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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 3, 2004. Commission file number 1-10730
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
(State of Incorporation) (I.R.S. Employer Identification No.)
400 Wood Road 02184-9114
Braintreee, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. |_|
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 aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant (assuming for these purposes that all executive
officers and Directors are "affiliates" of the Registrant) as of September 27,
2003, the last business day of the registrant's most recently completed second
fiscal quarter was $571,000,000 (based on the closing sale price of the
Registrant's Common Stock on that date as reported on the New York Stock
Exchange).
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 14, 2004 was 25,156,449.
Documents Incorporated By Reference
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on July 27, 2004, are incorporated by reference in Part III.
TABLE OF CONTENTS
Page Number
-----------
ITEM 1. Business
(a) General History of the Business...................................... 3
(b) Financial Information about Industry Segments........................ 4
(c) Narrative Description of Business.................................... 4
(d) Financial Information about Foreign and Domestic Operations and
Export Sales...................................................... 15
ITEM 2. Properties................................................................ 16
ITEM 3. Legal Proceedings......................................................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders....................... 18
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................ 20
ITEM 6. Selected Consolidated Financial Data...................................... 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 22
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk................ 45
ITEM 8. Financial Statements and Supplementary Data............................... 48
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 81
ITEM 9A. Controls and Procedures................................................... 81
ITEM 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors.......................................... 81
(b) Identification of Executive Officers................................. 81
(c) Audit Committee Financial Expert..................................... 81
ITEM 11. Executive Compensation.................................................... 82
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ...........
and Related Stockholder Matters........................................... 82
ITEM 13. Certain Relationships and Related Transactions............................ 83
ITEM 14. Principal Accountant Fees and Services.................................... 83
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statement Schedules........................................ 83
(b) Reports on Form 8-K.................................................. 83
(c) Exhibits ............................................................ 83
SIGNATURES
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ITEM 1. BUSINESS
(a) General History of the Business
Note: The terms "Haemonetics," "we," "us," "our," and "the Company" as used
herein include Haemonetics' subsidiaries and predecessor where the context so
requires.
Our Company was founded in 1971 and became publicly owned for the first time in
1979. In 1983, we were acquired by American Hospital Supply Corporation ("AHS").
When Baxter Travenol Laboratories, Inc. acquired AHS in 1985, Baxter divested
the Haemonetics business to address antitrust concerns related to the AHS
acquisition. As a result, we were purchased in December 1985 by investors that
included E. I. du Pont de Nemours and Company ("Du Pont") and present and former
Haemonetics employees. We were incorporated in Massachusetts in 1985. In May
1991, we completed an Initial Public Offering, at which time Du Pont divested
its interest.
We are a pioneer and a market leader in developing and manufacturing technology
to help ensure a safe and adequate blood supply for patients world wide, and to
assist blood banks and hospitals to operate efficiently and in compliance with
regulatory requirements. To that end, we are engaged in manufacturing automated
systems and single use consumables for blood donors and patients, for the
collection, processing, and surgical salvage of their blood. We also develop
associated data management technology. We developed our first automated blood
processing system in 1971 and for more than 30 years we have been driven to
improve the safety and practice of transfusion medicine. Our direct customers
are blood and plasma collectors, hospitals and hospital service providers. In
fiscal 2004, we reorganized into two global product families that address our
ultimate customer (our customers' customer): blood donors and surgical patients.
Within these product families we offer:
Donor Products
1) Our PCS brand systems automate the collection of plasma from donors who
are usually paid a fee for their donation. The collected plasma is then
generally processed into therapeutic pharmaceuticals.
2) Blood bank systems:
a) Our MCS brand systems automate the collection of platelets from
volunteer donors. The systems enable the donation of a larger volume
of the donor's platelets, which are then generally given to cancer
patients and others with bleeding disorders.
b) Our ACP brand systems automate the process used to freeze, thaw and
wash red blood cells; and
3) Other MCS systems automate the collection of red cells from volunteer
donors. These systems maximize the volume of red cells that can be
collected from one blood donation, thus helping to alleviate blood
shortages.
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Patient Products
1) Surgical blood salvage systems, used during and after surgery to collect a
patient's own blood for reinfusion, including:
a) Our Cell Saver brand systems for higher blood loss surgeries and
trauma, and
b) Our OrthoPAT brand systems for lower, slower blood loss procedures,
typically orthopedic surgeries.
Our principal operations are in the U.S., Europe, and Japan and other parts of
Asia. Our products are marketed in more than 50 countries around the world via a
direct sales force as well as some independent distributors and agents.
In fiscal 2004, we remained focused on increasing sales of our newer red cell
collection technology and orthopedic surgical blood salvage system. In addition
to this focus, however, we also implemented some new growth strategies. We
leveraged the core business by strengthening current marketing partnerships,
identifying new marketing partners and improving our margins and cash position.
To prepare the business for further expansion, we initiated a Core Competency
Review Process to identify the unique activities that we can leverage to grow
our business. These potential core competencies are our superior level of
service to a complex medical customer base, our rigorous manufacturing process
management and control, and our robust software development platform for
information technology applications related to our medical devices. Phase 1 of
this process is complete. Phase 2, begun in May 2004 and expected to be
completed within twelve months, includes validating and benchmarking the core
competencies to assure that our practices are genuinely world class, and then
testing whether they can be leveraged into other therapeutic classes to deliver
enhanced shareholder value.
(b) Financial Information about Industry Segments
Although we address our customer constituents through two global product
families (Donor and Patient), we manage our business as one operating segment:
automated blood processing systems. Our chief operating decision maker uses
consolidated financial 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.
The financial information required for the business segment is included herein
in note 17 of the financial statements, entitled SEGMENT, GEOGRAPHIC AND
CUSTOMER INFORMATION.
(c) Narrative Description of the Business
(i) Products
We have developed and market a variety of automated systems for blood donors and
patients world wide that collect, process, and surgically salvage their blood.
We also market data management systems through our subsidiary, Fifth Dimension
Information Systems ("5D") to promote efficient and compliant operations of
blood collectors, principally plasma collectors.
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All of our blood systems involve the extracorporeal processing of human blood,
which is made up of components called red blood cells, plasma, platelets, and
white blood cells. Doctors today generally treat patients with a transfusion of
only the blood component needed, rather than with whole blood. The different
components have different clinical applications. For example, plasma derived
products treat varying illnesses and hereditary disorders such as hemophilia,
red cells treat trauma patients or patients undergoing major surgeries involving
high blood loss such as open heart surgery or organ transplant, and platelets
treat cancer patients undergoing chemotherapy.
With our automated blood collection systems, a blood donation can be targeted to
the specific blood component needed by a blood collector. More of that blood
component can be collected during any one donation event because the blood
component not targeted is returned to the donor through a sterile,
closed-circuit disposable set used for the blood donation procedure.
With our automated blood processing systems, blood collectors and hospitals can
freeze and thaw red cells so that they can maintain a frozen blood reserve.
Blood reserves are often maintained to adequately respond to large-scale
emergencies in which many people require blood transfusions or to treat patients
who require transfusions of very rare blood. Our blood processing systems can
also remove the plasma from red cells for patients who need specially treated
blood.
With our surgical blood salvage systems, medical teams can collect blood lost by
a surgical patient during or after the surgery, clean it, and make it available
for transfusion back to the patient. These systems ensure that elective surgery
will not be cancelled due to lack of available blood, and also ensures that a
patient receives the safest blood possible - his or her own.
In every one of our major product offerings: plasma collection, platelet
collection, red cell collection, cell processing and surgical cell salvage, we
invented the technology that first created the market. We continue to innovate
our product offerings with next generation technologies.
As a general practice, we place our equipment at customers' sites, with
contractual requirements that customers purchase a certain number of disposables
in a predetermined time frame. Within this model, we may redeploy equipment
should utilization be less than optimal. Blood cell processing equipment is most
commonly sold outright.
Automated Plasma Collection and Data Management Systems
Automated plasma collection technology allows for the safe and efficient
collection of plasma from donors who are usually paid a fee for their blood
donation. The plasma which is collected is then further processed
("fractionated") by pharmaceutical companies into therapeutic and diagnostic
products that aid in the treatment of: immune diseases, inherited coagulation
disorders (e.g., hemophilia) and blood volume loss (e.g. from trauma). The
collected plasma is also used in the manufacture of vaccines and blood testing
and quality control reagents. Our role in the plasma industry is limited to the
supply of plasma collection and data management systems to plasma collectors.
Our business does not include the actual collection, fractionation, or
distribution of plasma-derived pharmaceuticals, businesses mostly conducted by
large multi-national pharmaceutical corporations.
Until automated plasma collection technology was pioneered and introduced by our
Company in the 1980s, plasma for fractionation was collected manually. Manual
collection was time-consuming, labor-intensive, produced relatively poor yields,
and posed risk to donors. Currently the vast majority of plasma collections
worldwide are performed using automated collection technology because it is safe
and
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cost-effective. We market our PCS(R)2 automated plasma collection systems to
commercial plasma collectors as well as not-for-profit blood banks and
government affiliated plasma collectors worldwide.
We offer "one stop shopping" to our plasma collection customers, enabling them
to source from us the full range of products necessary for their plasma
collection operations. To that end, in addition to providing plasma collection
equipment and disposables, we offer plasma collection containers, intravenous
solutions necessary for plasma collection and storage, and data management
technology to automate plasma collectors' operations.
On January 1, 2002, we acquired 5D, the leading provider of information
management products and services for plasma collectors and fractionators. A
majority of plasma collectors currently use manual systems to track their donors
and collected plasma. 5D's sales are recorded in the miscellaneous and service
revenue line although the majority of its sales currently are to plasma
collectors. Our strategy is to expand 5D's sales to not-for-profit blood
collectors.
Blood Collection for Transfusion
There are millions of blood donations throughout the world every year to obtain
blood products for transfusion to surgical, trauma, or chronically ill patients.
In the U.S. alone approximately 13.5 million units of blood are collected each
year.
Patients requiring blood are rarely transfused with whole blood. Instead, a
patient typically receives only the blood component necessary to treat their
clinical condition: red cells to surgical or trauma patients, platelets to
surgical or cancer patients, and plasma to surgical patients.
Most donations worldwide are non-automated procedures (also referred to as
"manual donations"). In a manual donation, a person donates about a pint of
whole blood, bleeding by gravity directly into a blood collection bag. After the
donation, a laboratory worker manually processes the blood and separates it into
its constituent parts: red cells, platelets and plasma. One pint of whole blood
contains one transfusible dose of red cells, one-half to one transfusible dose
of plasma, and one-sixth to one-eighth transfusible dose of platelets.
We do no business in the large, non-automated part of the blood collection
market for transfusions. Abbott Laboratories, Baxter International, Pall
Corporation, Terumo and others supply this market with whole blood collection
supplies such as needles, plastic blood bags, solutions and tubing. Worldwide
demand for blood continues to rise as the population ages and more patients have
need for and access to medical therapies that require blood transfusions. At the
same time, tighter donor eligibility requirements to improve blood safety have
decreased the number of donors willing or able to donate blood. Thus, this
worldwide market is growing modestly in the low single digits.
In contrast to manual collections, automated procedures eliminate the need to
manually separate whole blood at a remote laboratory. Instead the blood
separation process is automated and occurs "real-time" while the blood donor is
attached to the blood collection system. In this separation method, only the
specific blood component targeted is collected, and the remaining components are
returned to the blood donor. Among other things, automated blood collection
allows significantly more of the targeted blood component to be collected during
a donation event.
Today in the U.S., automated collection systems are used to collect more than
550,000 red cell units and about 1.5 million platelet units (called "single
donor" platelets, because one donation from a single donor
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can produce enough platelets for a transfusible dose as compared to a pooled
platelet that is a blood product that combines platelet fractions from 6-8
different whole blood donors).
Our products currently address the small part of the blood collection market
that uses automation to enhance blood collection safety and efficiency, as well
as regulatory compliance. Though we compete against large companies including
Baxter International and Gambro, we are the only company whose business is
strongly focused on automated blood collection.
Blood Bank Systems
Automated Platelet Collection Systems
Automated platelet collection systems collect one or more therapeutic "dose" of
platelets during a single donation by a volunteer blood donor. Platelets derived
from non-automated donations of whole blood (also called manual collections)
must be "pooled" together with platelets from 6 to 8 other manual donations to
make a single therapeutically useful dose because platelets are only a very
small portion of whole blood volume. We invented the automation of platelet
collection, resulting in improved platelet yields and improved patient safety.
Platelet therapy is typically used to alleviate the side effects of bone marrow
suppression, a condition in which bone marrow is unable to produce a sufficient
quantity of platelets. Bone marrow suppression is most commonly a side effect of
chemotherapy. Physicians who prescribe platelet therapy have increasingly turned
to "single donor" platelet products (i.e., enough platelets collected from a
single donor, during an automated collection procedure, to constitute a
transfusible dose) to minimize a patient's exposure to multiple donors and
possible blood-borne diseases.
Related products that improve safety of platelets
Bacterial Detection
Over the past year, bacterial detection of platelets has become an important
trend in the transfusion industry. To reduce risks to patients receiving
transfusions, the U.S. and other countries have implemented requirements that
all platelets be tested for bacteria. Bacterial contamination is one of the most
common causes of transfusion-related death, but it also has other risks which
can result in longer hospitalization. In February 2004, we reached an agreement
with Hemosystem SA to market its bacterial screening technology, Scansystem(R)
in Europe, the Middle East, Africa, and Latin America for the next three years.
Local European evaluations of Scansystem have begun. Additionally, in the fourth
quarter of fiscal year 2004, we announced U.S. regulatory clearances for two
blood sampling systems. The systems are specifically designed to facilitate the
collection of a sample of platelets for the bacterial detection test. One system
is integrated into our platelet collection disposable kit and the other system
can be used to sample platelets collected through any other means.
Pathogen Reduction
Pathogen reduction technologies are processes to eliminate or reduce pathogens,
including viruses and bacteria, from blood prior to its transfusion to patients.
Pathogen reduction has been discussed by the transfusion community for many
years, and is in various stages of development and/or commercialization by
several companies, not including Haemonetics. In December 2001 we entered into
an agreement with
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Baxter International, Inc. ("Baxter") to enable us to seamlessly integrate our
platelet collection systems with Baxter's InterSOL which is a platelet storage
solution for use with Baxter's INTERCEPT(R) Platelet System for pathogen
reduction of platelets. To date, pathogen reduction of platelets is not
routinely practiced in most countries. However, because of our agreement with
Baxter we are poised to participate in this market should there be a trend
toward pathogen reduction.
Automated Blood Cell Processing Systems
Our cell processing business is based on technology that enables users to add
and remove solutions or other substances to and from blood components. We have
several technologies that support this business.
One technology allows the freezing and thawing of blood to enable blood banks to
better manage their red cell inventory. Although it has been possible to freeze
red cells for up to ten years, the freezing and thawing processes took place in
a manual, open-circuit system, which exposed red cells to the potential for
bacterial contamination. Once the cells were thawed, they had to be transfused
within 24 hours. The ACP(R)215 automated cell processing system extends thawed
cells' shelf life to 14 days by performing the freezing and thawing processes in
an automated, closed-circuit technology.
Another cell processing technology supports V.I. Technologies ("VITEX") in its
development efforts for pathogen reduction of red cells. Our technology washes
VITEX's pathogen inactivation agent out of the red cell units prior to
transfusion. VITEX is currently in Phase III acute transfusion studies for its
system. Through a supply agreement with Vitex, we provide VITEX with devices and
disposables for their processing operations.
Another cell processing technology washes red blood cells of plasma proteins for
patients at risk for allergic or anaphylactic reactions to transfusions. This
technology was U.S. regulatory cleared in September 2003.
Automated Red Cell Collection Systems
Automated red cell collection, which we also pioneered, allows for the safe and
efficient collection of more red cells from a single blood donor. Most often,
red cells are derived from manual collection of whole blood, after which the
components are separated. However, this manual procedure involves
time-consuming, error-prone secondary handling and processing in a laboratory
that tax a blood collector's limited resources. Red cell shortages are a common
problem plaguing many healthcare systems worldwide, particularly the U.S. The
most recent statistics available by the National Blood Data Resource Center show
that in 2001 nearly 13% of hospitals (versus 7% in 1999) canceled elective
surgeries at some point during the year as a result of low blood supplies.
Our MCS brand systems help blood collectors address their operational
challenges. The system automates the blood separation function, eliminating the
need for laboratory processing and enables the collection of two transfusible
doses of red cells from a single donor thus alleviating blood shortages. We call
this our two unit protocol or double red cell collection.
In addition to the two unit protocol, blood collectors can use the MCS brand
system to collect one unit of red cells and a "jumbo" (double) unit of plasma
from a single donor or they may leukoreduce their two unit red cell collections.
Leukoreduction is the removal of potentially harmful white blood cells from the
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blood. Leukoreduction has been adopted in many countries worldwide, and an
estimated 80% of all red cells in the U.S. are now leukoreduced.
During fiscal 2004, blood shortages continued and blood banks continued their
adoption of double red cell collection. United Blood Services, the second
largest collector of blood in the U.S., expanded its automated red cell program
to collect 30% of all of its red cells using our systems. Throughout the year,
the American Red Cross also expanded the use of our technology. We finished the
fiscal year with twelve new Red Cross regions using our systems. In total, our
systems are now installed at nineteen of the Red Cross' 36 regions. These
regions combined collect four million units of red cells annually, or about 25%
of the U.S. blood supply.
We submitted a 510(k) for FDA approval of the Chairside Separator(R) system,
which automates the whole blood collection process, during fiscal year 2002.
During fiscal year 2003, we directed research and development resources away
from the Chairside Separator to the Red Cell Collector, a portable, automated
device to collect and process two units of red cells from donors. These
resources were redirected due to a number of factors including the progress
already made on the Red Cell Collector and our belief that the market demand for
the Red Cell Collector would occur prior to a significant demand for a chairside
product. As the market for the Chairside Separator would be a new market for the
Company, this delay has no immediate impact on our results of operations or
financial condition. We will continue to advance the Red Cell Collector in
fiscal year 2005. We expect CE marking of this device during the second half of
fiscal 2005.
See the section entitled "Research and Development" for further discussion.
Surgical Blood Salvage Systems
Surgical blood salvage, also known as autotransfusion, involves the collection
of a patient's own blood during and after surgery, for reinfusion to that
patient. In surgical blood salvage, blood is suctioned from a wound site,
collected in a centrifuge, and cleaned and filtered to remove unwanted
substances from the recovered blood. The blood is transferred to a collection
bag and made available for transfusion back to the patient. This process occurs
in a sterile, closed-circuit; consumable set which sits inside our device. We
market our surgical blood salvage products to hospital-based medical
specialists, primarily cardiovascular, orthopedic, and trauma surgeons or to
surgical suite service providers.
Loss of blood is common in open heart, trauma, transplant, vascular, and
orthopedic procedures, and the need for transfusion of oxygen-carrying red cells
to make up for lost blood volume is routine. Prior to the introduction of our
technology, patients were transfused exclusively with blood from volunteer
donors. Donor blood carries various potential risks including (i) risk of
transfusion with the wrong blood type (the most common cause of
transfusion-related death), (ii) risk of transfusion reactions including death,
but more commonly chills, fevers or other side effects that can prolong a
patient's recovery, and (iii) risk of transfusion of blood with a blood-borne
disease or infectious agent.
As a result of numerous blood safety initiatives, today's blood transfusions are
extremely safe, especially in well developed and resourced health care systems.
However, transfusions are not risk free. Surgical blood salvage reduces or
eliminates a patient's dependence on blood donated from others and ensures that
the patient receives the safest blood possible - his or her own.
Surgical blood salvage is also a cost effective alternative for hospitals
compared to the total cost of transfusing donor blood. Blood shortages have also
reinforced the benefits of surgical blood salvage. As
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hospitals are forced to consider canceling elective surgeries, they can turn to
surgical blood salvage as a means of conserving their blood supply for other
patients.
We pioneered the first surgical blood salvage systems. Today, we market the Cell
Saver brand(R) system which is targeted to procedures that involve rapid, high
volume blood loss such as cardiovascular surgeries, as well as the OrthoPAT(R)
system which is targeted to orthopedic procedures that involve slower, lower
volume blood loss that often occurs well after surgery.
In July 2003, we announced a marketing agreement with Augustine Medical
Corporation International (a subsidiary of Arizant, Inc.) under which we now
market the Bair Hugger(R) surgical patient warming system in Japan. The Bair
Hugger system is a device and disposable blanket that warms a patient before,
during, and after surgery so that the patient's body temperature remains stable.
Published clinical studies demonstrate that maintaining normal body temperatures
during surgery can reduce the incidence of wound infection, bleeding, cardiac
events, and mortality.
