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: December 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
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.
24,237,965 shares of Common Stock, $ .01 par value, as of
---------------------------------------------------------
December 28, 2002
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income -
Three and Nine Months Ended December 28, 2002 and
December 29, 2001 2
Unaudited Consolidated Balance Sheets -
December 28, 2002 and March 30, 2002 3
Unaudited Consolidated Statement of Stockholders' Equity -
Nine Months Ended December 28, 2002 4
Unaudited Consolidated Statements of Cash Flows -
Nine Months Ended December 28, 2002 and December 29, 2001 5
Notes to Unaudited Consolidated Financial Statements 6-14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 31-32
ITEM 4. Controls and Procedures 33
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 34
Signatures 35
Certifications 36-37
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 Nine Months Ended
----------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Revenues $87,115 $84,411 $256,075 $240,916
Cost of goods sold 46,174 43,176 137,597 123,569
-----------------------------------------------------------
Gross profit 40,941 41,235 118,478 117,347
Operating expenses:
Research and development 4,633 5,146 14,682 14,948
Selling, general and administrative 24,486 23,283 72,456 67,107
Acquired research and development - 10,000 - 10,000
-----------------------------------------------------------
Total operating expenses 29,119 38,429 87,138 92,055
-----------------------------------------------------------
Operating income 11,822 2,806 31,340 25,292
Interest expense (783) (895) (2,530) (2,858)
Interest income 325 1,002 1,111 3,179
Other income, net 549 463 1,637 2,191
-----------------------------------------------------------
Income before provision for income taxes 11,913 3,376 31,558 27,804
Provision for income taxes 1,566 944 7,656 7,784
-----------------------------------------------------------
Income before cumulative effect of change in
accounting principle 10,347 2,432 23,902 20,020
Cumulative effect of change in accounting
principle, net of tax - - - 2,304
-----------------------------------------------------------
Net income $10,347 $ 2,432 $ 23,902 $ 22,324
===========================================================
Basic income per common share
Income before cumulative effect of change
in accounting principle $ 0.43 $ 0.09 $ 0.97 $ 0.76
Cumulative effect of change in accounting
principle, net of tax - - - 0.09
Net income $ 0.43 $ 0.09 $ 0.97 $ 0.85
Diluted income per common share
Income before cumulative effect of change
in accounting principle $ 0.42 $ 0.09 $ 0.95 $ 0.73
Cumulative effect of change in accounting
principle, net of tax - - - 0.08
Net income $ 0.42 $ 0.09 $ 0.95 $ 0.82
Weighted average shares outstanding
Basic 24,295 26,445 24,752 26,237
Diluted 24,573 27,525 25,280 27,240
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)
December 28, March 30,
2002 2002
------------ ---------
ASSETS
Current assets:
Cash and short term investments $ 49,666 $ 34,913
Available-for-sale investments - 32,636
Accounts receivable, less allowance of $1,368
at December 28, 2002 and $1,298 at March 30, 2002 79,198 63,743
Inventories 70,138 67,244
Current investment in sales-type leases, net 2,661 2,783
Deferred tax asset 23,347 18,943
Other prepaid and current assets 12,916 12,573
-----------------------
Total current assets 237,926 232,835
-----------------------
Property, plant and equipment 237,111 218,819
Less accumulated depreciation 155,355 133,942
-----------------------
Net property, plant and equipment 81,756 84,877
Other assets:
Investment in sales-type leases, net (long-term) 3,523 3,234
Other intangibles, less accumulated amortization of
$3,302 at December 28, 2002 and $1,977 at March 30, 2002 22,930 24,204
Goodwill, net 14,913 14,168
Deferred tax asset 1,636 2,275
Other long-term assets 3,238 3,328
-----------------------
Total other assets 46,240 47,209
-----------------------
Total assets ... $365,922 $364,921
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 44,878 $ 31,356
Accounts payable 11,296 12,536
Accrued payroll and related costs 12,505 12,696
Accrued income taxes 19,738 11,355
Other accrued liabilities 21,163 16,155
-----------------------
Total current liabilities 109,580 84,098
-----------------------
Long-term debt, net of current maturities 31,721 40,787
Other long-term liabilities 3,357 3,212
Stockholders' equity:
Common stock, $.01 par value; Authorized - 80,000,000
shares; Issued 31,621,561 shares at December 28, 2002;
31,453,511 shares at March 30, 2002 316 315
Additional paid-in capital 108,053 104,261
Retained earnings 288,494 264,592
Accumulated other comprehensive loss (15,450) (16,395)
-----------------------
Stockholders' equity before treasury stock 381,413 352,773
Less: treasury stock 7,383,596 shares at cost at
December 28, 2002 and 5,812,943 shares at cost at
March 30, 2002 160,149 115,949
-----------------------
Total stockholders' equity 221,264 236,824
-----------------------
Total liabilities and stockholders' equity $365,922 $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, 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 --- --- 16 780 --- --- 796
Exercise of stock options
and related tax benefit 168 1 3,776 --- --- --- 3,777
Purchase of treasury stock --- --- --- (44,980) --- --- (44,980)
Net income --- --- --- --- 23,902 --- 23,902 $23,902
Foreign currency
translation adjustment --- --- --- --- --- 6,702 6,702 6,702
Unrealized loss on
derivatives --- --- --- --- --- (5,757) (5,757) (5,757)
-------
Comprehensive income --- --- --- --- --- --- --- $24,847
-----------------------------------------------------------------------------------------------
Balance, December 28, 2002 31,622 $316 $108,053 $(160,149) $288,494 $(15,450) $221,264
===============================================================================
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)
Nine Months Ended
-----------------------------
December 28, December 29,
2002 2001
------------ ------------
Cash Flows from Operating Activities:
Net income $ 23,902 $ 22,324
-------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Non cash items:
Depreciation and amortization 22,168 19,226
Deferred income taxes (851) 13
Tax benefit related to the exercise of stock options 612 -
Gain from exchange activities (1,599) (804)
Change in operating assets and liabilities:
Increase in accounts receivable - net (10,045) (5,526)
Increase in inventories (7,207) (13,348)
Decrease in sales-type leases (current) 215 1,421
Increase in prepaid income taxes (3,913) (1,201)
Decrease (increase) in other assets 395 (3,974)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 5,648 (1,936)
-------------------------
Net cash provided by operating activities 29,325 16,195
Cash Flows from Investing Activities:
Purchases of available-for-sale investments, net of maturities (11,670) (71,274)
Gross proceeds from sale of available-for-sale investments 44,306 57,779
Capital expenditures on property, plant and equipment, net of
retirements and disposals (9,128) (16,588)
Net (increase) decrease in sales-type leases (long-term) (197) 2,606
-------------------------
Net cash provided by (used in) investing activities 23,311 (27,477)
-------------------------
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (311) (174)
Net increase in short-term revolving credit agreements 8,455 12,857
