Back to GetFilings.com
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended: September 27, 2003 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
---- ----
The number of shares of $.01 par value common stock outstanding as of
September 27, 2003:
24,213,005
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income -
Three and Six Months Ended September 27, 2003 and
September 28, 2002 2
Unaudited Consolidated Balance Sheets -
September 27, 2003 and March 29, 2003 3
Unaudited Consolidated Statement of Stockholders' Equity -
Six Months Ended September 27, 2003 4
Unaudited Consolidated Statements of Cash Flows -
Six Months Ended September 27, 2003 and
September 28, 2002 5
Notes to Unaudited Consolidated Financial Statements 6-15
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-29
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 29
ITEM 4. Controls and Procedures 30
PART II. OTHER INFORMATION 31
ITEM 6. Exhibits and Reports on Form 8-K 31
Signatures
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 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues $87,488 $87,025 $175,771 $168,960
Cost of goods sold 46,108 48,135 94,805 91,423
------- ------- -------- --------
Gross profit 41,380 38,890 80,966 77,537
Operating expenses:
Research and development. 4,622 5,110 9,619 10,049
------- ------- -------- --------
Selling, general and administrative 27,852 23,954 54,255 47,970
Total operating expenses 32,474 29,064 63,874 58,019
------- ------- -------- --------
Operating income 8,906 9,826 17,092 19,518
Interest expense (767) (870) (1,553) (1,747)
Interest income 186 345 469 786
Other income, net 261 525 364 1,088
------- ------- -------- --------
Income before provision for income taxes 8,586 9,826 16,372 19,645
Provision for income taxes 3,091 3,046 5,894 6,090
------- ------- -------- --------
Net income... $ 5,495 $ 6,780 $ 10,478 $ 13,555
======= ======= ======== ========
Basic earnings per common share $ 0.23 $ 0.28 $ 0.43 $ 0.54
Diluted earnings per common share $ 0.23 $ 0.27 $ 0.43 $ 0.53
Weighted average shares outstanding
Basic 24,120 24,642 24,092 24,980
Diluted 24,327 25,163 24,276 25,642
The accompanying notes are an integral part of these consolidated financial
statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 27, 2003 March 29, 2003
------------------ --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 66,771 $ 49,885
Accounts receivable, less allowance of $1,536
at September 27, 2003 and $1,449 at
March 29, 2003 84,162 77,913
Inventories 58,726 65,805
Current investment in sales-type leases, net 2,229 2,681
Deferred tax asset 18,247 17,307
Prepaid expenses and other current assets 11,434 9,664
-------- --------
Total current assets 241,569 223,255
Total property, plant and equipment 258,690 244,499
Less: accumulated depreciation 177,345 160,512
-------- --------
Net property, plant and equipment 81,345 83,987
Other assets:
Investment in sales-type leases, net (long-term) 2,552 2,968
Other intangibles, less amortization of $4,664 at
September 27, 2003 and $3,753 at March 29, 2003 25,619 26,339
Goodwill, net 16,639 16,010
Deferred tax asset, net 3,022 2,954
Other long-term assets 3,641 3,695
-------- --------
Total other assets 51,473 51,966
-------- --------
Total assets $374,387 $359,208
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 38,388 $ 39,005
Accounts payable 13,682 13,677
Accrued payroll and related costs 13,993 11,930
Accrued income taxes 7,035 12,093
Other accrued liabilities 25,842 23,670
-------- --------
Total current liabilities 98,940 100,375
Long-term debt, net of current maturities 31,389 31,612
Other long-term liabilities 4,210 3,984
Stockholders' equity:
Common stock, $0.01 par value; Authorized -
80,000,000 shares;
Issued - 31,808,940 shares at September 27, 2003
and 31,664,849 shares at March 29, 2003 318 317
Additional paid-in capital 111,232 108,770
Retained earnings 303,449 292,971
Accumulated other comprehensive loss (10,472) (13,486)
-------- --------
Stockholders' equity before treasury stock 404,527 388,572
Less: Treasury stock at cost - 7,595,935 shares
at September 27, 2003 and 7,626,096 shares at
March 29, 2003 164,679 165,335
-------- --------
Total stockholders' equity 239,848 223,237
-------- --------
Total liabilities and stockholders' equity $374,387 $359,208
======== ========
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 29, 2003 31,665 $317 $108,770 ($165,335) $292,971 ($13,486) $223,237
Employee stock purchase plan --- --- (202) 656 --- --- 454
Exercise of stock options
and related tax benefit 144 1 2,664 --- --- --- 2,665
Purchase of treasury stock --- --- --- --- --- --- ---
Net income --- --- --- --- 10,478 --- 10,478 $10,478
Foreign currency translation
adjustment --- --- --- --- --- 4,528 4,528 4,528
Unrealized loss on derivatives --- --- --- --- --- (1,514) (1,514) (1,514)
--------
Comprehensive income --- --- --- --- --- --- --- $13,492
-------------------------------------------------------------------------------- --------
Balance, September 27, 2003 31,809 $318 $111,232 ($164,679) $303,449 ($10,472) $239,848
================================================================================
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
--------------------------------
September 27, September 28,
2003 2002
------------- -------------
Cash Flows from Operating Activities:
Net income $10,478 $ 13,555
Adjustments to reconcile net income to net cash provided
by operating activities:
Non cash items:
Depreciation and amortization 15,603 14,253
Deferred tax benefit (86) (330)
Tax benefit related to the exercise of stock options 290 470
Unrealized gain from hedging activities (48) (794)
Change in operating assets and liabilities:
Increase in accounts receivable - net (2,472) (10,213)
Decrease (increase) in inventories 3,624 (8,888)
Decrease in sales-type leases (current) 535 368
(Increase) decrease in prepaid income taxes (1,186) 402
(Increase) decrease in other assets and other long-term liabilities (180) 169
Increase (decrease) in accounts payable and accrued payroll 1,485 (724)
(Decrease) increase in accrued taxes (5,259) 4,125
Decrease in accrued expenses (26) (336)
------- --------
Net cash provided by operating activities 22,758 12,057
------- --------
Cash Flows from Investing Activities:
Purchases of available-for-sale investments -- (11,670)
Gross proceeds from sale of available-for-sale investments -- 44,306
Capital expenditures on property, plant and equipment, net of
retirements and disposals (5,234) (3,172)
Performance milestone payment to acquired software development company (1,020) 0
Net decrease in sales-type leases (long-term) 535 22
------- --------
Net cash (used in) provided by investing activities (5,719) 29,486
------- --------
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (205) (189)
Net (decrease) increase in short-term revolving
credit agreements (3,105) 4,628
Employee stock purchase plan purchases 454 361
Exercise of stock options 2,374 3,027
Purchase of treasury stock -- (41,033)
------- --------
Net cash used in financing activities (482) (33,206)
Effect of exchange rates on cash and cash equivalents 329 365
------- --------
Net increase in cash and cash equivalents 16,886 8,702
Cash and cash equivalents at beginning of period 49,885 34,913
------- --------
Cash and cash equivalents at end of period $66,771 $ 43,615
======= ========
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for placements of Haemonetics
equipment $ 4,266 $ 6,843
Reclassifications fron long-term credit agreements to short-term credit
agreements $ 0 $ 2,579
Supplemental disclosures of cash flow information:
Interest paid $ 1,414 $ 1,620
Income taxes paid $12,330 $ 1,270
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 six-month period ended September 27,
2003 are not necessarily indicative of the results that may be expected for
the full fiscal year ending April 3, 2004. 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 29, 2003.