In fiscal 2005, we will focus research and development efforts on a new surgical
blood salvage device, the CardioPAT brand system. This is a small, portable, and
operator-friendly cardiovascular surgical blood salvage device that will address
the beating heart surgical market. We expect this device will be in limited
market release by the second half of fiscal 2005.
(ii) Revenue Detail
We discuss our revenues using the following categories:
Disposables (the consumables used in blood collecting, processing, and
salvaging) Equipment (the devices) Miscellaneous and Service (including 5D
software management systems and service contracts)
In fiscal 2004, sales of disposable products accounted for approximately 89.4%
of net revenues. Sales of our disposable products were 9.2% higher in 2004 than
in 2003 and grew at a compound average annual growth rate of 6.9% for the three
years ended April 3, 2004. The 9.2% increase in disposable sales in fiscal 2004
was a result of volume increases in our red cell, blood bank and surgical
product lines partly offset by decreases in our plasma product line. Foreign
exchange contributed to about half of the disposable sales increase in fiscal
2004.
Sales of equipment accounted for approximately 4.6% of net revenues in fiscal
2004 and approximately 6.0% in fiscal 2003. The decrease in equipment revenue is
primarily attributable to decreases in the sales of our ACP 215 system in the
U.S., our platelet collection device in Japan, and our plasma collection device
in Europe.
Service and other miscellaneous revenues accounted for approximately 6.0% of net
revenues in fiscal 2004.
(iii) Marketing/Sales/Distribution
We market and sell our products to hospitals and hospital service providers,
blood systems and independent blood banks, commercial plasma collection centers,
and national health organizations through our own direct sales force (including
full-time sales representatives and clinical specialists) as
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well as independent distributors. Sales representatives target the primary
decision-makers within each of those organizations.
In fiscal 2004, we announced that for the fourth consecutive year we received
the Omega NorthFace ScoreBoard Award for exemplary service to customers. This
award is presented to the highest-ranked organizations based on customer ratings
of firms' actual performance against customer expectations in areas such as
phone support, on-site operations, technical services, and training.
(iv) United States
In fiscal 2004, approximately 35% of consolidated net sales were generated in
the U.S. where we use a direct sales force to sell the majority of our products.
We have an exclusive distribution agreement with Zimmer Holdings Inc. for the
sale and marketing of the OrthoPAT system within the U.S.
(v) Outside the United States
In fiscal 2004, approximately 65% of consolidated net revenues were generated
through sales to non-U.S. customers. Our direct sales force in Europe and Asia
includes full-time sales representatives and clinical specialists based in the
United Kingdom, Germany, France, Sweden, the Netherlands, Italy, Austria, Hong
Kong, Canada, Japan, Switzerland, Czech Republic, China, Taiwan, and Belgium. We
also use various distributors to market our products in South America, the
Middle East, and parts of Europe and the Far East.
(vi) Research and Development
We operate research and development ("R&D") centers in Switzerland, Japan, and
the United States, so that protocol variations are incorporated to closely match
local customer requirements. In addition to the above R&D facilities, our 5D
subsidiary maintains development operations in Edmonton, Alberta, Canada.
Customer collaboration is also an important part of our technical strength and
competitive advantage. We have built close working relationships with a
significant number of transfusion experts around the world. These individual
provides us with ideas for new products and applications, enhanced protocols,
and potential test sites as well as objective evaluations and expert opinions
regarding technical and performance issues.
The development of extracorporeal blood processing systems has required us to
maintain technical expertise in various engineering disciplines, including
mechanical, electrical, software, biomedical, and materials. Innovations
resulting from these various engineering efforts enable us to develop systems
that are faster, smaller, and more user-friendly, or that incorporate additional
features important to our customer base.
Our expenditures for R&D were $17.8 million for fiscal 2004 and $19.5 million
for both fiscal 2003 and fiscal 2002. All R&D costs are expensed as incurred. We
expect to continue to invest resources in R&D.
In fiscal 2004, we conducted an R&D prioritization initiative. During this
process, we scaled back our R&D resources and reviewed all products to determine
which were most important to bring to market quickly. Based on the
prioritization exercise, we determined that in fiscal 2005, the majority of R&D
resources would be allocated to completing work on a new surgical blood salvage
device, the CardioPAT
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and an enhanced MCS platelet collection platform. The CardioPAT surgical blood
salvage system is a small, portable, and operator-friendly cardiovascular
surgical blood salvage device designed to address low volume post operative
blood loss. We expect this device will be in limited market release in the
second half of fiscal 2005. Our new MCS platelet collection protocol adds
several new enhancements in response to customer feedback. We expect that this
device will be in clinical trials by the end of fiscal 2005. Additionally, we
are continuing to invest in the development of the Red Cell Collector. We expect
CE marking of this device during the second half of fiscal 2005.
(vii) Manufacturing
Our principal manufacturing operations (equipment, disposables, and solutions)
are located in Braintree, Massachusetts; Leetsdale, Pennsylvania; Union, South
Carolina; and Bothwell, Scotland.
In general, our production activities occur in a controlled setting or
"cleanroom" environment. Each step of the manufacturing and assembly process is
quality checked, qualified, and validated. Critical process steps and materials
are documented to ensure that every unit is produced consistently and meets
performance requirements.
Some component manufacturing is performed by outside contractors according to
our specifications. We maintain important relationships with two Japanese
manufacturers that provide finished consumables in Singapore, Japan, and
Thailand. Certain parts and components are purchased from various single
sources. If necessary, we believe that, in most cases, alternative sources of
supply could be identified and developed within a relatively short period of
time. Nevertheless, an interruption in supply could temporarily interfere with
production schedules and affect our operations. All of our equipment and
disposable manufacturing sites are certified to the ISO 9000 standard and to the
Medical Device Directive allowing placement of the CE mark of conformity.
Each blood processing machine is designed in-house and assembled from components
that are either manufactured by us or by others to our specifications. Many
critical mechanical assemblies are machined and fabricated utilizing our own
process control procedures. The completed instruments are programmed,
calibrated, and tested to ensure compliance with our engineering and quality
assurance specifications. Inspection checks are conducted throughout the
manufacturing process to verify proper assembly and functionality. When
mechanical and electronic components are sourced from outside vendors, those
vendors must meet detailed qualification requirements, and the components are
subjected to focused incoming inspection programs. During fiscal year 2004, we
manufactured approximately 75% of our equipment. The remainder was manufactured
for us by outside contractors.
We have established a Customer Oriented Redesign for Excellence ("CORE")
program, which is based on the tenets of Total Quality of Management ("TQM").
This program's goals include: 1) improving customer satisfaction through top
quality and on-time deliveries, 2) lowering production costs, and 3) optimizing
inventories.
(viii) Intellectual Property
We hold patents in the United States and many international jurisdictions on
some of our machines, processes and disposables. These patents cover certain
elements of our systems, including protocols employed in our equipment and
certain aspects of our processing chambers and disposables. We consider our
patents to be important but not indispensable to our business. To maintain our
competitive position, we rely to a greater degree on the technical expertise and
know-how of our personnel than on our patents. We pursue an active and formal
program of invention disclosure and patent application in both the United
12
States and international jurisdictions. We own various trademarks that have been
registered in the United States and certain other countries.
Our policy is to file patent and trademark applications in the U.S. and foreign
countries where rights are available and we believe it is commercially
advantageous to do so. However, the standards for international protection of
intellectual property vary widely. We cannot assure that pending patent and
trademark applications will result in issued patents and trademarks, that
patents issued to or licensed by us will not be challenged or circumvented by
competitors, or that our patents will not be found to be invalid.
(ix) Competition
We created our markets and have established a record of innovation and market
leadership in each of the areas in which we compete. Although we compete
directly with others, no one company competes with us across the full line of
products.
In order to remain competitive, we must continue to develop and acquire
cost-effective new products, technologies and services. We believe that our
ability to maintain a competitive advantage will continue to depend on a
combination of factors, including factors within our control (reputation,
regulatory approvals, patents, unpatented proprietary know-how in several
technological areas, product quality, safety and cost effectiveness and
continual and rigorous documentation of clinical performance) as well as factors
outside of our control (regulatory standards, medical standards and the practice
of medicine).
We innovated the plasma collection market. Prior to our invention of the PCS
system, plasma was collected manually, posing significant risks to donors. In
the automated plasma collection markets, we compete with Baxter International,
Inc. on the basis of quality, ease of use, services and technical features of
systems, and on the long-term cost-effectiveness of equipment and disposables.
To a much lesser degree, our automated systems also compete with manual
collection systems, which are less expensive, but are also slower, less
efficient, and clinically riskier. Baxter has pursued a strategy of developing
plasma collection sites and acquiring collection centers, which has altered the
competitive landscape and affected our sales. In October 2003, Baxter acquired
our largest U.S. plasma customer, Alpha Therapeutic Corporation ("Alpha"). Upon
Baxter's announcement of its acquisition of Alpha's business, Baxter closed 38
of 41 of the former Alpha centers and sold the remaining three centers. (These
three centers remain Haemonetics' customers.) While Baxter has begun closing
some of its plasma collection centers, there can be no assurance that it will
not acquire other plasma collection centers, some of which may currently use our
collection technology.
In the automated platelet collection markets, competition is based on continual
performance improvement, as measured by the time and efficiency of component
collection and the quality of the components collected. Our quality is
exceptional, as evidenced by more than 70% market share in Japan, where quality
is a leading purchasing consideration. Our major competitors in the automated
platelet collection market are Gambro BCT, Inc. and Baxter. Each of these
companies has taken a different technological approach in designing their
systems for the automated platelet collection market. In the platelet collection
market, we also compete with whole blood collections from which pooled platelets
are derived.
In the cell processing market, competition is based on level of automation,
labor-intensiveness, and system type (open versus closed). Open systems are
weaker in GMP compliance and blood processed through them has a 24 hour shelf
life. We do have open system cell processors which compete with
13
Gambro BCT systems. Our closed system cell processor gives blood processed
through it a 14 day shelf life and has no competition.
Our most recent innovation is automated red cell collection which we pioneered
in the late 1990s. We preceded one competitor, Gambro BCT, Inc. to market by 2
years, and the other competitor, Baxter, to market by six years. However, it is
important to note that currently less than 1% of the forty million red cells
collected worldwide annually are collected via automation. So, we more often
compete with traditional (manual) methods of deriving red cells by collecting
and separating a pint of whole blood on the basis of total cost, process
control, product quality, and inventory management.
We invented surgical blood salvage, and the Cell Saver brand is recognized
worldwide. In this high blood loss surgical market, competition is based on
reliability, ease of use, service, support, and price. Each manufacturer's
technology is similar, and we compete principally with Medtronic, Fresenius, and
Sorin Biomedica.
In the orthopedic surgical blood salvage market there are no direct competitors.
The OrthoPAT system is the only system designed specifically for use in these
surgeries where a patient often bleeds more slowly, bleeds less, and bleeds well
after surgery.
Our technical staff is highly skilled, but many competitors have substantially
greater financial resources and larger technical staffs at their disposal. There
can be no assurance that such competitors will not direct substantial efforts
and resources toward the development and marketing of products competitive with
those of Haemonetics.
(x) Seasonality
Net revenues have historically been higher in the second half of our fiscal
year, reflecting principally the seasonal buying patterns of our customers. This
has proven true in four of our last five fiscal years with the exception being
fiscal 2003 where the second half of our fiscal year had slightly lower revenues
due principally to market conditions in plasma.
(xi) Government Regulation
The products we manufacture and market are subject to regulation by the Center
of Biologics Evaluation and Research ("CBER") and the Center of Devices and
Radiological Health ("CDRH") of the United States Food and Drug Administration
("FDA"), and other non-United States regulatory bodies.
All medical devices introduced to the United States market since 1976 are
required by the FDA, as a condition of marketing, to secure either a 510(k)
pre-market notification clearance or an approved Pre-market Approval Application
("PMA"). In the United States, software used to automate blood center operations
and blood collections and to track those components through the system are
considered by FDA to be medical devices, subject to 510(k) pre-market
notification. Intravenous ("IV") solutions marketed by us for use with our
automated systems (blood anticoagulants and solutions for storage of red blood
cells) require us to obtain from CBER an approved New Drug Application ("NDA")
or Abbreviated New Drug Application ("ANDA"). A 510(k) pre-market clearance
indicates FDA's agreement with an applicant's determination that the product for
which clearance is sought is substantially equivalent to another legally
marketed medical device. The process of obtaining a 510(k) clearance may take up
to 24 months and involves the submission of clinical data and supporting
information. The process of obtaining NDA approval for solutions is likely to
take much longer than 510(k) approvals both
14
because the FDA review process is more complicated and because we do not have
significant experience and expertise in submitting NDAs.
We maintain customer complaint files, record all lot numbers of disposable
products, and conduct periodic audits to assure compliance with FDA regulations.
We place special emphasis on customer training and advise all customers that
blood processing procedures should be undertaken only by qualified personnel.
We are also subject to regulation in the countries outside the United States in
which we market our products. Many of the regulations applicable to our products
in such countries are similar to those of the FDA. However, the national health
or social security organizations of certain countries require our products to be
qualified by those countries before they can be marketed in those countries. We
have complied with these regulations and have obtained such qualifications.
Federal, state and foreign regulations regarding the manufacture and sale of
products such as ours are subject to change. We cannot predict what impact, if
any, such changes might have on our business.
(xii) Environmental Matters
We do not anticipate that compliance with federal, state, and local
environmental protection laws presently in effect will have a material adverse
impact upon our business or will require any material capital expenditures.
However, environmental laws, including those that regulate raw materials for
medical grade plastics, are subject to change. We cannot predict what impact, if
any, such changes might have on our business.
(xiii) Employees
As of April 3, 2004, we employed 1,438 persons assigned to the following
functional areas: manufacturing, 760; sales and marketing, 199; general and
administrative, 163; research and development, 119; and quality control and
field service, 197. We consider our employee relations to be satisfactory.
(xiv) Availability of Reports and Other Information
All of the our corporate governance materials, including the Principles of
Corporate Governance, the Business Conduct Policy and the charters of the Audit,
Compensation, and Nominating and Governance Committees are published on the
Investor Relations section of the Haemonetics website at
http://www.haemonetics.com/site/content/investor/investor.asp. Such information
is also available in print to any shareholder who requests it. All requests
should be directed to our Company's Clerk. On this web site the public can also
access, free of charge, our annual, quarterly and current reports and other
documents filed or furnished to the Securities and Exchange Commission as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The financial information required by this item is included herein in note 17 of
the financial statements, entitled Segment, Geographic and Customer Information.
Sales to the Japanese Red Cross accounted for 24.1% of net revenues in fiscal
2004. No other customer accounted for more than 10% of our net
15
revenues. For more information concerning significant customers, see subheading
of note 2 of the financial statements, entitled, Concentration of Credit Risk
and Significant Customers.
Cautionary Statement
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 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 2. PROPERTIES
Our main facility is located on 14 acres in Braintree, Massachusetts. This
facility is located in a light industrial park and was constructed in the 1970s.
The building is approximately 180,000 square feet, of which 70,000 square feet
are devoted to manufacturing and quality control operations, 35,000 square feet
to warehousing, 68,000 square feet for administrative and research and
development activities and 7,000 square feet available for expansion. See Note 8
to the financial statements for details of our mortgage on the Braintree
facility.
On property adjacent to the Braintree facility the company leases 43,708 of
additional office space. This facility is used for sales, marketing, finance and
other administrative services. Annual lease expense for this facility is
$591,330.
We lease a 81,850 square foot facility in Leetsdale, Pennsylvania. This facility
is used for warehousing, distribution and manufacturing operations. Annual lease
expense is $311,330 for this facility.
We own a facility in Bothwell, Scotland used to manufacture disposable
components for European customers. The facility is approximately 22,200 square
feet.
We manufacture sterile solutions to support our blood bank (component therapy)
and plasma businesses at a facility in Union, South Carolina. The facility is
approximately 69,300 square feet.
16
We also lease a 48,000 square foot facility in Avon, Massachusetts. This
facility is used for warehousing and distribution of products. Effective May
2004 leased space at this facility was increased to 61,000 square feet. Annual
lease expense for this facility is $366,549.
Effective January 2002, we acquired Fifth Dimension Information Systems Inc. and
as part of the acquisition the Company assumed lease payments of $115,701
annually for 10,183 square feet of office space in Edmonton, Alberta, Canada.
We also lease sales, service, and distribution facilities in Japan, Europe
(Austria, Belgium, Czech Republic, France, Germany, Italy, Sweden, Switzerland,
the Netherlands, United Kingdom) China, Hong Kong and Taiwan to support our
international business.
ITEM 3. LEGAL PROCEEDINGS
We are presently engaged in various legal actions, and although ultimate
liability cannot be determined at the present time, we believe that any such
liability will not materially affect our consolidated financial position or our
results of operations.
Our products are relied upon by medical personnel in connection with the
treatment of patients and the collection of blood from donors. In the event that
patients or donors sustain injury or death in connection with their condition or
treatment, we, along with others, may be sued, and whether or not we are
ultimately determined to be liable, we may incur significant legal expenses. In
addition, such litigation could damage our reputation and, therefore, impair our
ability to market our products or to obtain professional or product liability
insurance or cause the premiums for such insurances to increase. We carry
product liability coverage. While we believe that the aggregate current coverage
is sufficient, there can be no assurance that such coverage will be adequate to
cover liabilities which may be incurred. Moreover, we may in the future be
unable to obtain product and professional liability coverages in amounts and on
terms that we find acceptable, if at all.
In order to aggressively protect our intellectual property throughout the world,
we have a program of patent disclosures and filings in markets where we conduct
significant business. While we believe this program is reasonable and adequate,
the risk of loss is inherent in litigation as different legal systems offer
different levels of protection to intellectual property, and it is still
possible that even patented technologies may not be protected absolutely from
infringement.
On January 21, 2004, we filed a claim for binding arbitration against Baxter,
seeking an arbitration award that compels Baxter to honor numerous supply
contracts it assumed when Baxter purchased the plasma collection operations of
Alpha Therapeutic Corporation, our largest plasma customer, or to pay us
damages. The outcome of this arbitration in unknown at this time. See "Market
Trends" in Management's Discussion and Analysis for further details of this
action.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
The information concerning our Executive Officers is as follows. Executive
officers are elected by and serve at the discretion of our Board of Directors.
PETER ALLEN joined our Company in 2003 as President, Donor Division. Prior to
joining our Company, Mr. Allen was Vice President of The Aethena Group, a
private equity firm providing services to the global healthcare industry. From
1998 to 2001, he held various positions including Vice President of Sales and
the Oncology Business at Syncor International, a provider of radiopharmaceutical
and comprehensive medical imaging services. Previously, he held executive level
positions in sales, marketing and operations in DataMedic, Inc., Enterprise
Systems, Inc./HBOC, and Robertson Lowstuter, Inc. Mr. Allen has also worked in
sales at American Hospital Supply Corporation and Baxter International, Inc.
BRIAN CONCANNON joined our Company in 2003 as President, Patient Division. Prior
to joining our Company, Mr. Concannon was President, Northeast Region, Cardinal
Health Medical Products and Services. From 1996 to 1999, he was with Allegiance
Healthcare, most recently holding the position of Vice President, Distribution
Sales and Operations. Mr. Concannon has also held various sales and marketing
positions at American Hospital Supply Corporation and Baxter Healthcare
Corporation.
ROBERT EBBELING joined our Company in 1987 as Manager of Injection Molding.
Throughout his career at our Company, Mr. Ebbeling has held various management
and executive positions in manufacturing and operations. In 1996, he was
appointed to Senior Vice President, Manufacturing. In February 2003, Mr.
Ebbeling was promoted to Executive Vice President, Manufacturing, and then in
August 2003, he was promoted to Vice President, Operations. Prior to joining our
Company, Mr. Ebbeling was Vice President, Manufacturing, for Data Packaging
Corporation.
DR. ULRICH ECKERT joined our Company in 1995 as Vice President, Haemonetics
Germany. In 1998 and 2001, Dr. Eckert assumed additional responsibility for
European plasma marketing and our Nordic countries' subsidiaries respectively.
In 2002, he was promoted to President, Europe and Latin America. In 2003, Dr.
Eckert joined our Corporate Staff. Prior to joining our Company, Dr. Eckert
spent eight years with Apple Computer where his most recent responsibility was
Director, Business Systems for Germany, Austria and Switzerland.
ALICIA R. LOPEZ joined our Company in 1988 as General Counsel and Director of
Human Resources. Throughout her career at Haemonetics, Ms. Lopez has held
various executive positions with responsibilities over legal, human resources,
administration, regulatory affairs, and investor relations. Since 1990, she has
served as Clerk to the Board of Directors. In 2000, Ms. Lopez was appointed
Senior Vice President. In 2003, Ms. Lopez was named Vice President and General
Counsel and in 2004 she was promoted to General Counsel and Vice President of
Administration. Prior to joining our Company, Ms. Lopez was a litigation
associate with the law firm of Sullivan & Worcester.
