscal 2002. At constant currency rates, operating
income increased slightly by $0.2 million but decreased as a percentage of
sales by 0.7%.
15
Other Income, Net
Interest expense for fiscal 2003 was relatively flat as compared to
fiscal 2002. Nearly all 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 and investments and lower investment yields.
Other income, net decreased $0.2 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 second quarter of fiscal 2003 and 28.0% for the second quarter of
fiscal 2002. The increase in the effective tax rate for the three months
ended September 28, 2002, as compared to the three months ended September
29, 2001, reflects reduced export tax benefits among other factors.
For the full 2003 fiscal year, the Company anticipates its effective
tax rate to approximate 27%. In the third quarter of fiscal 2003, the
Company anticipates favorable resolution to certain tax contingencies that
will reduce its effective tax rate significantly. In the fourth quarter of
fiscal year 2003, the Company estimates the effective tax rate at 36.0%,
which it anticipates will approximate the fiscal year 2004 effective rate.
16
Six Months Ended September 28, 2002 (fiscal 2003) Compared to Six Months
Ended September 29, 2001(fiscal 2002)
Percentage Increase/(Decrease)
-----------------------------------------------------
Percentage of Net Revenues
Six Months Ended
------------------------------ Six Months Ended
September 28, September 29, (in actual dollars)
2002 2001 2002/2001
------------- ------------- -------------------
Net revenues 100.0% 100.0% 8.0%
Cost of goods sold 54.1 51.4 13.7
------------------------------------------
Gross Profit 45.9 48.6 1.9
Operating Expenses:
Research and development 5.9 6.2 2.5
Selling, general and administrative 28.4 28.0 9.5
------------------------------------------
Total operating expenses 34.3 34.2 8.2
------------------------------------------
Operating income 11.6 14.4 (13.2)
Interest expense (1.0) (1.3) (11.0)
Interest income 0.4 1.4 (63.9)
Other income, net 0.6 1.1 (37.0)
------------------------------------------
Income before provision for income taxes 11.6 15.6 (19.6)
Provision for income taxes 3.6 4.4 (11.0)
------------------------------------------
Income before cumulative effect of change in
accounting 8.0 11.2 (22.9)
Cumulative effect of change in accounting
principle, net of tax -- 1.5 (100.0)
------------------------------------------
Net income 8.0% 12.7% (31.9)
==========================================
Percent Increase/(Decrease)
-----------------------------
Actual dollars At constant
By geography: 2002 2001 as reported currency
- ------------- ---- ---- -------------- -----------
United States $ 64,567 $ 58,785 9.8% 9.8%
International 104,393 97,720 6.8 9.8
-------------------------------------------------
Net revenues $168,960 $156,505 8.0% 9.8%
Percent Increase/(Decrease)
-----------------------------
Actual dollars At constant
By product type: 2002 2001 as reported currency
- ---------------- ---- ---- -------------- -----------
Disposables $149,069 $144,945 2.8% 4.9%
Misc. & Service 8,086 4,633 74.5 75.0
Equipment 11,805 6,927 70.4 66.0
--------------------------------------------------
Net revenues $168,960 $156,505 8.0% 9.8%
17
Percent Increase/(Decrease)
-----------------------------
Disposable revenue by Actual dollars At constant
product line: 2002 2001 as reported currency
- ------------- ---- ---- -------------- -----------
Surgical $ 33,886 $ 32,922 2.9% 3.4%
Blood bank 49,379 51,436 (4.0) (0.4)
Red cells 6,949 4,972 39.8 38.2
Plasma 58,855 55,615 5.8 7.4
-------------------------------------------------
Disposable revenues $149,069 $144,945 2.8% 4.9%
Six Months Ended September 28, 2002 (fiscal 2003) Compared to Six Months
Ended September 29, 2001(fiscal 2002)
Net Revenues
Net revenues in fiscal 2003 increased 8.0% to $169.0 million from
$156.5 million in fiscal 2002. With currency rates held constant, net
revenues increased 9.8%. The increase in revenues was partially offset by
spot rate losses realized on forward contracts recorded in revenues as
compared to gains realized for the same period in the prior year.