Payments on long-term credit agreements (5,714) (5,706)
Employee stock purchase plan purchases 796 553
Exercise of stock options and related tax benefit 3,165 15,126
Purchase of treasury stock (44,980) -
-------------------------
Net cash (used in) provided by financing activities (38,589) 22,656
Effect of exchange rates on cash and cash equivalents 706 85
-------------------------
Net increase in cash and cash equivalents 14,753 11,459
Cash and cash equivalents at beginning of period 34,913 41,441
-------------------------
Cash and cash equivalents at end of period $ 49,666 $ 52,900
=========================
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for Haemonetics
placement equipment $ 7,631 $ 3,519
Reclassifications from long-term credit agreements
to short-term credit agreements $ 2,512 ---
Supplemental disclosures of cash flow information:
Interest paid $ 3,033 $ 3,481
Income taxes paid $ 3,772 $ 7,059
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
Our accompanying unaudited consolidated financial statements 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 our 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 nine-month period ended December 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 included in
our 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.
Our fiscal year ends on the Saturday closest to the last day of March.
Both fiscal year 2003 and 2002 include 52 weeks with all quarters during
both fiscal years 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 our customers in sale transactions for shipping and handling is recorded
as revenue. All other related shipping and handling costs are included in
costs of goods sold with the exception of $1.2 million for both the three
months ended December 28, 2002 and December 29, 2001 and $3.9 million and
$3.3 million for the nine months ending December 28, 2002 and December 29,
2001, respectively, that are included in selling, general and administrative
expenses.
3. FOREIGN CURRENCY
We enter into forward exchange contracts to hedge the anticipated cash
flows from forecasted foreign currency denominated revenues. The purpose of
our foreign hedging activities is to minimize, for a period of time, the
unforeseen impact on our results of operations of fluctuations in foreign
exchange rates. We also enter 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 December 28, 2002, we had 28 forward contracts outstanding, all
maturing in less than twelve months, to exchange Euro and Japanese yen
primarily for U.S. dollars totaling $117.3 million. Of these contracts, six,
totaling $33.4 million, represented contracts with zero fair value relating
to inter-company receivables established at quarter-end, that settle within
35 days after quarter-end. We have 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 our assessment of hedge effectiveness.
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
At December 28, 2002, the fair value of the forward contract liability
was $4.1 million. For the nine months ended December 28, 2002, a $5.8
million loss related to changes in the spot rates for the hedge contracts
was recorded in accumulated other comprehensive loss, ($9.2 million loss
less tax benefit of $3.4 million.) The change in the fair value attributable
to points on forward contracts totaled approximately $0.9 million for the
nine months ended December 28, 2002. This $0.9 million of income was
excluded from the assessment of hedge effectiveness and was recorded as part
of other income, net for the nine months ended December 28, 2002 in our
unaudited consolidated statement of income. For the nine months ended
December 29, 2001, income from points on forward contracts, included in
other income, net was $2.3 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
nine-months ended December 28, 2002 $(8,116) 5,757 $(936)
-------------------------------------------
Total $(4,133) $ 3,470 $(936)
4. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-
owner changes in stockholders' equity. For us, all other non-owner changes
are primarily foreign currency translation and with our adoption of SFAS No.
133, as amended, the changes in fair value of the effective portion of our
outstanding cash flow hedge contracts.
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Three Months Ended Nine Months Ended
(In thousands) December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------------------------------------------------------
Net income $ 10,347 $ 2,432 $ 23,902 22,324
-------------------------------------------------------
Other comprehensive income:
Foreign currency translation 1,915 (2,141) 6,702 (821)
Unrealized gain (loss) on cash flow
hedges, net of tax (1,673) 4,315 (6,602) 6,904
Reclassifications into earnings of
cash flow hedge (gains) and
losses, net of tax 511 (944) 845 (3,736)
-------------------------------------------------------
Comprehensive income $ 11,100 $ 3,662 $ 24,847 $ 24,671
========================================================
5. NEW PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," which
amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148
provides alternative methods of transition to the fair value method of
accounting proposed in SFAS No. 123 for stock-based employee compensation,
and also amends the disclosure provision of SFAS No. 123 to require
disclosure in the summary of significant accounting policies of the effects
of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The disclosure provision is required for all
companies with stock-based employee compensation, regardless of whether the
company utilizes the fair method of accounting described in SFAS No. 123 or
the intrinsic value method described in APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 148's amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective for fiscal years
ending after December 15, 2002. The disclosure requirements for interim
financial statements containing condensed consolidated financial statements
are effective for interim periods beginning after December 15, 2002. We
currently use the intrinsic value method of accounting for stock-based
employee compensation described by APB Opinion No. 25. We will implement all
disclosure provisions outlined in SFAS No. 148 within the required
timeframes.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (the Interpretation) which expands on
the accounting guidance of Statements No. 5, 57 and 107 and incorporates
without change the provisions of FASB Interpretation No.34, which is being
superseded. The Interpretation will significantly change current practice in
the accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in the Interpretation are to be recognized at fair
value and significant disclosure rules have been implemented even if the
likelihood of the guarantor making payments is remote. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002, while the initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. Certain guarantees are
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
excluded from the initial recognition provisions of the Interpretation,
however specific disclosures are still required. The following required
disclosure describes our current accounting method and policy used to
determine our liability for product warranties. The table provides the
detail of the change in our product warranty accrual, which is a component
of other accrued liabilities on the unaudited consolidated balance sheet for
the reporting period ending December 28, 2002.