BRAD NUTTER joined our Company in 2003 as Board Member, President and Chief
Executive Officer. Prior to joining our Company, Mr. Nutter was President and
Chief Executive Officer of Gambro Healthcare, an international dialysis
provider, a division of Gambro AB. From 1997 to 2000, he was Executive Vice
President and Chief Operating Officer of Syncor International, an international
provider
18
of radiopharmaceuticals and medical imaging. Previously, Mr. Nutter held senior
level positions at American Hospital Supply Corporation and Baxter
International, Inc.
RONALD J. RYAN joined our Company in 1998 as Senior Vice President and Chief
Financial Officer. In 2003, Mr. Ryan was named Vice President and Chief
Financial Officer. Prior to joining our Company, he held the position of Chief
Financial Officer and later Senior Vice President of Operations with Converse
Inc. From 1984 to 1990, Mr. Ryan was Vice President of Finance and Business
Planning for the Europe, Middle East and Africa Division of Bristol-Myers
Squibb.
DR. YUTAKA SAKURADA joined our Company in 1991 as Board Member and President,
Haemonetics Japan. In 2001, Dr. Sakurada was promoted to Chairman and CEO of
Haemonetics Japan. In 2003, he was named President Japan/Asia in addition to his
responsibilities as Chairman and CEO of Haemonetics Japan. Prior to joining our
Company, Dr. Sakurada was Managing Director of Kuraray Plastic Company Ltd., a
diversified synthetic fiber company, in Japan. From 1985 to 1989, Dr. Sakurada
was a member of the Board of Kuraray.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is listed on the New York Stock Exchange under symbol HAE. The
following table sets forth for the periods indicated the high and low sales
prices of such common stock, which represent actual transactions as reported by
the New York Stock Exchange.
-----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------
Fiscal year ended April 3, 2004:
Market price of
Common Stock
High $23.75 $24.30 $24.00 $32.50
Low $17.35 $16.30 $21.70 $23.52
Fiscal year ended March 29, 2003:
Market price of
Common Stock
High $34.80 $29.20 $25.75 $23.08
Low $28.10 $22.51 $18.02 $19.45
There were approximately 591 holders of record of the Company's common stock as
of May 14, 2004. The Company has never paid cash dividends on shares of its
common stock and does not expect to pay cash dividends in the foreseeable
future.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Haemonetics Corporation and Subsidiaries
Five-Year Review
(in thousands, except share and employee data)
- -------------------------------------------------------------------- -------- -------- -------- --------
Summary of Operations 2004 2003 2002 2001 2000
- -------------------------------------------------------------------- -------- -------- -------- --------
Net revenues $ 364,229 $336,956 $319,969 $293,860 $280,612
Cost of goods sold 192,109 182,260 165,135 151,447 149,155
--------- -------- -------- -------- --------
Gross profit 172,120 154,696 154,834 142,413 131,457
--------- -------- -------- -------- --------
Operating expenses:
Research and development 17,793 19,512 19,512 19,039 14,943
Selling, general and administrative 108,450 97,705 88,874 86,734 82,895
Acquired research and development -- -- 10,000 18,606 2,871
Other unusual charges -- -- -- 4,614 10,305
--------- -------- -------- -------- --------
Total operating expenses 126,243 117,217 118,386 128,993 111,014
--------- -------- -------- -------- --------
Operating income 45,877 37,479 36,448 13,420 20,443
Other income (expense), net (65) 1,128 2,057 3,906 3,254
--------- -------- -------- -------- --------
Income from continuing operations
before provision for income taxes 45,812 38,607 38,505 17,326 23,697
Provision for income taxes 16,492 10,228 10,782 10,090 8,471
--------- -------- -------- -------- --------
Income from continuing operations before cumulative
effect of a change in accounting principle 29,320 28,379 27,723 7,236 15,226
--------- -------- -------- -------- --------
Income from discontinued operations -- -- -- -- 144
Cumulative effect of a change in accounting principle -- -- 2,304 (a) -- --
--------- -------- -------- -------- --------
Net income 29,320 28,379 $ 30,027 $ 7,236 $ 15,370
========= ======== ======== ======== ========
Income per share:
Basic $ 1.20 $ 1.15 $ 1.15 $ 0.29 $ 0.59
Diluted $ 1.19 $ 1.13 $ 1.11 $ 0.28 $ 0.58
Weighted average number of shares 24,435 24,591 26,214 25,299 26,087
Common stock equivalents 260 457 941 706 414
--------- -------- -------- -------- --------
Weighted average number of common
and common equivalent shares 24,695 25,048 27,155 26,005 26,501
========= ======== ======== ======== ========
Financial and Statistical Data: 2004 2003 2002 2001 2000
- -------------------------------------------------------------------- -------- -------- -------- --------
Working capital $ 185,606 $122,880 $148,737 $139,717 $121,443
--------- -------- -------- -------- --------
Current ratio 2.9 2.2 2.8 2.8 2.4
Property, plant and equipment, net $ 78,030 $ 83,987 $ 84,877 $ 83,251 $ 81,608
--------- -------- -------- -------- --------
Capital expenditures $ 13,862 $ 16,715 $ 23,509 $ 16,146 $ 17,346
Depreciation and amortization $ 30,149 $ 28,431 $ 25,616 $ 24,499 $ 24,906
--------- -------- -------- -------- --------
Total assets $ 407,394 $359,485 $364,921 $345,314 $334,760
Total debt $ 58,260 $ 70,617 $ 72,143 $ 69,719 $ 74,202
--------- -------- -------- -------- --------
Stockholders' equity $ 279,749 $223,237 $236,824 $215,516 $202,815
Return on average equity 11.7% 12.3% 13.3% 3.5% 7.2%
Debt as a % of stockholders' equity 20.8% 31.6% 30.5% 32.3% 36.6%
--------- -------- -------- -------- --------
Employees from continuing operations 1,438 1,497 1,498 1,357 1,328
Net revenues per employee
from continuing operations $ 253 $ 225 $ 214 $ 217 $ 211
--------- -------- -------- -------- --------
(a) Effective April 1, 2001, the Company adopted SFAS 133, as amended, which
resulted in the recognition of $2.3 million as a cumulative effect of a change
in accounting principle, net of tax.
This amount is the change in the fair value of forward contracts related to
forward points, which the Company excludes from its assessment of hedge
effectiveness.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Business
We design, manufacture and market automated systems for the collection,
processing and surgical salvage of donor and patient blood, including the
single-use disposables used with our systems and related data management
software. Our systems allow users to collect and process only the blood
component(s) they target, red blood cells, platelets or plasma, increasing donor
and patient safety as well as collection efficiencies. Our systems consist of
proprietary disposable sets that operate on our specialized equipment. Our data
management systems are used by blood collectors to improve the safety and
efficiency of blood collection logistics by eliminating previously manual
functions at commercial plasma and not-for-profit blood banks.
As a general practice we place our equipment at customers' sites, with
contractual requirements that customers purchase a certain number of disposables
in a predetermined time frame. This disposable revenue stream accounts for about
90% of our total revenues.
During fiscal 2004, we reorganized our business into two global product
families: donor and patient. This reorganization redefined our customer and
allowed us to expand our customer base to better position us for future growth.
Product Families
Our donor products include systems to collect plasma, platelets and red cells
from blood donors. We market our donor products primarily to blood collectors
which include both for-profit plasma collectors and not-for-profit blood banks.
Our patient products include systems to collect (during and after surgery), wash
and filter unwanted substances from the blood prior to reinfusion to the
surgical patient. We market these patient products to hospitals and hospital
service providers.
Miscellaneous and service revenue includes revenue generated from equipment
repairs performed under preventive maintenance contracts or emergency service
billings, as well as revenue from our software division, Fifth Dimension ("5D").
Donor Products
Plasma
o Plasma collection systems - These systems are used by plasma
collectors to collect the plasma component of a donor's whole blood.
The plasma is sold to fractionators for processing into therapeutic
pharmaceuticals and vaccines. Automated plasma collection is a safe
and cost-effective improvement to manual (non-automated) plasma
collection which is time-consuming, labor-intensive, produces
relatively poor yields, and poses risk to donors. Currently the vast
majority of plasma collections worldwide are automated collections.
22
Blood Bank
o Platelet collection systems - These systems are used by blood
collectors to collect the platelet component of a donor's whole
blood. Platelets are transfused to cancer patients whose platelets
have been depleted as a result of chemotherapy. Before the advent of
our platelet collection technology, the "pooling" or combination of
platelets from six to eight different donors was necessary to
prepare a single therapeutic dose for transfusion to a patient. Our
MCS(R) line of products allows the collection of a sufficient number
of platelets from only one donor to produce one or two therapeutic
doses.
o Cell Processing systems - These systems are used to freeze, thaw and
wash red cells, which enables blood collectors to better manage
their red cell inventories. In a liquid state, red cells must be
transfused within 42 days whereas frozen red cells may be stored for
up to ten years. Previous generation freezing technology required
that red cells be transfused within 24 hours after thawing; Our
ACP(R) 215 systems allow red cells to be transfused for up to 14
days post thaw.
Red Cell
o These systems are used to automate the collection of red cells from
blood donors, improving the blood collector's operational efficiency
by increasing the volume of red cells collected per donation event
and eliminating manual processing. Just as important, these systems
collect twice the volume of red cells than the traditional
(non-automated) collection method help blood systems address red
cell shortages that commonly plague health care systems.
Patient Products
Surgical
o Surgical blood salvage systems - These systems are used by hospitals
for the collection of a patient's own blood during or after surgery
for reinfusion to the patient, mitigating or eliminating the need
for transfusion of donated blood. We market Cell Saver(R) brand
systems for higher blood loss procedures such as cardiovascular
surgeries and the OrthoPAT (R) brand system for lower blood loss
orthopedic surgeries.
23
Financial Summary
For the years ended
%Increase/ %Increase/
April 3, March 29, March 30, (Decrease) (Decrease)
(in thousands, except per share data) 2004 2003 2002 04 vs. 03 03 vs. 02
------------------------------------------------------------------------------------------
Net revenues $364,229 $336,956 $319,969 8.1% 5.3%
Gross profit 172,120 154,696 154,834 11.3% (0.1)%
% of net revenues 47.3% 45.9% 48.4%
Operating income 45,877 37,479 36,448 22.4% 2.8%
% of net revenues 12.6% 11.1% 11.4%
Provision for income tax 16,492 10,228 10,782 61.2% (5.1)%
% of net revenues 4.5% 3.0% 3.4%
Net income $29,320 $28,379 $30,027 3.3% (5.5)%
% of net revenues 8.0% 8.4% 9.4%
Earnings per share-diluted $1.19 $1.13 $1.11 5.3% 1.8%
Net revenues for fiscal 2004 increased 8.1% over fiscal 2003. The favorable
effects of foreign exchange contributed 5.2% of the increase with the remaining
2.9% resulting from disposable volume increases in our red cell, blood bank and
surgical product lines and targeted price increases, partly offset by volume
decreases in our plasma product line. The increase in miscellaneous and service
revenue was more than offset by volume decreases in equipment revenue. Revenues
for the current year were also positively impacted by the addition of the 53rd
week in our fiscal year, resulting from the policy that we use to determine our
fiscal year end.
Higher sales, the positive effects of foreign exchange, and cost reductions
resulted in a gross profit increase of 11.3% versus fiscal 2003. Operating
income increased 22.4% over fiscal 2003 due to gross profit improvements from
sales increases, foreign exchange, cost reductions, and the net favorable impact
resulting from the 53rd week in our fiscal year, which included both additional
revenues and operating expenses. Net income increased 3.3% as compared to last
year. This increase was a reflection of higher operating income partly offset by
the increase in our income tax rate to 36% this year versus 26.5% last year due
to a $4.0 million tax refund recorded during fiscal 2003.
Market Trends
Plasma Market
Despite the continued increase in demand for plasma derived pharmaceuticals,
three significant factors have and are expected to continue to cause volatility
in the worldwide commercial plasma collection markets:
o The commercial plasma industry experienced significant consolidation among
plasma collectors and fractionators. Continued consolidation is likely. Industry
consolidation impacts us when a collector
24
changes the total number of its collection centers, the total number of
collections performed per center or changes the plasma collection system
(Haemonetics or competitive technology) used to perform some or all of those
collections.
o An oversupply of source plasma has reduced the number of collection procedures
performed annually worldwide. This phenomenon affected us especially in the
second half of fiscal year 2004 and is expected to continue to affect us in
fiscal year 2005. However, we believe that the current oversupply of source
plasma will be reduced in the next 12 to 18 months, allowing collection activity
to return to levels that are consistent with the current demand for the
therapeutic pharmaceuticals and vaccines.
o The newer plasma fractionation facilities make more efficient use of plasma in
their production processes, utilizing less plasma to make similar quantities of
pharmaceuticals and vaccines.
In April of 2004, two of our non-exclusive commercial plasma customers merged to
form the combined ZLB Behring. In May of 2004, ZLB Behring announced plans to
close 35 of its combined 100 collection centers, and to reduce its annual plasma
collection volume by approximately one million litres. ZLB Behring uses both our
systems as well as those of a competitor to collect plasma. We expect to lose
approximately $3.0 million of revenue that we had planned for ZLB Behring as a
result of these reductions.
Our largest U.S. plasma customer, Alpha Therapeutic Corporation ("Alpha") was
acquired by Baxter Healthcare Corporation ("Baxter"), effective October 2003.
During fiscal year 2003 and for the first seven months of fiscal 2004, Alpha was
our largest U.S. customer of plasma collection disposables. It had over 1,000
plasma collection devices loaned or leased from us. Our sales to Alpha were
governed by long term purchase and supply contracts that required Alpha to
purchase plasma collection disposables exclusively from Haemonetics and to meet
annual minimum purchase obligations for disposable kits, plasma anticoagulant
solutions and plasma collection bottles. The exclusivity provisions of the
contracts lapse over time beginning in January 2005 and ending in January 2009.
The minimum purchase requirements of the contracts lapse over time beginning in
January 2006 and ending in January 2009. Sales to Alpha totaled $9.2 million and
$19.5 million in fiscal 2004 and 2003, respectively.
Upon Baxter's October 20, 2003 announcement of its acquisition of Alpha's
business, Baxter closed 38 of 41 of the former Alpha centers and sold the
remaining three centers. (These three centers remain Haemonetics' customers.)
Baxter immediately stopped purchasing our plasma collection products (disposable
bowls, bottles and solutions). We had no sales to Alpha in the fourth quarter of
fiscal 2004 compared to $4.7 million in the same quarter last year. For fiscal
2005, the loss of Alpha related revenues will result in decreased revenue in the
U.S. of approximately $9.0 million.
Provisions in our supply contracts signed with Alpha included protections in
case of a change in ownership. In particular the contracts required that if
Alpha were sold, the buyer must assume the obligations of the contracts. On
January 21, 2004, we filed a claim for binding arbitration against Baxter,
seeking an arbitration award that compels Baxter to honor its obligations to
Haemonetics in the contracts it assumed, or to pay us damages.
We have evaluated the likely future use and recoverability of certain
disposables inventories and plasma collection devices that supported the Alpha
business, as well as an intangible asset related to our plasma collection bottle
business. In connection with this evaluation we established reserves of $1.2
million in fiscal 2004 for inventories and devices in accordance with our excess
and obsolescence policy.
25
Blood Bank Market
Despite moderate increases in the demand for platelets in our major markets,
improved collection efficiencies that increase the yield of platelets per
collection event have resulted in a flat market for collection disposables.
Several factors could affect the future demand for and collection of platelets
including:
o An emerging practice to test platelets for bacteria may result in a need to
collect more platelets, as the usable life of platelets collected (up to 5 days)
is generally shortened by up to one day as a result of the bacterial detection
process. The market may also shift towards platelets collected via automation as
the test for bacteria would only need to be performed once, as opposed to six to
eight times for each whole blood derived platelet collection.
o While the initial interest in pathogen reduction technology has abated there
is still interest over a longer horizon in the technology in all regions,
particularly Japan.
o Past outbreaks of Severe Acute Respiratory Syndrome (SARS) in China resulted
in the cancellation or delay of elective surgeries and a reduction in willing
donors due to concerns about the communication of SARS in the region. A
recurrence could result in fewer platelet collections.
Red Cell Market
Blood shortages, a need for greater operating efficiency, and a stringent
regulatory environment continue to drive demand for our red cell product. There
are now two competitive products on the market: one from Gambro BCT and one from
Baxter. The Baxter product was introduced in May of 2003, but is only now
beginning to be placed in the market and there has been little effect on our
business from this competitive introduction. We can not predict what effect
competition will have on our business during fiscal year 2005.
Our business continues to grow as we gain new customers and expand our
penetration at existing customer sites. Additionally, over the past year our
profitability has been increased as more customers have migrated to our filtered
disposable sets which support our customers' good manufacturing processes by
reducing manual processing. We expect red cell growth to continue in fiscal year
2005.
Surgical Market
The part of the U.S. surgical blood salvage market that is aimed at higher blood
loss procedures is a mature market that is declining and may continue to decline
due to improved surgical techniques minimizing blood loss and a decrease in the
number of open-heart (bypass) surgeries performed. As technology improves as
seen by the continuous improvements made to coronary stents and angioplasty the
preference of surgeons may shift to minimally invasive surgical procedures,
reducing the number of open-heart surgeries performed.
The main driver of growth for us in this market is the lower blood loss
orthopedic procedures served by our OrthoPAT system. In January, we renewed our
agreement with Zimmer Holdings, Inc. ("Zimmer"), our exclusive U.S. marketing
partner which we believe will sustain our position in this market. We sell the
OrthoPAT system direct in our other major markets.
26
RESULTS OF OPERATIONS
FISCAL 2004 AS COMPARED TO FISCAL 2003
Net Revenues
By geography
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
---------------------------------------------------------
United States $126,872 $127,241 ($369) (0.3%)
International 237,357 209,715 27,642 13.2
---------------------------------------------------------
Net revenues $364,229 $336,956 $27,273 8.1%
=========================================================
International Operations and the Impact of Foreign Exchange
Our principal operations are in the U.S., Europe, Japan and other parts of Asia.
Our products are marketed in more than 50 countries around the world via a
direct sales force as well as independent distributors.
Approximately 65% of our revenues during fiscal year 2004 were generated outside
the U.S.. Revenues in Japan accounted for approximately 27% and 28% of total
revenues for fiscal 2004 and 2003, respectively. The European region comprised
approximately 30% and 26% of our total revenues for fiscal 2004 and 2003,
respectively. These sales are primarily conducted in local currencies,
specifically the Japanese Yen and the Euro. Accordingly, our results of
operations are significantly affected by changes in the value of the Yen and the
Euro relative to the dollar. The favorable effects of foreign exchange resulted
in a 5.2% increase in sales, greater than 60% of the total increase in sales.
Please see section entitled "Foreign Exchange" in this management's discussion
for a more complete discussion how foreign currency affects our business and our
strategy to manage this exposure.
By product type
$ %
(in thousands) April 3, March 29, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
----------------------------------------------------
Disposables $325,540 $298,220 $ 27,320 9.2%
Misc. & service 22,002 18,355 3,647 19.9
Equipment 16,687 20,381 (3,694) (18.1)
---------------------------------------------------
Net revenues $364,229 $336,956 $ 27,273 8.1%
===================================================
27
Disposables revenue by product line
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
-------------------------------------------------------
Donor:
Plasma $114,346 $114,436 $ (90) (0.1)%
Blood bank 112,209 99,921 12,288 12.3
Red Cells 22,321 15,542 6,779 43.6
---------------------------------------------------
Subtotal $248,876 $229,899 $ 18,977 8.3%
Patient:
Surgical 76,664 68,321 8,343 12.2
---------------------------------------------------
Total disposables revenue $325,540 $298,220 $ 27,320 9.2%
===================================================
Donor
Disposable revenue for donor products increased 8.3% compared to the prior year.
The favorable effects of foreign exchange resulted in a 5.1% increase in
revenues, with the remaining 3.2% increase in revenues resulting primarily from
volume increases and to a lesser extent pricing increases and other factors as
detailed below.
Plasma
The favorable effects of foreign exchange resulted in a 4.0% increase in plasma
disposable revenue. An entirely offsetting decrease in plasma disposables
revenue resulted from reduced volumes in most markets, especially in the latter
half of the year, most notably the loss of our largest U.S. customer, Alpha (See
"Market Trends" section above for a more detailed discussion of the U.S. plasma
market.), partly offset by increases especially earlier in the year in Europe as
additional collection centers opened in the second half of fiscal 2003, and
volume increases in Asia. The volume increases in Asia were due to market share
gains as a result of superior quality over the competitive product and a
temporary increase in fiscal 2004 demand for plasma derivatives as a result of
the SARS virus.