Certain amounts in the prior year financial statements have been
reclassified to conform to the fiscal year 2004 presentation.
Our fiscal year ends on the Saturday closest to the last day of March.
Fiscal year 2004 includes 53 weeks with the first three quarters of the
fiscal year including 13 weeks and the fourth quarter of fiscal 2004
including 14 weeks. Fiscal year 2003 included 52 weeks with all four
quarters including 13 weeks.
2. EARNINGS 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 27, 2003 September 28, 2002
----------------------------------------
(in thousands, except per share
----------------------------------------
Basic EPS
Net income $ 5,495 $ 6,780
Weighted average shares 24,120 24,642
-----------------------------
Basic earnings per share $ 0.23 $ 0.28
-----------------------------
Diluted EPS
Net income $ 5,495 $ 6,780
Basic weighted average shares 24,120 24,642
Effect of stock options 207 521
-----------------------------
Diluted weighted average shares 24,327 25,163
-----------------------------
Diluted earnings per share $ 0.23 $ 0.27
-----------------------------
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the six months ended
September 27, 2003 September 28, 2002
----------------------------------------
(in thousands, except per share amounts)
----------------------------------------
Basic EPS
Net income $10,478 $13,555
Weighted average shares 24,092 24,980
-----------------------------
Basic earnings per share $ 0.43 $ 0.54
-----------------------------
Diluted EPS
Net income $10,478 $13,555
Basic weighted average shares 24,092 24,980
Effect of stock options 184 662
-----------------------------
Diluted weighted average shares 24,276 25,642
-----------------------------
Diluted earnings per share $ 0.43 $ 0.53
-----------------------------
3. STOCK-BASED COMPENSATION
Effective in the fourth quarter of fiscal 2003, we adopted the
disclosure only provisions for employee stock-based compensation under
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and will continue to
account for employee stock-based compensation using the intrinsic value
method under Accounting Principles Board Opinion No. 25 ("APB No. 25").
At the date of grant, the exercise price of our employee stock options
equals the market price of the underlying stock. Therefore, under the
intrinsic value method no accounting recognition is given to options granted
to employees and directors until the options are exercised. Upon exercise,
net proceeds, including tax benefits realized, are credited to equity. The
compensation cost for options granted to consultants is recorded at fair
value in accordance with Emerging Issues Task Force "EITF" issue 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Had compensation costs under our stock-based compensation plans been
determined based on the fair value model of Statement of Financial
Accounting Standards (SFAS) 123 "Accounting for Stock-Based
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Compensation," the effect on our earnings per share would have been as
follows:
For the three months ended
September 27, September 28,
2003 2002
-----------------------------
(in thousands, except per share amounts)
Net income (as reported): $ 5,495 $ 6,780
Deduct: Total stock-based compensation expense
determined under the fair value method for
all awards, net of tax $(1,200) $(1,850)
-----------------------
Pro Forma Net Income: $ 4,295 $ 4,930
======= =======
Earnings per share:
Basic
As Reported $ 0.23 $ 0.28
Pro forma $ 0.18 $ 0.20
Diluted
As Reported $ 0.23 $ 0.27
Pro forma $ 0.18 $ 0.20
For the six months ended
September 27, September 28,
2003 2002
-----------------------------
(in thousands, except per share amounts)
Net income (as reported): $10,478 $13,555
Deduct: Total stock-based employee compensation
expense determined under the fair value
method for all awards, net of tax $(2,680) $(3,951)
------- -------
Pro Forma Net Income: $ 7,798 $ 9,604
======= =======
Earnings per share:
Basic
As Reported $ 0.43 $ 0.54
Pro forma $ 0.32 $ 0.38
Diluted
As Reported $ 0.43 $ 0.53
8
Pro forma $ 0.32 $ 0.38
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
4. ACCOUNTING FOR SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in costs of goods sold with
the exception of $1.2 million and $1.3 million for the three months ended
September 27, 2003 and September 28, 2002, respectively and $2.5 million and
$2.6 million for the six months ended September 27, 2003 and September 28,
2002, respectively. We include these costs in selling, general and
administrative expenses.
5. FOREIGN CURRENCY
We enter into forward exchange contracts to hedge the anticipated cash
flows from forecasted foreign currency denominated revenues, principally
Japanese Yen and Euro. The purpose of our hedging strategy is to lock in
foreign exchange rates for twelve months to minimize, for this 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.
6. PRODUCT WARRANTIES
We provide a warranty on parts and labor for one year after the sale
and installation of each device. 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.