We provide a warranty on parts and labor for one year after the sale
and installation of one of our devices. We also warrant our disposable
products through their use or expiration. We estimate our potential warranty
expense based on our historical warranty experience, and we periodically
assess the adequacy of our warranty accrual and make adjustments as
necessary.
Total
-----
Warranty accrual as of March 30, 2002 $ 800
Provision related to preexisting warranties 375
Warranty Provision 815
Warranty Spending (707)
------
Warranty accrual as of December 28, 2002 $1,283
======
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. We will adopt the provisions of SFAS 146 for all
exit activities, if any, initiated after December 31, 2002.
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. We do not expect the adoption of
this statement to have a material impact on its consolidated financial
statements.
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
6. ACQUIRED OTHER INTANGIBLE ASSETS
As of December 28, 2002
- -----------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-----------------------------------------------
Amortized Intangibles
- ---------------------
Patents $ 6,371 $1,001 14
Developed technology 7,993 1,140 17
Customer contracts and related
relationships 11,396 1,161 15
-------------------------
Subtotal $25,760 $3,302 15
Indefinite Life Intangibles
- ---------------------------
Trade name 472 -- Indefinite
-------------------------
Total Intangibles $26,232 $3,302
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
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
The only change to the net carrying value of our intangible assets
from March 30, 2002 to December 28, 2002 was amortization expense and the
effect of rate changes in the translation of the intangibles contained in
the financial statement of our Canadian subsidiary.
Aggregate amortization expense for amortized other intangible assets
for the nine months ended December 28, 2002 and for the twelve months ended
March 30, 2002 is $1.3 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 nine months ended December 28, 2002, no event or
circumstance change occurred to impair our goodwill or indefinite life
assets. The change in the carrying value of goodwill during the nine months
ended December 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 our goodwill during the nine
months ended December 28, 2002 are as follows (in thousands):
Carrying amount as of March 30, 2002 $14,168
Effect of change in rates used for translation 745
-------
Carrying amount as of December 28, 2002 $14,913
-------
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:
December 28, 2002 March 30, 2002
-----------------------------------
(in thousands)
Raw materials $19,034 $16,808
Work-in-process 3,680 4,700
Finished goods 47,424 45,736
--------------------------
$70,138 $67,244
--------------------------
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
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
--------------------------------------
December 28, 2002 December 29, 2001
----------------- -----------------
Basic EPS
Net income $ 10,347 $ 2,432
Weighted average shares 24,295 26,445
---------------------------------
Basic income per share $ 0.43 $ 0.09
---------------------------------
Diluted EPS
Net income $ 10,347 $ 2,432
Basic weighted average shares 24,295 26,445
Effect of stock options 278 1,080
---------------------------------
Diluted weighted average shares 24,573 27,525
---------------------------------
Diluted income per share $ 0.42 $ 0.09
---------------------------------
For the nine months ended
--------------------------------------
December 28, 2002 December 29, 2001
----------------- -----------------
Basic EPS
Net income $ 23,902 $22,324
Weighted average shares 24,752 26,237
---------------------------------
Basic income per share $ 0.97 $ 0.85
---------------------------------
Diluted EPS
Net income $ 23,902 $22,324
Basic weighted average shares 24,752 26,237
Effect of stock options 528 1,003
---------------------------------
Diluted weighted average shares 25,280 27,240
---------------------------------
Diluted income per share $ 0.95 $ 0.82
---------------------------------
12
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
10. COMMITMENTS AND CONTINGENCIES
We are presently engaged in various legal actions, and although
ultimate liability cannot be determined at the present time, we believe,
based on consultation with counsel, that any such liability will not
materially affect our consolidated financial position or our results of
operations.
Through our acquisition of Fifth Dimension Information Systems, Inc.
(Fifth Dimension), as well as our agreement with Baxter Healthcare
Corporation (Baxter) related to pathogen reduction technology, we are
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
2008. The Baxter agreement calls for us to make milestone payments over the
next several years of up to $14.5 million as regulatory approvals are
received in various markets. In the fourth calendar quarter of 2002, Baxter
acquired its initial regulatory approval in the European market. In
connection with this approval, we anticipate making an initial $3.8 million
milestone payment to Baxter during the fourth quarter of fiscal 2003. We
expect that the remaining European approvals will be obtained during our
fiscal 2004 and we anticipate making an additional milestone payment of $3.8
million to Baxter at that time. These payments will be recorded as developed
technology, an intangible asset, and amortized over their useful lives.
11. SEGMENT INFORMATION
Segment Definition Criteria
We manage our business on the basis of one operating segment: the
design, manufacture and marketing of automated blood processing systems. Our
chief operating decision-maker uses consolidated results to make operating
and strategic decisions.
Manufacturing processes, as well as the regulatory environment in
which we operate, are largely the same for all product lines.
Product and Service Segmentation
Our 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
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) and the Cell
Saver(R) autologous blood recovery systems.
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
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).
Other includes revenue generated from equipment repairs performed
under preventative maintenance contracts or emergency service billings and
miscellaneous sales, including revenue from our software division, Fifth
Dimension, acquired on January 1, 2002. Fifth Dimension provides software
applications that automate plasma collection center operations.
