FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended: December 27, 2003 Commission File Number: 1-10730
----------------- -------
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
------------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 Wood Road, Braintree, MA 02184
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
Indicate by check mark whether the registrant (1.) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) (2.) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes X No
----- -----
The number of shares of $.01 par value common stock outstanding as of
December 27, 2003:
24,896,058
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income - Three and Nine
Months Ended December 27, 2003 and December 28, 2002 2
Unaudited Consolidated Balance Sheets - December 27, 2003 and
March 29, 2003 3
Unaudited Consolidated Statement of Stockholders' Equity -
Nine Months Ended December 27, 2003 4
Unaudited Consolidated Statements of Cash Flows -Nine Months
Ended December 27, 2003 and December 28, 2002 5
Notes to Unaudited Consolidated Financial Statements 6-15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-30
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 30
ITEM 4. Controls and Procedures 31
PART II. OTHER INFORMATION 32
ITEM 6. Exhibits and Reports on Form 8-K 32
Signatures
ITEM 1. Financial Statements
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except share data)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net revenues $90,737 $87,115 $266,508 $256,075
Cost of goods sold 47,624 46,174 $142,429 137,597
------- ------- -------- --------
Gross profit 43,113 40,941 124,079 118,478
Operating expenses:
Research and development 4,072 4,633 $ 13,691 14,682
Selling, general and administrative 24,945 24,486 $ 79,200 72,456
------- ------- -------- --------
Total operating expenses 29,017 29,119 92,891 87,138
------- ------- -------- --------
Operating income 14,096 11,822 31,188 31,340
Interest expense (682) (783) (2,235) (2,530)
Interest income 805 325 1,274 1,111
Other income, net 335 549 699 1,637
------- ------- -------- --------
Income before provision for income taxes 14,554 11,913 30,926 31,558
Provision for income taxes 5,240 1,566 11,134 7,656
------- ------- -------- --------
Net income $ 9,314 $10,347 $ 19,792 $ 23,902
======= ======= ======== ========
Basic earnings per common share $ 0.38 $ 0.43 $ 0.82 $ 0.97
Diluted earnings per common share $ 0.38 $ 0.42 $ 0.81 $ 0.95
Weighted average shares outstanding
Basic 24,518 24,295 24,234 24,752
Diluted 24,780 24,573 24,446 25,280
The accompanying notes are an integral part of these consolidated financial
statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 27, 2003 March 29, 2003
----------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 97,182 $ 49,885
Accounts receivable, less allowance of $1,912
at December 27, 2003 and $1,449 at March 29, 2003 84,399 77,913
Inventories 56,081 65,805
Current investment in sales-type leases, net 2,102 2,681
Deferred tax asset 19,143 17,307
Prepaid expenses and other current assets 7,085 9,664
-------- --------
Total current assets 265,992 223,255
Total property, plant and equipment 266,502 244,499
Less: accumulated depreciation 187,182 160,512
-------- --------
Net property, plant and equipment 79,320 83,987
Other assets:
Investment in sales-type leases, net (long-term) 2,312 2,968
Other intangibles, less amortization of $5,116
at December 27, 2003 and $3,753 at March 29, 2003 25,202 26,339
Goodwill, net 16,994 16,010
Deferred tax asset, net 2,997 2,954
Other long-term assets 3,747 3,695
-------- --------
Total other assets 51,252 51,966
-------- --------
Total assets $396,564 $359,208
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 41,016 $ 39,005
Accounts payable 13,922 13,677
Accrued payroll and related costs 13,103 11,930
Accrued income taxes 7,741 12,093
Other accrued liabilities 26,572 23,670
-------- --------
Total current liabilities 102,354 100,375
Long-term debt, net of current maturities 25,560 31,612
Other long-term liabilities 4,422 3,984
Stockholders' equity:
Common stock, $0.01 par value; Authorized - 80,000,000
shares; Issued - 32,464,347 shares at December 27, 2003
and 31,664,849 shares at March 29, 2003 325 317
Additional paid-in capital 123,519 108,770
Retained earnings 312,763 292,971
Accumulated other comprehensive loss (8,302) (13,486)
-------- --------
Stockholders' equity before treasury stock 428,305 388,572
Less: Treasury stock at cost - 7,568,289 shares at
December 27, 2003 and 7,626,096 shares at March 29, 2003 164,077 165,335
-------- --------
Total stockholders' equity 264,228 223,237
-------- --------
Total liabilities and stockholders' equity $396,564 $359,208
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited, in thousands)
Accumulated
Common Stock Additional Other Total
------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive
Shares $'s Capital Stock Earnings Loss Equity Income
------ --- ---------- -------- -------- ------------- ------------- -------------
Balance, March 29, 2003 31,665 $317 $108,770 $(165,335) $292,971 $(13,486) $223,237
===============================================================================
Employee stock purchase
plan --- --- (393) 1,258 --- --- 865
Exercise of stock options
and related tax benefit 799 8 15,142 --- --- --- 15,150
Purchase of treasury stock --- --- --- --- --- --- ---
Net income --- --- --- --- 19,792 --- 19,792 $19,792
Foreign currency
translation adjustment --- --- --- --- --- 8,040 8,040 8,040
Unrealized loss on
derivatives --- --- --- --- --- (2,856) (2,856) (2,856)
-------
Comprehensive income --- --- --- --- --- --- --- $24,976
-----------------------------------------------------------------------------------------------
Balance, December 27, 2003 32,464 $325 $123,519 $(164,077) $312,763 $ (8,302) $264,228
===============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Nine Months Ended
----------------------------
December 27, December 28,
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net income $19,792 $ 23,902
------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Non cash items:
Depreciation and amortization 23,191 22,169
Deferred tax benefit (143) (377)
Tax benefit related to the exercise of stock options 1,725 612
Unrealized gain from hedging activities (2,224) (2,074)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable - net 731 (10,045)
Decrease (increase) in inventories 6,474 (7,207)
Decrease in sales-type leases (current) 754 215
Decrease (increase) in prepaid income taxes 2,934 (3,913)
Decrease in other assets and other long-term liabilities 1,090 226
Increase (decrease) in accounts payable and accrued payroll 300 (2,273)
(Decrease) increase in accrued taxes (4,701) 8,204
Decrease in accrued expenses (2,170) (114)
------- --------
Net cash provided by operating activities 47,753 29,325
------- --------
Cash Flows from Investing Activities:
Purchases of available-for-sale investments -- (11,670)
Gross proceeds from sale of available-for-sale investments -- 44,306
Capital expenditures on property, plant and equipment, net of
retirements and disposals (7,535) (9,128)
Performance milestone payment to acquired software development company (1,020)
Net decrease (increase) in sales-type leases (long-term) 913 (197)
------- --------
Net cash (used in) provided by investing activities (7,642) 23,311
------- --------
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (311) (311)
Net (decrease) increase in short-term revolving credit agreements (1,903) 8,455
Payments on long term credit agreements (5,714) (5,714)
Employee stock purchase plan purchases 865 796
Exercise of stock options 13,425 3,165
Purchase of treasury stock -- (44,980)
------- --------
Net cash used in financing activities 6,362 (38,589)
Effect of exchange rates on cash and cash equivalents 824 706
------- --------
Net increase in cash and cash equivalents 47,297 14,753
Cash and cash equivalents at beginning of period 49,885 34,913
------- --------
Cash and cash equivalents at end of period $97,182 $ 49,666
======= ========
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for placements
of Haemonetics equipment $ 5,851 $ 7,631
Reclassifications from long-term credit agreements
to short-term credit agreements $ 0 $ 2,512
Supplemental disclosures of cash flow information:
Interest paid $ 2,615 $ 3,033
Income taxes paid, net of refunds $11,945 $ 3,772
5
INSERT TAB
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of our management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany transactions have been
eliminated. Operating results for the nine-month period ended December 27,
2003 are not necessarily indicative of the results that may be expected for
the full fiscal year ending April 3, 2004. For further information, refer to
the audited consolidated financial statements and footnotes included in our
annual report on Form 10-K for the fiscal year ended March 29, 2003.