Blood bank
The favorable effects of foreign exchange resulted in a 6.0% increase in blood
bank disposable revenues as the majority of our platelet sales occur in Europe
and Japan. These regions also increased sales as we achieved market share gains
due to enhancements to our platelet collection systems and our reputation for
quality.
Red Cell
Adoption of our technology increased in fiscal 2004 as more blood collectors
sought to increase the supply of red cells from a declining number of eligible
donors, to reduce collection costs, and to improve operating quality and
efficiency. 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 revenue increase.
28
Patient
Surgical
The favorable effects of foreign exchange resulted in a 5.7% increase in
surgical disposable revenue. The remaining increase in surgical disposable
revenue of 6.5% was primarily due to increases in our OrthoPAT disposable
products. OrthoPAT sales increased as U.S. and European orthopedic surgeons
continue to adopt surgical blood salvage as an effective alternative to patient
pre-donation and blood transfusions in hip and knee replacements and other
orthopedic surgeries. We recently announced signing a five year extension to our
distribution agreement with Zimmer, the distributor of our OrthoPAT product in
the U.S., which positions us for continued growth in this market. Our
traditional surgical blood salvage business was down slightly year over year.
See discussion of the reasons for this in the "Market Trends" section.
Other Revenues
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Miscellaneous & Service $22,002 $18,355 $3,647 19.9%
Equipment 16,687 20,381 (3,694) (18.1)
----------------------------------------------------
Total other revenues $38,689 $38,736 ($47) (0.1)%
====================================================
Our miscellaneous and service revenue includes revenue from repairs performed
under preventative maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, 5D.
Miscellaneous and service revenue increased 4% due to foreign exchange. The
remaining increase resulted from several factors, most notably: (i) 7 % due to
preventative maintenance contract increases in line with the increasing
installed base of automated red cell collection devices, and (ii) 9% due to
increased software revenues from 5D of $1.6 million.
The 18.1% decrease in equipment revenue versus fiscal 2003 is primarily
attributable to three factors:(i) prior year sales of the ACP 215 system were
positively impacted during its initial rollout to the U.S. military, (ii)
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 and (iii) equipment revenue from the sale of our plasma
collection devices to new customers in Europe during fiscal 2003 was not
duplicated in the current fiscal year.
Due to the variable nature of equipment sales, the level of equipment sales can
not be easily forecasted.
Gross profit
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
---------------------------------------------------------------------
Gross profit $172,120 $154,696 $17,424 11.3%
% of net sales 47.3% 45.9%
29
Of the $17.4 million increase in gross profit, approximately 50% was a result of
the favorable effects of currency. The remaining increase was due primarily to
the impact of our higher sales, which included targeted price increases. Other
factors impacting our gross profit were offsetting and included $5.6 million of
cost savings from our Customer Oriented Redesign for Excellence ("CORE") program
offset by a $2.1 million increase in our excess and obsolete provision and other
cost increases.
Operating Expenses
$ %
(in thousands) April 3, March 29, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
-------------------------------------------------------
Research and development $ 17,793 $ 19,512 ($ 1,719) (8.8%)
Selling, general and administrative 108,450 97,705 10,745 11.0
---------------------------------------------------
Total operating expenses $126,243 $117,217 $ 9,026 7.7%
---------------------------------------------------
Research and Development
The $1.7 million decrease in research and development expense is related to
lower costs as a result of the personnel reductions (see note 18). In fiscal
2004, we reviewed our R&D projects and plan to prioritize the completion of the
development of the CardioPAT, a platform for the cardiovascular market,
enhancements to our MCS multi component platform for platelet collection and the
Red Cell Collector. The CardioPAT is scheduled for limited market release during
the second half of fiscal year 2005. The MCS platelet collection system
enhancements are scheduled for clinical trials by the end of fiscal year 2005.
We expect CE marking of the Red Cell Collector in the second half of fiscal
2005.
Selling, general and administrative
Approximately 60% of the $10.7 million increase in selling, general and
administrative is due to foreign exchange. The other significant components of
the increase were $2.7 million of severance costs recognized in fiscal 2004
related to our reorganization which reduced our worldwide workforce by 4.0% (see
note 17) and the additional week of expenses in fiscal 2004 (53rd week) as
compared to fiscal 2003.
Operating income
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
---------------------------------------------------------------------
Operating Income $45,877 $37,479 $8,398 22.4%
% of net sales 12.6% 11.1%
The $8.4 million increase in operating income is primarily a result of improving
gross profit from sales increases and cost reductions and lower R&D spending
partly offset by increased selling, general and administrative expenses due to
our recent reorganization. Foreign currency contributed approximately 20% to the
year over year improvement.
30
Other income (expense), net
$ %
April 3, March 29, Increase/ Increase/
(in thousands) 2004 2003 (Decrease) (Decrease)
---------------------------------------------------
Interest expense ($2,903) $(3,495) $ 592 16.9%
Interest income 1,848 2,214 (366) (16.5)
Other income, net 990 2,409 (1,419) (58.9)
-------------------------------------------------
Total other income (expense), net ($ 65) $ 1,128 ($1,193) (105.8%)
-------------------------------------------------
Interest expense decreased due to lower average debt balances as nearly all of
our long-term debt is at fixed rates. Interest income decreased $0.4 million
from 2003 to 2004, due primarily to lower investment yields on higher average
cash investment balances. Other income, net decreased $1.4 million from fiscal
2003 to fiscal 2004 due primarily to a $0.9 million decrease in income earned
from points on forward contracts in fiscal 2004. 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 36.0% for fiscal
2004 and 26.5% for fiscal 2003. The fiscal 2003 tax rate reflects a $4.0 million
income tax refund recorded during the third quarter of fiscal 2003. At present,
we foresee our tax rate remaining at 36% in fiscal 2005.
31
FISCAL 2003 AS COMPARED TO FISCAL 2002
Net Revenues
By geography
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
United States $127,241 $121,558 $ 5,683 4.7%
International 209,715 198,411 11,304 5.7
----------------------------------------------------------------
Net revenues $336,956 $319,969 $16,987 5.3%
International Operations and the Impact of Foreign Exchange
Approximately 62% of our revenues during fiscal year 2003 were generated outside
the U.S.. Revenues in Japan accounted for approximately 28% and 30% of total
revenues for fiscal 2003 and 2002, respectively. The European region comprised
approximately 26% and 25% of our total revenues for fiscal 2003 and 2002,
respectively. These sales are primarily conducted in local currencies,
specifically the Japanese Yen and the Euro. Accordingly our results of
operations are significantly affected by changes in the value of the Yen and the
Euro relative to the dollar.
For fiscal year 2003, foreign exchange resulted in a 0.7% decrease in sales.
By product type
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
---------------------------------------------------------
Disposables $298,220 $290,824 $ 7,396 2.5%
Misc. & service 18,355 12,105 6,250 51.6
Equipment 20,381 17,040 3,341 19.6
------------------------------------------------------
Net revenues $336,956 $319,969 $16,987 5.3%
======================================================
32
Disposables revenue by product line
$ %
(in thousands) March 29, March 30, Increase/ Increase/
2003 2002 (Decrease) (Decrease)
----------------------------------------------------------
Donor:
Plasma $114,436 $110,178 $ 4,258 3.9%
Blood bank 99,921 102,961 (3,040) (3.0)
Red Cells 15,542 10,675 4,867 45.6
-------------------------------------------------------
Subtotal $229,899 $223,814 $ 6,085 2.7%
Patient:
Surgical 68,321 67,010 1,311 2.0%
-------------------------------------------------------
Total disposables revenue $298,220 $290,824 $ 7,396 2.5%
=======================================================
Donor
Disposable revenue in the donor product family increased 2.7% compared to fiscal
year 2002. Foreign exchange resulted in a 1.6% decrease in donor disposable
revenue. An offsetting increase of 4.3% was attributable to primarily volume
related increases in the red cell and plasma product lines:
Plasma
Plasma disposable sales increases were related to increases in product sold in
Japan, Asia, and Europe partially offset by decreases in the U.S. plasma market,
which represents half of the market. The U.S. volume decrease was due to
declining sales to one customer in fiscal 2003 as a result of industry
consolidation.
Blood Bank
Foreign exchange resulted in a 2.6% decrease in blood bank revenues. The
remaining decrease is attributable to reduced sales of our platelet and cell
processing disposables. Overall, in fiscal 2003 there was a decrease in demand
in our platelet markets in the U.S. and Europe as compared to fiscal 2002.
Additionally, fiscal year 2002 sales related to our ACP 215 system disposables
were high due to the demand resulting from the events of September 11, 2001.
Red Cell
Demand for red cell technology increased 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.
Patient
Surgical
Worldwide surgical disposable revenues, including both our traditional
cardiovascular surgical blood salvage business and our newer OrthoPAT business,
grew modestly. Foreign exchange had no significant impact on these results. The
factors impacting growth include:
o In the second half of fiscal year 2003, we slowed down the manufacture and
sale of OrthoPAT products to our distributor as we implemented a quality
enhancement program for the OrthoPAT. Sales
33
of the OrthoPAT product accelerated in the second half of fiscal 2004 as we had
completed enhancements and sales began to match end user usage.
o We experienced a modest reduction in volume in 2003 in our cardiovascular
surgical blood salvage business.
Other revenues
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
-----------------------------------------------------
Misc. & Service $18,355 $12,105 $6,250 51.6%
Equipment 20,381 17,040 3,341 19.6
--------------------------------------------------
Total other revenues $38,736 $29,145 $9,591 32.9%
==================================================
Our miscellaneous and service revenue includes revenue from repairs performed
under preventative maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, 5D
acquired on January 1, 2002. Miscellaneous and service revenue increased 51.6%.
Of this increase, $3.9 million, or 32.5% was due to increased software revenues
from 5D.
The 19.6% increase in equipment revenue versus fiscal 2002 is primarily
attributable to three factors:(i) fiscal 2003 sales of the ACP 215 system were
positively impacted due to an initial rollout to the U.S. military, (ii)
equipment revenue from our platelet collection device in Japan was high in
fiscal 2003 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 and (iii) equipment revenue from the sale of
our plasma collection devices to new customers in Europe.
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.
Gross profit
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
-----------------------------------------------------------
Gross Profit $154,696 $154,834 $(138) (0.1)%
% of net sales 45.9% 48.4%
The $0.1 million decrease in gross profit was a result of the negative effects
of foreign currency, which were offset by the additional contribution from the
increase in sales and cost reductions. In fiscal 2003, the CORE program
generated $3.8 million in cost savings.
34
Operating expenses
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
------------------------------------------------------------
Research and development $ 19,512 $ 19,512 $ -- --%
Selling, general and administrative 97,705 88,874 8,831 9.9%
Acquired research and development -- 10,000 (10,000) (100.0)%
---------------------------------------------------------
Total operating expenses $117,217 $118,386 $ (1,169) (1.0)%
=========================================================
Research and Development
Spending on research and development projects declined slightly in fiscal year
2003. These small decreases were offset by increases in expenses reported due to
foreign exchange.
Selling, general and administrative
The 9.9% increase in spending is related to increases in selling, marketing, and
field support expenses to support the higher volumes of sales, a full fiscal
year of expenses from 5D, which we acquired in Q4 of fiscal year 2002, and
increases in expenses reported due to foreign exchange.
Acquired research and development
In the third quarter of fiscal year 2002, we paid Baxter $10.0 million for the
right to integrate the new pathogen reduction technology which Baxter was
developing into our platelet collection devices after the technology receives
regulatory approval. In the fourth quarter of fiscal year 2003, we made an
additional $3.8 million milestone payment to Baxter as Baxter acquired its
initial regulatory approvals in the European market. Because this technology has
achieved commercial viability, this payment was capitalized as developed
technology, and will be amortized over its useful life.
Operating income
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
----------------------------------------------------------------
Operating income $37,479 $36,448 $1,031 2.8%
% of net sales 11.1% 11.4%
Operating income for fiscal year 2003 increased $1.0 million from fiscal year
2002 but decreased to 11.1% of sales in fiscal year 2003 from 11.4% in fiscal
year 2002. The $1.0 million increase in operating income was a result of three
factors favorably impacting our operations partially offset by two negative
factors, as follows: 1) the reduction in acquired research and development, 2)
revenue driven gross profit improvements, and 3) cost reductions generated by
the CORE program, (4) increased selling, general and administrative spending and
(5) the negative effect of foreign currency.
35
Other income (expense), net
$ %
March 29, March 30, Increase/ Increase/
(in thousands) 2003 2002 (Decrease) (Decrease)
----------------------------------------------------------
Interest expense $(3,495) $(3,908) $ 413 10.6%
Interest income 2,214 3,905 (1,691) (43.3)
Other income, net 2,409 2,060 349 16.9
-------------------------------------------------------
Total other income, net $ 1,128 $ 2,057 $ (929) 45.2%
=======================================================
Interest expense for fiscal year 2003 was relatively flat compared to fiscal
year 2002. Nearly all of our long-term debt is at fixed rates. Interest income
decreased $1.7 million from 2002 to 2003, due primarily to lower average
balances of cash invested and lower investment yields. Other income, net
increased $0.3 million from fiscal year 2002 to fiscal year 2003 due to foreign
exchange transaction gains in fiscal year 2003 as compared to transaction losses
in fiscal year 2002 and income recorded to reflect an anticipated payment for a
customer contract termination. These increases in other income were offset in
large part by decreases in income earned from points on forward contracts in
fiscal year 2003 as compared to fiscal year 2002. 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 provision for income tax as a percentage of pretax income was 26.5% for
fiscal year 2003 down from 28.0% for fiscal year 2002. The decrease in fiscal
year 2003 effective tax rate and tax expense resulted from an anticipated income
tax refund. The Q4 fiscal year 2003 effective tax rate was 36.0%.
36
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 of our financial
statements. While all of these significant accounting policies impact our
financial condition and results of operations, we view certain of these policies
as critical. Policies determined to be critical are those policies that have the
most significant impact on our financial statements and require management to
use a greater degree of judgment and/or estimates. Actual results may differ
from those estimates.
The accounting policies identified as critical are as follows:
Revenue Recognition
We recognize revenues in accordance with generally accepted accounting
principles as outlined in SAB No. 104 which requires that four basic criteria be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists, (2) product delivery, including customer acceptance, has occurred or
services have been rendered, (3) the price is fixed or determinable and (4)
collectibility is reasonably assured. We believe that our revenue recognition
policy is critical because revenue is a very significant component of our
results of operations.
With our acquisition of Fifth Dimension Information Systems, Inc. ("Fifth
Dimension") in January 2002, we have recorded software sales in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended,
and in instances where services are essential to the functionality of the
software, which represents the majority of Fifth Dimensions software sales,
revenue is recognized in accordance with SOP 81-1, "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts."
In accordance SOP 97-2, when the services are essential to the functionality of
the software, or payment of the license fees are dependent upon the performance
of the services, the software license, configuration, training and
implementation fees are recognized under the contract method of accounting using
labor hours to measure the completion percentage. In order to apply the contract
method of accounting, management is required to estimate the number of hours
needed to complete a particular project. As a result, recognized revenues and
profits are subject to revisions as the contract progresses to completion.
Inventories
Inventories are stated at the lower of the actual cost to purchase and/or
manufacture or the current estimated market value of the inventory. On a
quarterly basis, inventory quantities on hand are reviewed and an analysis of
the provision for excess and obsolete inventory is performed based primarily on
our estimates of product demand and production requirements for the next
twenty-four months. A change in the estimated timing or amount of demand for our
products could result in additional provisions for excess inventory quantities
on hand. Any significant unanticipated changes in demand could have a
significant impact on the value of our inventory and reported operating results.
37
Goodwill and Other Intangible Assets
Purchase accounting requires extensive use of accounting estimates and judgments
to allocate the purchase price to the fair market value of the assets and
liabilities purchased, with the excess value, if any, being classified as
goodwill. In addition, as described in Notes 3 and 6 of our financial
statements, as a result of our acquisitions, values were assigned to intangible
assets for patented and unpatented technologies and customer contracts and
related relationships. For those assets with finite lives, useful lives were
assigned to these intangibles and they will be amortized over their remaining
life. We review our intangible assets and their related useful lives at least
once a year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. This review is called an
impairment assessment. We conduct more frequent impairment assessments if
certain conditions exist, including: a change in the competitive landscape, any
internal decisions to pursue new or different technology strategies, a loss of a
significant customer, or a significant change in the market place including
changes in the prices paid for our products or changes in the size of the market
for our products.
An impairment results if the carrying value of the asset exceeds the sum of the
future undiscounted cash flows expected to result from the use and disposition
of the asset. The amount of the impairment would be determined by comparing the
carrying value to the fair value of the asset. Fair value is generally
determined by calculating the present value of the estimated future cash flows
using an appropriate discount rate. The projection of the future cash flows and
the selection of a discount rate require significant management judgment. The
key variables that management must estimate include sales volume, prices,
inflation, product costs, capital expenditures and sales and marketing costs.
For developed technology (patents and other technology) that have not been
deployed we also must estimate the likelihood of both pursuing a particular
strategy and the level of expected market adoption.
Significant judgment is involved in making these estimates. Future write-downs
may be required if the value of the assets become impaired.
Property, Plant and Equipment
Property, plant and equipment are depreciated over their useful lives. Useful
lives are based on our estimate of the period that the assets will generate
revenue. Any change in conditions that would cause us to change our estimate as
to the useful lives of a group or class of assets may significantly impact our
depreciation expense on a prospective basis. Haemonetics equipment includes
devices that we have loaned to our customers under contractual arrangements that
allow them to use the device in exchange for rental payments or the purchase of
disposables. In addition to periodically reviewing the useful lives of these
devices, we also periodically perform reviews to determine if a group of these
devices is impaired. To conduct these reviews we must estimate the future amount
and timing of demand for these devices. Changes in expected demand can result in
additional depreciation expense, which is classified as cost of goods sold. Any
significant unanticipated changes in demand could have a significant impact on
the value of equipment and our reported operating results.
Income Taxes
In preparing our consolidated financial statements, income tax expense is
calculated for all jurisdictions in which we operate. This process involves
estimating actual current taxes due plus assessing temporary differences arising
from differing treatment for tax and accounting purposes that are recorded as
deferred
38
tax assets and liabilities. Deferred tax assets are periodically evaluated to
determine their recoverability. A valuation allowance is established and a
corresponding additional income tax expense is recorded in our statement of
operations if their recovery is not likely. The provision for income taxes could
also be materially impacted if actual taxes due differ from our earlier
estimates. As of April 3, 2004, no valuation allowance existed on our balance
sheet. The total net deferred tax asset as of April 3, 2004 was $20.2 million.
We file income tax returns in all jurisdictions in which we operate. We
established reserves to provide for additional income taxes that may be due in
future years as these previously filed tax returns are audited. These reserves
have been established based on management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments made as events occur that warrant modification.
Liquidity and Capital Resources
The following table contains certain key performance indicators we think depict
our liquidity and cash flow position:
April 3, March 29,
2004 2003
---------------------------
(dollars in thousands)
Cash & cash equivalents $118,117 $49,885
Working capital $185,606 $122,880
Current ratio 2.9 2.2
Net cash (debt) position (1) $59,857 ($20,732)
Days sales outstanding (DSO) 76 80
Disposables finished goods inventory turnover 5.7 4.6
(1) Net cash position is the sum of cash and cash equivalents less total debt.
39
Our primary sources of capital include cash and cash equivalents, internally
generated cash flows and bank borrowings. We believe these sources to be
sufficient to fund our requirements, which are primarily capital expenditures
(including systems to improve our product life cycle management), acquisitions,
new business and product development and working capital for at least the next
twelve months.
Cash Flow Overview:
For the years ended
April 3, March 29,
2004 2003 Change
------------------------------------------
(In thousands)
Net cash provided by (used in):
Operating activities $ 74,610 $ 46,375 $ 28,235
Investing activities (7,871) 16,777 (24,648)
Financing activities 718 (49,001) 49,719
Effect of exchange rate changes on cash (1) 775 821 (46)
------------------------------------------
Net increase in cash and cash equivalents $ 68,232 $ 14,972 $ 53,260
------------------------------------------
(1) The balance sheet is affected by spot exchange rates used to translate
local currency amounts into U.S. dollars. In comparing spot exchange rates
at April 2004 versus March 2003, the European currencies and the Yen have
strengthened against the U.S. dollar. In accordance with GAAP, we have
removed the effect of foreign currency throughout our cash flow statement,
except for its effect on our cash and cash equivalents.