Three months ended (in thousands)
December 28, 2002 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers $28,401 3,971 18,112 31,239 5,392 87,115
December 29, 2001
-----------------
Revenues from external customers $30,395 2,716 18,719 29,793 2,788 84,411
Nine months ended (in thousands)
December 28, 2002 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers $84,098 11,351 54,410 92,240 13,976 256,075
December 29, 2001
-----------------
Revenues from external customers $85,708 7,719 53,621 86,440 7,428 240,916
12. ACQUISITIONS
In the third quarter of fiscal 2002, we paid Baxter $10.0 million to
acquire the right to integrate a new pathogen reduction technology into our
platelet collection devices after the technology receives regulatory
approvals (see note 10). The $10.0 million was expensed in our consolidated
statement of operations as acquired research and development.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leader in the manufacture of automated systems and single use
disposables for the collection, processing, and surgical salvage of blood,
as well as associated consumables and data management technology.
RESULTS OF OPERATIONS
The following table compares our results of operations for Q3 of
fiscal 2003 against Q3 of fiscal 2002:
Three Months Ended Three Months Ended
(expressed as a percentage Percentage Increase/
of net sales) (Decrease)
December 28, December 29,
2002 2001 2002/2001
------------ ------------ ---------
Net revenues 100.0% 100.0% 3.2%
Cost of goods sold 53.0 51.1 6.9
-------------------------------------------
Gross Profit 47.0 48.9 (0.7)
Operating Expenses:
Research and Development 5.3 6.1 (10.0)
Selling, general and administrative 28.1 27.6 5.2
Acquired research and development - 11.9 (100.0)
-------------------------------------------
Total operating Expenses 33.4 45.6 (24.2)
-------------------------------------------
Operating income 13.6 3.3 >100.0
Interest expense (0.9) (1.1) (12.5)
Interest income 0.4 1.2 (67.6)
Other income, net 0.6 0.6 18.6
-------------------------------------------
Income before provision for income taxes 13.7 4.0 >100.0
Provision for income Taxes 1.8 1.1 65.9
-------------------------------------------
Net income 11.9% 2.9% >100.0%
===========================================
15
Third quarter of fiscal 2003 compared to third quarter of fiscal 2002
- ---------------------------------------------------------------------
Net Revenue Summary
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By geography: 2002 2001 as reported currency
- ------------- ---- ---- -------------- -----------
United States $32,132 $32,261 (0.4)% (0.4)%
International 54,983 52,150 5.4 6.8
--------------------------------------------------
Net revenues $87,115 $84,411 3.2% 4.0%
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By product type: 2002 2001 as reported currency*
- ---------------- ---- ---- -------------- -----------
Disposables $77,004 $76,584 0.5% 1.7%
Misc. & service 5,392 2,788 93.4 92.9
Equipment 4,719 5,039 (6.4) (10.6)
--------------------------------------------------
Net revenues $87,115 $84,411 3.2% 4.0%
Disposable revenue Actual dollars At constant
by product line: 2002 2001 as reported currency*
- ------------------ ---- ---- -------------- -----------
Surgical $17,067 $17,139 (0.4)% (1.1)%
Blood bank 26,417 27,817 (5.0) (2.5)
Red cells 3,891 2,612 49.0 45.7
Plasma 29,629 29,016 2.1 3.1
--------------------------------------------------
Disposable revenues $77,004 $76,584 0.5% 1.7%
* Constant currency comparisons reflect our current year and prior year
results retranslated at the same exchange rate. We establish these
exchange rates at the beginning of each fiscal year.
16
Net Revenues
Net revenues in fiscal 2003 increased $2.7 million from $84.4 million
in fiscal 2002. At constant currency rates, net revenues increased 4.0% or
$3.2 million as a result of volume increases from both disposable and
software sales. The increase in sales was reduced by spot rate losses
realized on forward contracts recorded in sales as compared to gains
realized for the same period in the prior year.
Disposable Sales
Disposable sales increased 0.5% or $0.4 million year over year at
actual rates. At constant currency rates, disposable sales increased 1.7% or
$1.2 million.
By product line, disposable sales at constant currency rates increased
in worldwide Red Cell (up 45.7%), and worldwide Plasma sales (up 3.1%)
offset by decreases in worldwide Bloodbank (down 2.5%) and worldwide
Surgical (down 1.1%).
* Red Cell - Worldwide Red Cell sales grew due to volume
increases in the U.S. as customers (new and existing) reacted to
red cell shortages by introducing automation into their
collection operations as a means to increase the number of units
of blood collected from a declining number of eligible donors.
The decline in the red cell supply in the U.S. relates primarily
to blood shortages ad recently adopted donor deferral
regulations mandated by the U.S. Food and Drug Administration.
* Plasma -The growth in worldwide Plasma disposables sales is
attributed to volume increases of products sold in Japan, Asia
and Europe. In the U.S., our plasma disposable sales decreased
3.0% due to declining sales to one customer as a result of
industry consolidation. Additionally, Baxter International
(Baxter) recently announced it would acquire, subject to
regulatory approval, the plasma collection operations of Alpha
Therapeutic Corporation (Alpha) during the first half of calendar
2003. During the first nine months of our fiscal 2003, sales of
plasma disposables, including bowls, collection bottles and
solutions, to Alpha were approximately $15.0 million. Alpha's
collection operations have several exclusive purchasing contracts
with us which begin to lapse in January 2005 through 2009. Due to
uncertainties about Baxter's plans for the collection centers, we
are unable to estimate the impact upon future operating results.
* Bloodbank- Worldwide Bloodbank disposable sales decreased as
compared to 2002 due primarily to volume decreases of our
Automated Cell Processing ("ACP") 215 system. Prior year sales
related to our ACP 215 disposables were high due to the demand
resulting from the events of September 11, 2001. Volume
decreases also
17
existed in both the U.S. and European platelet markets because
the newest platelet collection technologies use a single
disposable to collect multiple platelet units versus a
single platelet unit thereby reducing the number of disposables
needed. The effects of these decreases were reduced by strong
volume growth in our Asia platelet business.