For the three months ended
September 27, September 28,
2003 2002
-----------------------------
(in thousands)
Warranty accrual as of the beginning of the period $ 722 $ 800
Provision related to preexisting warranties -- 375
Warranty Provision 156 648
Warranty Spending (226) (398)
------ ------
Warranty accrual as of the end of the period $ 652 $1,425
====== ======
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the six months ended
September 27, September 28,
2003 2002
-----------------------------
(in thousands)
Warranty accrual as of the beginning of the period $1,056 $ 800
Provision related to preexisting warranties -- 375
Warranty Provision 314 831
Warranty Spending (718) (581)
------ ------
Warranty accrual as of the end of the period $ 652 $1,425
====== ======
7. 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 the changes in fair value
associated with our outstanding cash flow hedge contracts.
Three Months Ended
(In thousands) September 27, September 28,
2003 2002
-----------------------------
Net income $ 5,495 $ 6,780
Other comprehensive income:
Foreign currency translation 721 (622)
Unrealized (losses) gains on cash flow
hedges, net of tax (2,172) 1,131
Reclassifications into earnings of
cash flow hedge losses, net of tax 940 761
------- -------
Comprehensive income $ 4,984 $ 8,050
======= =======
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Six Months Ended
(In thousands) September 27, September 28,
2003 2002
-----------------------------
Net income $10,478 $13,555
Other comprehensive income:
Foreign currency translation 4,528 4,787
Unrealized loss on cash flow
hedges, net of tax (4,336) (4,928)
Reclassifications into earnings of
cash flow hedge losses, net of tax 2,822 333
------- -------
Comprehensive income $13,492 $13,747
======= =======
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 27, 2003 March 29, 2003
------------------------------------
(in thousands)
Raw materials $13,574 $17,037
Work-in-process 4,700 $4,597
Finished goods 40,452 $44,171
---------------------------
$58,726 $65,805
===========================
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
9. ACQUIRED INTANGIBLE ASSETS
As of September 27, 2003
- ------------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
---------------------
Patents $ 6,371 $ 1,357 14
Other technology 11,752 1,542 15
Customer contracts and related relationships 11,674 1,765 15
------- -------
Subtotal
Indefinite Life Intangibles $29,797 $ 4,664 15
---------------------------
Trade name 486 -- Indefinite
------- -------
Total Intangibles $30,283 $ 4,664
======= =======
As of March 29, 2003
- --------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
---------------------
Patents $ 6,371 $ 1,119 14
Other technology 11,746 1,274 15
Customer contracts and related relationships
11,498 1,360 15
------- -------
Subtotal
Indefinite Life Intangibles
---------------------------
$29,615 $ 3,753 15
Trade name 477 -- Indefinite
------- -------
Total Intangibles $30,092 $ 3,753
======= =======
12
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 29, 2003 to September 27, 2003 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 both the six months ended September 27, 2003 and September 28, 2002 was
$0.9 million. Additionally, expected future amortization expenses on other
intangible assets for each of the succeeding five fiscal years approximate
$1.7 million.
10. GOODWILL
The change in the carrying amount of our goodwill during the six
months ended September 27, 2003 is as follows (in thousands):
Carrying amount as of March 29, 2003 $16,010
Effect of change in rates used for translation 629
-------
Carrying amount as of September 27, 2003 $16,639
=======
11. 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.
12. 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 automated 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.
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
The main devices used for these blood component processes are the MCS(R)+
9000 mobile collection system and the ACP(R) 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)+ 8150 and
the MCS(R)+ 9000 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? and the Cell
Saver(R) autologous blood recovery systems.
Plasma collection products are machines, disposables and solutions
that perform apheresis for the 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 preventive maintenance contracts or emergency service billings and
miscellaneous sales, including revenue from our software division, Fifth
Dimension. Fifth Dimension provides information management products and
services to plasma collectors and fractionators.
Three months ended (in thousands)
September 27, 2003
------------------
Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
Revenues from external customers $27,869 5,166 17,950 31,599 4,904 $87,488
September 28, 2002
------------------
Revenues from external customers $29,203 3,737 17,963 31,563 4,559 $87,025
Six months ended (in thousands)
September 27, 2003
------------------
Blood Bank Red Cells Surgical Plasma Other Total
---------- --------- -------- ------ ----- -----
Revenues from external customers $55,460 9,845 38,320 61,840 10,306 $175,771
September 28, 2002
------------------
Revenues from external customers $55,696 7,380 36,297 61,000 8,587 $168,960
14
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
13. REORGANIZATION
On August 12, 2003, we announced a reorganization of our business in
order to meet the needs of our two categories of customers: "Donor" and
"Patient". As a result of the reorganization, we reduced our worldwide
workforce of 1,500 employees by approximately 4%. No facilities were closed.
The reductions resulted in a charge, included in selling, general and
administrative expenses, for severance and related costs of $2.6 million in
the second quarter. A summary of activity follows (in thousands):
Balance as of March 29, 2003 $ --
Total charges 2,566
Severance and related costs paid (2,075)
-------
Balance as of September 27, 2003 $ 491
We expect all payments to be made by the end of fiscal 2004. In connection
with the reorganization, we are performing a review of all significant
strategic initiatives and development projects. As a result of this certain
projects and technologies may no longer be pursued, which could result in
the impairment of certain long term assets. We expect the review to be
complete by the end of our fourth quarter.