Disposable sales increased 2.8% year over year at actual rates and
with currency rates held constant, disposable sales increased 4.9%. Year
over year constant currency disposable sales growth was a result of growth
in worldwide Surgical (up 3.4%), worldwide Red Cell (up 38.2%), and
worldwide Plasma (up 7.4%) partly offset by a decline in worldwide Bloodbank
(down 0.4%). Constant currency growth in the worldwide Surgical disposable
sales is mainly attributed to increases from the Company's OrthoPAT(R)
product worldwide and increases in cardiovascular products in the U.S and
Europe. The slow down in the growth rate from the preceding six months and
the same period a year ago is due to a temporary leveling off of the growth
in the OrthoPAT(R) business, which we anticipate will continue for the
remainder of this fiscal year. The growth in worldwide Red Cell sales is
attributed to volume increases in the U.S. as customers react to the supply
of red cells shrinking 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., while
industry collection continued to grow, the Company's plasma disposable sales
decreased 3.6% due to declining sales to one customer as a result of
industry consolidation. Worldwide Bloodbank disposable sales decreased as
compared to 2002 as a result of volume decreases in platelet disposable
sales in Europe and in the U.S. reflecting the efficiency of automated
technology in collecting multiple platelet units rather than a single unit
from a single donor.
At actual rates, sales of disposable products, excluding service and
other miscellaneous revenue, accounted for 87.7% and 92.3% of net revenues
for fiscal 2003 and 2002, respectively. Constant currency sales of
disposable products, excluding service and other miscellaneous revenue,
accounted for 87.6% and 92.1% 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
software company, Fifth Dimension, which was acquired on January 1, 2002,
accounted for 4.8% and 3.0% of the Company's net revenues, at actual rates,
for fiscal year 2003 and 2002, respectively. The increase in constant
currency revenue of $3.4 million reflects $2.2 million of software revenue
from Fifth Dimension.
18
Equipment revenues increased 70.4% from $6.9 million in fiscal 2002 at
actual rates and increased 66.0 % year over year with currency rates held
constant. The 66.0% constant currency increase is primarily attributable to
sales of Superlite(TM) plasma machines in Japan and the new ACP 215 system
in the U.S. Most of our equipment sales occur in markets outside the U.S.,
as in the U.S. the Company generally places equipment with a customer, in
exchange for an agreement to purchase disposables or to pay a rental fee.
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 61.8%
and 62.4% of net revenues for fiscal 2003 and 2002, respectively. 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 $ 77.5 million for fiscal 2003 increased $1.4 million
from $76.1 million for fiscal 2002. As a percentage of sales, gross profit
decreased 2.7% in fiscal 2003 to 45.9%. With currency rates held constant,
gross profit increased by 9.7%, or $6.7 million, but decreased 0.1 as a
percentage of sales. The $6.7 million increase in constant currency gross
profit from fiscal 2002 was a result of the additional contribution from the
increase in constant currency revenues and cost reductions generated by the
CORE program, partially offset by a manufacturing provision for quality
enhancements to the Company's OrthoPAT(R) surgical blood salvage system.
Equipment revenues, which have a lower gross profit contribution, were a
significant component of the increase in constant currency revenues.
For the six months ending September 28, 2002, the CORE program
generated $1.4 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 $10.0 million, 5.9% of net revenues, on research
and development for fiscal 2003 and $9.8 million, 6.2% of net revenues, for
fiscal 2002. At constant currency rates, research and development as a
percentage of sales decreased 0.5% from fiscal 2002 to fiscal 2003 remaining
relatively flat in dollars.
Selling, general and administrative expenses increased $4.2 million in
fiscal 2003 to $48.0 million from $43.8 million in fiscal 2002. At constant
currency rates, selling, general and administrative expenses increased $3.3
million, however, decreased as a percent of net revenues by 0.6% to 28.4%
due to the Company's higher sales. Increased spending behind the Company's
new product sales and related marketing activities contributed to the dollar
increase in selling, general and administrative dollars.
Operating Income
Operating income as a percentage of net revenues decreased to 11.6%
from 14.4% in fiscal 2002. At constant currency rates, operating income
increased by $3.3 million and increased as a percentage of sales by 1.1%.
Foreign Exchange
The Company generates approximately 62% of its revenues outside the
U.S. in foreign currencies. As such, the Company uses a combination of
business and financial tools comprising 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 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.
19
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 and second quarters of fiscal 2003, the indexed hedge
spot rates depreciated 8.9% and 10.3%, respectively and for the first and
second quarters of fiscal 2004, the indexed hedge spot rates depreciated
3.6% and appreciated 3.6%, respectively over the corresponding quarters 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%)
Q2 1.05 3.6%
Q3 1.06 3.2%
2004 Total 1.08 2.9%
Other Income, Net
Interest expense for fiscal 2003 was relatively flat as compared to
fiscal 2002. Nearly all of the Company's long-term debt is at fixed rates.
Interest income decreased $1.4 million from 2002 to 2003, due primarily to
lower average balances of cash available to invest and lower investment
yields. Other income, net decreased $0.6 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.
