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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended: January 1, 2005 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
January 1, 2005:
25,885,759
HAEMONETICS CORPORATION
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income - Three and Nine Months
Ended January 1, 2005 and December 27, 2003 2
Unaudited Consolidated Balance Sheets - January 1, 2005 and April 3, 2004 3
Unaudited Consolidated Statement of Stockholders' Equity - Nine Months Ended
January 1, 2005 4
Unaudited Consolidated Statements of Cash Flows -Nine Months Ended
January 1, 2005 and December 27, 2003 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 36
ITEM 4. Controls and Procedures 37
PART II. OTHER INFORMATION
ITEM 6. Exhibits 38
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
------------------------------ ------------------------------
JANUARY 1, DECEMBER 27, JANUARY 1, DECEMBER 27,
2005 2003 2005 2003
------------- ------------- ------------- -------------
Net revenues ................................ $ 98,098 $ 90,737 $ 283,623 $ 266,508
Cost of goods sold .......................... 46,317 47,347 139,193 141,675
------------- ------------- ------------- -------------
Gross profit ................................ 51,781 43,390 144,430 124,833
Operating expenses:
Research and development .................. 6,584 4,072 14,891 13,691
Selling, general and administrative ....... 29,897 24,945 85,366 79,200
------------- ------------- ------------- -------------
Total operating expenses ................ 36,481 29,017 100,257 92,891
------------- ------------- ------------- -------------
Operating income ............................ 15,300 14,373 44,173 31,942
Interest expense ............................ (553) (682) (1,850) (2,235)
Interest income.............................. 598 805 1,463 1,274
Other income (expense), net ................. 262 58 (39) (55)
------------- ------------- ------------- -------------
Income before provision for income taxes .... 15,607 14,554 43,747 30,926
Provision for income taxes .................. 4,600 5,240 14,046 11,134
------------- ------------- ------------- -------------
Net income .................................. $ 11,007 $ 9,314 $ 29,701 $ 19,792
============= ============= ============= =============
Basic earnings per common share $ 0.43 $ 0.38 $ 1.17 $ 0.82
Diluted earnings per common share $ 0.42 $ 0.38 $ 1.15 $ 0.81
Weighted average shares outstanding
Basic 25,628 24,518 25,347 24,234
Diluted 26,314 24,780 25,886 24,446
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)
JANUARY 1, APRIL 3,
2005 2004
------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 160,276 $ 118,117
Accounts receivable, less allowance of $2,105 as of
January 1, 2005 and $2,261 as of April 3, 2004 87,578 82,640
Inventories 52,485 52,235
Deferred tax asset, net 19,523 21,856
Prepaid expenses and other current assets 8,594 6,601
------------- -------------
Total current assets 328,456 281,449
PROPERTY, PLANT AND EQUIPMENT:
Total property, plant and equipment 280,073 269,121
Less: accumulated depreciation 207,389 191,091
------------- -------------
Net property, plant and equipment 72,684 78,030
OTHER ASSETS:
Other intangibles, less amortization of $8,810 as of
Januray 1, 2005 and $5,569 as of April 3, 2004 26,317 24,784
Goodwill, net 18,545 17,242
Other long-term assets 10,772 5,889
------------- -------------
Total other assets 55,634 47,915
------------- -------------
Total assets $ 456,774 $ 407,394
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 29,862 $ 32,818
Accounts payable 12,305 14,249
Accrued payroll and related costs 15,737 14,547
Accrued income taxes 8,844 7,967
Other accrued liabilities 28,197 26,262
------------- -------------
Total current liabilities 94,945 95,843
Deferred tax liability, net 1,388 1,682
Long-term debt, net of current maturities 19,359 25,442
Other long-term liabilities 5,143 4,678
Stockholders' equity:
Common stock, $0.01 par value; Authorized - 80,000,000 shares;
Issued - 33,411,667 shares at January 1, 2005 and 32,647,910
shares at April 3, 2004 334 326
Additional paid-in capital 147,758 127,744
Retained earnings 351,992 322,291
Accumulated other comprehensive loss (987) (6,535)
------------- -------------
Stockholders' equity before treasury stock 499,097 443,826
Less: Treasury stock at cost - 7,525,908 shares at
January 1, 2005 and 7,568,289 shares at April 3, 2004 163,158 164,077