Certain amounts in the prior year financial statements have been
reclassified to conform to the fiscal year 2004 presentation.
Our fiscal year ends on the Saturday closest to the last day of March.
Fiscal year 2004 includes 53 weeks with the first three quarters of the
fiscal year including 13 weeks and the fourth quarter of fiscal 2004
including 14 weeks. Fiscal year 2003 included 52 weeks with all four
quarters including 13 weeks.
2. EARNINGS PER SHARE ("EPS")
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations, as
required by SFAS No. 128, "Earnings Per Share." Basic EPS is computed by
dividing net income by weighted average shares outstanding. Diluted EPS
includes the effect of potential dilutive common shares.
For the three months ended
December 27, 2003 December 28, 2002
----------------------------------------
(in thousands, except per share amounts)
----------------------------------------
Basic EPS
Net income $ 9,314 $10,347
Weighted average shares 24,518 24,295
----------------------------
Basic earnings per share $ 0.38 $ 0.43
----------------------------
Diluted EPS
Net income $ 9,314 $10,347
Basic weighted average shares 24,518 24,295
Effect of stock options 262 278
----------------------------
Diluted weighted average shares 24,780 24,573
----------------------------
Diluted earnings per share $ 0.38 $ 0.42
----------------------------
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the nine months ended
December 27, 2003 December 28, 2002
----------------------------------------
(in thousands, except per share amounts)
----------------------------------------
Basic EPS
Net income $19,792 $23,902
Weighted average shares 24,234 24,752
----------------------------
Basic earnings per share $ 0.82 $ 0.97
----------------------------
Diluted EPS
Net income $19,792 $23,902
Basic weighted average shares 24,234 24,752
Effect of stock options 212 528
----------------------------
Diluted weighted average shares 24,446 25,280
----------------------------
Diluted earnings per share $ 0.81 $ 0.95
----------------------------
3. STOCK-BASED COMPENSATION
Effective in the fourth quarter of fiscal 2003, we adopted the
disclosure only provisions for employee stock-based compensation under
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and will continue to
account for employee stock-based compensation using the intrinsic value
method under Accounting Principles Board Opinion No. 25 ("APB No. 25").
At the date of grant, the exercise price of our employee stock options
equals the market price of the underlying stock. Therefore, under the
intrinsic value method no accounting recognition is given to options granted
to employees and directors until the options are exercised. Upon exercise,
net proceeds, including tax benefits realized, are credited to equity. The
compensation cost for options granted to consultants is recorded at fair
value in accordance with Emerging Issues Task Force "EITF" issue 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Had compensation costs under our stock-based compensation plans been
determined based on the fair value model of Statement of Financial
Accounting Standards (SFAS) 123 "Accounting for Stock-Based Compensation,"
the effect on our earnings per share would have been as follows:
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the three months ended
December 27, December 28,
2003 2002
----------------------------
(in thousands, except per share amounts)
Net income (as reported): $ 9,314 $10,347
Deduct: Total stock-based compensation expense
determined under the fair value method for all
awards, net of tax $(1,159) $(1,790)
-----------------------
Pro Forma Net Income: $ 8,155 $ 8,557
======= =======
Earnings per share:
Basic
As Reported $ 0.38 $ 0.43
Pro forma $ 0.33 $ 0.35
Diluted
As Reported $ 0.38 $ 0.42
Pro forma $ 0.33 $ 0.35
For the nine months ended
December 27, December 28,
2003 2002
----------------------------
(in thousands, except per share amounts)
Net income (as reported): $19,792 $23,902
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of tax $(3,839) $(5,741)
------- -------
Pro Forma Net Income: $15,953 $18,161
======= =======
Earnings per share:
Basic
As Reported $ 0.82 $ 0.97
Pro forma $ 0.66 $ 0.73
Diluted
As Reported $ 0.81 $ 0.95
Pro forma $ 0.65 $ 0.72
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
4. ACCOUNTING FOR SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in costs of goods sold with
the exception of $1.2 million for both the three month period ended December
27, 2003 and December 28, 2002 and $3.7 million and $3.9 million for the
nine months ended December 27, 2003 and December 28, 2002, respectively. We
include these costs in selling, general and administrative expenses.
5. FOREIGN CURRENCY
We enter into forward exchange contracts to hedge the anticipated cash
flows from forecasted foreign currency denominated revenues, principally
Japanese Yen and Euro. The purpose of our hedging strategy is to lock in
foreign exchange rates for twelve months to minimize, for this period of
time, the unforeseen impact on our results of operations of fluctuations in
foreign exchange rates. We also enter into forward contracts that settle
within 35 days to hedge certain inter-company receivables denominated in
foreign currencies. These derivative financial instruments are not used for
trading purposes. The cash flows related to the gains and losses on these
foreign currency hedges are classified in the consolidated statements of
cash flows as part of cash flows from operating activities.
6. PRODUCT WARRANTIES
We provide a warranty on parts and labor for one year after the sale
and installation of each device. We also warrant our disposable products
through their use or expiration. We estimate our potential warranty expense
based on our historical warranty experience, and we periodically assess the
adequacy of our warranty accrual and make adjustments as necessary.