14. SUBSEQUENT EVENT
On October 20, 2003, Baxter Healthcare Corporation (Baxter) announced the
completion of its acquisition of certain assets of Alpha Therapeutics
(Alpha), a significant customer of our Plasma business. As part of the
acquisition, Baxter acquired 41 plasma collection centers, all of which
utilized Haemonetics technology. Baxter has announced its intent to close 38
centers and sell the remaining 3 centers. We have supply contracts with
Alpha that include both exclusivity provisions and minimum purchase
requirements. The exclusivity provisions lapse over time beginning in
January 2005 and ending in January 2009. The minimum purchase requirements
lapse over time beginning in January 2006 and ending in January 2009. All of
the contracts between us and Alpha were assumed by Baxter as part of the
acquisition. At the current time, we do not know the impact of Baxter's
acquisition of Alpha's plasma operations on our business. Our sales to Alpha
were $8.2 million and $9.6 million for the first six months of fiscal 2004
and fiscal 2003, respectively. We also have certain fixed assets dedicated
to supporting the Alpha business as well as customer contract and related
relationship intangible assets associated with the Alpha business. We are
currently evaluating the likely future use and recoverability of these
assets as part of our business planning and ongoing discussions with Baxter.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2003 (FISCAL 2004) COMPARED TO THREE
- -----------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 28, 2002 (FISCAL 2003)
- ---------------------------------------------
The table outlines the components of the consolidated statements of
operations as a percentage of net revenues:
Percentage of Net Revenues
For the three months ended
--------------------------
Percentage
September 27, September 28, Increase/
2003 2002 (Decrease)
- -----------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% 0.5%
Cost of goods sold 52.7 55.3 (4.2)
- -----------------------------------------------------------------------------------------
Gross profit 47.3 44.7 6.4
- -----------------------------------------------------------------------------------------
Operating expenses:
Research and development 5.3 5.9 (9.5)
Selling, general and administrative 31.8 27.5 16.3
- -----------------------------------------------------------------------------------------
Total operating expenses 37.1 33.4 11.7
- -----------------------------------------------------------------------------------------
Operating income 10.2 11.3 (9.4)
Interest expense (0.9) (1.0) (11.8)
Interest income 0.2 0.4 (46.1)
Other income, net 0.3 0.6 (50.3)
- -----------------------------------------------------------------------------------------
Income from operations before
provision for income taxes
9.8 11.3 (12.6)
Provision for income taxes 3.5 3.5 1.5
- -----------------------------------------------------------------------------------------
Net income 6.3% 7.8% (19.0)%
=========================================================================================
Net Revenue Summary
- -------------------
%
September 27, September 28, Increase/
By location 2003 2002 (Decrease)
- ----------- --------------------------------------------
United States $32,317 $33,632 (3.9%)
International 55,171 53,393 3.3
-----------------------------------------
Net revenues $87,488 $87,025 0.5%
16
%
September 27, September 28, Increase/
By product type 2003 2002 (Decrease)
- --------------- --------------------------------------------
Disposables $79,472 $75,093 5.8%
Misc. & service 4,904 4,559 7.6
Equipment 3,112 7,373 (57.8)
-----------------------------------------
Net revenues $87,488 $87,025 0.5%
Disposable revenue by %
product line September 27, September 28, Increase/
- --------------------- 2003 2002 (Decrease)
--------------------------------------------
Surgical $16,939 $16,625 1.9%
Blood bank 26,731 24,917 7.3
Red Cell 5,082 3,461 46.8
Plasma 30,720 30,090 2.1
-----------------------------------------
Total disposables revenue $79,472 $75,093 5.8%
Net Revenues
Net revenues for the three months ended September 27, 2003, increased
$0.5 million to $87.5 million from $87.0 million for the three months ended
September 28, 2002. The increase in net revenue resulted from volume
increases in disposable sales as well as positive effects from foreign
currency, offset, almost entirely, by decreases in equipment revenue. See
the section below entitled "Foreign Exchange" for a complete discussion of
how foreign exchange impacts our business. International sales accounted for
63.1% of net sales for the second quarter of fiscal 2004 as compared to
61.4% in the second quarter of fiscal 2003.
Disposable Sales
- ----------------
Disposable sales increased 5.8% or $4.4 million. By product line,
disposable sales increased in worldwide Surgical (up 1.9%), worldwide Blood
bank (up 7.3%), worldwide Red Cell (up 46.8%), and worldwide Plasma (up
2.1%).
* Surgical- Worldwide Surgical disposable sales include our
traditional cell salvage business (which targets procedures in
which there is a large volume of blood lost) and our OrthoPAT(R)
business for lower blood loss orthopedic procedures. Without the
favorable effect of foreign currency, worldwide surgical
disposable sales were down slightly. The decrease was a result
of a volume decrease in the U.S. cell salvage market, partially
offset by a volume increase in our OrthoPAT(R) sales.
OrthoPAT(R) sales have increased as U.S. and
European orthopedic surgeons continue to adopt cell salvage as
an effective alternative to patient pre-donation and blood
17
transfusions in hip and knee replacements as well as other
orthopedic surgeries. The U.S. cell salvage market has experienced
a decline in the number of open-heart procedures performed which
is contributing to the decline in our cell salvage business.
As advances are made in the medical field and technology
improves, the preference of surgeons may shift to minimally
invasive surgical procedures enabled by coronary stents and
angioplasty, reducing the number of open heart surgeries.
Blood bank- Approximately one-half of the increase in worldwide
Blood bank disposable sales was due to the favorable effect of
foreign currency. The remainder of the increase was primarily a
result of platelet volume increases in Europe and Japan. The
volume increase in Europe represented two-thirds of the increase
and was a result of market share gains due to product
enhancements as well as our reputation for quality.
Red Cell - Worldwide Red Cell sales grew primarily due to volume
increases in the U.S. U.S. blood collectors are adopting
automated red cell collection to increase the supply of red
cells, reduce collection costs and improve quality. Automated
collections also overcome the impact of red cell shortages by
increasing the number of units of blood collected from a
declining number of eligible donors. The growth in the U.S. of
higher priced filtered sets (which include a filter to remove
white blood cells from the collected blood) also contributed to
the sales increase.
Plasma - Worldwide plasma disposable sales were up slightly.
Overall, an excess supply of plasma and plasma derived products
and industry consolidation is negatively impacting the plasma
disposable collection market. Increases in worldwide Plasma sales
from the favorable effects of currency, the expansion of our
Plasma product line with solutions and containers and volume
increases in Europe were partially offset by disposable volume
decreases in Japan and the U.S. The growth in Europe is due to
additional collection centers opened in the second half of fiscal
year 2003. The decrease in disposable volumes in Japan was due to
a decline in plasma collections over the previous year as the
Japanese Red Cross decreased collection targets. The decrease in
disposable volumes in the U.S. is due primarily to the impact of
industry consolidation.