------------- -------------
Total stockholders' equity 335,939 279,749
------------- -------------
Total liabilities and stockholders' equity $ 456,774 $ 407,394
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN TREASURY RETAINED
SHARES $ CAPITAL STOCK EARNINGS
------------- ------------- ------------- ------------- -------------
Balance, April 3, 2004 32,648 $ 326 $ 127,744 $ (164,077) $ 322,291
============= ============= ============= ============= =============
Employee stock purchase plan -- -- 10 919 --
Exercise of stock options
and related tax benefit 764 8 20,004 -- --
Net income -- -- -- -- 29,701
Foreign currency translation adjustment -- -- -- -- --
Unrealized gain on derivatives -- -- -- -- --
Comprehensive income -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance, January 1, 2005 33,412 $ 334 $ 147,758 $ (163,158) $ 351,992
============= ============= ============= ============= =============
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
LOSS EQUITY INCOME
------------- ------------- -------------
Balance, April 3, 2004 $ (6,535) $ 279,749
============= =============
Employee stock purchase plan -- 929
Exercise of stock options
and related tax benefit -- 20,012
Net income -- 29,701 $ 29,701
Foreign currency translation adjustment 5,240 5,240 5,240
Unrealized gain on derivatives 308 308 308
-------------
Comprehensive income -- -- $ 35,249
------------- ------------- -------------
Balance, January 1, 2005 $ (987) $ 335,939
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,701 $ 19,792
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
NON CASH ITEMS:
Depreciation and amortization 20,723 23,191
Impairment of intangibles 1,700 --
Deferred tax expense (benefit) 1,877 (143)
Gain on sales of plant, property and equipment (3,114) (1,495)
Tax benefit related to exercise of stock options 2,138 1,725
Unrealized gain from hedging activities (410) (2,224)
CHANGE IN OPERATING ASSETS AND LIABILITIES:
( Increase) decrease in accounts receivable, net (1,125) 343
(Increase) decrease in inventories (2,331) 6,474
(Increase) decrease in prepaid income taxes (1,984) 2,934
Decrease in other assets and other long-term liabilities 1,059 2,676
Increase (decrease) in accounts payable and accrued expenses 229 (6,102)
------------- -------------
Net cash provided by operating activities 48,463 47,171
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on property, plant and equipment (12,980) (9,477)
Proceeds from sale of property, plant and equipment 7,034 3,437
Acquisition of patents (4,019) --
Acquisition of software development company and milestone payments (1,020) (1,020)
Investment in preferred stock (5,570) --
------------- -------------
Net cash used in investing activities (16,555) (7,060)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term real estate mortgage (349) (311)
Net decrease in short-term revolving
credit agreements (3,315) (1,903)
Payments on long-term credit agreements (5,714) (5,714)
Employee stock purchase plan 929 865
Exercise of stock options 17,874 13,425
------------- -------------
Net cash provided by financing activities 9,425 6,362
Effect of Exchange Rates on Cash and Cash Equivalents 826 824
------------- -------------
Net Increase in Cash and Cash Equivalents 42,159 47,297
Cash and Cash Equivalents at Beginning of Year 118,117 49,885
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Cash and Cash Equivalents at End of Period $ 160,276 $ 97,182
============= =============
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements
of Haemonetics equipment $ 3,561 $ 5,851
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
============= =============
Interest paid $ 2,171 $ 2,615
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Income taxes paid $ 12,386 $ 11,945
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The accompanying notes are an integral part of these
consolidated financial statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
our management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated. Operating results for the
nine-month period ended January 1, 2005 are not necessarily indicative of the
results that may be expected for the full fiscal year ending April 2, 2005. 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
April 3, 2004.
Certain amounts in the prior year financial statements have been reclassified to
conform to the fiscal year 2005 presentation.