For the three months ended
December 27, December 28,
2003 2002
----------------------------
(in thousands)
Warranty accrual as of the beginning of the period 652 $1,425
Provision related to preexisting warranties --
Warranty Provision 185 441
Warranty Spending (185) (583)
------ ------
Warranty accrual as of the end of the period $ 652 $1,283
====== ======
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the nine months ended
December 27, December 28,
2003 2002
----------------------------
(in thousands)
Warranty accrual as of the beginning of the period $1,056 $ 800
Provision related to preexisting warranties -- 375
Warranty Provision 499 815
Warranty Spending (903) (707)
------ ------
Warranty accrual as of the end of the period $ 652 $1,283
====== ======
7. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-
owner changes in stockholders' equity. For us, all other non-owner changes
are primarily foreign currency translation and the changes in fair value
associated with our outstanding cash flow hedge contracts.
Three Months Ended
December 27, December 28,
(In thousands) 2003 2002
------------ ------------
Net income $ 9,314 $10,347
Other comprehensive income:
Foreign currency translation 3,512 1,915
Unrealized losses on cash flow
hedges, net of tax (3,495) (1,673)
Reclassifications into earnings of
cash flow hedge losses, net of tax 2,153 511
------- -------
Comprehensive income $11,484 $11,100
======= =======
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Nine Months Ended
December 27, December 28,
(In thousands) 2003 2002
------------ ------------
Net income $19,792 $23,902
Other comprehensive income:
Foreign currency translation 8,040 6,702
Unrealized loss on cash flow
hedges, net of tax (7,831) (6,602)
Reclassifications into earnings of
cash flow hedge losses, net of tax 4,975 845
------- -------
Comprehensive income $24,976 $24,847
======= =======
8. INVENTORIES
Inventories are stated at the lower of cost or market and include the
cost of material, labor and manufacturing overhead. Cost is determined on
the first-in, first-out method.
Inventories consist of the following:
December 27, 2003 March 29, 2003
-----------------------------------
(in thousands)
Raw materials $11,812 $17,037
Work-in-process $ 5,856 $ 4,597
Finished goods $38,413 $44,171
---------------------------
$56,081 $65,805
===========================
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
9. ACQUIRED INTANGIBLE ASSETS
As of December 27, 2003
- -----------------------
Weighted
Gross Carrying Accumulated Average
Amount Amortization Useful Life
(in thousands) (in thousands) (in years)
-------------- -------------- -----------
Amortized Intangibles
- ---------------------
Patents $ 6,371 $1,476 14
Other technology 11,753 1,676 15
Customer contracts and related
relationships 11,706 1,964 15
------- ------
Subtotal $29,830 $5,116 15
Indefinite Life Intangibles
- ---------------------------
Trade name 488 -- Indefinite
------- ------
Total Intangibles $30,318 $5,116
======= ======
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
======= ======
12
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
The only change to the net carrying value of our intangible assets
from March 29, 2003 to December 27, 2003 was amortization expense and the
effect of rate changes in the translation of the intangibles contained in
the financial statement of our Canadian subsidiary.
Aggregate amortization expense for amortized other intangible assets
was $1.4 million and $1.3 million for the nine months ended December 27,
2003 and December 28, 2002, respectively. Additionally, expected future
amortization expenses on other intangible assets approximates $2.2 million
for fiscal 2005, $2.5 million for fiscal years 2006 through 2008 and $2.4
million for fiscal 2009
10. GOODWILL
The change in the carrying amount of our goodwill during the nine
months ended December 27, 2003 is as follows (in thousands):
Carrying amount as of March 29, 2003 $16,010
Effect of change in rates used for translation 984
-------
Carrying amount as of December 27, 2003 $16,994
=======
11. COMMITMENTS AND CONTINGENCIES
We are presently engaged in various legal actions, and although
ultimate liability cannot be determined at the present time, we believe,
based on consultation with counsel, that any such liability will not
materially affect our consolidated financial position or our results of
operations.
12. SEGMENT INFORMATION
Segment Definition Criteria
We manage our business on the basis of one operating segment: the
design, manufacture and marketing of automated blood processing systems. Our
chief operating decision-maker uses consolidated results to make operating
and strategic decisions. Manufacturing processes, as well as the regulatory
environment in which we operate, are largely the same for all product lines.
Product and Service Segmentation
Our principal product offerings include blood bank, red cell, surgical
and plasma collection products.
The blood bank products include machines, single use disposables and
solutions that perform "apheresis," (the automated separation of whole blood
into its components and subsequent collection of certain components,
including platelets and plasma), as well as the washing of red blood cells
for certain procedures. In addition, the blood bank product line includes
solutions used in non-apheresis applications.
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
The main devices used for these blood component processes are the MCS(R)+
9000 mobile collection system and the ACP(R) 215 automated cell processing
system.
Red cell products include machines and single use disposables and
solutions that perform apheresis for the collection of red blood cells.
Devices used for the collection of red blood cells are the MCS(R)+ 8150 and
the MCS(R)+ 9000 mobile collection systems.
Surgical products include machines and single use disposables that
perform surgical blood salvage in orthopedic and cardiovascular surgical
applications. Surgical blood salvage is a procedure whereby shed blood is
collected, cleansed and made available to be transfused back to the patient.
The devices used in the surgical area are the OrthoPAT(R) and the Cell
Saver(R) autologous blood recovery systems.
Plasma collection products are machines, single use disposables and
solutions that perform apheresis for the collection of plasma. The devices
used in automated plasma collection are the PCS(R)2 plasma collection system
and the Superlite(TM).
Other includes revenue generated from equipment repairs performed
under preventive maintenance contracts or emergency service billings and
miscellaneous sales, including revenue from our software division, Fifth
Dimension. Fifth Dimension provides information management products and
services to plasma collectors and fractionators.
Three months ended (in thousands)
December 27, 2003 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers $31,525 5,610 21,072 27,529 5,001 $ 90,737
December 28, 2002
-----------------
Revenues from external customers $28,401 3,971 18,112 31,239 5,392 $ 87,115
Nine months ended (in thousands)
December 27, 2003 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers $86,985 15,455 59,392 89,369 15,307 $266,508
December 28, 2002
-----------------
Revenues from external customers $84,098 11,351 54,410 92,240 13,976 $256,075
14
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
13. REORGANIZATION
On August 12, 2003, we announced a reorganization of our business in
order to meet the needs of our two categories of customers: "Donor" and
"Patient". As a result of the reorganization, we reduced our worldwide
workforce of 1,500 employees by approximately 4%. No facilities were closed.