20
Taxes
The income tax provision as a percentage of pretax income was 31.0%
for the six months ending September 28, 2002 and 28.0% for the six months
ending September 29, 2001. The increase in the effective tax rate is
primarily attributable to reduced export tax benefits among other factors.
For the full 2003 fiscal year, the Company anticipates its effective
tax rate to be approximately 27%. In the third quarter of fiscal 2003, the
Company anticipates favorable resolution to certain tax contingencies that
will reduce its effective tax rate significantly. In the fourth quarter of
fiscal year 2003, the Company estimates the effective tax rate at 36.0%,
which it anticipates will approximate the fiscal year 2004 effective rate.
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 primarily capital expenditures, acquisitions, new business
development, share repurchase and working capital.
During the six months ending September 28, 2002, the Company funded
its activities primarily with $12.1 million of cash flows generated by
operations, $44.3 million of gross proceeds from the sale of available-for-
sale securities and $3.0 million in stock option proceeds.
Working capital for the six months ended September 28, 2002, was
$125.6 million. This reflects a decrease of $44.6 million in working capital
from the same period in the prior year largely due to decreases in
available-for-sale investments and increases in short-term borrowings,
offset by increases in inventories and accounts receivable.
The acquisition of Fifth Dimension, which occurred on January 1, 2002,
involves potential earn-out payments of up to $4.1 million based on the
acquired Company reaching certain performance milestones prior to fiscal
2008. These payments, if earned, will be allocated to goodwill.
The acquisition of the right to integrate a new pathogen inactivation
technology into the Company's platelet collection devices includes certain
incremental milestone payments based on the achievement of regulatory
approvals in the US, Europe and elsewhere. The total amount of these
milestone payments is $14.5 million and is anticipated to become due and
payable over the next one to five years.
The Company anticipates spending $3.7 million on the manufacture of
OrthoPAT(R) machines over the next twenty-four months under an existing
purchase order with Nova Biomedical.
21
The increase of $8.7 million in cash and short term investments during
the six months ending September 28, 2002 from operating, investing and
financing activities before the effect of exchange rates represents a
decrease in cash flow of $7.8 million compared to the $16.1 million in cash
generated during the six months ending September 29, 2001. The $7.8 million
decrease was primarily a result of the Company's purchase of treasury stock
offset by more cash generated from the net proceeds of available-for-sale
investments.
Operating Activities:
The Company generated $12.1 million in cash from operating activities
during the six months ending September 28, 2002 as compared to $17.1 million
generated during the six months ending September 29, 2001. The $5.0 million
decrease in operating cash flow from fiscal 2003 to fiscal 2002 was a result
of a $6.6 million decrease in net income adjusted for depreciation,
amortization and other non-cash items, $3.5 million more cash utilized by
accounts receivable as days sales outstanding increased, offset by a $4.2
million decrease in other assets due to decreased investment. The increase
to the Company's days sales outstanding year over year was due largely to
the timing of payments and not due to collectibility issues.
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.
As measured by the Company's operating cash flow metric, the Company
generated $5.2 million and $13.3 million of operating cash during the six
months ending September 28, 2002, and September 29, 2001, respectively. The
$5.2 million of operating cash flow for the six months ending September 28,
2002, resulted from $13.6 million of net income adjusted for non-cash items
and $11.5 million from the reduction of the Company's net investment in
property, plant and equipment and sales-type leases. Offsetting these was
$19.8 million from increased working capital investment, primarily an
increase in accounts receivable of $10.2 million, a $8.9 million increase in
inventory and a decrease in accounts payable and accrued expenses of
$0.7million. The $13.3 million of operating cash flow generated for six
months ending September 29, 2001, resulted from $19.5 million of net income
adjusted for non-cash items and $8.0 million from the reduction of the
Company's net investment in property, plant and equipment and sales-type
leases offset by $14.2 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 $6.8 million and $2.8 million
for the six months ending September 28, 2002, and September 29, 2001,
respectively.
Investing Activities:
Net cash provided by investing activities totaled $29.4 million for
the six months ending September 28, 2002, as compared to net cash utilized
of $22.7 million during the six months ending September 29, 2001. This
change of $52.2 million was primarily due to the Company's liquidation of
the Company's available-for-sale investments and reduction in capital
expenditures in fiscal 2003 as compared to fiscal 2002. 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 $33.2 million for the
six months ending September 28, 2002 as compared to net cash provided of
$21.7 million for the six months ending September 29, 2001. The $54.9
million decrease in cash from financing activities was a result of an
additional $41.0 million spent in the six months ending
22
September 28, 2002 to repurchase Company stock, $6.4 million from changes in
debt and $7.5 million from fewer stock option exercises in fiscal 2003 than
in fiscal 2002. The $6.4 million change in debt from 2002 was a result of
significant changes in foreign exchange rates in fiscal 2003 and 2002 and
increases in Japan debt.