Update on previously announced consolidation plans. - On October 20,
2003, Baxter Healthcare Corporation (Baxter) announced the completion of its
acquisition of certain assets of Alpha Therapeutics (Alpha), a significant
customer of our Plasma business. As part of the acquisition, Baxter acquired
41 plasma collection centers, all of which utilized Haemonetics technology.
Baxter has announced its intent to close 38 centers and sell the remaining 3
centers. We have supply contracts with Alpha that include both exclusivity
provisions and minimum purchase requirements. The exclusivity provisions
lapse over time beginning in January 2005 and ending in January 2009. The
minimum purchase requirements lapse over time beginning in January 2006 and
ending in January 2009. All of the contracts between us and Alpha were
assumed by Baxter as part of the acquisition. At the current time, we do not
know the impact of Baxter's acquisition of Alpha's plasma operations on our
business. Our sales to Alpha were $8.2 million and $9.6 million for the
first six months of fiscal 2004 and fiscal 2003, respectively. We also have
certain fixed assets dedicated to supporting the Alpha business as well as
customer contract and related relationship intangible assets associated with
the Alpha business. We are currently evaluating the likely future use and
recoverability of these assets as part of our business planning and ongoing
discussions with Baxter.
18
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales include revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension.
Miscellaneous and service sales increased 7.6% or $0.3 million year
over year. The most significant contributor to the increase was the
favorable effect of foreign currency.
Equipment Sales
- ---------------
The $4.3 million decrease in equipment revenue from $7.3 million in
fiscal 2003 is primarily attributable to a decrease in volume in the sales
of our ACP (R) 215 automated cell processing system in the U.S. and our
platelet collection device in Japan. Prior year sales of our ACP 215 (R)
system were positively impacted during its initial rollout to the U.S.
military. Equipment revenue from our platelet collection device in Japan was
high in the prior year because of a sale to the Japanese Red Cross ("JRC") of
equipment used previously by the JRC under a use plan arrangement due to a
change in Japanese regulatory requirements.
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 require payment of a rental fee. Due
to the variable nature of equipment sales, we give no assurance as to
whether or not our current level of equipment sales will continue in the
future.
Gross profit
Gross profit of $41.4 million for the second quarter of fiscal 2004
increased $2.5 million from $38.9 million for the second quarter of fiscal
2003. Foreign currency, cost reductions generated by our Customer Oriented
Redesign for Excellence ("CORE") program and a prior year provision for
quality enhancements to the Company's OrthoPAT(R) surgical blood salvage
system were the most significant reasons for the increase.
For the second quarter of fiscal 2004, the CORE program generated a
$1.4 million improvement in our gross profit by automating and redesigning
the way certain products are made and by negotiating reduced raw material
prices from suppliers.
Expenses
* Research and Development
------------------------
We spent $4.6 million on research and development in the second
quarter of fiscal 2004 (5.3% as a percentage of sales) and $5.1 million in
the second quarter of fiscal 2003 (5.9% as a percentage of sales). The
decrease in research and development expense is related primarily to lower
headcount which lead to reduced salary and bonus expenses in the U.S. in
fiscal 2004 as compared to fiscal 2003.
19
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $3.9 million in
the second quarter of fiscal 2004 from $24.0 million in the second quarter
of fiscal 2003. The majority of the increase was due to the $2.6 million in
severance costs related to the recent reorganization which reduced our
worldwide workforce by approximately 4.0 percent (see note 13). Most of the
remainder of the increase was related to foreign currency.
Operating Income
Operating income for the second quarter of fiscal 2004 decreased $0.9
million from the second quarter of fiscal 2003 and decreased to 10.2% of
sales in the second quarter of fiscal 2004 from 11.3% in the second quarter
of fiscal 2003. The $0.9 million decrease in operating income is primarily a
result of the increased selling, general and administrative expenses due to
our recent reorganization, partially offset by net favorable effects of
foreign currency.
Other income (expense), net
Interest expense for the second quarter of fiscal 2004 was down
slightly compared to the second quarter of fiscal 2003 due to lower average
borrowings in fiscal 2004 compared to fiscal 2003. All of our long-term debt
is at fixed rates so changing rates do not have a significant impact on our
interest expense. Interest income decreased $0.2 million from 2003 to 2004,
due primarily to lower investment yields. Other income, net decreased $0.3
million from the second quarter of fiscal 2003 to the second quarter of
fiscal 2004 due to a decrease in income earned from points on forward
contracts in the second quarter of fiscal 2004 as compared to the second
quarter of fiscal 2003. 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.
Income Taxes
The income tax provision, as a percentage of pretax income, was 36.0%
for the second quarter of fiscal 2004. This increase from 31.0% for the
second quarter of fiscal year 2003 is attributable to prior year tax
efficient cash repatriations and higher export credits. We expect our tax
rate to be 36% for the remainder of fiscal year 2004.