The reductions resulted in a charge, included in selling, general and
administrative expenses, for severance and related costs of $2.7 million. 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 December 27, 2003 $ -
======
In connection with the reorganization, we began a review of all significant
strategic initiatives and development projects. As a result of the review,
certain projects and technologies may no longer be pursued, which could
result in the impairment of certain long term assets. We expect the review
to be complete by the end of our fourth quarter.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FOR THE THREE MONTHS ENDED DECEMBER 27, 2003 (FISCAL 2004) COMPARED TO
- ----------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 28, 2002 (FISCAL 2003)
- --------------------------------------------------
The table outlines the components of the consolidated statements of
operations as a percentage of net revenues:
Percentage of Net Revenues
For the three months ended
--------------------------
Percentage
December 27, December 28, Increase/
2003 2002 (Decrease)
------------------------------------------
Net revenues 100.0% 100.0% 4.2%
Cost of goods sold 52.5 53.0 3.1
------------------------------------
Gross profit 47.5 47.0 5.3
------------------------------------
Operating expenses:
Research and development 4.5 5.3 (12.1)
Selling, general and administrative 27.5 28.1 1.9
------------------------------------
Total operating expenses 32.0 33.4 (0.4)
------------------------------------
Operating income 15.5 13.6 19.2
Interest expense (0.8) (0.9) (12.9)
Interest income 0.9 0.4 >100%
Other income, net 0.4 0.6 (39.0)
------------------------------------
Income from operations before
provision for income taxes 16.0 13.7 22.2
Provision for income taxes 5.7 1.8 >100%
------------------------------------
Net income 10.3% 11.9% (10.0)%
====================================
Net Revenue Summary
- -------------------
%
December 27, December 28, Increase/
By location 2003 2002 (Decrease)
- ----------- ------------ ------------ ----------
United States $30,372 $32,132 (5.5)%
International 60,365 54,983 9.8
------------------------------------
Net revenues $90,737 $87,115 4.2%
16
%
December 27, December 28, Increase/
By product type 2003 2002 (Decrease)
- --------------- ------------ ------------ ----------
Disposables $81,783 $77,004 6.2%
Misc. & service 5,001 5,392 (7.3)
Equipment 3,953 4,719 (16.2)
------------------------------------
Net revenues $90,737 $87,115 4.2%
%
Disposable revenue December 27, December 28, Increase/
by product line 2003 2002 (Decrease)
- ------------------ ------------ ------------ ----------
Surgical $19,810 $17,067 16.1%
Blood Bank 29,650 26,417 12.2
Red Cell 5,493 3,891 41.2
Plasma 26,830 29,629 (9.4)
------------------------------------
Total disposables revenue $81,783 $77,004 6.2%
Net Revenues
Net revenues for the three months ended December 27, 2003, increased $
3.6 million to $90.7 million from $87.1 million for the three months ended
December 28, 2002. The increase in net revenue resulted from volume
increases in disposable sales across most product lines and positive effects
from foreign currency offset by a decrease in plasma disposable sales and a
decrease in equipment revenue. See the section below entitled "Foreign
Exchange" for a complete discussion of how foreign exchange impacts our
business. International sales increased to 67% of net sales for the third
quarter of fiscal 2004 from 63% in the third quarter of fiscal 2003.
Disposable Sales
- ----------------
Disposable sales increased 6.2% or $4.8 million. By product line,
disposable sales increased in worldwide Surgical (up 16.1%), worldwide Blood
Bank (up 12.2%), and worldwide Red Cell (up 41.2%), and decreased in
worldwide Plasma (down 9.4%).
Surgical- Worldwide Surgical disposable sales include our traditional
cell salvage business (which targets procedures in which there is a
large volume of blood lost) and our OrthoPAT(R) business for lower
blood loss orthopedic procedures. The increase in worldwide surgical
sales in the third quarter of fiscal year 2004 as compared to the
third quarter of fiscal year 2003 was due largely to volume increases
in OrthoPAT(R) sales and the favorable impact of foreign exchange. Our
traditional cell salvage sales increased only slightly over the prior
period. The majority of the increase in OrthoPAT(R) sales occurred in
the U.S. with Europe contributing the remaining
17
increase. We recently announced signing a five year extension to our
distribution agreement with Zimmer Holdings, Inc. ("Zimmer") the
distributor of our OrthoPAT(R) product in the U.S. which positions us
for continued growth in this market.
Trends
------
The U.S cell salvage market is a mature market that is
declining and may continue to decline due to the following
factors: (1) improved surgical techniques minimizing blood loss
and (2) a decrease in the number of open-heart (bypass)
surgeries performed. As advances are made in the medical field
and technology improves, the preference of surgeons may shift to
minimally invasive surgical procedures enabled by coronary
stents and angioplasty, reducing the number of open heart
surgeries performed.
Blood Bank- Approximately one-half of the increase in worldwide Blood
Bank disposable sales was due to the favorable effect of foreign
currency. The remainder of the increase was primarily a result of
platelet volume increases in Europe and Japan due to enhancements to
our platelet collection systems and our reputation for quality.
Achieving sustained growth in our platelet collection product line
remains challenging as increased collection efficiencies offset the
increased demand for platelets. Several additional factors could also
affect the future demand for and collection of platelets including:
* An emerging practice to test platelets for bacteria may result
in a need to collect more platelets, as the usable life of
platelets collected (generally 5 days) is shortened by one day
as a result of the bacterial detection process. The market may
also shift towards apheresis platelets 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.
* While the immediate interest in pathogen reduction technology in
both Europe and the US has abated, we have noted a heightened
interest in pathogen reduction in Japan.
* Past outbreaks of Severe Acute Respiratory Syndrome (SARS) in
Asia resulted in a reduction in the demand for platelets as
fewer elective surgeries were performed, and a reduction in
willing donors due to concerns about the communication of the
disease in the region.
Red Cell - Worldwide Red Cell sales grew primarily due to volume
increases in the U.S as we continue to expand our customer base. U.S.
blood collectors are adopting automated red cell collection to
increase the supply of red cells from a declining number of eligible
donors, reduce collection costs and improve operating quality and
efficiency. Automated collections also overcome the impact of red cell
shortages by increasing the number of units of blood collected from
the eligible donor population. The growth in the U.S. of higher priced
filtered sets (which include a filter to remove white blood cells from
the collected blood) also contributed to the sales increase.
Plasma - Worldwide plasma disposable sales decreased as compared to
the same quarter of the prior year. A significant volume decrease in
the U.S. and to a lesser extent in Japan was only partially offset by
the positive effect of foreign currency and a modest volume increase
in Europe. The US market was impacted by the closure of a number of
collection centers due to
18
industry consolidation (see the update on the acquisition of Alpha
Therapeutic below) and a current excess of source plasma. The decrease
in disposable volumes in Japan was due to a decline in plasma
collections over the previous year as the Japanese Red Cross decreased
collection targets at the end of fiscal 2003.