* Surgical- Worldwide Surgical disposable sales declined as a
result of volume decreases as our primary growth contributor,
the OrthoPAT(R), showed no growth. We have slowed down the
manufacture and sale of OrthoPAT(R) products to our distributor
as we implement the quality enhancement program reported in the
previous quarter. End customer sales of our OrthoPAT(R) product
are growing and we anticipate that our sales to our distributor
will reflect strong growth in the first half of next fiscal
year.
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales includes revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension, acquired on January 1, 2002.
Miscellaneous and service sales increased 93.4% or $2.6 million year
over year at actual rates. At constant currency rates, miscellaneous and
service sales increased 92.9% or $2.6 million as a result of $1.7 million of
volume increases from Fifth Dimension software products.
Equipment Sales
- ---------------
Equipment sales decreased 6.4% or $0.3 million year over year at
actual rates. At constant currency rates, equipment sales decreased 10.6% or
$0.5 million due to volume. The volume decrease was primarily because of
prior year sales of our Automated Cell Processing ("ACP") 215 system due to
demand resulting from the events of September 11, 2001 offset by volume
increases in Europe, particularly in plasma. Most of our equipment sales
occur in markets outside the U.S. In the U.S. we generally place 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, we give no
assurance as to whether or not this level of equipment sales will continue
in the foreseeable future.
International sales at actual rates accounted for 63.1% and 61.8% of
net sales 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, our ability to forecast product demand and market acceptance of our
products, changes in economic conditions, the impact of competitive products
and pricing and changes in health care policy.
18
Gross profit
Gross profit of $40.9 for fiscal 2003 decreased $0.3 million from
$41.2 million for fiscal 2002. As a percentage of sales, gross profit
decreased 1.9% in fiscal 2003 to 47.0%. With currency rates held constant,
gross profit increased by $2.3 million and increased as a percentage of
sales by 0.9%. The $2.3 million increase in constant currency gross profit
from fiscal 2002 was a result of the additional contribution from the
increase in constant currency sales and cost reductions generated from our
Customer Oriented Redesign for Excellence ("CORE") Program. During the third
quarter of fiscal 2003, the CORE program generated $0.9 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
* Research and development
------------------------
We expended $4.6 million, 5.3% of net sales, on research and
development for fiscal 2003 and $5.2 million, 6.1% of net sales, for fiscal
2002. At constant currency rates, research and development as a percentage of
sales decreased 1.0% or $0.6 million from fiscal 2002 to fiscal 2003.
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $1.2 million
in fiscal 2003 from $23.3 million in fiscal 2002. At constant currency rates,
selling, general and administrative expenses increased $0.7 million, but
decreased as a percentage of sales by 0.3% to 28.0% due to our higher sales.
* Acquired research and development
---------------------------------
In the third quarter of fiscal 2002, we paid Baxter International
$10.0 million for the right to integrate its new pathogen reduction
technology into our platelet collection devices after the technology receives
regulatory approval.
Operating Income
Operating income for the third quarter of fiscal 2003 increased $9.0
million from the third quarter of fiscal 2002 and increased to 13.6% of
sales in fiscal 2003 from 3.3% in fiscal 2002. Without the $10.0 million
paid to Baxter in fiscal 2002, and at constant currency rates, operating
income increased by $2.2 million or 2.2% as a percentage of sales. The $2.2
constant currency increase is due to the growth in constant currency sales
and cost savings from our CORE program.
19
Other Income, Net
Interest expense for fiscal 2003 was relatively flat as compared to
fiscal 2002. All of our 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 invested and lower investment yields. Other income was
relatively flat from fiscal 2002 to fiscal 2003 due to decreases in income
earned from points on forward contracts partly offset by an increase in
foreign exchange transaction gains. Points on forward contracts are amounts,
either expensed 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 13.1%
for the third quarter of fiscal 2003 and 28.0% for the third quarter of
fiscal 2002. The decrease in the fiscal 2003 effective tax rate and tax
expense results from an anticipated income tax refund. We estimate the Q4
effective tax rate to be 36.0%, which is also the anticipated fiscal year
2004 effective tax rate.
20
Results of Operations
The following table contains compares our results of operations for
the first nine months of fiscal 2003 against the first nine months of fiscal
2002:
Nine Months Ended Nine Months Ended
(expressed as a percentage Percentage
of net sales) Increase/(Decrease)
December 28, 2002 December 29, 2001 2002/2001
----------------- ----------------- -------------------
Net revenues 100.0% 100.0% 6.3%
Cost of goods sold 53.7 51.3 11.4
---------------------------------------------------
Gross Profit 46.3 48.7 1.0
Operating Expenses:
Research and development 5.7 6.2 (1.8)
Selling, general and Administrative 28.3 27.9 8.0
Acquired research and development - 4.2 (100.0)
---------------------------------------------------
Total operating expenses 34.0 38.3 (5.3)
---------------------------------------------------
Operating income 12.3 10.4 23.9
Interest expense (1.0) (1.2) (11.5)
Interest income 0.4 1.3 (65.1)
Other income, net 0.6 1.0 (25.3)
---------------------------------------------------
Income before provision for income taxes 12.3 11.5 13.5
Provision for income Taxes 3.0 3.2 (1.6)
---------------------------------------------------
Income before cumulative effect of change
in accounting principle, net of tax 9.3 8.3 19.4
---------------------------------------------------
Cumulative effect of change in accounting
principle, net of tax - 1.0 (100.0)
---------------------------------------------------
Net income 9.3% 9.3% 7.1%
===================================================
21
Nine months of fiscal 2003 compared to the nine months of fiscal 2002
- ---------------------------------------------------------------------
Net Revenue Summary
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By geography: 2002 2001 as reported currency*
- ------------- ---- ---- -------------- -----------
United States $ 96,700 $ 91,044 6.2% 6.2%
International 159,375 149,872 6.3 8.8
--------------------------------------------------
Net revenues $256,075 $240,916 6.3% 7.8%
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By product type: 2002 2001 as reported currency*
- ---------------- ---- ---- -------------- -----------
Disposables $225,588 $221,531 1.8% 3.5%
Misc.& service 13,976 7,421 88.3 88.0
Equipment 16,511 11,964 38.0 33.6
--------------------------------------------------
Net revenues $256,075 $240,916 6.3% 7.8%
Disposable revenue Actual dollars At constant
by product line: 2002 2001 as reported currency*
- ---------------- ---- ---- -------------- -----------
Surgical $ 50,956 $ 50,062 1.8% 1.8%
Blood bank 75,374 79,254 (4.9) (1.7)
Red cells 10,880 7,584 43.5 40.8
Plasma 88,378 84,631 4.4 5.8
--------------------------------------------------
Disposable revenues $225,588 $221,531 1.8% 3.5%
* Constant currency comparisons reflect our current year and prior year
results retranslated at the same exchange rate. We establish these
exchange rates at the beginning of each fiscal year.