FISCAL 2004 AS COMPARED TO FISCAL 2003
Operating Activities:
Net cash provided by operating activities increased $28.2 million in 2004 due
to:
o a $2.7 million increase in net income adjusted for non-cash items,
o a $12.1 million increase in cash provided from accounts receivable
due to the timing of customer payments, particularly in Japan,
within the 53rd week in the fiscal year, and
o $14.8 million increase in cash provided by reduced investments in
inventory.
Investing Activities:
Net cash used in investing activities increased $24.6 million as a result of:
o the prior year liquidation of our available-for-sale investments
which provided $32.6 million in additional cash in fiscal 2003,
o offset by $2.9 million less cash spent on capital expenditures
during fiscal year 2004, and
o the $3.8 million milestone payment we made in fiscal 2003 for
pathogen reduction technology.
40
During fiscal year 2004, we had capital expenditures of $13.8 million, a
decrease of $2.9 million from the prior year.
Financing Activities:
Net cash provided by financing activities increased by $49.7 million. The change
was driven by the following factors:
o in fiscal 2003, we spent $50.2 million to repurchase our stock (no
repurchases occurred in fiscal 2004),
o proceeds of $17.2 million from stock option exercises as compared to
the $4.0 million in fiscal year 2003, and
o a $13.7 million decrease in the short-term debt primarily in Japan
for working capital purposes.
FISCAL 2003 AS COMPARED TO FISCAL 2002
For the years ended
March 29, March 30,
2003 2002 Change
------------------------------------------
(In thousands)
Net cash provided by (used in):
Operating activities $ 46,375 $ 33,055 $ 13,320
Investing activities 16,777 (34,054) 50,831
Financing activities (49,001) (9,336) (39,665)
Effect of exchange rate changes on cash (1) 821 75 746
------------------------------------------
Net increase (decrease) in cash and cash
equivalents $ 14,972 ($10,260) $ 25,232
==========================================
(1) The balance sheet is affected by spot exchange rates used to translate
local currency amounts into U.S. dollars. In comparing spot exchange rates
at March 2003 vs. March 2002, the European currencies and the Yen have
strengthened against the U.S. dollar. In accordance with GAAP, we have
removed the effect of foreign currency throughout our cash flow statement,
except for its effect on our cash and cash equivalents.
Operating Activities:
Net cash provided by operating activities increased $13.3 million in 2003 due
to:
o a decrease in inventory
o an increase in accrued taxes due to an increase in our effective tax
rate in Q4 of fiscal 2003 and a reduction in tax payments
o an increase in accrued expenses
o an increase in accounts receivable
41
Investing Activities:
Net cash provided by investing activities increased $50.8 million as a result
of:
o the liquidation of our available for sale investments in fiscal 2003
which provided $32.6 million in cash.
o Cash spent in fiscal 2002 to purchase a software company, Fifth
Dimension and a license for outside technology
o less cash spent on capital expenditures in fiscal 2003 and
o milestone payments made related to the acquisition of Fifth
Dimension.
During fiscal year 2003, we had capital expenditures of $16.7 million, a
decrease of $6.8 million from the prior year.
Financing Activities:
Net cash used by our financing activities increased by $39.7 million. The change
was driven by the following factors:
o $50.2 million spent to repurchase stock in fiscal 2003.
o a decline in proceeds from stock option activity.
o a decrease in the short-term debt borrowings in Japan.
Contractual Obligations and Contingencies
A summary of our contractual and commercial commitments as of April 3, 2004,
were as follows (for more information concerning our debt see Note 8 to the
consolidated financial statements and for our operating lease obligations see
Note 10):
Payments Due by Period
----------------------
Contractual Obligations Total Less than 1-3 years 3-5 years After 5
(in thousands) 1 year years
-------------------------------------------------------------------------
Debt $58,260 $32,818 $12,465 $ 6,939 $6,038
Operating Leases 20,536 6,109 9,107 4,301 1,019
Purchase commitments* 32,708 31,590 1,118 -- --
------------------------------------------------------------------------
Total $111,504 $70,517 $22,690 $11,240 $7,057
========================================================================
*Includes amounts we are committed to spend on purchase orders entered in the
normal course of business for capital equipment and for the purpose of
manufacturing our products including contract manufacturers, specifically Nova
Biomedical, for the purchase of devices and JMS Co. LTD, and Kawasumi
Laboratories for the manufacture of certain disposable products. The majority of
our operating expense spending does not require any advance commitment.
Contingent Commitments
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
42
to fiscal 2008. The first milestone payment, in the amount of $1.0 million was
earned and accrued as of the end of our fiscal 2003. This payment was allocated
to goodwill and paid in the first quarter of fiscal 2004. We anticipate making
an additional milestone payment in the first half of fiscal year 2005.
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 third quarter of fiscal 2003, Baxter received initial regulatory approval
in the European market. In connection with this approval, we made an initial
$3.8 million milestone payment to Baxter during the fourth quarter of fiscal
2003. Despite expectations, the remaining European approvals were not obtained
during fiscal 2004. When the approvals are obtained, we anticipate making an
additional milestone payment of $3.8 million to Baxter. These payments will be
recorded as other technology, an intangible asset, and amortized over their
useful lives.
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.
Foreign Exchange
Approximately 65% of our sales are generated outside the U.S. in local
currencies, yet our reporting currency is the U.S. dollar. Our primary foreign
currency exposures in relation to the U.S. dollar are the Japanese Yen and the
Euro. 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.
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 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. 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 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 underlying transactions being hedged are
recorded.
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.
43
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, and as a result 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.
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 0.92 15.5%
Q4 0.89 14.1%
--------------------------------------------------------
2005 Total 0.94 12.7%
--------------------------------------------------------
FY2006 Q1 0.93* 4.6%
* NOTE: Represents hedges for April and May FY06.
44
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 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 7A. 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 April 3, 2004, we had the following significant foreign
exchange contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated sales outstanding:
45
Hedged (BUY) / SELL Weighted Spot Weighted Forward
Currency Local Currency Contract Rate Contract Rate Fair Value Maturity
Euro 6,000,000 $1.149 $1.137 ($550,105) Apr-May 2004
Euro 8,500,000 $1.133 $1.123 ($864,365) June-Aug 2004
Euro 8,000,000 $1.176 $1.165 ($458,992) Sep-Nov 2004
Euro 8,250,000 $1.254 $1.244 $166,454 Dec 2004-Feb 2005
Japanese Yen 1,265,000,000 117.3 per US$ 115.8 per US$ ($1,196,007) Apr-May 2004
Japanese Yen 1,800,000,000 120.4 per US$ 118.8 per US$ ($2,109,759) June-Aug 2004
Japanese Yen 1,925,000,000 109.2 per US$ 107.8 per US$ ($694,127) Sep-Nov 2004
Japanese Yen 1,725,000,000 106.9 per US$ 105.6 per US$ ($358,683) Dec 2004-Feb 2005
------------
Total: ($6,065,584)
============
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 $11.3 million increase
in the fair value of the forward contracts; whereas a 10% weakening of the U.S.
dollar would result in a $12.7 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 April 3, 2004, the fair value of our
long-term debt was approximately $2.6 million higher than the value of the debt
reflected on our financial statements. This higher fair market is entirely
related to our $17.1 million, 7.05% fixed rate senior notes and our $8.3
million, 8.41% real estate mortgage.
At March 29, 2003, the fair value of our long-term debt was approximately $3.6
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 $8.8 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 April 3, 2004 the fair
value of our long-term debt would change by approximately $0.3 million.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, accounts receivable and
investment in sales type lease receivables. Sales to one unaffiliated Japanese
customer, the Japanese Red Cross Society, amounted to $87.6 million, $79.0
million and $75.5 million for 2004, 2003 and 2002, respectively. Accounts
receivable balances attributable to this customer accounted for 22.0%, 23.6% and
20.0% of total accounts receivable at fiscal year end 2004, 2003 and 2002,
respectively. While the accounts receivable related to the Japanese Red
46
Cross Society may be significant, we do not believe the credit loss risk to be
significant given the consistent payment history by this customer.
Certain other markets and industries can expose us to concentrations of credit
risk. For example, we tend to have fewer larger customers in the commercial
plasma business. As a result our accounts receivable extended to any one of
these commercial plasma customers can be somewhat significant at any point in
time.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
--------------------------------------
April 3, March 29, March 30,
2004 2003 2002
--------------------------------------
Net revenues $ 364,229 $ 336,956 $ 319,969
Cost of goods sold 192,109 182,260 165,135
--------------------------------------
Gross profit 172,120 154,696 154,834
--------------------------------------
Operating expenses:
Research and development 17,793 19,512 19,512
Selling, general and administrative 108,450 97,705 88,874
Acquired research and development -- -- 10,000
--------------------------------------
Total operating expenses 126,243 117,217 118,386
--------------------------------------
Operating income 45,877 37,479 36,448
Interest expense (2,903) (3,495) (3,908)
Interest income 1,848 2,214 3,905
Other income, net 990 2,409 2,060
--------------------------------------
Income before provision for income taxes 45,812 38,607 38,505
Provision for income taxes 16,492 10,228 10,782
--------------------------------------
Income from operations before cumulative effect
of a change in accounting principle 29,320 28,379 27,723
Cumulative effect of a change in accounting principle, net of tax -- -- 2,304
--------------------------------------
Net income $ 29,320 $ 28,379 $ 30,027
======================================
Basic income per common share
Income from operations before cumulative effect of a
change in accounting principle $ 1.20 $ 1.15 $ 1.06
Cumulative effect of a change in accounting principle, net of tax $ -- $ -- $ 0.09
Net income $ 1.20 $ 1.15 $ 1.15
Income per common share assuming dilution
Income from operations before cumulative effect of a
change in accounting principle $ 1.19 $ 1.13 $ 1.02
Cumulative effect of a change in accounting principle, net of tax $ -- $ -- $ 0.09
Net income $ 1.19 $ 1.13 $ 1.11
Weighted average shares outstanding
Basic 24,435 24,591 26,214
Diluted 24,695 25,048 27,155
The accompanying notes are an integral part of these
consolidated financial statements.
48
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 3, 2004 March 29, 2003
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 118,117 $ 49,885
Accounts receivable, less allowance of $2,261 in 2004 and $1,449 in 2003 82,640 78,582
Inventories 52,235 65,805
Current investment in sales-type leases, net 1,859 2,681
Deferred tax asset, net 21,856 17,307
Prepaid expenses and other current assets 4,742 9,272
--------- ---------
Total current assets 281,449 223,532
Property, plant and equipment:
Land, building and building improvements 33,966 32,426
Plant equipment and machinery 63,866 59,009
Office equipment and information technology 39,600 36,011
Haemonetics equipment 131,689 117,053
--------- ---------
Total property, plant and equipment 269,121 244,499
Less: accumulated depreciation 191,091 160,512
--------- ---------
Net property, plant and equipment 78,030 83,987
Other assets:
Investment in sales-type leases, net (long-term) 2,037 2,968
Other intangibles, less amortization of $5,569 in 2004 and $3,753 in 2003 24,784 26,339
Goodwill, net 17,242 16,010
Deferred tax asset, net -- 2,954
Other long-term assets 3,852 3,695
--------- ---------
Total other assets 47,915 51,966
--------- ---------
Total assets $ 407,394 $ 359,485
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 32,818 $ 39,005
Accounts payable 14,249 13,677
Accrued payroll and related costs 14,547 11,930
Accrued income taxes 7,967 12,093
Other accrued liabilities 26,262 23,947
--------- ---------
Total current liabilities 95,843 100,652
Deferred tax liability, net 1,682 --
Long-term debt, net of current maturities 25,442 31,612
Other long-term liabilities 4,678 3,984
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.01 par value; Authorized - 80,000,000 shares;
Issued - 32,647,910 shares in 2004 and 31,664,849 shares in 2003 326 317
Additional paid-in capital 127,744 108,770
Retained earnings 322,291 292,971
Accumulated other comprehensive loss (6,535) (13,486)
--------- ---------
Stockholders' equity before treasury stock 443,826 388,572
Less: Treasury stock at cost - 7,568,289 shares in 2004
and 7,626,096 shares in 2003 164,077 165,335
--------- ---------
Total stockholders' equity 279,749 223,237
--------- ---------
Total liabilities and stockholders' equity $ 407,394 $ 359,485
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
49
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional
------------------ Paid-in Treasury Retained
Shares $'s Capital Stock Earnings
--------------------------------------------------------------
Balance, March 31, 2001 30,722 $ 307 $ 87,958 ($ 89,456) $ 234,325
==============================================================
Employee stock purchase plan -- -- (105) 421 240
Exercise of stock options
and related tax benefit 732 8 16,408 -- --
Purchase of treasury stock -- -- -- (26,914) --
Net income -- -- -- -- 30,027
Unrealized loss on available-for-sale
securities -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Unrealized gain on derivatives at adoption
of SFAS 133 -- -- -- -- --
Unrealized loss on derivatives -- -- -- -- --
Comprehensive income -- -- -- -- --
--------------------------------------------------------------
Balance, March 30, 2002 31,454 $ 315 $ 104,261 ($115,949) $ 264,592
==============================================================
Employee stock purchase plan -- -- 16 780 --
Exercise of stock options
and related tax benefit 211 2 4,493 -- --
Purchase of treasury stock -- -- -- (50,166) --
Net income -- -- -- -- 28,379
Net change in minimum pension liability -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Unrealized loss on derivatives -- -- -- -- --
Comprehensive income -- -- -- -- --
--------------------------------------------------------------
Balance, March 29, 2003 31,665 $ 317 $ 108,770 ($165,335) $ 292,971
==============================================================
Employee stock purchase plan -- -- (393) 1,258 --
Exercise of stock options
and related tax benefit 983 9 19,367 -- --
Net income -- -- -- -- 29,320
Net change in minimum pension liability -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Unrealized loss on derivatives -- -- -- -- --
Comprehensive income -- -- -- -- --
--------------------------------------------------------------
Balance, April 3, 2004 32,648 $ 326 $ 127,744 ($164,077) $ 322,291
==============================================================
Accumulated
Other Total
Comprehensive Stockholders' Comprehensive
Loss Equity Income
------------------------- -------------
Balance, March 31, 2001 ($17,618) $ 215,516
=========================
Employee stock purchase plan -- 556
Exercise of stock options
and related tax benefit -- 16,416
Purchase of treasury stock -- (26,914)
Net income -- 30,027 $ 30,027
Unrealized loss on available-for-sale
securities (10) (10) ($ 10)
Foreign currency translation adjustment (1,054) (1,054) (1,054)
Unrealized gain on derivatives at adoption
of SFAS 133 4,608 4,608 4,608
Unrealized loss on derivatives (2,321) (2,321) (2,321)
--------
Comprehensive income -- -- $ 31,250
------------------------- --------
Balance, March 30, 2002 ($16,395) $ 236,824
=========================
Employee stock purchase plan -- 796
Exercise of stock options
and related tax benefit -- 4,495
Purchase of treasury stock -- (50,166)
Net income -- 28,379 $ 28,379
Net change in minimum pension liability (424) (424) (424)
Foreign currency translation adjustment 8,028 8,028 8,028
Unrealized loss on derivatives (4,695) (4,695) (4,695)
--------
Comprehensive income -- -- $ 31,288
------------------------- --------
Balance, March 29, 2003 ($13,486) $ 223,237
=========================
Employee stock purchase plan -- 865
Exercise of stock options
and related tax benefit -- 19,376
Net income -- 29,320 $ 29,320
Net change in minimum pension liability 35 35 35
Foreign currency translation adjustment 8,934 8,934 8,934
Unrealized loss on derivatives (2,018) (2,018) (2,018)
--------
Comprehensive income -- -- $ 36,271
------------------------- --------
Balance, April 3, 2004 ($ 6,535) $ 279,749
=========================
The accompanying notes are an integral part of these
consolidated financial statements.
50
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-------------------------------------
April 3, March 29, March 30,
2004 2003 2002
---------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 29,320 $ 28,379 $ 30,027
Adjustments to reconcile net income to net cash provided by operating activities:
Non cash items:
Depreciation and amortization 30,149 28,431 25,616
Deferred tax expense 1,338 4,030 5,629
Gain on sales of plant, property and equipment (1,547) (873) (160)
Tax benefit related to exercise of stock options 2,191 538 3,429
Unrealized gain from hedging activities (984) (2,762) (355)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 3,697 (8,365) (4,980)
Decrease (increase) in inventories 9,267 (5,486) (18,344)
Decrease (increase) in prepaid income taxes 4,408 (1,315) (2,497)
Decrease (increase) decrease in other assets and other long-term liabilities 962 1,737 (1,204)
Increase (decrease) in accounts payable and accrued payroll 1,984 (585) 1,905
(Decrease) increase in accrued taxes (4,535) 555 (3,319)
(Decrease) increase in accrued expenses (1,640) 2,091 (2,692)
-------------------------------------
Net cash provided by operating activities 74,610 46,375 33,055
Cash Flows from Investing Activities:
Purchases of available-for-sale-investments -- (11,670) (69,852)
Gross proceeds from sale of available-for-sale investments -- 44,306 66,525
Capital expenditures on property, plant and equipment (13,862) (16,715) (23,509)
Proceeds from sale of property, plant and equipment 4,850 4,053 994
Milestone payments related to acquisition of completed technology -- (3,800) --
Acquisition of license -- -- (2,800)
Acquisition of software development company and milestone payments (1,020) -- (10,461)
Payments received on sales-type leases, net 2,161 603 5,049
-------------------------------------
Net cash (used in) provided by investing activities (7,871) 16,777 (34,054)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (420) (386) (355)
Net (decrease) increase in short-term revolving
credit agreements (11,198) 2,513 10,104
Payments on long-term credit agreements (5,714) (5,714) (5,714)
Employee stock purchase plan 865 796 556
Exercise of stock options 17,185 3,956 12,987
Purchase of treasury stock -- (50,166) (26,914)
-------------------------------------
Net cash provided by (used in) financing activities 718 (49,001) (9,336)
Effect of Exchange Rates on Cash and Cash Equivalents 775 821 75
-------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 68,232 14,972 (10,260)
Cash and Cash Equivalents at Beginning of Year 49,885 34,913 45,173
-------------------------------------
Cash and Cash Equivalents at End of Year $ 118,117 $ 49,885 $ 34,913
=====================================
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements
of Haemonetics equipment $ 7,478 $ 10,699 $ 4,385
=====================================
Reclassifications from long-term credit agreements
to short-term credit agreements -- $ 2,489 --
=====================================
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,806 $ 3,227 $ 3,689
=====================================
Income taxes paid $ 14,014 $ 6,625 $ 8,813
=====================================
The accompanying notes are an integral part of these
consolidated financial statements.
51
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
We design, manufacture and market automated systems and single-use disposables
for the collection, processing and surgical salvage of blood as well as
associated consumables and data management technology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Our fiscal year ends on the Saturday closest to the last day in March. Fiscal
year 2004 includes 53 weeks, fiscal year 2003 and fiscal year 2002 each included
52 weeks.
Principles of Consolidation
The accompanying consolidated financial statements include all accounts
including those of our subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Our revenue recognition policy is to recognize revenues from product sales and
services when earned as required by generally accepted accounting principles and
in accordance with SAB No. 104, "Revenue Recognition in Financial Statements."
Revenues are recognized when persuasive evidence of an arrangement exists,
product delivery, including customer acceptance, has occurred or services have
been rendered, the price is fixed or determinable and collectibility is
reasonably assured. For product sales, revenue is not recognized until title and
risk of loss have transferred and all provisions agreed to in the arrangement
necessary for customer acceptance have been fulfilled.
There are principally four arrangements under which our products are shipped to
a customer: a use plan, a rental agreement, a sales-type lease and an outright
sale for cash.
Under use plan and rental agreements, no equipment revenue is recognized as in
each of these arrangements, the equipment remains our property and title does
not pass to the customer.
Equipment revenues under sales-type lease agreements are recognized either at
shipment or delivery in accordance with the agreed upon contract terms with
interest income recognized over the life of the lease.
Revenues from Software Sales
Since January of fiscal year 2002 with our acquisition of Fifth Dimension
Information Systems, Inc. ("Fifth Dimension"), we have recorded software sales
in accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended and, in instances where services are essential to the
functionality of the software, which represents the majority of Fifth Dimensions
software sales, revenue is recognized in accordance with SOP 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts."
In accordance SOP 97-2, when the services are essential to the functionality of
the software, or payment of the license fees are dependent upon the performance
of the services, the software license,
52
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
configuration, training and implementation fees are recognized under the
contract method of accounting using labor hours to measure the completion
percentage. In order to apply the contract method of accounting, we are required
to estimate the number of hours needed to complete a particular project. As a
result, recognized revenues and profits are subject to revisions as the contract
progresses to completion. We recorded $6.6 million, $5.0 million and $1.1
million of software revenue in fiscal 2004, 2003 and 2002, respectively.