20
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003 (FISCAL 2004) COMPARED TO
- ---------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 28, 2002 (FISCAL 2003)
- -------------------------------------------------
The table outlines the components of the consolidated statements of
operations as a percentage of net revenues:
Percentage of Net Revenues
For the six months ended
------------------------
Percentage
September 27, September 28, Increase/
2003 2002 (Decrease)
- ------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% 4.0%
Cost of goods sold 53.9 54.1 3.7
- ------------------------------------------------------------------------------------------
Gross profit 46.1 45.9 4.4
- ------------------------------------------------------------------------------------------
Operating expenses:
Research and development 5.5 5.9 (4.3)
Selling, general and administrative 30.9 28.4 13.1
- ------------------------------------------------------------------------------------------
Total operating expenses 36.3 34.3 10.1
- ------------------------------------------------------------------------------------------
Operating income 9.7 11.6 (12.4)
Interest expense (0.9) (1.0) (11.1)
Interest income 0.3 0.4 (40.3)
Other income, net 0.2 0.6 (66.5)
- ------------------------------------------------------------------------------------------
Income from operations before
provision for income taxes 9.3 11.6 (16.7)
Provision for income taxes 3.3 3.6 (3.2)
- ------------------------------------------------------------------------------------------
Net income 6.0% 8.0% (22.7)
==========================================================================================
Net Revenue Summary
- -------------------
%
September 27, September 28, Increase/
By location 2003 2002 (Decrease)
- ----------- --------------------------------------------
United States $ 63,869 $ 64,562 (1.1)%
International 111,902 104,398 7.2
-----------------------------------------
Net revenues $175,771 $168,960 4.0%
%
September 27, September 28, Increase/
By product type 2003 2002 (Decrease)
- --------------- --------------------------------------------
Disposables $157,867 $148,581 6.2%
Misc. & service 10,306 8,587 20.0
Equipment 7,598 11,792 (35.6)
-----------------------------------------
Net revenues $175,771 $168,960 4.0%
21
%
Disposable revenue by September 27, September 28, Increase/
product line 2003 2002 (Decrease)
- --------------------- --------------------------------------------
Surgical $ 35,232 $ 33,888 4.0%
Blood bank 52,680 48,956 7.6
Red Cell 9,646 6,989 38.0
Plasma 60,309 58,748 2.7
-----------------------------------------
Total disposables revenue $157,867 $148,581 6.2%
Net Revenues
Net revenues for the six months ended September 27, 2003, increased
$6.8 million to $175.8 million from $169.0 million for the six months ended
September 28, 2002. The sales change was a result of (i) volume increases
from both disposable and miscellaneous and service sales, which include
sales from our software company, Fifth Dimension, (ii) positive effects from
foreign currency, and (iii) volume decreases in equipment revenue. See the
section below entitled "Foreign Exchange" for a complete discussion of how
foreign exchange impacts our business. International sales accounted for
63.7% of net sales for the first six months of fiscal 2004 as compared to
61.8% for the first six months of fiscal 2003.
Disposable Sales
- ----------------
Disposable sales increased 6.2% or $9.3 million. By product line,
disposable sales increased in worldwide Surgical (up 4.0%), worldwide Blood
bank (up 7.6%), worldwide Red Cell (up 38.0%), and worldwide Plasma (up
2.7%).
* Surgical- Worldwide Surgical disposable sales include our
traditional cell salvage business (which targets procedures in
which there is a large volume of blood lost) and our OrthoPAT(R)
business for lower blood loss orthopedic procedures. Without the
favorable effect of foreign currency, worldwide surgical
disposable sales were down slightly. The decrease was a result
of a volume decrease in the U.S. cell salvage market, partially
offset by a volume increase in our OrthoPAT(R) sales.
OrthoPAT(R) sales increased as U.S. and European orthopedic
surgeons continue to adopt cell salvage as an effective
alternative to patient pre-donation and blood transfusions in
hip and knee replacements as well as other orthopedic surgeries.
The U.S. surgical cell salvage market has experienced a decline
in the number of open-heart procedures performed which is
contributing to the decline in our cell salvage business. As
advances are made in the medical field and technology improves,
the preference of surgeons may shift to minimally invasive
surgical procedures enabled by coronary stents and angioplasty,
reducing the number of open heart surgeries.
* Blood bank-The increase in worldwide Blood bank disposable
sales was primarily a result of platelet volume increases in
Europe and Japan. We achieved market share gains due to product
enhancements as well as our reputation for quality.
Approximately one-third of the increase was due to the
favorable effect of foreign currency.
22
* Red Cell - Worldwide Red Cell sales grew primarily due to volume
increases in the U.S. U.S. blood collectors are adopting
automated red cell collection to increase the supply of red
cells, reduce collection costs and improve quality. Automated
collections also overcome the impact of red cell shortages by
increasing the number of units of blood collected from a
declining number of eligible donors. The growth in the U.S. of
higher priced filtered sets (which include a filter to remove
white blood cells from the collected blood) also contributed to
the sales increase.
* Plasma - Worldwide plasma disposable sales were up slightly.
Overall, an excess supply of plasma and plasma derived products
and industry consolidation is negatively impacting the plasma
disposable collection market. Increases in worldwide Plasma sales
from the favorable effects of currency, the expansion of our Plasma
product line with solutions and containers and volume increases
in Europe were partially offset by disposable volume decreases in
Japan and the U.S. The growth in Europe is due to additional
collection centers opened in the second half of fiscal year
2003. The decrease in disposable volumes in Japan was due to a
decline in plasma collections over the previous year as the
Japanese Red Cross decreased collection targets. The decrease in
disposable volumes in the U.S. is due primarily to the impact of
industry consolidation.
Update on previously announced consolidation plans. - On October 20,
2003, Baxter Healthcare Corporation (Baxter) announced the completion of its
acquisition of certain assets of Alpha Therapeutics (Alpha), a significant
customer of our Plasma business. As part of the acquisition, Baxter acquired
41 plasma collection centers, all of which utilized Haemonetics technology.
Baxter has announced its intent to close 38 centers and sell the remaining 3
centers. We have supply contracts with Alpha that include both exclusivity
provisions and minimum purchase requirements. The exclusivity provisions
lapse over time beginning in January 2005 and ending in January 2009. The
minimum purchase requirements lapse over time beginning in January 2006 and
ending in January 2009. All of the contracts between us and Alpha were
assumed by Baxter as part of the acquisition. At the current time, we do not
know the impact of Baxter's acquisition of Alpha's plasma operations on our
business. Our sales to Alpha were $8.2 million and $9.6 million for the
first six months of fiscal 2004 and fiscal 2003, respectively. We also have
certain fixed assets dedicated to supporting the Alpha business as well as
customer contract and related relationship intangible assets associated with
the Alpha business. We are currently evaluating the likely future use and
recoverability of these assets as part of our business planning and ongoing
discussions with Baxter.
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales include revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension.
Miscellaneous and service sales increased 20.0% or $1.7 million year
over year. Growth in both service and software revenues contributed almost
equally to this change.
23
Equipment Sales
- ---------------
The $4.2 million decrease in equipment revenue from $11.8 million in
fiscal 2003 is primarily attributable to a decrease in volume in the sales
of our Automated Cell Process ("ACP(R) 215") system in the U.S. and our
platelet collection device in Japan. Prior year sales of our ACP(R) 215 system
were positively impacted during its initial rollout to the U.S. military.