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal
year 2005 includes 52 weeks with all four quarters including 13 weeks. Fiscal
year 2004 included 53 weeks with the first three quarters of the fiscal year
including 13 weeks and the fourth quarter of fiscal 2004 including 14 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
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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(in thousands, except per
share amounts)
BASIC EPS
Net income $ 11,007 $ 9,314
Weighted average shares 25,628 24,518
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Basic earnings per share $ 0.43 $ 0.38
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DILUTED EPS
Net income $ 11,007 $ 9,314
Basic weighted average shares 25,628 24,518
Effect of stock options 686 262
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Diluted weighted average shares 26,314 24,780
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Diluted earnings per share $ 0.42 $ 0.38
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6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
FOR THE NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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(in thousands, except per
share amounts)
BASIC EPS
Net income $ 29,701 $ 19,792
Weighted average shares 25,347 24,234
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Basic earnings per share $ 1.17 $ 0.82
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DILUTED EPS
Net income $ 29,701 $ 19,792
Basic weighted average shares 25,347 24,234
Effect of stock options 539 212
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Diluted weighted average shares 25,886 24,446
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Diluted earnings per share $ 1.15 $ 0.81
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3. STOCK-BASED COMPENSATION
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 continue to
account for employee stock-based compensation using the intrinsic value method
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("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," as amended by SFAS 148,
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
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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(in thousands, except per
share amounts)
Net income (as reported): $ 11,007 $ 9,314
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax (1,214) (1,159)
------------- -------------
Pro Forma Net Income: $ 9,793 $ 8,155
============= =============
Earnings per share:
Basic
As reported $ 0.43 $ 0.38
Pro forma $ 0.38 $ 0.33
Diluted
As Reported $ 0.42 $ 0.38
Pro forma $ 0.37 $ 0.33
FOR THE NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
------------- -------------
(in thousands, except per
share amounts)
Net income (as reported): $ 29,701 $ 19,792
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax (3,806) (3,839)
------------- -------------
Pro Forma Net Income: $ 25,895 $ 15,953
============= =============
Earnings per share:
Basic
As reported $ 1.17 $ 0.82
Pro forma $ 1.02 $ 0.66
Diluted
As Reported $ 1.15 $ 0.81
Pro forma $ 1.00 $ 0.65
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 $1.3 million and $1.2 million for the three month period ended
January 1, 2005 and December 27, 2003, respectively, and $3.8 million and $3.7
million for the nine month period ended January 1, 2005 and December 27, 2003,
respectively which is included 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
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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(in thousands)
Warranty accrual as of the beginning of the period $ 751 $ 652
Warranty Provision 392 320
Warranty Spending (395) (320)
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Warranty accrual as of the end of the period $ 748 $ 652
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9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
FOR THE NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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Warranty accrual as of the beginning of the period $ 677 $ 1,056
Warranty Provision 1,421 1,122
Warranty Spending (1,350) (1,526)
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Warranty accrual as of the end of the period $ 748 $ 652
============= =============
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, 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.
A summary of the components of other comprehensive income is as follows:
FOR THE THREE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
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(in thousands)
Net income $ 11,007 $ 9,314
------------- -------------
Other comprehensive income:
Foreign currency translation 6,343 3,512
Unrealized loss on cash flow hedges, net of tax (5,206) (3,495)
Reclassifications into earnings of cash flow hedge
losses, net of tax 800 2,153
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Total comprehensive income $ 12,944 11,484
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10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
FOR THE NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
2005 2003
------------- -------------
(in thousands)
Net income $ 29,701 $ 19,792
------------- -------------
Other comprehensive income:
Foreign currency translation 5,240 8,040
Unrealized gain (loss) on cash flow hedges,
net of tax (2,842) (7,831)
Reclassifications into earnings of cash flow
hedge losses, net of tax
3,150 4,975
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Total comprehensive income $ 35,249 $ 24,976
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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:
JANUARY 1, APRIL 3,
2005 2004
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(in thousands)
Raw materials $ 13,904 $ 11,630
Work-in-process 6,126 5,340
Finished goods 32,455 35,265
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$ 52,485 $ 52,235
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9. ACQUIRED INTANGIBLE ASSETS
OTHER TECHNOLOGY
During the 3rd quarter of fiscal year 2005, we entered into an exclusive license
arrangement with a private company related to the use of their technology in
blood processing applications. We paid an initial $0.6 million related to this
license and made an investment in the private company of $5 million (see
investment note for further discussion on our investment). In connection with
the agreement, future milestones are payable upon the demonstration of a
successful proof of concept and completion of other specified deliverables. The
potential milestone payments total $12.4 million and will be capitalized as
other technology if paid. We are also obligated to make minimum royalty payments
for future commercial sales of products that incorporate this technology.
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The license is classified as "Other Technology" in the table below and is
assigned an estimated useful life of 15 years.
In addition, during the 3rd quarter, we recognized an impairment charge of $1.7
million related to the excess of the carrying value over the fair market value
of an intangible asset. The impairment was triggered by a re-evaluation of our
plans to deploy such technology. As a result of our change in strategy, the
carrying value of the intangible was reduced to zero.
PATENTS
During the second quarter of fiscal 2005, we purchased $4.0 million in patents
for several products aimed at blood conservation and surgical blood salvage. The
useful life assigned to the patents acquired was 10 years.
AS OF JANUARY 1, 2005
WEIGHTED
AVERAGE
GROSS CARRYING ACCUMULATED USEFUL LIFE
AMOUNT AMORTIZATION (IN YEARS)
-------------- ------------- -------------
(in thousands)
AMORTIZED INTANGIBLES
Patents $ 10,389 $ (2,102) 13
Other technology 12,330 (3,921) 15
Customer contracts and related
relationships 11,909 (2,786) 15
-------------- ------------- -------------
Subtotal 34,628 (8,809) 14
INDEFINITE LIFE INTANGIBLES
Trade name 498 -- Indefinite
------------- ------------- -------------
Total Intangibles $ 35,126 $ (8,809)
============== =============
12
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
AS OF APRIL 3, 2004
WEIGHTED
AVERAGE
GROSS CARRYING ACCUMULATED USEFUL LIFE
AMOUNT AMORTIZATION (IN YEARS)
-------------- ------------- -------------
(in thousands)
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
============== =============
Other changes to the net carrying value of our intangible assets from April 3,
2004 to January 1, 2005 include amortization expense and the effect of exchange
rate changes in the translation of the intangible assets held by our Canadian
subsidiary.