Update on Baxter Healthcare Corporation's acquisition of Alpha
Therapeutic:. - During fiscal 2003 and for the first nine months of
fiscal 2004, Alpha Therapeutic ("Alpha") was our largest customer of
plasma collection disposables, and user of over 1,000 plasma
collection devices loaned or leased by 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
collection sets, plasma anticoagulant solutions and plasma collection
bottles. The exclusivity provisions lapse over time beginning in
January 2005 and ending in January 2009. The minimum purchase
requirements lapse over time beginning in January 2006 and ending in
January 2009. Sales to Alpha totaled $19.5 million in fiscal 2003
($14.8 million for the first nine months of fiscal 2003) and totaled
$9.2 million for the first nine months of fiscal 2004. On October 20,
2003, Baxter Healthcare Corporation (Baxter) announced the completion
of its acquisition of Alpha's plasma collection business. Baxter
immediately closed 38 of 41 of the former Alpha plasma collection
centers and sold the remaining three centers. We continue to supply
these three centers under direct supply agreements. Baxter stopped
purchasing our plasma collection products (disposable bowls, bottles
and solutions). Our sales to Alpha declined to $1.0 million this
quarter from $5.2 million in the comparable quarter last year.
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. Though we have been in settlement
discussions with Baxter, we have not reached resolution. On January
21, 2004 we filed a claim for binding arbitration against Baxter,
asking an arbitrator to order Baxter to make purchases pursuant to the
contract, or to buy out the obligations of the contract, and to award
damages based on unfair business practices.
We have evaluated the likely future use and recoverability of
certain 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 $0.7 million this quarter for inventories and
devices in accordance with our excess and obsolescence policy.
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales include revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension.
Miscellaneous and service sales decreased 7.3% or $0.4 million year
over year. The most significant component of the decrease is due to a
decline in software revenue related to the timing of delivery, installation
and training related to the Fifth Dimension software.
19
Equipment Sales
- ---------------
The $0.8 million decrease in equipment revenue from $5.4 million in
fiscal 2003 is primarily attributable to a decrease in volume in both the
sales of our ACP(R) 215 automated cell processing system in the U.S. and our
plasma collection device in Europe, offset by the favorable impact of
foreign exchange. Prior year sales of our ACP(R) 215 system were positively
impacted during its initial rollout to the U.S. military. Strong equipment
revenue from the sale of our plasma collection devices to new customers in
Europe in fiscal 2003 was not duplicated in the current fiscal quarter.
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, (a "use plan")to purchase disposables or to require payment of a
rental fee. Therefore, equipment sales are variable quarter to quarter and
year to year. Accordingly, we give no assurance as to whether or not our
current level of equipment sales will continue in the future.
Gross profit
Gross profit of $43.1 million for the third quarter of fiscal 2004
increased $2.2 million from $40.9 million for the third quarter of fiscal
2003 and increased 0.5%, as a percent of sales. Cost reductions generated by
our Customer Oriented Redesign for Excellence ("CORE") program and foreign
currency contributed significantly to the increase. These improvements were
partially offset by a provision of $1.2 million for excess and obsolete
inventory; including $0.7 million relating to the loss of the Alpha business
(see Plasma Revenue discussion).
For the third quarter of fiscal 2004, the CORE program generated a
$1.9 million improvement in our gross profit by automating and redesigning
the way certain products are made and by negotiating reduced raw material
prices from suppliers.
Expenses
* Research and Development
------------------------
We spent $4.1 million on research and development in the third
quarter of fiscal 2004 (4.5% as a percentage of sales) and $4.6 million in
the third quarter of fiscal 2003 (5.3% as a percentage of sales). The
decrease in research and development expense is related primarily to lower
personnel levels in fiscal 2004 as compared to fiscal 2003.
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $0.4 million
in the third quarter of fiscal 2004 from $24.5 million in the third quarter
of fiscal 2003 but decreased 0.6% as a percent of sales. In fiscal 2004, we
realized savings from our second quarter fiscal 2004 reorganization and our
spending constraints. However, savings were more than offset by the impact
of foreign currency.
20
Operating Income
Operating income for the third quarter of fiscal 2004 increased $2.3
million from the third quarter of fiscal 2003 and increased to 15.5% of
sales in the third quarter of fiscal 2004 from 13.6% in the third quarter of
fiscal 2003. The $2.3 million increase in operating income is primarily a
result of cost reductions from our CORE Program and the previously mentioned
operating expense reductions.
Other income (expense), net
Interest income increased $0.5 million from 2003 to 2004, due
primarily to interest associated with an income tax refund. Other income,
net decreased $0.2 million from the third quarter of fiscal 2003 to the
third quarter of fiscal 2004 due to a decrease in income earned from points
on foreign currency forward contracts.
Income Taxes
The income tax provision, as a percentage of pretax income, was
36.0% for the third quarter in fiscal 2004 and 13.1% for the third quarter
in fiscal 2003. The fiscal year 2003 third quarter tax rate reflects a $4.0
million income tax refund recorded during that quarter. We expect our 36%
tax rate to continue through the remainder of fiscal 2004.
21
FOR THE NINE MONTHS ENDED DECEMBER 27, 2003 (FISCAL 2004) COMPARED TO
- ---------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 28, 2002 (FISCAL 2003)
- -------------------------------------------------
The table outlines the components of the consolidated statements of
operations as a percentage of net revenues:
Percentage of Net Revenues
For the nine months ended
--------------------------
Percentage
December 27, December 28, Increase/
2003 2002 (Decrease)
------------------------------------------
Net revenues 100.0% 100.0% 4.1%
Cost of goods sold 53.4 53.7 3.5
Gross profit 46.6 46.3 4.7
Operating expenses:
Research and development 5.2 5.7 (6.8)
Selling, general and administrative 29.7 28.3 9.3
Total operating expenses 34.9 34.0 6.6
Operating income 11.7 12.3 (0.5)
Interest expense (0.8) (1.0) (11.7)
Interest income 0.5 0.4 14.7
Other income, net 0.2 0.6 (57.3)
Income from operations before
provision for income taxes 11.6 12.3 (2.0)
Provision for income taxes 4.2 3.0 45.4
Net income 7.4% 9.3% (17.2)%
Net Revenue Summary
- -------------------
%
December 27, December 28, Increase/
By location 2003 2002 (Decrease)
- ----------- ------------ ------------ ----------
United States $ 94,241 $ 96,693 (2.5)%
International 172,267 159,382 8.1
------------------------------------
Net revenues $266,508 $256,075 4.1%
%
December 27, December 28, Increase/
By product type 2003 2002 (Decrease)
- --------------- ------------ ------------ ----------
Disposables $239,650 $225,585 6.2%
Misc. & service 15,307 13,979 9.5
Equipment 11,551 16,511 (30.0)
------------------------------------
Net revenues $266,508 $256,075 4.1%
22
%
Disposable revenue December 27, December 28, Increase/
by product line 2003 2002 (Decrease)
- ------------------ ------------ ------------ ----------
Surgical $ 55,042 $ 50,954 8.0%
Blood Bank 82,330 75,373 9.2
Red Cell 15,139 10,880 39.1
Plasma 87,139 88,378 (1.4)
------------------------------------
Total disposables revenue $239,650 $225,585 6.2%
Net Revenues
Net revenues for the nine months ended December 27, 2003, increased
$10.4 million to $266.5 million from $256.1 million for the nine months
ended December 28, 2002. The increase in revenue was a result of (i)
positive effects from foreign currency, (ii) volume increases from both
disposable and miscellaneous and service sales partly offset by (iii) volume
decreases in equipment sales. See the section below entitled "Foreign
Exchange" for a complete discussion of how foreign exchange impacts our
business. International sales increased to 65.0% of net sales for the first
nine months of fiscal 2004 from 60.0% for the first nine months of fiscal
2003.