Revenues from Distributor Sales
We recognize revenue for both equipment and disposables revenue upon shipment of
these products to our distributors. Our standard contracts with our distributors
state that title to the equipment passes to the distributors at point of
shipment to a distributor's location. The distributors are responsible for
shipment to the end customer along with installation, training and acceptance of
the equipment by the end customer. All shipments to distributors are at contract
prices and payment is not contingent upon resale of the product.
Service Revenues
Service revenues are recognized ratably over the contractual periods or as the
services are provided.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could vary from the amounts derived from our estimates and assumptions.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries are translated at the rate of
exchange at year-end while sales and expenses are translated at an average rate
in effect during the year. The net effect of these translation adjustments is
shown in the accompanying financial statements as a component of stockholders'
equity. Foreign currency transaction gains and losses are included in other
income, net on the consolidated statement of operations.
Cash and Cash Equivalents
Cash equivalents include various short-term instruments such as money market
funds, U.S. government agency notes, certificates of deposit and commercial
paper with maturities of three months or less at date of acquisition. Cash and
cash equivalents are recorded at cost, which approximates fair market value.
Available-for-Sale Investments
As of April 3, 2004 and March 29, 2003, we held no available-for-sale
investments. As of March 30, 2002 all of our short-term investments had
maturities greater than three months but equal to or less than 12 months. All
our investments were classified as available-for-sale and carried at fair value,
with unrealized gains and losses, for fiscal year 2002, recorded as a separate
component of accumulated comprehensive loss, net of tax until realized. Realized
gains and losses are calculated based on the specific identification method and
are included in other income, net on our consolidated statements of operations.
During 2004, there was no activity related to available-for-sale investments.
During 2003,
53
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
proceeds from these investment securities sales totaled approximately $44.3
million with realized gains of approximately $30,300. There were no realized
losses during 2003. During 2002, proceeds from these investment securities sales
totaled approximately $66.5 million with realized gains and losses of
approximately $176,000 and $14,000, respectively.
Allowance for Doubtful Accounts
We establish a specific allowance for customers when we become aware they will
not be able to meet their financial obligation. Customer accounts are reviewed
individually on a regular basis and appropriate reserves are established as
deemed appropriate. We also maintain a general reserve using the aging method.
We established appropriate percentages for balances not yet due and past due
accounts based on past experience.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, accounts receivable and
investment in sales type lease receivables. Sales to one unaffiliated Japanese
customer, the Japanese Red Cross Society, amounted to $87.6 million, $79.0
million and $75.5 million for 2004, 2003 and 2002, respectively. Accounts
receivable balances attributable to this customer accounted for 22.0%, 23.6% and
20.0% of total accounts receivable at fiscal year end 2004, 2003 and 2002,
respectively. While the accounts receivable related to the Japanese Red Cross
Society may be significant, we do not believe the credit loss risk to be
significant given the consistent payment history by this customer.
Property, Plant and Equipment
We provide for depreciation and amortization by charges to operations using the
straight-line method in amounts estimated to recover the cost of the building
and improvements, equipment, and furniture and fixtures over their estimated
useful lives as follows:
Estimated
Asset Classification Useful Lives
-------------------- ------------
Building 30 Years
Building and leasehold improvements 5-25 Years
Plant equipment and machinery 3-10 Years
Office equipment and information technology 4-8 Years
Haemonetics equipment 2-8 Years
Depreciation expense was $ 28.3 million, $26.6 million and $24.2 million for
fiscal years 2004, 2003 and 2002, respectively.
Leasehold improvements are amortized over the lesser of their useful lives or
the term of the lease. Maintenance and repairs are charged to operations as
incurred. When equipment and improvements are sold or otherwise disposed of, the
asset cost and accumulated depreciation are removed from the accounts, and the
resulting gain or loss, if any, is included in the results of operations. Fully
depreciated assets are removed from the accounts when they are no longer in use.
54
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Haemonetics Equipment
Our equipment is comprised of machines installed at customer sites under use
plan or rental agreements and machines utilized by our sales personnel as
demonstration units. Under each of these arrangements, the equipment remains our
property. Contracts for use plan and rental arrangements vary in length from two
to eight years.
Use plan contracts commit the customer to purchase certain minimum amounts of
disposables at a stated price over a defined contract term. The equipment
remains our property and as such, we have the right to either remove the
equipment or increase the price per disposable if the customer does not consume
at least the number of disposables agreed to in the contract.
Equipment under rental agreements may or may not commit the customer to use a
minimum number of disposables. Rental charges are billed monthly and the
equipment remains our property.
Equipment given to salespeople for demonstration remains our property and is
depreciated over estimated useful lives of two to five years.
Periodically, we review the useful lives of our devices and perform reviews to
determine if a group of these devices is impaired. To conduct these reviews we
estimate the future amount and timing of demand for these devices. Changes in
expected demand can result in additional depreciation expense, which is
classified as cost of goods sold. Any significant unanticipated changes in
demand could have a significant impact on the value of equipment and our
reported operating results.
Research and Development Expenses
All research and development costs are expensed as incurred. Research and
development expense was $17.8 million for fiscal 2004 and $19.5 million for both
fiscal 2003 and 2002.
Income Taxes
We utilize the asset and liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No.
109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of the temporary differences between the tax
and financial reporting basis for assets and liabilities, utilizing currently
enacted tax rates. The effect of any change in tax rates is recognized in the
period in which the change occurs.
We do not provide for U.S. income taxes on our foreign subsidiaries'
undistributed earnings as they are deemed to be permanently reinvested. Non-U.S.
income taxes are, however, provided on these earnings. If repatriated to the
U.S., we provide the appropriate U.S. income tax on repatriated earnings.
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
55
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. The ineffective portion of a derivative's change in
fair value is recognized currently in other income, net on our consolidated
statement of operations.
Goodwill and Other Intangible Assets
We account for our intangible assets at historical cost. Intangible assets
acquired in a business combination, including purchases research and
development, are recorded under the purchase method of accounting at their
estimated fair values at the date of acquisition. Goodwill represents the excess
purchase price over the fair value of the net tangible and other intangible
assets acquired. We amortize our other intangible assets over their useful
lives, as applicable.
Goodwill and certain other intangible assets, determined to have an indefinite
life, are not amortized. Instead these assets are reviewed for impairment at
least annually. We perform our annual impairment test on January 1st (or the
first business day immediately following that date). As we only have one
reporting unit, the test is based on a fair value approach which uses our market
capitalization as the basis reduced by the excess of the fair market value of
our long-term debt over its carrying value as identified in our assessment of
interest rate risk of the entity as a whole. The test showed no evidence of
impairment to our goodwill and other indefinite lived assets for fiscal 2004 or
fiscal 2003.
We review our intangible assets and their related useful lives at least once a
year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. This review is called an
impairment assessment. We conduct more frequent impairment assessments if
certain conditions exist, including: a change in the competitive landscape, any
internal decisions to pursue new or different technology strategies, a loss of a
significant customer, or a significant change in the market place including
changes in the prices paid for our products or changes in the size of the market
for our products.
An impairment results if the carrying value of the asset exceeds the sum of the
future undiscounted cash flows expected to result from the use and disposition
of the asset. The amount of the impairment would be determined by comparing the
carrying value to the fair value of the asset. Fair value is generally
determined by calculating the present value of the estimated future cash flows
using an appropriate discount rate. The projection of the future cash flows and
the selection of a discount rate require significant management judgment. The
key variables that management must estimate include sales volume, prices,
inflation, product costs, capital expenditures and sales and marketing costs.
For developed technology that has not been deployed we also must estimate the
likelihood of both pursuing a particular strategy and the level of expected
market adoption.
If the estimate of an intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over the revised remaining useful life.
Accounting for Stock-Based Compensation
We continue to account for employee stock-based compensation under Accounting
Principles Board Opinion No. 25 ("APB No. 25").
Under APB No. 25, no accounting recognition is given to options granted to
employees and directors at fair market value until they 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
56
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 FAS 123, the effect on our earnings per share would have been as follows:
Years Ended
--------------------------------------------------
April 3, 2004 March 29, 2003 March 30, 2002
--------------------------------------------------
(in thousands, except per share amounts)
Net income (as reported): $29,320 $28,379 $30,027
Deduct: Total stock-based employee
compensation expense determined
under the fair value method for all
awards, net of tax ($4,938) ($6,805) ($7,466)
-----------------------------------------------
Pro Forma Net Income: $24,382 $21,574 $22,561
==============================================
Earnings per share:
Basic
As Reported $1.20 $1.15 $1.15
Pro forma $1.00 $0.88 $0.86
Diluted
As Reported $1.19 $1.13 $1.11
Pro forma $0.99 $0.86 $0.83
For purposes of the pro forma disclosure, the fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
Volatility 29.0% 28.3% 29.1%
Risk-Free Interest Rate 3.6% 5.0% 5.1%
Expected Life of Options 7 yrs. 7 yrs. 7 yrs.
The weighted average grant date fair value of options granted during 2004, 2003
and 2002 was approximately $8.81, $13.13 and $13.48, respectively.
The fair values of shares purchased under the Employee Stock Purchase Plan are
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
Volatility 32.5% 32.7% 30.5%
Risk-Free Interest Rate 1.3% 1.5% 5.1%
Expected Life of Options 6 mos. 6 mos. 6 mos.
57
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The weighted average grant date fair value of the six-month option inherent in
the Purchase Plan was $4.95 in 2004, $7.11 in 2003 and $6.77 in 2002.
Accounting for Shipping and Handling Costs
Shipping and handling costs are included in costs of goods sold with the
exception of $5.1 million for fiscal years 2004 and 2003 and $4.5 million for
fiscal year 2002 that are included in selling, general and administrative
expenses.
New Pronouncements
Emerging Issues Task Force Issue No. 00-21, "Multiple-Deliverable Revenue
Arrangements" ("EITF 00-21"), provides guidance on how to account for
arrangements that may involve the delivery or performance of multiple products,
services, and/or rights to use assets. The adoption of EITF 00-21 did not have a
material effect on our results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46) and in December 2003 the FASB issued a
revised FIN 46, which addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. FIN 46
requires consolidation of a variable interest entity if the reporting entity is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the variable interest entity's
residual returns or both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003, and to
all other existing structures commonly referred to as special- purpose entities.
The consolidation requirements will apply to variable interest entities created
prior to January 31, 2003, other than special-purpose entities, in the first
quarter of 2004. The adoption of FIN 46 did not have and the application of the
revised FIN 46 is not expected to have a significant impact on earnings or
financial position.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform to the fiscal 2004 presentation.
3. ACQUISITIONS
Fifth Dimension
Effective January 1, 2002 we acquired Fifth Dimension Information Systems, Inc.
("Fifth Dimension") of Edmonton Canada, for $10.4 million. Fifth Dimension
develops and markets data management software for plasma collection centers and
fractionators. The acquisition was accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141 ("SFAS No. 141"), "Business Combinations" which requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under the purchase method, the results of operations of
acquired companies are included prospectively from the date of acquisition and
the acquisition cost is allocated to the acquirees' assets and liabilities based
upon their fair market value at the date of acquisition.
The purchase price was allocated to the net assets acquired based on estimates
of fair value at the acquisition date. An independent valuation was performed to
assess and allocate value to certain purchased tangible assets including
property, plant and equipment. The fair market value of liabilities included in
the net assets purchased was $0.4 million. No cash was purchased. The excess of
the
58
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
purchase price over the fair market value of the net assets acquired was
recorded as goodwill. At April 3, 2004, the amount of recorded goodwill is $3.0
million. Pro forma results of Fifth Dimension's operations have not been
presented because the effect of this acquisition is not material.
A separate independent valuation was performed to assess and allocate value to
the technology and customer contracts with the acquisition. The useful life
assigned to the technology and the contracts was 6 years and 15 years
respectively.
This acquisition involved potential earn-out payments based on the acquired
company reaching certain performance milestones. These payments, if made, will
be allocated to goodwill. The first milestone, in the amount of $1.0 million,
was earned as of the end of the fiscal year 2003. This payment was accrued as of
the end of fiscal 2003 and was paid in the first quarter of fiscal year 2004.
Pathogen Reduction Technology
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. The $10.0
million was expensed in our consolidated statement of operations as acquired
research and development. In the third quarter of fiscal 2003, Baxter received
initial regulatory approval in the European market. In connection with this
approval, we made an initial $3.8 million milestone payment to Baxter during the
fourth quarter of fiscal 2003.
4. 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.
April 3, 2004 March 29, 2003
-----------------------------
Warranty accrual as of the beginning of the period $ 1,056 $ 800
Provision related to preexisting warranties -- 375
Warranty Provision 706 1,053
Warranty Spending (1,085) (1,172)
---------- ----------
Warranty accrual as of the end of the period $ 677 $ 1,056
========== ==========
59
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. INVENTORIES, NET
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 basis.
Inventories consist of the following:
April 3, 2004 March 29, 2003
------------------------------
(in thousands)
Raw materials $11,630 $17,037
Work-in-process $ 5,340 $ 4,597
Finished goods $35,265 $44,171
------------------------------
$52,235 $65,805
==============================
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of Goodwill for fiscal year 2004, 2003
and 2002 are as follows (in thousands):
Carrying amount as of March 30, 2002 $14,168
Fifth Dimension earn-out payment 1,020(a)
Effect of change in rates used for translation 822
-------
Carrying amount as of March 29, 2003 $16,010
Effect of change in rates used for translation 1,232
-------
Carrying amount as of April 3, 2004 $17,242
=======
(a) The acquisition of Fifth Dimension, which occurred on January 1,
2002, involved the potential for earn-out payments of up to $4.1
million based on Fifth Dimension reaching certain performance
milestones prior to fiscal 2008. The first milestone, in the amount
of $1.0 million, was accrued as of the end of the fiscal year 2003.
This payment was made in the first quarter of fiscal year 2004.
Other Intangible Assets
Other intangible assets include the value assigned to patents and the
OrthoPAT(R) core technology purchased in conjunction with the Transfusion
Technologies Corporation acquisition, the value assigned to a customer base
purchased in conjunction with the acquisition of a plasma collection bottle
plant and the value assigned to the software technology, customer contracts and
trade name purchased in conjunction with the acquisition of Fifth Dimension and
the rights to integrate pathogen reduction technology into our platelet
collection systems. The estimated useful lives for all of these intangible
60
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
assets, excluding the Fifth Dimension trade name as it is considered to have an
indefinite life, are 6 to 20 years.
The patents we purchased as part of our acquisition of Transfusion Technologies
Corporation cover various processes, systems and components of the blood
collection and separation processes utilized in both the existing OrthoPAT(R)
product and the Chairside Separator(R) and Red Cell Collector that are currently
under development. Core technology consists of the OrthoPAT(R) orthopedic
perioperative autotransfusion system and other already developed and working
theory and know how that is shared by all three products purchased in the
acquisition. An independent valuation was performed to assess and allocate value
to the intangible assets purchased.
The bottling plant customer base intangible asset represents the value allocated
to the acquired customer base and certain customer contracts purchased in the
acquisition of Alpha Therapeutic's Compton, California, plasma collection bottle
plant. An independent valuation was also performed to assess and allocate value
to the intangible assets purchased in this transaction.
The technology purchased as part of the acquisition of Fifth Dimension consists
primarily of data management software that automates the data collection and
data tracking for plasma centers and fractionators. The customer contracts
intangible represents the value allocated to the acquired contracts and related
relationships. The useful life assigned to the technology and the contracts was
6 years and 15 years respectively. In addition, we purchased the trade name,
Fifth Dimension, which is deemed to have an indefinite useful life because it is
expected to generate cash flows indefinitely. An independent valuation was also
performed to assess and allocate value to the intangible assets purchased in
this transaction.
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. In the third quarter of our fiscal year
2003, Baxter acquired its initial regulatory approval in the European market. In
connection with this approval, we made an initial $3.8 million milestone payment
to Baxter during the fourth quarter of our fiscal year 2003. This payment was
recorded as other technology, an intangible asset, and it will be amortized over
its useful life.
61
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As of April 3, 2004
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
Amortized Intangibles
Patents $ 6,371 $1,594 14
Other technology 11,754 1,810 15
Customer contracts and related relationships 11,738 2,165 15
------- ------
Subtotal 29,863 $5,569 15
Indefinite Life Intangibles
Trade name 490 -- Indefinite
------- ------
Total Intangibles $30,353 $5,569
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 $29,615 $3,753 15
Indefinite Life Intangibles
Trade name 477 -- Indefinite
------- ------
Total Intangibles $30,092 $3,753
62
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The only other changes to the net carrying value of our intangible assets from
March 29, 2003 to April 3, 2004 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 fiscal
years 2004 and 2003 is $1.8 million. Additionally, expected future amortization
expenses on other intangible assets approximate $1.8 million for fiscal 2005,
$2.6 million for fiscal years 2006 through 2007, $2.5 million for fiscal 2008
and $2.4 million for 2009.
With the adoption of SFAS No. 142, there were no changes to amortization expense
on acquired other intangible assets.
7. INVESTMENT IN SALES-TYPE LEASES
We lease equipment to customers under sales-type leases. As sales-type leases,
the lease payments to be received over the term of the leases are recorded as a
receivable at the inception of the new lease. Finance income attributable to the
lease contracts is initially recorded as unearned income and subsequently
recognized as interest income under the interest method over the term of the
leases.
The sales-type lease arrangements call for a stated monthly payment for each
piece of equipment under lease. Leases are billed monthly and contract terms
vary but are generally three to five years. At the completion of the lease
arrangement, title to the equipment transfers to the customer.
The components of our net investment in sales-type leases are as follows:
April 3, 2004 March 29, 2003
-----------------------------
(in thousands)
Total minimum lease payments receivable $4,414 $6,568
Less - Unearned interest 518 919
------ ------
Net investment in sales-type leases 3,896 5,649
Less - Current portion 1,859 2,681
------ ------
Net investment, long-term $2,037 $2,968
====== ======
Future minimum lease payments receivable under non-cancelable sales-type
leases as of April 3, 2004, are as follows:
Fiscal Year Ending (in thousands)
-------------------------------------------
2005 $2,152
2006 1,291
2007 724
2008 244
2009 3
and thereafter --
--------
$4,414
========
63
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
-------------------------------
April 3, 2004 March 29, 2003
-------------------------------
(in thousands)
Real estate mortgage $ 8,755 $ 9,175
Senior notes 22,857 28,571
Haemonetics Japan Co. Ltd. 26,648 32,780
Other non-U.S. borrowings -- 91
------- -------
58,260 70,617
Less - Current portion 32,818 39,005
------- -------
$25,442 $31,612
======= =======
Real Estate Mortgage Agreement
In December 2000 we entered into a $10.0 million real estate mortgage agreement
(the "Mortgage Agreement") with an investment firm. The Mortgage Agreement
requires principal and interest payments of $0.1 million per month for a period
of 180 months, commencing February 1, 2001. The entire balance of the loan may
be repaid at any time after February 1, 2006, subject to a prepayment premium,
which is calculated based upon the change in the current weekly average yield of
Ten (10)-year U.S. Treasury Constant Maturities, the principal balance due and
the remaining loan term. The Mortgage Agreement provides for interest to accrue
on the unpaid principal balance at a rate of 8.41% per annum. Borrowings under
the Mortgage Agreement are secured by the land, building and improvements at our
headquarters and manufacturing facility with a collective carrying value of
approximately $9.9 million and $10.5 million as of April 3, 2004 and March 29,
2003, respectively. There are no financial covenants in the terms and conditions
of this agreement.
Senior Notes
We have $22.9 million of 7.05% Senior Notes due in 2007 (the "Senior Notes"). We
are required to make annual prepayments of principal each year in the amount
$5.7 million, which began October 15, 2001 and conclude with the final principal
payment on October 15, 2007.
Interest on the Senior Notes is computed on the basis of a 360-day year of
twelve 30-day months on the unpaid balance at the rate of 7.05% per annum,
payable semiannually, on April 15 and October 15 each year. The Senior Notes
contain affirmative and negative covenants and restrictions including but not
limited to minimum stockholders' equity and ratio requirements of consolidated
funded indebtedness to consolidated total capitalization and priority
indebtedness to consolidated stockholders equity. At April 3, 2004, we are in
compliance with all debt covenants.
Haemonetics Japan Co. Ltd.
At April 3, 2004, Haemonetics Japan Co. Ltd. had 2.8 billion Japanese yen,
equivalent to U.S. $26.6 million, in unsecured debt outstanding. All of this
debt is short term, maturing in less than 12 months.
Other Non-U.S. Borrowings
Non-U.S. borrowings represent the financing arranged by our subsidiaries with
local banks, which we may guarantee.
64
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The weighted average short-term rates for U.S. and non-U.S. borrowings were
1.76%, 1.62% and 1.83% as of April 3, 2004, March 29, 2003 and March 30, 2002,
respectively.