Equipment revenue from our platelet collection device in Japan was high in
the prior year because of a sale to the Japanese Red Cross ("JRC") of
equipment used previously by the JRC under a use plan arrangement due to a
change in Japanese regulatory requirements.
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 require payment of a rental fee. Due to the
variable nature of equipment sales, we give no assurance as to whether or
not our current level of equipment sales will continue in the future.
Gross profit
Gross profit of $81.0 million for the first six months of fiscal 2004
increased $3.4 million from $77.5 million for the first six months of fiscal
2003. Foreign currency and the cost reductions generated by our Customer
Oriented Redesign for Excellence ("CORE") program were the most significant
reasons for the increase. Included in the year over year increase in gross
profit was the effect of a first quarter fiscal 2004 provision of $0.9
million for excess and obsolete inventory and a second quarter fiscal 2003
provision for quality enhancement to the Company's OrthoPAT(R) surgical
blood salvage system. These items were not significant factors in the year
over year increase as they were largely offsetting.
For the first six months of fiscal 2004, the CORE program generated a
$2.4 million improvement in our gross profit by automating and redesigning
the way certain products are made and by negotiating reduced raw material
prices from suppliers.
Expenses
* Research and Development
-------------------------
We spent $9.6 million on research and development in the first six
months of fiscal 2004 (5.5% as a percentage of sales) and $10.0 million for
the first six months of fiscal 2003 (5.9% as a percentage of sales). The
small decrease in research and development expense is related primarily to
lower headcount which reduced salary and bonus expenses in the U.S. in the
first six months of fiscal 2004 as compared to the first six months of
fiscal 2003.
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $6.3 million in
fiscal 2004 from $48.0 million in fiscal 2003. A little more than one-half
of the increase in spending is related to foreign exchange.
The remainder of the increase is primarily due to the $2.6 million in
severance costs recognized in the second quarter of fiscal 2004 related to
our recent reorganization which reduced our worldwide workforce by 4.0
percent (see note 13).
24
Operating Income
Operating income in fiscal 2004 decreased $2.4 million from $19.5
fiscal 2003 and decreased to 9.7% of sales in fiscal 2004 from 11.6% in
fiscal 2003. The $2.4 million decrease in operating income is primarily a
result of the increase in selling, general and administrative expenses due
to our recent reorganization. Foreign currency had a limited impact on the
decrease in operating income.
Foreign Exchange
Approximately 64% 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, primarily the
Euro and the Japanese Yen. Exposure is partially mitigated by producing and
sourcing product in local currency and expenses incurred by local sales
offices. However, 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 lock in for a period of time the impact on our
financial results of fluctuations in foreign exchange rates. We do this by
using derivative financial instruments known as forward contracts to hedge
the anticipated cash flows from forecasted foreign currency denominated
sales. We refer to these contracts as our plan hedges. Hedging through the
use of forward contracts does not eliminate the volatility of foreign
exchange rates. However, because we enter into forward contracts one year in
advance, exchange 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 prior year. The relative
value of currencies in the index is weighted by 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 recorded when we obtain
relatively more U.S. dollars for each of the underlying foreign currencies
than we did in the prior period. An unfavorable change is recorded 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, and consequently, also gross profit, operating income, and net
income, in our 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.
25
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%
FY2005 Q1 0.97 15.7%
Q2 0.99 5.1%
Q3 0.93* 14.8%
----------------------------
* NOTE: Represents hedges for Oct FY05.
Other income (expense), net
Interest expense for fiscal 2004 was slightly down compared to fiscal
2003 due to lower average borrowings in fiscal 2004 compared to fiscal 2003.
All of our long-term debt is at fixed rates so changing rates do not have a
significant impact on our interest expense. Interest income decreased $0.3
million from 2003 to 2004, due primarily to lower investment yields. Other
income, net decreased $0.7 million from fiscal 2003 to fiscal 2004 due to a
decrease in income earned from points on forward contracts in fiscal 2004 as
compared to of fiscal 2003. 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.
26
Income Taxes
The income tax provision, as a percentage of pretax income, was 36.0%
for the first six months of fiscal year 2004. This increase from 31.0% for
the first six months of fiscal year 2003 is attributable to prior year tax
efficient cash repatriations and higher export credits. We expect our tax
rate to be at 36.0% for the remainder of fiscal year 2004.
Liquidity and Capital Resources
Our primary sources of liquidity include cash and short-term
investments, internally generated cash flows, and borrowings. We believe
these sources to be sufficient to fund our requirements, which are primarily
capital expenditures, acquisitions, new business development, share
repurchases and working capital.
During the six-months ended September 27, 2003, we funded our
activities primarily with $22.8 million of cash flow generated by
operations.
Working capital at September 27, 2003, was $142.6 million. This
reflects an increase of $17.0 million in working capital from the same
period in the prior year largely due to an increase in cash and cash
equivalents and accounts receivable offset by a decrease in inventory.
Cash Flow Overview:
For the six months ended
September 27, 2003 September 28, 2002 Change
- ------------------------------------------------------------------------------------------------
(In thousands)
Net cash provided by (used in):
Operating activities $22,758 $ 12,057 $ 10,701
Investing activities (5,719) 29,486 (35,205)
Financing activities (482) (33,206) 32,714
Effect of exchange rate changes on cash 329 365 (36)
----------------------------------------------
Net increase in cash and cash equivalents $16,886 $ 8,702 $ 8,184
----------------------------------------------
Operating Activities:
Cash provided by operating activities was $22.7 million for the six
months ended September 27, 2003, as compared to $12.1 million for the six
months ended September 28, 2002. The $10.7 million increase was primarily
related to lower working capital investments in accounts receivable and
inventory in fiscal 2004 offset by additional tax payments in fiscal 2004.
Cash spent on inventory decreased in
27
fiscal 2004 as compared to fiscal 2003 due to lower inventory balances in
fiscal 2004. Increases in cash flows from accounts receivables in fiscal
2004 as compared to fiscal 2003 were due to the timing of customer payments
and sales fluctuations.