Disposable Sales
- ----------------
Disposable sales increased 6.2% or $14.1 million. By product line,
disposable sales increased in worldwide Surgical (up 8.0%), worldwide Blood
Bank (up 9.2%), worldwide Red Cell (up 39.1%)and decreased in worldwide
Plasma (down 1.4%).
Surgical- Worldwide Surgical disposable sales include our traditional
cell salvage business (which targets procedures in which there is a
large volume of blood lost) and our OrthoPAT(R) business for lower
blood loss orthopedic procedures. The increase in surgical disposable
sales was due to volume increases in OrthoPAT(R) sales combined with
the favorable effect of foreign currency, partly offset by volume
decreases in U.S. cell salvage sales. OrthoPAT(R) sales increased as
U.S. and European orthopedic surgeons continue to adopt cell salvage
as an effective alternative to patient pre-donation and blood
transfusions in hip and knee replacements as well as other orthopedic
surgeries. We recently announced signing a five year extension to our
distribution agreement with Zimmer Holdings, Inc. ("Zimmer") the
distributor of our OrthoPAT(R) product in the U.S. which positions us
for continued growth in this market.
Trends
------
The U.S. cell salvage market is a mature market that is
declining and may continue to decline due to the following
factors: (1) improved surgical techniques minimizing blood loss
and (2) a decrease in the number of open-heart (bypass)
surgeries performed. As advances are made in the medical field
and technology improves, the preference of surgeons may shift to
minimally invasive surgical procedures enabled by coronary
stents and angioplasty, reducing the number of open heart
surgeries performed.
23
Blood Bank-The increase in worldwide Blood Bank disposable sales was
primarily a result of platelet volume increases in Europe and Japan.
We achieved market share gains due to enhancements to our platelet
collection systems and our reputation for quality. Approximately one-
half of the increase was due to the favorable effect of foreign
currency. Achieving sustained growth in our platelet collection
product line remains challenging as increased collection efficiencies
offset the increased demand for platelets. Several additional factors
could also affect the future demand for and collection of platelets
including:
* An emerging practice to test platelets for bacteria may result
in a need to collect more platelets, as the usable life of
platelets collected (generally 5 days) is shortened by one day
as a result of the bacterial detection process. The market may
also shift towards apheresis platelets 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.
* While the immediate interest in pathogen reduction technology in
both Europe and the US has abated, we have noted a heightened
interest in pathogen reduction in Japan.
* Past outbreaks of Severe Acute Respiratory Syndrome (SARS) in
Asia resulted in a reduction in the demand for platelets as
fewer elective surgeries were performed, and a reduction in
willing donors due to concerns about the communication of the
disease in the region.
Red Cell - Worldwide Red Cell sales grew primarily due to volume
increases in the U.S. U.S. blood collectors are adopting automated red
cell collection to increase the supply of red cells from a declining
number of eligible donors, reduce collection costs and improve
operating quality and efficiency. Automated collections also overcome
the impact of red cell shortages by increasing the number of units of
blood collected from of the eligible donor population. The growth in
the U.S. of higher priced filtered sets (which include a filter to
remove white blood cells from the collected blood) also contributed to
the sales increase.
Plasma - Worldwide plasma disposable sales decreased as compared to
the same period in the prior year. Volume reductions in the US and
Japanese market were partially offset by the favorable effects of
foreign currency and volume increases in Europe earlier in the year.
The U.S. market was impacted by the recent closure of a number of
collection centers due to industry consolidation (see the update on
the acquisition of Alpha) and a current excess of source plasma.
Fiscal year to date sales to Alpha were $9.2 million as compared to
$14.8 million in the same period last year. The decrease in disposable
volumes in Japan was due to a decline in plasma collections over the
previous year as the Japanese Red Cross decreased collection targets
late in fiscal year 2003.
Miscellaneous and Service Sales
- -------------------------------
Miscellaneous and service sales include revenues generated from
equipment repairs performed under preventive maintenance contracts or
emergency service billings and revenue from our software division, Fifth
Dimension.
24
Miscellaneous and service sales increased 9.5% or $1.3 million year
over year. Growth in service revenues in the U.S. and Europe contributed to
this change.
Equipment Sales
- ---------------
The $5.0 million decrease in equipment revenue from $16.5 million in
fiscal 2003 is primarily attributable to volume decreases in the sales of
our Automated Cell Process ("ACP (R) 215") system in the U.S., our platelet
collection device in Japan and our plasma collection device in Europe. Prior
year sales of our ACP(R) 215 system were positively impacted during its
initial rollout to the U.S. military. Equipment revenue from our platelet
collection device in Japan was high in the prior year because of a sale to
the Japanese Red Cross ("JRC") of equipment used previously by the JRC under
a use plan arrangement due to a change in Japanese regulatory requirements.
Strong 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.
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,(a "use plan") to purchase disposables or to require payment of a
rental fee. Therefore, equipment sales are variable quarter to quarter and
year to year. Accordingly, we give no assurance as to whether or not our
current levels of equipment sales are indicative of future results.
Gross profit
Gross profit of $124.1 million for the first nine months of fiscal
2004 increased $5.6 million from $118.5 million for the first nine months of
fiscal 2003 and increased 0.3% as a percent of sales. Increases due to
foreign currency, reductions generated by our Customer Oriented Redesign for
Excellence ("CORE") program and $0.6 million reduced warranty provisions
related to a provision for quality enhancements to our OrthoPAT(R) surgical
blood salvage system made in the prior year were partly offset by $1.1
million in higher excess and obsolete provisions during the first nine
months of fiscal 2004.
For the first nine months of fiscal 2004, the CORE program generated a
$4.3 million improvement in our gross profit by automating and redesigning
the way certain products are made and by negotiating reduced raw material
prices from suppliers.
Expenses
* Research and Development
------------------------
Research and development expenses decreased $1.0 million in the
first nine months of fiscal 2004 from $14.7 million for the first nine
months of fiscal 2003 and decreased 0.6 % as a percent of sales). The
decrease in research and development expense is related primarily to lower
personnel levels.