As of April 3, 2004, notes payable and long-term debts mature as follows:
Fiscal Year Ending (in thousands)
---------------------------------------
2005 $32,818
2006 6,211
2007 6,254
2008 6,301
2009 638
2010 and thereafter 6,038
----------
$58,260
==========
9. INCOME TAXES
Domestic and foreign income before the cumulative effect of a change in
accounting principle is as follows:
Years Ended
-----------------------------------------------
April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
(in thousands)
Domestic $29,685 $28,310 $29,286
Foreign 16,127 10,297 9,219
------- ------- -------
Total $45,812 $38,607 $38,505
======= ======= =======
The income tax provision attributable to continuing operations before the
cumulative effect of a change in accounting principle contains the following
components:
Years Ended
------------------------------------------------
April 3, 2004 March 29, 2003 March 30, 2002
------------------------------------------------
(in thousands)
Current
Federal $ 8,459 $ 1,092 $ 10,838
State 946 981 824
Foreign 5,749 4,125 (133)
-------- -------- --------
Total current $ 15,154 $ 6,198 $ 11,529
-------- -------- --------
Deferred
Federal 1,172 4,171 (3,832)
State (33) (193) (77)
Foreign 199 52 3,162
-------- -------- --------
Total deferred 1,338 4,030 (747)
-------- -------- --------
Total tax expense $ 16,492 $ 10,228 $ 10,782
======== ======== ========
65
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Included in the federal income tax provisions for fiscal years 2004, 2003 and
2002 are approximately $0.6 million, $0.4 million and $0.2 million,
respectively, provided on foreign source income of approximately $1.7 million,
$0.9 million and $0.4 million for fiscal 2004, 2003 and 2002, respectively for
taxes which are payable in the United States.
The total income tax provision included in the consolidated financial statements
is as follows:
Years Ended
-----------------------------------
April 3, March 29, March 30,
2004 2003 2002
-----------------------------------
(in thousands)
Income before the cumulative effect
of a change in accounting principle $16,492 $10,228 $10,782
Cumulative effect of a change in
accounting principle -- -- 896
----------------------------------
$16,492 $10,228 $11,678
==================================
Tax effected, significant temporary differences comprising the net deferred tax
asset (liability) are as follows:
Years Ended
-------------------------------
April 3, 2004 March 29, 2003
-------------------------------
(in thousands)
Depreciation $ (2,965) $ (4,297)
Amortization (3,004) (2,174)
Inventory 15,530 13,000
Hedging 2,605 1,288
Accruals and reserves 1,950 2,359
Net operating loss carryforward 6,058 10,086
-------- --------
Total net deferred taxes $ 20,174 $ 20,262
-------- --------
At April 3, 2004, we have approximately $17.3 million in U.S. acquisition
related net operating loss carryforwards, subject to separate limitations
expiring beginning in 2010. In fiscal 2002, as part of our ongoing Transfusion
acquisition purchase price allocation analysis, it was determined that a tax
valuation allowance was no longer necessary. Accordingly, we wrote down the
goodwill by $2.8 million, other acquired intangibles by $2.6 million, and the
value of other assets related to this transaction by $1.0 million.
We file income tax returns in all jurisdictions in which we operate. We
established reserves to provide for additional income taxes that may be due in
future years as these previously filed tax returns are audited. These reserves
have been established based on management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments made as events occur that warrant modification.
We do not provide U.S. taxes on our foreign subsidiaries' undistributed earnings
as they are deemed to be permanently reinvested outside the U.S. Non-US income
taxes are, however, provided on these foreign
66
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
subsidiaries' undistributed earnings. Upon repatriation, we provide the
appropriate U.S. income taxes on these earnings.
The income tax provision from operations before the cumulative effect of a
change in accounting principle differs from the amount computed by applying the
35% U.S. federal statutory income tax rate in 2004, 2003 and 2002, due to the
following:
Years Ended
-----------------------------------
April 3, March 29, March 30,
2004 2003 2002
-----------------------------------
(in thousands)
Tax at federal statutory rate $ 16,034 $ 13,512 $ 13,477
Foreign Sales Corporation and
Extraterritorial Income Exclusion (659) (1,961) (2,155)
Difference between U.S. tax and
foreign statutory rates 574 (1,522) (923)
State taxes, net of federal income tax
benefits 593 512 486
Non-deductible acquisition costs -- -- 155
Other, net (50) (313) (258)
----------------------------------
Tax at effective tax rate $ 16,492 $ 10,228 $ 10,782
==================================
10. COMMITMENTS AND CONTINGENCIES
We lease facilities and certain equipment under operating leases expiring at
various dates through fiscal year 2013. Facility leases require us to pay
certain insurance expenses, maintenance costs and real estate taxes.
Approximate future basic rental commitments under operating leases as of April
3, 2004 are as follows:
Fiscal Year Ending (in thousands)
--------------------------------------------
2005 $6,109
2006 5,360
2007 3,747
2008 2,663
2009 1,638
Thereafter 1,019
-------
$20,536
=======
Rent expense in fiscal 2004, 2003 and 2002 was $4.9 million, $4.0 million and
$3.7 million respectively.
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 and results of operations.
67
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On January 21, 2004 we filed a claim for binding arbitration against Baxter,
seeking an arbitration award that compels Baxter to honor its obligations to
Haemonetics in the contracts it assumed, or to pay us damages. Provisions in our
supply contracts signed with Alpha include protections in case of a change in
ownership. In particular the contracts required that if Alpha were sold, the
buyer must assume the obligations of the contracts. At the present time, we are
uncertain about the timing and nature of the outcome of this arbitration. We
will record any amounts awarded in the period in which we are certain of the
amount and that collection is probable. See "Market Trends" in management's
discussion and analysis for further details of this action.
Through our acquisition of Fifth Dimension Information Systems, Inc. (Fifth
Dimension), as well as our agreement with 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
(of which $1.0 million was already paid. Therefore our current potential
obligation is $3.1 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. Out of the $14.5 million
of potential milestone payments to Baxter, we paid $3.8 million in the fourth
quarter of fiscal year 2003 as they acquired initial regulatory approval in the
European market. No payments were made in fiscal 2004.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, receivables and short-term debt
approximate their carrying value due to their short term maturities. The
carrying value and estimated fair values of our other significant financial
instruments are as follows:
(in thousands) April 3, 2004 March 29, 2003
-----------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------
Liabilities
Long-term debt $25,442 $28,057 $31,612 $35,241
Foreign exchange contracts 6,066 6,066 2,591 2,591
The fair value of long term debt was calculated based upon the current market
interest rates for debt of similar maturity and credit rating. The fair value of
our foreign exchange contracts was based upon the market rates at the fiscal
year end for the remaining life of the contract. The estimates provided are not
necessarily indicative of the amounts we would realize in a current market
exchange.
12. CAPITAL STOCK
Treasury Stock
We made no stock repurchases during fiscal 2004. During fiscal 2003, we
repurchased 1,850,150 shares of our outstanding common stock at an average
prevailing price of $27.11. This includes 829,700 shares repurchased under a
10b5-1 Plan, adopted March 29, 2002; 100,050 shares repurchased under a 10b5-1
Plan adopted July 29, 2002; and 427,600 shares repurchased under a 10b5-1 Plan
adopted October 28, 2002. During fiscal 2002, we repurchased 895,800 shares of
our outstanding common stock at an average prevailing price of $30.04. We expect
any repurchased shares to be made available for issuance pursuant to our
employee benefit and incentive plans and for other corporate purposes.
68
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Stock Plans
We have a long-term incentive stock option plan under which a maximum of
3,500,000 shares of our common stock may be issued pursuant to incentive and
non-qualified stock options granted to our key employees, officers and directors
(the "Long-term Incentive Plan"). The Long-term Incentive Plan is administered
by the Compensation Committee of the Board of Directors (the "Committee")
consisting of two or more independent members of our Board of Directors. The
exercise price, for both incentive and non-qualified options granted under the
Long-term Incentive Plan is determined by the Committee, but in no event shall
such option price be less than the fair market value of the common stock at the
time the option is granted. Options become exercisable in a manner determined by
the Committee, generally between two and seven years, and all options expire not
more than 10 years from the date of the grant. At April 3, 2004, there were
2,331,675 options outstanding under this plan and 1,168,325 shares available for
future grant.
We had a non-qualified stock option plan under which options were granted to
non-employee directors and two previous plans under which options were granted
to key employees, consultants and advisors. During 2004, our recorded stock
option compensation expense related to grants to consultants and advisors was
immaterial. At April 3, 2004, there were 1,656,020 options outstanding related
to these plans. No further options will be granted under these plans.
We have an Employee Stock Purchase Plan (the "Purchase Plan") under which a
maximum of 375,000 shares (subject to adjustment for stock splits and similar
changes) of common stock may be purchased by eligible employees. Substantially
all of our full-time employees are eligible to participate in the Purchase Plan.
The Purchase Plan provides for two "purchase periods" within each of our fiscal
years, the first commencing on November 1 of each year and continuing through
April 30 of the next calendar year, and the second commencing on May 1 of each
year and continuing through October 31 of such year. Shares are purchased
through an accumulation of payroll deductions (of not less than 2% nor more than
8% of compensation, as defined) for the number of whole shares determined by
dividing the balance in the employee's account on the last day of the purchase
period by the purchase price per share for the stock determined under the
Purchase Plan. The purchase price for shares is the lower of 85% of the fair
market value of the common stock at the beginning of the purchase period, or 85%
of such value at the end of the purchase period.
During fiscal 2004, there were 57,807 shares purchased at a range of $14.86 to
$15.07 per share under the Purchase Plan. During fiscal 2003, there were 36,997
shares purchased at a range of $18.03 to $28.17 per share under the Purchase
Plan. A summary of stock option activity for the three years ended April 3, 2004
is as follows:
Weighted Average
Shares Exercise Price per Share
- --------------------------------------------------------------------------------
Outstanding at March 31, 2001 4,137,715 $19.51
========== ==========
Exercisable at March 31, 2001 1,842,814 $18.44
========== ==========
Granted 1,044,289 $31.60
Exercised (731,788) $17.68
Terminated (92,416) $23.03
---------- ----------
Outstanding at March 30, 2002 4,357,800 $22.64
========== ==========
Exercisable at March 30, 2002 2,100,147 $19.32
========== ==========
Granted 843,670 $31.41
Exercised (211,338) $18.62
Terminated (234,954) $27.39
Outstanding at March 29, 2003 4,755,178 $24.14
========== ==========
Exercisable at March 29, 2003 2,841,486 $20.83
========== ==========
Granted 766,000 $22.59
Exercised (983,061) $17.46
Terminated (550,422) $27.71
Outstanding at April 3, 2004 3,987,695 $25.00
========== ==========
Exercisable at April 3, 2004 2,576,042 $23.61
========== ==========
69
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes information about stock options outstanding at
April 3, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Outstanding Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices April 3, 2004 Life Price April 3, 2004 Price
- ------------------------------------------------------------------------------------------
$15.16 - $22.27 1,397,048 6.15 $18.69 1,010,798 $17.50
$22.53 - $31.66 1,982,688 7.38 $26.96 1,202,976 $25.90
$32.01 - $35.58 607,959 7.09 $33.10 362,268 $33.04
--------------------------------------------------------- -------
Total 3,987,695 6.90 $25.00 2,576,042 $23.61
========================================================= =======
13. EARNINGS PER SHARE ("EPS")
The following table provides a reconciliation of the numerators and denominators
reflected in the basic and diluted earnings per share computations, as required
by Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," ("EPS").
Basic EPS is computed by dividing reported earnings available to stockholders by
the weighted average shares outstanding. Diluted EPS also includes the effect of
dilutive potential common shares.
Years Ended
----------------------------------------------------------
April 3, 2004 March 29, 2003 March 30, 2002
----------------------------------------------------------
(Dollars and shares in thousands except per share amounts)
Basic EPS
Net income $29,320 $28,379 $30,027
Weighted average shares 24,435 24,591 26,214
----------- ----------- -----------
Basic income per share $ 1.20 $ 1.15 $ 1.15
Diluted EPS
Net income $29,320 $28,379 $30,027
Basic weighted average shares 24,435 24,591 26,214
Dilutive effect of stock options 260 457 941
----------- ----------- -----------
Diluted weighted average shares 24,695 25,048 27,155
Diluted income per share $ 1.19 $ 1.13 $ 1.11
=========== =========== ===========
70
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
During 2004, 2003 and 2002 approximately 2.7 million, 2.1 million and 0.6
million potential common shares, respectively, were not included in the
computation of diluted earnings per share because exercise prices were greater
than the average market price of the common shares.
14. 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; the change in our net minimum pension liability
and the changes in fair value of the effective portion of our outstanding cash
flow hedge contracts.
The reconciliation of the components of accumulated other comprehensive loss was
as follows:
Net change Unrealized
Unrealized in loss on
Foreign gain (loss) minimum available
Currency on pension for sale
(in thousands): Translation derivatives liability investments Total
------------------------------------------------------------------
Balance as of March 31, 2001 ($17,628) $ -- $ -- $ 10 ($17,628)
Changes during the year, net of tax (1,054) 2,287 -- (10) 1,223
-----------------------------------------------------------------
Balance as of March 30, 2002 (18,682) 2,287 -- -- (16,395)
Changes during the year, net of tax 8,028 (4,695) (424) -- 2,909
-----------------------------------------------------------------
Balance as of March 29, 2003 (10,654) (2,408) (424) -- (13,486)
Changes during the year, net of tax 8,934 (2,018) 35 -- 6,951
-----------------------------------------------------------------
Balance as of April 3, 2004 ($ 1,720) ($ 4,426) ($ 389) $ -- ($ 6,535)
=================================================================
A summary of the components of other comprehensive income is as follows:
71
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Years Ended
(In thousands) April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
Net income $ 29,320 $ 28,379 $ 30,027
-----------------------------------------------
Other comprehensive income:
Foreign currency translation 8,934 8,028 (1,054)
Unrealized loss on available for sale securities -- -- (10)
Unrealized gain (loss) on cash flow hedges,
net of tax (8,973) (7,519) 7,414
Reclassifications into earnings of cash flow
hedge (gains) and losses, net of tax 6,955 2,824 (5,127)
Minimum pension liabilities adjustment, net
of tax 35 (424)
-----------------------------------------------
Total comprehensive income $ 36,271 $ 31,288 $ 31,250
===============================================
15. RETIREMENT PLANS
Defined Contribution Plans
We have a Savings Plus Plan that is a 401(k) plan that allows our U.S. employees
to accumulate savings on a pre-tax basis. In addition, matching contributions
are made to the Plan based upon pre-established rates. Our matching
contributions amounted to approximately $1.8 million in 2004 and $1.7 million in
both 2003 and 2002. Upon Board approval, additional discretionary contributions
can also be made. No discretionary contributions were made for the Savings Plan
in 2004, 2003 or 2002.
One of our subsidiaries also has a defined contribution plan. Both the employee
and the employer make contributions to the plan. The employer contributions to
this plan were $0.5 million in 2004 and $0.6 million in both 2003 and 2002.
We have no other material obligation for post-retirement or post-employment
benefits.
72
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Defined Benefit Plans
Two of our subsidiaries have defined benefit pension plans covering
substantially all full time employees at those subsidiaries. Net periodic
benefit costs for the plans in the aggregate include the following components
April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
(in thousands):
Service Cost $ 514 $ 436 $ 350
Interest cost on benefit obligation 146 125 112
Expected return on plan assets (197) 155 109
Recognized net actuarial (gain) loss 176 (173) (172)
Amortization of unrecognized prior service cost (35) (66) --
Amortization of unrecognized gain 53 20 --
Amortization of Unrecognized Initial Obligation 22 20 20
-----------------------------------------------
$ 679 $ 517 $ 419
===============================================
The activity under those defined benefit plans is as follows:
April 3, 2004 March 29, 2003 March 30, 2002
-----------------------------------------------
(in thousands)
Change in Benefit Obligation:
Benefit Obligation, beginning of year $(4,373) $(3,260) $(2,867)
Service cost (514) (436) (350)
Interest cost (146) (125) (112)
Benefits paid 64 37 209
Actuarial (gain) loss (181) (90) (301)
Currency translation (708) (499) 161
-----------------------------------------------
Benefit obligation, end of year $(5,858) $(4,373) $(3,260)
===============================================
Change in Plan Assets:
Fair value of plan assets, beginning of year $ 2,017 $ 1,600 $ 1,619
Company contributions 467 419 417
Benefits paid (41) (18) (192)
Actual (gain) loss on plan assets 197 (155) (109)
Currency translation 361 171 (135)
-----------------------------------------------
Fair value of Plan Assets, end of year $ 3,001 $ 2,017 $ 1,600
===============================================
Funded Status $(2,857) $(2,516) $(1,660)
Unrecognized net actuarial loss 989 1,091 627
Unrecognized initial obligation 303 284 276
Unrecognized prior service cost (335) (324) (355)
-----------------------------------------------
Net amount recognized $(1,900) $(1,465) $(1,112)
===============================================
Amounts recognized on the balance sheet:
Prepaid pension asset $ 304 $ 188 $ 34
Accrued pension liability (2,970) (2,373) (1,146)
Accumulated other comprehensive items 766 720 --
-----------------------------------------------
Net amount recognized $(1,900) $(1,465) $(1,112)
===============================================
73
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
One of the benefit plans is funded through assets of the Company. Accordingly
that plan has no assets included in the information presented above. The assets
of the other plan are less than the accumulated benefit obligation.
The weighted average rates used to determine the net periodic benefit costs were
as follows:
April 3, 2004 March 29, 2003 March 30, 2002
--------------------------------------------------
Discount Rate 2.9% 3.2% 3.5%
Rate of increased salary levels 1% 1% 1%
Expected long-term rate of return on assets 1% 1% 1%
16. TRANSACTIONS WITH RELATED PARTIES
Money is lent to employees for relocation costs and other personal purposes. The
amount of these loans, which is included in other assets, amounted to
approximately $0.3 million, $0.7 million and $0.8 million in 2004, 2003 and
2002, respectively. These loans are payable within five years. Certain loans are
interest bearing, and interest income is recorded on these loans when collected.
Certain loans have forgiveness provisions based upon continued service or
compliance with various guidelines. The outstanding loan balance is amortized as
a charge to operating expense as such amounts are forgiven.
Additionally, a $1.0 million payment was made to 6 Encore (formerly Fifth
Dimension Information Systems, Inc.) on May 19, 2003, in accordance with the
Asset Purchase Agreement, dated December 12, 2001, as amended, in which
Haemonetics Enterprises, Inc. and Haemonetics Canada Ltd. purchased the assets
of Fifth Dimension Information Systems, Inc. The President and principle
shareholder of 6 Encore is Brad Lazaruik, former Haemonetics Vice President, 5D.
17. SEGMENT, GEOGRAPHIC AND CUSTOMER 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
We have two families of products: (1) those that serve the donor and (2) those
that serve the patient. Under the donor family of products we have included
blood bank, red cell and plasma collection products. The patient products are
the surgical collection products.
74
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Donor
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(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 mobile collection systems.
Plasma collection products are machines, disposables and solutions that perform
apheresis for the separation of whole blood components and subsequent collection
of plasma. The devices used in automated plasma collection are the PCS(R)2
plasma collection system and the Superlite(TM).
Patient
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.
Other
Other revenue 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 collection and
data management systems to plasma collectors.