Net Revenues
Net revenues in fiscal 2003 increased $15.2 million from $240.9
million in fiscal 2002. At constant currency rates, net revenues increased
7.8% or $18.0 million as a result of volume increases from both disposable
and software sales. The increase in sales was reduced by spot rate
22
losses realized on forward contracts recorded in sales as compared to gains
realized for the same period in the prior year.
Disposable Sales
- ----------------
Disposable sales increased 1.8%or $4.1 million year over year at
actual rates. At constant currency rates, disposable sales increased 3.5% or
$7.5 million.
By product line, disposable sales at constant currency rates increased
in worldwide Red Cell (up 40.8%), worldwide Plasma sales (up 5.8%) and
worldwide Surgical (up 1.8%) partially offset by a decrease in worldwide
Bloodbank (down 1.7%).
* Red Cell- Worldwide Red Cell sales grew due to volume
increases in the U.S. as customers (new and existing)
reacted to red cells shortages by introducing automation
into their collection operations as a means to increase the
number of units of blood collected from a declining number
of eligible donors. The decline in the red cell supply in
the U.S. related primarily to blood shortages and recently
adopted donor deferral regulations mandated by the U.S. Food
and Drug Administration.
* Plasma-The growth in worldwide Plasma disposables sales is
attributed to volume increases of products sold in Japan, Asia
and Europe. In the U.S., our plasma disposable sales decreased
3.4% due to declining sales to one customer as a result of
industry consolidation. Additionally, Baxter recently announced
it would acquire, subject to regulatory approval, the plasma
collection operations of Alpha during the first half of calendar
2003. During the first nine months of our fiscal 2003, sales of
plasma disposables, including bowls, collection bottles and
solutions, to Alpha were approximately $15.0 million. Alpha's
collection operations have several exclusive purchasing
contracts with us which begin to lapse in January 2005 through
2009. Due to uncertainties about Baxter's plans for the
collection centers, we are unable to estimate the impact upon
future operating results.
* Surgical- Worldwide Surgical disposable sales showed low
growth as a result of a slow down in sales of our primary
growth contributor, the OrthoPAT(R). We have slowed down the
manufacture and sale of OrthoPAT(R) products to our
distributor as we implement the quality enhancement program
reported in the previous quarter. End customer sales of our
OrthoPAT(R) product are growing and we anticipate that our
sales to our distributor will reflect strong growth in the
first half of next fiscal year.
* Bloodbank Worldwide Bloodbank disposable sales decreased as
compared to 2002, due to volume decreases primarily related
to our Automated Cell Processing ("ACP") 215 system. Prior
year sales related to our ACP 215 disposables were high due to
the demand resulting from the events of September 11, 2001. We
experienced volume decreases in both the U.S. and European
platelet markets because the newest platelet collection
technologies use a single disposable to collect multiple platelet
units versus a single platelet unit reducing the number of
disposables needed. The effects of these decreases were reduced by
strong volume growth in our Asia platelet business.
23
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales includes revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension, acquired on January 1, 2002.
Miscellaneous and service sales increased 88.3%or $6.6 million year
over year at actual rates. At constant currency rates, miscellaneous and
service sales increased 88.0% or $6.5 million primarily as a result of $3.9
million of volume increases from Fifth Dimension software products.
Equipment Sales
- ---------------
Equipment sales increased 38.0% from $12.0 million in fiscal 2002 at
actual rates and increased 33.6% year over year with currency rates held
constant. The 33.6% constant currency increase is primarily attributable to
sales of plasma and platelet machines in Japan and sales of plasma machines
in Europe. Most of our equipment sales occur in markets outside the U.S., as
in the U.S. we generally place 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, we give no assurance as to whether or
not this level of equipment sales will continue in the foreseeable future.
At actual rates, international sales as reported accounted for 62.2%
of net sales 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,
our ability to forecast product demand and market acceptance of our
products, changes in economic conditions, the impact of competitive products
and pricing and changes in health care policy.
Gross profit
Gross profit of $118.5 million for fiscal 2003 increased $1.1 million
from $117.4 million for fiscal 2002. As a percentage of sales, gross profit
decreased 2.4% in fiscal 2003 to 46.3%. With currency rates held constant,
gross profit increased by 8.4%, or $9.0 million and increased as a
percentage of sales by 0.3%. The $9.0 million increase in constant currency
gross profit from fiscal 2002 was a result of the additional contribution
from the increase in constant currency sales and cost reductions generated
by the CORE program, partially offset by a manufacturing provision for
quality enhancements to our OrthoPAT(R) surgical blood salvage system.
For the nine months ending December 28, 2002, the CORE program
generated $2.4 million of cost savings benefiting our 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.
24
Expenses
* Research and Development
------------------------
We expended $14.7 million, 5.7% of net sales, on research and
development for fiscal 2003 and $14.9 million, and 6.2% of net revenues,
for fiscal 2002. At constant currency rates, research and development as a
percentage of revenues decreased 0.6% or $0.5 million from fiscal 2002 to
fiscal 2003.