* Selling, general and administrative
-----------------------------------
Selling, general and administrative expenses increased $6.7 million
in fiscal 2004 from $72.5 million in fiscal 2003 but decreased 1.4% as a
percent of sales. The most significant component of the dollar
25
increase relates to foreign exchange and the $2.6 million in severance costs
recognized in fiscal 2004 related to our recent reorganization which reduced
our worldwide workforce by 4.0 percent (see note 13).
Operating Income
Operating income in fiscal 2004 decreased $0.2 million from $31.3
million in fiscal 2003 and decreased to 11.7% of sales in fiscal 2004 from
12.2% in fiscal 2003. The $0.2 million decrease in operating income is
primarily a result of the increase in selling, general and administrative
expenses due to our recent reorganization. Foreign currency had a limited
impact on the decrease in operating income.
Foreign Exchange
Approximately 65% of our sales are generated outside the U.S., yet
our reporting currency is the U.S. dollar. Foreign exchange risk arises
because we engage in business in foreign countries in local currency,
primarily the Euro and the Japanese Yen. Exposure is partially mitigated by
producing and sourcing product in local currency and expenses incurred by
local sales offices. However, whenever the U.S. dollar strengthens relative
to the other major currencies, there is an adverse affect on our results of
operations and alternatively, whenever the U.S. dollar weakens relative to
the other major currencies there is a positive effect on our results of
operations.
It is our policy to lock in for a period of time the impact on our
financial results of fluctuations in foreign exchange rates. We do this by
using derivative financial instruments known as forward contracts to hedge
the anticipated cash flows from forecasted foreign currency denominated
sales. We refer to these contracts as our plan hedges. Hedging through the
use of forward contracts does not eliminate the volatility of foreign
exchange rates. However, because we enter into forward contracts one year in
advance, exchange rates are fixed for a one-year period, thereby
facilitating financial planning and resource allocation.
We compute a composite rate index for purposes of measuring,
comparatively, the change in foreign currency hedge spot rates from the
hedge spot rates of the corresponding period in the prior year. The relative
value of currencies in the index is weighted by sales in those currencies.
The composite was set at 1.00 based upon the weighted rates at March 31,
1997. The composite rate is presented in the period corresponding to the
maturity of the underlying forward contracts.
The favorable (or unfavorable) changes are in comparison to the same
period of the prior year. A favorable change is recorded when we obtain
relatively more U.S. dollars for each of the underlying foreign currencies
than we did in the prior period. An unfavorable change is recorded when we
obtain relatively fewer U.S. dollars for each of the underlying foreign
currencies than we did in the prior period. These indexed hedge rates impact
sales, and consequently, also gross profit, operating income, and net
income, in our financial statements. The final impact of currency
fluctuations on the results of operations is dependent on the local currency
amounts hedged and the actual local currency results.
26
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 0.88* 15.2%
----------------------------
Total 0.95 11.4%
* NOTE: Represents hedges for January FY05.
Other income (expense), net
Interest income increased $0.2 million from 2003 to 2004, due
primarily to interest earned on our income tax refund offset by lower
investment yields. Other income, net decreased $0.9 million from fiscal 2003
to fiscal 2004 due to a decrease in income earned from points on foreign
currency forward contracts in fiscal 2004 as compared to fiscal 2003.
27
Income Taxes
The income tax provision, as a percentage of pretax income, was 36.0%
for the first nine months in fiscal 2004 and 24.3% for the first nine months
in fiscal 2003. The fiscal 2003 tax rate reflects
A $4.0 million income tax refund recorded during the third quarter of fiscal
2003. We expect our 36% tax rate to continue through the remainder of fiscal
2004.
Liquidity and Capital Resources
Our primary sources of liquidity include cash and short-term
investments, internally generated cash flows, and borrowings. We believe
these sources to be sufficient to fund our requirements, which are primarily
capital expenditures, acquisitions, new business development, share
repurchases and working capital.
During the nine-months ended December 27, 2003, we funded our
activities primarily with $47.8 million of cash flow generated by
operations.
Working capital at December 27, 2003, was $163.6 million. This
reflects an increase of $35.3 million in working capital from the same
period in the prior year primarily due to an increase in cash and cash
equivalents and a decrease in accrued income taxes, partly offset by a
decrease in inventory.
Cash Flow Overview:
For the nine months ended
December 27, December 28
2003 2002 Change
- -------------------------------------------------------------------------------------
(In thousands)
Net cash provided by (used in):
Operating activities $47,753 $ 29,325 $ 18,428
Investing activities (7,642) 23,311 (30,953)
Financing activities 6,362 (38,589) 44,951
Effect of exchange rate changes on cash 824 706 118
-------------------------------------
Net increase in cash and cash equivalents $47,297 $ 14,753 $ 32,544
-------------------------------------
Operating Activities:
Cash provided by operating activities was $47.8 million for the nine
months ended December 27, 2003, as compared to $29.3 million for the nine
months ended December 28, 2002. The $18.4 million increase was primarily
related to reduced investments in accounts receivable and inventory in
fiscal 2004 offset by higher tax payments in fiscal 2004. Cash spent on
inventory decreased in fiscal 2004 as compared to fiscal 2003 due to an
increase in disposable finished goods inventory turns to 5.7 from 4.8
28
during fiscal 2003. Increases in cash flows from accounts receivables in
fiscal 2004 as compared to fiscal 2003 were due to the timing of customer
payments in Japan and to improved days sales outstanding in other regions
leading to a drop in our overall days sales outstanding in fiscal 2004 as
compared to fiscal 2003.
Investing Activities:
We used $7.6 million for investing activities for the nine months
ended December 27, 2003, which represents a decrease of $31.0 million from
the $23.3 million in cash provided for the nine months ended December 28,
2002. The $31.0 million decrease in cash provided was primarily a result of
the liquidation of our available for sale investments which provided $32.6
million in fiscal 2003.
Financing Activities:
Our financing activities for the nine months ended December 27, 2003
provided $ 6.4 million in cash as compared to $38.6 million utilized in the
same period of the prior year. This $45.0 decrease in cash used was
primarily due to the $45.0 million spent in fiscal 2003 to repurchase stock
under our repurchase program whereas no cash has been expended to purchase
stock in fiscal 2004. $10.3 million in additional cash provided from stock
option exercises in fiscal 2004 was offset by reduced borrowings under our
short-term revolving credit agreements. In fiscal 2003, we increased short-
term borrowings by $8.5 million to fund working capital needs in Japan while
in the same period of fiscal 2004, we repaid short-term borrowings of $ 1.9
million.