As authorized by the Board of Directors (the "Board"), the Company
repurchases its stock to optimize its capital structure depending upon
certain factors such as its cash flow and debt compliance considerations.
During the first quarter of fiscal 2003, the Company used $26.0 million to
repurchase 868,200 shares of common stock at an average price of $29.98.
This completed the 1,764,000 repurchase authorization approved by the Board
in February 2002. In July, the Board authorized a share repurchase program
for up to an additional $50 million. During the second quarter of fiscal
2003, the Company repurchased 554,350 shares at an average price of $27.02
using $15.0 million of cash, including 100,050 shares repurchased under a
10B5-1 Plan adopted by the Company. 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.
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.
Disclosure of Additional Non-audit Services
At its October 22, 2002 meeting, the Company's audit committee
approved the engagement of the Company's audit firm, Ernst and Young LLP, to
perform tax related services during the third quarter of the current fiscal
year. These fees are estimated at approximately $165,000.
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 and political conditions, the impact
of 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.
23
ITEM 3. 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 U.S.
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 September 28, 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 8,250,000 $0.879 $0.871 (856,850) Oct-Dec 2002
Euro 8,450,000 $0.880 $0.870 (845,879) Jan-Mar 2003
Euro 8,450,000 $0.924 $0.913 (456,475) Apr-Jun 2003
Euro 5,600,000 $0.978 $0.963 (18,564) Jul-Aug 2003
Japanese Yen 1,825,000,000 125.6 per US$ 123.0 per US$ (40,597) Oct-Dec 2002
Japanese Yen 1,850,000,000 131.8 per US$ 128.8 per US$ (771,851) Jan-Mar 2003
Japanese Yen 1,800,000,000 125.5 per US$ 122.7 per US$ (119,499) Apr-Jun 2003
Japanese Yen 1,225,000,000 119.9 per US$ 117.5 per US$ 301,454 Jul-Aug 2003
----------
Total: (2,808,261)
==========
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 $10.1 million increase in the fair value of the forward
contracts; whereas a 10% weakening of the U.S. dollar would result in a
$11.5 million decrease in the fair value of the forward contracts.
24
Interest Rate Risk
Substantially 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 September 28, 2002, the fair value of the
Company's long-term debt was approximately $4.1 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 $9.0 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 that existed at September
28, 2002. The effect was a change in the fair value of the Company's long-
term debt, of approximately $ 0.6 million.
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety day period prior to the date of this report, the
Company conducted an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer (its principal executive
officer and principal financial officer, respectively) regarding the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined in Rule 13a-14 of the Securities Exchange
Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within those entities.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
25
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
---------------------------------------------------
On July 23, 2002, the Company held its annual meeting of
stockholders. At the meeting, James L. Peterson and Benjamin L.
Holmes were re-elected as Directors for terms ending in 2005. The
voting results were as follows:
James L. Peterson For 22,666,705 Withheld 63,939
Benjamin L. Holmes For 22,618,318 Withheld 112,326
The other members of the Board of Directors whose terms continued
after the meeting were:
Serving a Term Ending in 2003 - Sir Stuart Burgess; Ronald G.
Gelbman and N. Colin Lind
Serving a Term Ending in 2004 -- Yutaka Sakurada, Donna C.E.
Williamson, Harvey G. Klein, M.D.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
99.1 Certification Pursuant to 18 United States Code Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, of James L. Peterson, President and Chief
Executive Officer of the Company
99.2 Certification Pursuant to 18 United States Code Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, of Ronald J. Ryan, Senior Vice President and Chief
Financial Officer of the Company
(b) Reports on Form 8-K
None.
26
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.
HAEMONETICS CORPORATION
Date: November 7, 2002 By: /s/James L. Peterson
---------------------------
James L. Peterson, President and
Chief Executive Officer
Date: November 7, 2002 By: /s/Ronald J. Ryan
---------------------------
Ronald J. Ryan, Senior Vice
President and Chief Financial
Officer (Principal Financial
Officer)
27
CERTIFICATION
I, James L. Peterson, President and Chief Executive Officer of Haemonetics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Haemonetics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/James L. Peterson
-------------------------------------
James L. Peterson, President and
Chief Executive Officer(Principal
Executive Officer)
28
CERTIFICATION
I, Ronald J. Ryan, Senior Vice President and Chief Financial Officer of
Haemonetics Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Haemonetics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/Ronald J. Ryan
-------------------------------------
Ronald J. Ryan, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
29