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $5.4 million
in fiscal 2003 to $72.5 million from $67.1 million in fiscal 2002. At
constant currency rates, selling, general and administrative expenses
increased $4.0 million, however, decreased as a percent of net revenues
by 0.5% due to our higher sales. Increased spending associated with the
higher volume of sales contributed to the dollar increase in selling,
general and administrative dollars.
* Acquired research and development
---------------------------------
In the third quarter of fiscal 2002, we paid Baxter $10.0 million
for the right to integrate their new pathogen reduction technology into
our platelet collection devices after the technology receives regulatory
approval.
Operating Income
Operating income as a percentage of net revenues increased to 12.2%
from 10.5% in fiscal 2002. Without the $10.0 million paid to Baxter in
fiscal 2002, and at constant currency rates, operating income increased by
$5.7 million and increased as a percentage of sales by 5.7%. The $5.7
million increase is due to the additional gross profit from the growth in
constant currency sales and cost savings from our CORE program offset by
increases in selling, general and administrative expenses.
Foreign Exchange
We generate approximately 62% of our sales outside the U.S. As such,
we use 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 our balance sheet and
income statement exposures. Hedging through the use of forward contracts
does not eliminate the volatility of foreign exchange rates, but because we
generally enter into forward contracts one year out, rates are fixed for a
one-year period, thereby facilitating financial planning and resource
allocation.
We compute 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
25
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. The composite rate is presented in the
period corresponding to the maturity of the underlying forward contracts.
The favorable or (unfavorable) changes are in comparison to the same
period of the prior year. A favorable change is presented when we will
obtain relatively more U.S. dollars for each of the underlying foreign
currencies than we did in the prior period. An unfavorable change is
presented when we obtain relatively fewer U.S. dollars for each of the
underlying foreign currencies than we did in the prior period. 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 versus 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%
Q4 1.01 15.9%
-----------------------------
2004 Total 1.06 4.9%
26
Other Income, Net
Interest expense for fiscal 2003 was relatively flat as compared to
fiscal 2002. Nearly all of our long-term debt is at fixed rates. Interest
income decreased $2.1 million from 2002 to 2003, due primarily to lower
average balances of cash invested 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 expensed 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 24.3%
for the nine months ending December 28, 2002 and 28.0% for the nine months
ending December 29, 2001. The decrease in the fiscal 2003 effective tax rate
and tax expense results from an anticipated income tax refund. We estimate
the Q4 effective tax rate to be 36.0%, which is also the anticipated fiscal
year 2004 effective tax 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
Our primary sources of capital include cash and short-term
investments, internally generated cash flows and bank borrowings. We believe
these sources to be sufficient to fund our requirements, which are primarily
capital expenditures, acquisitions, new business development, share
repurchase and working capital.
27
During the nine months ending December 28, 2002, we funded our
activities primarily with $29.3 million of cash flows generated by
operations, $44.3 million of gross proceeds from the sale of available-for-
sale securities and $3.2 million in stock option proceeds.
Working capital at December 28, 2002, was $128.3 million. This
reflects a decrease of $44.3 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 Fifth
Dimension 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 reduction
technology into our platelet collection devices includes certain incremental
milestone payments based on the receipt of regulatory approvals in the U.S.,
Europe and Japan. The total amount of these potential milestone payments is
$14.5 million. In the fourth calendar quarter of 2002, Baxter acquired its
initial regulatory approval in the European market. In connection with this
approval, we anticipate making an initial $3.8 million milestone payment to
Baxter during the fourth quarter of fiscal 2003. We expect that the
remaining European approvals will be obtained during our fiscal 2004 and we
anticipate making an additional milestone payment of $3.8 million to Baxter
at that time. These payments will be recorded as developed technology, an
intangible asset, and amortized over their useful lives.
We anticipate spending $2.8 million on the purchase of OrthoPAT(R)
machines through the end of fiscal 2004 under an existing purchase order
with Nova Biomedical.
Cash and short-term investments during the nine months ending December
28, 2002, before the effect of exchange rates increased $14.0 million, which
represents an increase in cash flow of $2.6 million compared to the $11.4
million in cash generated during the nine months ending December 29, 2001.
The $2.6 million increase was primarily a result of the cash generated in
fiscal 2003 from the available-for-sale investments and from our operating
activities. These increases were largely offset by the increase in fiscal
2003 treasury stock repurchases and less cash received in fiscal 2003 from
stock option exercises.
Operating Activities:
We generated $13.1 million more cash from operating activities in
fiscal 2003 as compared to fiscal 2002. The increase in operating cash is
from a $3.5 million increase in our net income adjusted for depreciation,
amortization and other non-cash items, a $6.1 million decrease in inventory
growth, a $4.4 million decrease in other assets due to lower acquisition
activity and an $8.0 million increase in accrued taxes, included in accrued
expenses, due to fewer fiscal 2003 payments made. These increases in cash
flow were offset by an anticipated tax refund not yet
28
received and $4.5 million more cash spent to fund accounts receivable
growth. Accounts receivables grew because of sales growth and because days
sales outstanding increased year over year. The increase in days sales
outstanding year over year is due largely to the timing of payments.
Internally we utilize a measure called operational cash flow to
measure the amount of cash flow generated after we have satisfied our
investment in Haemonetics equipment and our working capital needs, but
before the effect of foreign exchange and other changes such as
acquisitions. This operational cash flow measure indicates our ability to
generate cash from operations because it does not include foreign exchange,
which is not an indicator of such ability.