Investing Activities:
We used $5.7 million for investing activities for the six months ended
September 27, 2003, which represents a decrease of $35.2 million from the
$29.5 million in cash provided for the six months ended September 28, 2002.
The $35.2 million decrease in cash provided was a result of the liquidation
of our available for sale investments which provided $32.6 million in fiscal
2003.
Financing Activities:
Our financing activities for the six months ended September 27, 2003
utilized $0.5 million in cash as compared to $33.2 million utilized in the
same period of the prior year. This decrease in cash utilized was primarily
due to the $41.0 million spent in fiscal 2003 to repurchase stock under our
repurchase program whereas no cash has been expended to purchase stock in
fiscal 2004. Also, in fiscal 2003, we borrowed approximately $4.6 million
for working capital purposes in Japan while in the same period of fiscal
2004, we repaid outstanding borrowings by $3.1 million.
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 efficiencies, 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 we
make which 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 our
future plans of operations, business strategy, results of operations, and
financial position. These statements are based on our current expectations
and estimates as to prospective events and circumstances about which we can
give no firm assurance. Further, any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake 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 our 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 our standards for transfusion medicine and our ability to
successfully implement products that incorporate such advances and
standards, product demand and market acceptance of our products, regulatory
uncertainties, the effect of economic and political conditions, the impact
of competitive products and pricing, the impact of industry consolidation,
foreign currency exchange rates, changes in customers' ordering patterns,
the effect of industry consolidation as seen in the Plasma market, the
effect of
28
communicable diseases and the effect of uncertainties in markets outside the
U.S. (including Europe and Asia) in which we operate. 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
See the section entitled Foreign Exchange for a discussion of how
foreign currency affects our business. 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 anticipated cash flows from
forecasted foreign currency denominated sales. We do not use the financial
instruments for speculative or trading activities. At September 27, 2003, 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 9,400,000 $1.017 $1.004 $(1,314,530) Oct-Dec 2003
Euro 9,500,000 $1.100 $1.088 $ (505,273) Jan-Mar 2004
Euro 8,500,000 $1.144 $1.133 $ (55,368) Apr-Jun 2004
Euro 6,000,000 $1.133 $1.123 $ (85,140) Jul-Aug 2004
Japanese Yen 1,725,000,000 121.6 per US$ 119.8 per US$ $(1,044,064) Oct-Dec 2003
Japanese Yen 1,615,000,000 118.3 per US$ 116.7 per US$ $ (656,746) Jan-Mar 2004
Japanese Yen 1,815,000,000 118.2 per US$ 116.7 per US$ $ (771,404) Apr-Jun 2004
Japanese Yen 1,250,000,000 120.4 per US$ 118.7 per US$ $ (721,411) Jul-Aug 2004
-----------
Total: $(5,153,936)
===========
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 $12.4 million increase in the fair value of the forward contracts;
whereas a 10% weakening of the U.S. dollar would result in a $13.8 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 September 27,
2003, the fair value of our long-term debt was approximately $3.6 million
higher than the value of the debt reflected on our
29
financial statements. This higher fair market is entirely related to our
$22.9 million, 7.05% fixed rate senior notes and our $8.5 million, 8.41%
real estate mortgage.
At September 28, 2002, the fair value of our long-term debt was
approximately $ 4.1 million higher than the value of the debt reflected on
our financial statements. This higher fair value was primarily related to
the $28.6 million, 7.05% fixed rate senior notes and the $9.0 million, 8.41%
real estate mortgage.
Using scenario analysis, if we changed the interest rate on all long-
term maturities by 10% from the rate levels that existed at September 27,
2003 the fair value of our long-term debt would change by approximately $0.5
million.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, as of September 27, 2003, under the
supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer (our 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-15 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 was no change in our internal control over financial reporting during
the quarter ended September 27, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
30
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 22, 2003, the Company held its annual meeting of stockholders. At
the meeting, Ronald G. Gelbman, Brad Nutter and Ronald A. Matricaria were
elected as Directors for terms ending in 2005. The voting results were as
follows:
Ronald G. Gelbman For 16,983,188 Withheld 2,655,293
Brad Nutter For 19,443,150 Withheld 195,331
Ronald A. Matricaria For 19,292,609 Withheld 345,872
The other members of the Board of Directors whose terms continued after the
meeting were:
Serving a Term Ending in 2004 -- Yutaka Sakurada, Donna C.E. Williamson,
Harvey G. Klein, M.D.
Serving a term ending in 2005: -- Benjamin L. Holmes
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
10.1 Employment agreement between the Company and Peter Allen
dated August 15, 2003.
10.2 Employment agreement between the Company and Brian
Concannon dated August 25, 2003.
10.3 Employment agreement between the Company and Alicia Lopez,
dated February 1, 1999.
31
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley
Act of 2002, of Brad Nutter, President and Chief Executive
Officer of the Company
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley
of 2002, of Ronald J. Ryan, Vice President and Chief
Financial Officer of the Company
32.1 Certification Pursuant to 18 United States Code Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Brad Nutter, President and
Chief Executive Officer of the Company
32.2 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, Vice
President and Chief Financial Officer of the Company
(b) Reports on Form 8-K
We filed a report on Form 8-K on July 24, 2003 furnishing a
press release we issued on July 24, 2003 announcing fiscal 2004
first quarter results and our planned reorganization.
We filed a report on Form 8-K on August 20, 2003 announcing the
appointments of Peter M. Allen and Brian Concannon as Presidents
of our newly created Donor and Patient Divisions, respectively.
We filed a report on Form 8-K on August 25, 2003 announcing the
appointment of Lawrence Best, Senior Vice President and Chief
Financial Officer of Boston Scientific Corporation, to our Board
of Directors.
32
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 11, 2003 By: /s/ Brad Nutter
--------------------------------
Brad Nutter, President and
Chief Executive Officer
Date: November 11, 2003 By: /s/ Ronald J. Ryan
--------------------------------
Ronald J. Ryan, Vice President
and Chief Financial Officer
(Principal Financial Officer)
33