Inflation
We do not believe that inflation has had a significant impact on our
results of operations for the periods presented. Historically, we believe we
have been able to minimize the effects of inflation by improving our
manufacturing and purchasing efficiencies, by increasing employee
productivity and by adjusting the selling prices of new products we
introduce.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we
make which are prefaced with the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed," and
similar expressions, are intended to identify forward looking statements
regarding events, conditions, and financial trends that may affect our
future plans of operations, business strategy, results of operations, and
financial position. These statements are based on our current expectations
and estimates as to prospective events and circumstances about which we can
give no firm assurance. Further, any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made. As it is not
possible to predict every new factor that may emerge, forward-looking
statements should not be relied upon as a prediction of our actual future
financial condition or results. These forward-looking statements, like any
forward-looking statements, involve risks and uncertainties that could cause
actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include technological advances in the medical
field and our standards for transfusion medicine and our ability to
successfully implement products that incorporate such advances and
standards, product demand and market acceptance of our products, regulatory
uncertainties, the effect of economic and political conditions, the impact
of competitive products and
29
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.
FOREIGN EXCHANGE RISK
See the section entitled Foreign Exchange for a discussion of how
foreign currency affects our business. It is our policy to minimize for a
period of time, the unforeseen impact on our financial results of
fluctuations in foreign exchange rates by using derivative financial
instruments known as forward contracts to hedge anticipated cash flows from
forecasted foreign currency denominated sales. We do not use the financial
instruments for speculative or trading activities. At December 27, 2003, we
had the following significant foreign exchange contracts to hedge the
anticipated cash flows from forecasted foreign currency denominated sales
outstanding:
(BUY) / SELL
Hedged Local Weighted Spot Weighted Forward
Currency Currency Contract Rate Contract Rate Fair Value Maturity
Euro 9,500,000 $1.100 $1.088 $(1,405,269) Jan-Mar 2004
Euro 8,500,000 $1.144 $1.133 $ (835,580) Apr-Jun 2004
Euro 8,500,000 $1.141 $1.131 $ (813,426) Jul-Sep 2004
Euro 5,500,000 $1.183 $1.171 $ (302,098) Oct-Nov 2004
Japanese Yen 1,615,000,000 118.3 per US$ 116.7 per US$ $(1,196,714) Jan-Mar 2004
Japanese Yen 1,815,000,000 118.2 per US$ 116.7 per US$ $(1,374,223) Apr-Jun 2004
Japanese Yen 1,850,000,000 116.7 per US$ 115.1 per US$ $(1,219,285) Jul-Sep 2004
Japanese Yen 1,325,000,000 109.0 per US$ 107.7 per US$ $ (154,869) Oct-Nov 2004
-----------
Total: $(7,301,464)
===========
In the event of a 10% strengthening of the U.S. dollar, the change in
fair value of all forward contracts would result in a $12.2 million increase
in the fair value of the forward contracts; whereas a 10% weakening of the
U.S. dollar would result in a $13.5 million decrease in the fair value of
the forward contracts.
Interest Rate Risk
All of our long-term debt is at fixed rates. Accordingly, a change
in interest rates has an insignificant effect on our interest expense
amounts. The fair value of our long-term debt, however, does change in
response to interest rates movements due to its fixed rate nature. At
December 27, 2003, the fair value of
30
our long-term debt was approximately $2.5 million higher than the value of
the debt reflected on our financial statements. This higher fair market is
entirely related to our $17.2 million, 7.05% fixed rate senior notes and our
$ 8.4 million, 8.41% real estate mortgage.
At December 28, 2002, the fair value of our long-term debt was
approximately $3.8 million higher than the value of the debt reflected on
our financial statements. This higher fair value was primarily related to
the $22.9 million, 7.05% fixed rate senior notes and the $8.9 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 December 27,
2003 the fair value of our long-term debt would change by approximately $0.4
million.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, as of December 27, 2003, under the
supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) regarding the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934
(the "Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that material information relating to
the Company, including its consolidated subsidiaries, is made known to them
by others within those entities.
There was no change in our internal control over financial reporting
during the quarter ended December 27, 2003 that has materially affected, or
is reasonably likely to materially affect, our internal control over
financial reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley
Act of 2002, of Brad Nutter, President and Chief Executive
Officer of the Company
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley of
2002, of Ronald J. Ryan, Vice President and Chief Financial
Officer of the Company
32.1 Certification Pursuant to 18 United States Code Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of Brad Nutter, President and Chief Executive
Officer of the Company
32.2 Certification Pursuant to 18 United States Code Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of Ronald J. Ryan, Vice President and Chief
Financial Officer of the Company
(b) Reports on Form 8-K
We furnished a report on Form 8-K on January 22, 2004 furnishing
a press release we issued on January 22, 2004 announcing fiscal
2004 third quarter and year to date results.
32
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAEMONETICS CORPORATION
Date: February 6, 2004 By: s/Brad Nutter
----------------------------------
Brad Nutter, President and Chief
Executive Officer
Date: February 6, 2004 By: s/ Ronald J. Ryan
----------------------------------
Ronald J. Ryan, Vice President and
Chief Financial Officer (Principal
Financial Officer)
33
EXHIBIT 31.1
------------
CERTIFICATION
-------------
I, Brad Nutter, President and Chief Executive Officer of Haemonetics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Haemonetics
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 6, 2004
s/Brad Nutter
---------------------------------
Brad Nutter, President and Chief
Executive Officer (Principal
Executive Officer)
EXHIBIT 31.2
------------
CERTIFICATION
-------------
I, Ronald J. Ryan, Vice President and Chief Financial Officer of
Haemonetics Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Haemonetics
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: February 6, 2004
s/Ronald J. Ryan
------------------------------
Ronald J. Ryan, Vice President
and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
------------
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes/Oxley Act of 2002
In connection with the Quarterly Report of Haemonetics Corporation (the
"Company") on Form 10-Q for the period ending December 27, 2003 as
filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Brad Nutter, President and Chief Executive Officer
of the Company, certify, pursuant to Section 1350 of Chapter 63 of
Title 18, United States Code, that this Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that the information contained in this Report fairly
presents, in all material respects, the financial condition and results
of operations of the Company.
Date: February 6, 2004
s/Brad Nutter
-------------------------------------
Brad Nutter,
President and Chief Executive Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of
this written statement required by Section 906, has been provided to
Haemonetics and will be retained by Haemonetics and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
------------
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes/Oxley Act of 2002
In connection with the Quarterly Report of Haemonetics Corporation (the
"Company") on Form 10-Q for the period ending December 27, 2003 as
filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Ronald J. Ryan, Vice President and Chief Financial
Officer of the Company, certify, pursuant to Section 1350 of Chapter 63
of Title 18, United States Code, that this Report fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that the information contained in this Report fairly
presents, in all material respects, the financial condition and results
of operations of the Company.
Date: February 6, 2004
s/Ronald J. Ryan
------------------------
Ronald J. Ryan,
Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of
this written statement required by Section 906, has been provided to
Haemonetics and will be retained by Haemonetics and furnished to the
Securities and Exchange Commission or its staff upon request.