This table reconciles cash flow provided by operations per our
Statement of Cash Flows prepared in accordance with generally accepted
accounting principles to our operational cash flow (in thousands):
Operational cash flow metric: For the nine months ended:
December 28, December 29,
2002 2001
------------ ------------
Cash Flow provided by operations $29,325 $ 16,195
Investment in Haemonetics Equipment
including long-term sales type leases (9,325) (13,982)
-------------------------
Subtotal $20,000 $ 2,213
Deduct:
Income tax changes 8,080 (1,091)
Foreign exchange changes: (1,599) (804)
Other changes:
Other assets 395 (3,974)
Accrued expenses (283) (2,519)
Cash paid for pathogen reduction technology - (7,200)
Other - (471)
-------------------------
Operational cash flow: $13,407 $ 18,272
=========================
29
Investing Activities:
Our investing activities provided $50.8 million more cash in fiscal
2003 than in fiscal 2002. This is primarily due to the liquidation of our
available-for-sale investments due to changes in the interest rate
environment and from a reduction in our capital expenditures.
Financing Activities:
Our financing activities provided $61.2 million less cash in fiscal
2003 than in fiscal 2002. This decrease is primarily a result of the $44.5
million we spent in fiscal 2003 to repurchase our stock, smaller increases
in short-term debt and $12.0 million less from stock option exercises.
As authorized by the Board of Directors (the "Board"), we repurchase
our stock to optimize our capital structure depending upon certain factors
such as cash flow and debt compliance considerations. During the first
quarter of fiscal 2003, we 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
$50.0 million. During the second and third quarters of fiscal 2003, under
this new repurchase program, we repurchased 739,450 shares at an average
price of $25.63 using $19.0 million of cash, including 185,100 shares
repurchased under a 10b5-1 Plan. We keep repurchased shares on hand for our
employee benefit and incentive plans and for other corporate purposes.
Inflation
We do not believe that inflation has had a significant impact on our
results of operations for the periods presented. Historically, we believe we
have been able to minimize the effects of inflation by improving our
manufacturing and purchasing efficiency, by increasing employee productivity
and by adjusting the selling prices of new products we introduce.
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
30
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, industry consolidation, 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.
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 our sales are generated outside the U.S., yet our
reporting currency is the U.S. dollar. Foreign exchange risk arises because
we engage in business in foreign countries in local currency. Exposure is
partially mitigated by producing and sourcing product in local currency and
expenses incurred by local sales offices. Accordingly, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an
adverse affect on our results of operations and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies there is a
positive effect on our results of operations.
It is our policy to minimize for a period of time, the unforeseen
impact on our financial results 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
sales. We enter into forward contracts that mature one month prior to the
anticipated timing of the forecasted foreign currency denominated sales.
These contracts are designated as cash flow hedges intended to lock in the
expected cash flows of forecasted foreign currency denominated sales at the
available spot rate. Actual spot rate gains and losses on these contracts
are recorded in sales, 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. We also enter 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. Our primary foreign currency exposures in relation to the U.S.
dollar are the Japanese Yen and the Euro.
31
At December 28, 2002, we had the following significant foreign exchange
contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated sales outstanding:
Hedged (BUY)/SELL Weighted Spot Weighted Forward
Currency Local Currency Contract Rate Contract Rate Fair Value Maturity
-------- -------------- ------------- ---------------- ---------- --------
Euro 8,450,000 $0.880 $0.870 $(1,278,689) Jan-Mar 2003
Euro 8,450,000 $0.924 $0.913 (872,123) Apr-Jun 2003
Euro 8,400,000 $0.980 $0.966 (398,677) Jul-Sep 2003
Euro 6,300,000 $0.985 $0.971 (256,920) Oct-Nov 2003
Japanese Yen 1,850,000,000 131.8 per US$ 128.8 per US$ (1,001,130) Jan-Mar 2003
Japanese Yen 1,800,000,000 125.5 per US$ 122.7 per US$ (321,953) Apr-Jun 2003
Japanese Yen 1,775,000,000 120.7 per US$ 118.6 per US$ 121,412 Jul-Sep 2003
Japanese Yen 1,275,000,000 122.7 per US$ 120.7 per US$ (124,960) Oct-Nov 2003
---------------------------------------------------
Total: $(4,133,040)
===================================================
We estimate 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 $11.9 million
decrease in the fair value of the forward contracts.
Interest Rate Risk
All of our long-term debt is at fixed rates. Accordingly, a change in
interest rates has an insignificant effect on our interest expense amounts.
The fair value of our long-term debt, however, does change in response to
interest rates movements due to its fixed rate nature. At December 28, 2002,
the fair value of our long-term debt was approximately $3.8 million higher
than the value of the debt reflected on our financial statements. This
higher fair market is entirely related to our $22.9 million, 7.05% fixed
rate senior notes and our $8.9 million, 8.41% fixed rate mortgage.
Using scenario analysis, we changed the interest rate on all long-term
maturities by 10% from the rate levels that existed at December 28, 2002.
The effect was a change in the fair value of our long-term debt, of
approximately $0.5 million.
32
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety day period prior to the date of this report, we
conducted an evaluation under the supervision and with the participation of
our management, including our 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 our
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 our 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 our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out our evaluation.
33
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
---------------------------------------------------
None
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
99.3 Employment agreement between Thomas D. Headley and
Haemonetics Corporation dated January 2, 2003.
(b) Reports on Form 8-K
Registrant filed a Report on Form 8-K dated October 22, 2002
announcing the retirement of the current Chairman of the Board of
Directors and the selection of his successor.
34
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: February 7, 2003 By: /s/_James L. Peterson
---------------------------------
James L. Peterson, President and
Chief Executive Officer
Date: February 7, 2003 By: /s/ Ronald J. Ryan
Ronald J. Ryan, Senior Vice
--------------------------------
President and Chief Financial
Officer (Principal Financial
Officer)
35
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: February 7, 2003
/s/James L. Peterson
--------------------------------
James L. Peterson, President and
Chief Executive Officer Principal
Executive Officer)
36
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: February 7, 2003
/s/Ronald J. Ryan
--------------------------------
Ronald J. Ryan, Senior Vice
President and Chief Financial
Officer (Principal Financial
Officer)
37