Revenues from External Customers:
Years ended (in thousands)
April 3, 2004 March 29, 2003 March 30, 2002
------------- -------------- --------------
Donor:
Blood Bank $119,710 $110,608 $112,186
Red Cell 22,640 16,048 10,884
Plasma 117,051 118,690 112,662
-------- -------- --------
259,401 245,346 235,732
Patient:
Surgical 82,826 73,255 72,131
Other 22,002 18,355 12,106
Total revenues from external customers $364,229 $336,956 $319,969
======== ======== ========
75
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Geographic Segmentation
Years ended (in thousands)
April 3, 2004
Other Total
United North North Other Total
States America America Japan Asia Asia
Sales $126,872 $ 3,271 $130,143 $ 99,626 $ 27,129 $126,755
Total Assets 269,743 3,354 273,097 48,314 8,363 56,677
Long-Lived
Assets 82,728 3,050 85,778 18,316 2,294 20,610
April 3, 2004
United Other Total Total
Germany France Kingdom Italy Austria Europe Europe Consolidated
Sales $ 33,489 $ 20,666 $ 3,556 $ 13,936 $ 8,332 $ 27,352 $107,331 $364,229
Total Assets 13,698 11,401 6,225 19,577 2,821 23,898 77,620 407,394
Long-Lived
Assets 5,209 1,509 3,030 2,380 882 6,547 19,557 125,945
March 29, 2003
Other Total
United North North Other Total
States America America Japan Asia Asia
Sales $127,241 $ 2,746 $129,987 $ 94,215 $ 24,654 $118,869
Total Assets 228,560 3,666 232,226 $ 48,343 6,866 55,209
Long-Lived
Assets 96,437 3,077 99,514 17,060 2,594 19,654
March 29, 2003
United Other Total Total
Germany France Kingdom Italy Austria Europe Europe Consolidated
Sales $ 30,125 $ 18,065 $ 3,221 $ 10,376 $ 7,000 $ 19,313 $ 88,100 $336,956
Total Assets 14,028 15,067 4,689 16,697 2,474 19,095 72,050 359,485
Long-Lived
Assets 5,244 1,699 2,377 1,846 905 4,714 16,785 135,953
March 30, 2002
Other Total
United North North Other Total
States America America Japan Asia Asia
Sales $121,558 $ 2,697 $124,255 $ 96,559 $ 19,903 $116,462
Total Assets 258,925 3,022 261,947 38,465 5,658 44,123
Long-Lived
Assets 102,465 2,599 105,064 11,553 1,574 13,127
March 30, 2002
United Other Total Total
Germany France Kingdom Italy Austria Europe Europe Consolidated
Sales $ 23,941 $ 16,517 $ 4,183 $ 8,763 $ 6,929 $ 18,918 $ 79,252 $319,969
Total Assets 9,592 11,901 5,004 11,531 2,475 18,348 58,851 364,921
Long-Lived
Assets 3,451 1,469 249 1,124 820 6,782 13,895 132,086
76
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
18. REORGANIZATION
On August 12, 2003, we announced a reorganization of our business into two
global product families: donor and patient. This reorganization redefined our
customer and allowed us to expand our customer base to better position us for
future growth. 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 $2.7 million. We expect the savings
associated with the reorganization to approximate $4.0 million annually. A
summary of activity follows (in thousands):
Balance as of March 29, 2003 $ --
Total charges 2,690
Severance and related costs paid 2,690
------
Balance as of April 3, 2004 $ --
======
19. SUMMARY OF QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter*
Fiscal year ended April 3, 2004:
Net revenues $88,283 $87,488 $90,737 $97,721
Gross profit 39,586 41,380 43,113 48,041
Operating income 8,186 8,906 14,096 14,689
Net income 4,983 5,495 9,314 9,528
Share data:
Net Income:
Basic $ 0.21 $ 0.23 $ 0.38 $ 0.38
Diluted $ 0.21 $ 0.23 $ 0.38 $ 0.37
77
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Fiscal year ended March 29, 2003:
Net revenues $81,935 $87,025 $87,115 $80,881
Gross profit 38,647 38,890 40,941 36,218
Operating income 9,692 9,826 11,822 6,139
Net income 6,775 6,780 10,347 4,477
Share data:
Net Income:
Basic $ 0.27 $ 0.28 $ 0.43 $ 0.19
Diluted $ 0.26 $ 0.27 $ 0.42 $ 0.18
* The fourth fiscal quarter of fiscal year 2004 includes 14 weeks due to our
policy for determining our fiscal year end.
78
Report of Independent Registered Public Accounting Firm
To the Stockholders of Haemonetics Corporation:
We have audited the accompanying consolidated balance sheets of Haemonetics
Corporation (a Massachusetts corporation) and its subsidiaries as of April 3,
2004 and March 29, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Haemonetics
Corporation and its subsidiaries as of April 3, 2004 and March 29, 2003, and the
consolidated results of their operations and their cash flows for each of the
years then ended, in conformity with U.S. generally accepted accounting
principles.
S/ERNST & YOUNG, LLP
Boston, Massachusetts
April 26, 2004
79
THE FOLLOWING REPORT IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
Report of Independent Public Accountants
To the Stockholders of Haemonetics Corporation:
We have audited the accompanying consolidated balance sheets of Haemonetics
Corporation (a Massachusetts corporation) and its subsidiaries as of March 30,
2002 and March 31, 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 30, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Haemonetics Corporation and its
subsidiaries as of March 30, 2002 and March 31, 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
March 30, 2002, in conformity with accounting principles generally accepted in
the United States.
As explained in Note 2 to the financial statements, effective April 1, 2001, the
Company changed its method of accounting for derivative instruments and hedging
activities in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities."
S/ARTHUR ANDERSEN
Boston, Massachusetts
April 22, 2002
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In April 2002, we changed our independent accountants as reported in our Current
Report on Form 8-K dated June 18, 2002.
Our consolidated financial statements for the fiscal year ended March 30, 2002
were audited by Arthur Andersen, LLP, independent accountants. On August 31,
2002, Arthur Andersen ceased practicing before the SEC. Therefore, Arthur
Andersen did not participate in the preparation of this Form 10-K, did not
reissue its audit report with respect to the financial statements included in
this Form 10-K, and did not consent to the inclusion of its audit report in the
Form 10-K. As a result holders of our securities may have no effective remedy
against Arthur Andersen in connection with a material misstatement or omission
in the financial statements to which its audit report relates. In addition, even
if such holders were able to assert such a claim, because it has ceased
operations, Arthur Andersen may fail or otherwise have insufficient assets to
satisfy claims made by holders of our securities that might arise under federal
securities laws or otherwise with respect to Arthur Andersen's audit report.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by 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 (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 as of the end of the period covered by
this report, 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.
Changes in Internal Controls - There were no changes in the Company's internal
control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning our directors and compliance with Section 16(a)
of the Securities Exchange Act of 1934 required by this Item is incorporated by
reference to our Proxy Statement for the Annual Meeting to be held July 27,
2004.
(b) The information concerning our Executive Officers is set forth at the end of
Part I hereof.
(c) The balance of the information required by this item including information
concerning our Audit Committee and the Audit Committee Financial Expert and
compliance with Item 401 of S-K is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting to be held July 27, 2004. We have adopted
a Code of Ethics that applies to our chief executive officer, chief financial
officer and senior financial officers. The Code of Ethics is incorporated into
the Company's Code of Business Conduct located on the
81
Company's internet web site at
http://www.haemonetics.com/site/content/investor/investor.asp and it is
available in print to any shareholder who requests it. Such requests should be
directed to our company's Clerk.
We intend to disclose any amendment to, or waiver from, a provision of its code
of ethics that applies to our chief executive officer, chief financial officer
and senior financial officers and that relates to any element of the Code of
Ethics definition enumerated in Item 406 of Regulation S-K by posting such
information on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference in our Proxy
Statement for the Annual Meeting to be held July 27, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item concerning security ownership of certain
beneficial owners and management is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting to be held July 27, 2004.
Stock Plans
The following table below sets forth information as of April 3, 2004 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance.
(a) (b) (c)
Number of Weighted Number of securities
securities to average available for future
be issued upon exercise price issuance under equity
exercise of of outstanding compensation
outstanding options, plans(excluding
options, warrants and securities reflected in
warrants and rights columns (a) (1)
rights
Plan Category
Equity Compensation Plans
approved by security holders 3,987,695 $25.00 1,372,395
Equity compensation plans not
approved by security holders -0- -0- -0-
--------------------------------------------------
Total 3,987,695 $25.00 1,372,395
(1) Includes 204,070 shares available for purchase under the Employee Stock
Purchase Plan in future purchase periods.
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference in our Proxy
Statement for the Annual Meeting to be held July 27, 2004.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this report:
(a) Financial Statements are included in Part II of this report
Financial Statements required by Item 8 of this Form
Consolidated Statements of Operations..................48
Consolidated Balance Sheets............................49
Consolidated Statements of Stockholders' Equity........50
Consolidated Statements of Cash Flows..................51
Notes to Consolidated Financial Statements.............52
Report of Independent Public Accountants...............79
Schedules required by Article 12 of Regulation S-X
II Valuation and Qualifying Accounts......................90
All other schedules have been omitted because they are not applicable or
not required.
(b) Reports on Form 8-K
We furnished a report on Form 8-K on May 3, 2004 furnishing a press
release we issued on May 3, 2004 announcing our financial results for the
quarter and fiscal year ended April 3, 2004 and outlook for fiscal 2005.
(c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index at page 85, which is incorporated herein by reference.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Brad Nutter
-------------------
Brad Nutter, President
and Chief Executive Officer
Date: June 2, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald A. Matricaria Chairman of the Board June 2, 2004
- -------------------------
Ronald A. Matricaria
/s/ Brad Nutter President and Chief Executive Officer, June 2, 2004
- --------------------------- Director (Principal Executive Officer)
Brad Nutter
/s/ Ronald J. Ryan Vice President June 2, 2004
- --------------------------- and Chief Financial Officer,
Ronald J. Ryan (Principal Financial Officer)
/s/ Susan M. Hanlon Vice President and Corporate Controller June 2, 2004
- --------------------------- (Principal Accounting Officer)
Susan M. Hanlon
/s/ Yutaka Sakurada President, Haemonetics Japan/Asia June 2, 2004
- --------------------------- and Chairman and CEO, Haemonetics Japan
Yutaka Sakurada Director
/s/ Benjamin L. Holmes Director June 2, 2004
--------------------------
Benjamin L. Holmes
/s/ Donna C. E. Williamson Director June 2, 2004
- --------------------------
Donna C. E. Williamson
/s/ Lawrence C. Best Director June 2, 2004
- ---------------------------
Lawrence C. Best
/s/ Harvey G. Klein M.D. Director June 2, 2004
- ---------------------------
Harvey G. Klein M.D.
/s/ Ronald G. Gelbman Director June 2, 2004
- ---------------------
Ronald G. Gelbman
84
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number and Description of Exhibit
3. Articles of Organization
3A* Articles of Organization of the Company effective August 29, 1985, as
amended December 12, 1985 and May 21, 1987 (filed as Exhibit 3A to the Company's
Form S-1 No. 33-39490 and incorporated herein by reference).
3B* Form of Restated Articles of Organization of the Company (filed as
Exhibit 3B to the Company's Form S-1 No. 33-39490 and incorporated herein by
reference).
3C* Articles of Amendment to the Articles of Organization of the Company
filed May 8, 1991 with the Secretary of the Commonwealth of Massachusetts (filed
as Exhibit 3E to the Company's Amendment No. 1 to Form S-1 No. 33-39490 and
incorporated herein by reference).
3D* By-Laws of the Company, as amended May 1, 2001 filed as Exhibit 3D to
the Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
4. Instruments defining the rights of security holders
4A* Specimen certificate for shares of common stock (filed as Exhibit 4B
to the Company's Amendment No. 1 to Form S-1 No. 33-39490 and incorporated
herein by reference).
10. Material Contracts
10A* The 1990 Stock Option Plan, as amended (filed as Exhibit 4A to the
Company's Form S-8 No. 33-42006 and incorporated herein by reference).
10B* Form of Option Agreements for Incentive and Non-qualified Options
(filed as Exhibit 10B to the Company's Form S-1 No. 33-39490 and incorporated
herein by reference).
10C* Credit Facility with Swiss Bank Corporation (filed as Exhibit 10J to
the Company's Amendment No. 1 to Form S-1 No. 33-39490 and incorporated herein
by reference).
10D* Lease dated July 17, 1990 between the Buncher Company and the Company
of property in Pittsburgh, Pennsylvania (filed as Exhibit 10K to the Company's
Form S-1 No. 33-39490 and incorporated herein by reference).
10E* Lease dated July 3, 1991 between Wood Road Associates II Limited
Partnership and the Company for the property adjacent to the main facility in
Braintree, Massachusetts (filed as Exhibit 10M to the Company's Form 10-K No.
1-10730 for the year ended March 28, 1992 and incorporated herein by reference).
10F* Amendment No. 1 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company for the child care facility
(filed as Exhibit 10N to the Company's Form 10-K No. 1-10730 for the year ended
March 28, 1992 and incorporated herein by reference).
10G* Bank Overdraft Facility between The Sumitomo Bank and the Company
with an annual renewal beginning February 28, 1993 (filed as Exhibit 10O to the
Company's Form 10-K No. 1-10730 for the year ended March 28, 1992 and
incorporated herein by reference).
10H* Bank Overdraft Facility between The Mitsubishi Bank and the Company
with an annual renewal beginning June 30, 1993 (filed as Exhibit 10P to the
Company's Form 10-K, No. 1-10730 for the year ended March 28, 1992 and
incorporated herein by reference).
10I* Short-term Loan Agreement between The Mitsubishi Bank and the Company
renewable every three months (filed as Exhibit 10Q to the Company's Form 10-K
No. 1-10730 for the year ended March 28, 1992 and incorporated herein by
reference).
10J* Amendment No. 2 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company (filed as Exhibit 10S to the
Company's Form 10-K No. 1-10730 for the year ended April 3, 1993 and
incorporated herein by reference).
85
10K* Real Estate purchase agreement dated May 1, 1994 between 3M UK
Holding PLC and the Company (filed as Exhibit 10AA to the Company's Form 10-K
No. 1-10730 for the year ended April 1, 1995 and incorporated herein by
reference).
10L* 1992 Long-Term Incentive Plan (filed as Exhibit 10V to the Company's
Form 10-K No. 1-10730 for the year ended April 3, 1993 and incorporated herein
by reference).
10M* Real Estate purchase agreement dated September 30, 1994 between The
Midland Mutual Life Insurance Company and the Company (filed as Exhibit 10AB to
the Company's Form 10-K No. 1-10730 for the year ended April 1, 1995 and
incorporated herein by reference).
10N* Purchase agreement dated October 1, 1994 between Kuraray Co. and the
Company (filed as Exhibit 10AC to the Company's Form 10-K No. 1-10730 for the
year ended April 1, 1995 and incorporated herein by reference).
10O* First Amendment to lease dated July 17, 1990 between Buncher Company
and the Company of property in Pittsburgh, Pennsylvania (filed as Exhibit 10AI
to the Company's Form 10-Q No. 1-10730 for the quarter ended December 28, 1996
and incorporated herein by reference).
10P* Amendment, dated April 18, 1997 to the 1992 Long-Term Incentive Plan
(filed as Exhibit 10V to the Company's Form 10-K No. 1-10730 for the year ended
April 3, 1993 and incorporated herein by reference).
10Q* Note Purchase agreement whereby Haemonetics Corporation authorized
sale of $40,000,000, 7.05% Senior Notes due October 15, 2007 (filed as Exhibit
10A to the Company's Form 10-Q No. 1-10730 for the quarter ended September 27,
1997 and incorporated herein by reference).
10R* 1998 Employee Stock Purchase Plan (filed as Exhibit 10Z to the
Company's Form 10-K No. 1-10730 for the year ended March 28, 1998 and
incorporated herein by reference).
10S* 1998 Stock Option Plan for Non-Employee Directors. (filed as Exhibit
10AA to the Company's Form 10-K No. 1-10730 for the year ended March 28, 1998
and incorporated herein by reference).
10T* Lease, dated July 29, 1997 between New Avon Limited Partnership and
the Company for the property in Avon, Massachusetts (filed as Exhibit 10AB to
the Company's Form 10-K No. 1-10730 for the year ended March 28, 1998 and
incorporated herein by reference).
10U* Agreement on Bank Transactions between Haemonetics Corporation and
the Bank of Tokyo-Mitsubishi, Ltd. dated February 14, 1985 (filed as Exhibit
10AA to the Company's Form 10-K No. 1-10730 for the year ended April 3, 1999 and
incorporated herein by reference).
10V* Agreement and Plan of Merger dated September 4, 2000 between
Haemonetics Corporation and Transfusion Technologies Corporation (filed as
Exhibit 2.1 to the Company's Form 8-K No. 1-14041 dated September 29, 2000 and
incorporated herein by reference).
10W* Amendment dated September 29, 2000 to the 7.05% Senior Notes Plan
(filed as Exhibit 10A to the Company's Form 10-Q No. 1-10730 for the quarter
ended September 30, 2000 and incorporated herein by reference).
10X* Haemonetics Corporation 2000 Long-term Incentive Plan (filed as
Exhibit 10A to the Company's Form 10-Q No. 1-10730 for the quarter ended
December 30, 2000 and incorporated herein by reference).
10Y* Note and Mortgage dated December 12, 2000 between the Company and
General Electric Capital Business Asset Funding Corporation relating to the
Braintree facility (filed as Exhibit 10B to the Company's Form 10-Q No. 1-10730
for the quarter ended December 30, 2000 and incorporated herein by reference).
10Z* Amendment No. 3 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company, dated April 1, 1997 (filed as
Exhibit 10AA to the Company's Form 10-K No. 1-10730 for the year ended March 30,
2002 and incorporated herein by reference).
10AA* Amendment No. 4 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership, as assigned to Trinet Essential Facilities
XXIX, Inc., effective June 18, 1998, and the Company, dated February 25, 2002.
(filed as Exhibit 10AB to the Company's Form 10-K No. 1-10730 for the year ended
March 30, 2002 and incorporated herein by reference).
10AB* Employment Agreement between the Company and Ronald J. Ryan. (filed
as Exhibit 10.2 to the Company's Form 10-Q No. 1-10730 for the quarter ended
June 29, 2002and incorporated herein by reference).
86
10AC* Employment agreement between Brad Nutter and Haemonetics
Corporation. ( filed as Exhibit 10AE to the Company's Form 10-K No. 1-10730 for
the year ended March 29, 2003 and incorporated herein by reference).
10AD * First Amendment of lease dated July 29, 1997 between New Avon
Limited Partnership and the Company for the property in Avon, Massachusetts. (
filed as Exhibit 10AF to the Company's Form 10-K No. 1-10730 for the year ended
March 29, 2003 and incorporated herein by reference).
10AE * Second Amendment to lease dated July 17, 1990 between Buncher
Company and the Company for the property in Pittsburgh, Pennsylvania.( filed as
Exhibit 10AG to the Company's Form 10-K No. 1-10730 for the year ended March 29,
2003 and incorporated herein by reference).
10AF* Form of Option Agreements for Non-Qualified stock options for the
1992 Long-Term Incentive Plan for Employees. (filed as Exhibit 10AH to the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AG* Form of Option Agreements for Non-Qualified stock options for the
1998 Stock Option Plan for Non-Employee Directors. (filed as Exhibit 10AI to the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AH* Form of Option Agreement for Non-Qualified stock options for the
2000 Long Term-Incentive Plan for Employees. (filed as Exhibit 10AJto the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AI* Form of Option Agreements for Non-Qualified stock options for the
2000 Long- Term Incentive Plan for Non-Employee Directors. (filed as Exhibit
10AK to the Company's Form 10-K No. 1-10730 for the year ended March 29, 2003
and incorporated herein by reference).
10AJ* Employment Agreement between the Company and Robert Ebbeling. (filed
as Exhibit 10AL to the Company's Form 10-K No. 1-10730 for the year ended March
29, 2003.) 10AK* Employment agreement between the Company and Peter Allen (filed
as Exhibit 10.1 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AK* Employment agreement between the Company and Brian Concannon (filed
as Exhibit 10.2 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AL* Employment agreement between the Company and Alicia Lopez, (filed as
Exhibit 10.3 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AM Second Amendment of lease dated July 29, 1997 between New Avon
Limited Partnership and the Company for the property in Avon, Massachusetts.
10AN Third Amendment of lease dated July 29, 1997 between New Avon Limited
Partnership and the Company for the property in Avon, Massachusetts.
10AO Summary of the Employment Agreement between Haemonetics Corporation
and Dr. Ulrich Exckert.
21 Subsidiaries of the Company
23.1 Consent of the Independent Public Accountants, Ernst & Young LLP
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002,
of Brad Nutter, President and Chief Executive Officer of the Company
87
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
* Incorporated by reference
(All other exhibits are inapplicable.)
88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATIED FINANCIAL STATEMENTS
We have audited, in accordance with the standards of the Public Company
Oversight Board (United States), the consolidated financial statements of
Haemonetics Corporation and subsidiaries included in this Form 10-K, and have
issued our report thereon dated April 26, 2004. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index in item 15(a) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
S/ERNST & YOUNG LLP
Boston, Massachusetts
April 26, 2004
89
SCHEDULE II
HAEMONETICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Charged Write-Offs Balance
Beginning of Costs and to Other (Net of at End of
Period Expenses Accounts Recoveries) Period
------ -------- -------- ----------- ------
For Year Ended April 3, 2004
Allowance for Doubtful Accounts $ 1,449 $ 809 $ -- $ 3 $ 2,261
For Year Ended March 29, 2003
Allowance for Doubtful Accounts $ 1,298 $ 149 $ -- $ 2 $ 1,449
Purchase Accounting Reserves $ 44 $ (44) $ -- $ -- $ --
For Year Ended March 30, 2002
Allowance for Doubtful Accounts $ 1,233 $ 198 $ -- $ (133) $ 1,298
Purchase Accounting Reserves $ 601 $ -- $ 1,139 $(1,696) $ 44
90