Amortization expense for amortized other intangible assets was $2.3 million and
$0.4 million for the three months ended January 1, 2005 and December 27, 2003,
respectively. The amortization for the three months ended January 1, 2005
includes the $1.7 million impairment charge discussed above. Annual amortization
expenses is expected to approximate $3.7 million for fiscal 2005, $2.8 million
for fiscal years 2006 and 2007 and $2.7 million for fiscal years 2008 through
2010.
10. GOODWILL
The change in the carrying amount of our goodwill during the nine months ended
January 1, 2005 is as follows (in thousands):
Carrying amount as of April 3, 2004 $ 17,242
Fifth Dimension earn-out payment 1,020(a)
Effect of change in rates used for translation 283
---------
Carrying amount as of January 1, 2005 $ 18,545
=========
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(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 $ 1.0 million payment accrued in the second quarter of fiscal 2005 and made
during the third quarter of fiscal 2005 was the second milestone payment. The
first milestone payment, also in the amount of $1.0 million, was earned as of
the end of the fiscal year 2003 and paid during the first quarter of fiscal
2004.
11. INVESTMENT
As discussed previously in our acquired intangible asset note, during the
quarter, we made an investment of $5.0 million for preferred stock of a private
company representing an 18% ownership interest. This investment is being
accounted for under the cost method of accounting.
12. INCOME TAXES
The income tax provision, as a percentage of pretax income, was 29.5% and 32.1%
for the three and nine months ended January 1, 2005, as compared to 36.0% for
both of the comparable periods in fiscal 2004. The lower effective tax rate for
the quarter resulted from a 1% reduction in our natural tax rate for the full
year to 35% due to an increase in export tax credits and tax exempt income. The
effective tax rate for the three and nine month periods were also favorably
impacted by certain discrete events occurring during the year including the
resolution of certain tax contingencies.
13. 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.
14. DEFINED BENEFIT PENSION 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:
FOR THE THREE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
(in thousands): 2005 2003
- ------------------------------------------------ ------------- -------------
Service Cost $ 146 $ 123
Interest cost on benefit obligation 41 32
Expected return on plan assets (14) (48)
Recognized net actuarial loss -- 43
Settlements 6 6
Amortization of unrecognized prior service cost,
unrecognized gain and unrecognized
initial obligation 8 10
------------- -------------
Net periodic benefit cost $ 187 $ 166
============= =============
14
FOR THE NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
(in thousands): 2005 2003
- ------------------------------------------------ ------------- -------------
Service Cost $ 762 $ 649
Interest cost on benefit obligation 206 168
Expected return on plan assets (77) (258)
Recognized net actuarial loss -- 230
Settlements 31 30
Amortization of unrecognized prior service cost,
unrecognized gain and unrecognized
initial obligation 43 51
------------- -------------
Net periodic benefit cost $ 965 $ 870
============= =============
15. 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
We have two families of products: (1) those that serve the donor and (2) those
that serve the patient. Under the donor product of families we have included
blood bank, red cell and plasma collection products. The patient products are
the surgical collection products.
Donor
The blood bank products include machines, single use disposables and intravenous
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.
The main devices used for this blood component processing are the MCS(R)+ 9000
system and the ACP(R) 215 automated cell processing system. In addition, the
blood bank product line includes intravenous solutions used in non-apheresis
applications.
15
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Red cell products include machines, single use disposables and intravenous
solutions that perform apheresis for the collection of red blood cells. The
device used for the collection of red blood cells is the MCS(R)+ 8150 systems.
Plasma collection products are machines, single use disposables and intravenous
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).
Patient
Surgical products include machines and single use disposables that perform
surgical blood salvage in transplant, 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.
Revenues from External Customers:
THREE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
(in thousands) 2005 2003
- -------------------------------------- ------------- -------------
Donor:
Blood Bank $ 36,938 $ 31,525
Red Cell 7,220 5,610
Plasma 24,433 27,529
------------- -------------
68,591 64,664
Patient:
Surgical 24,298 21,072
Other 5,209 5,001
------------- -------------
Total revenues from external customers $ 98,098 $ 90,737
============= =============
NINE MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 27,
(in thousands) 2005 2003
- -------------------------------------- ------------- -------------
Blood Bank $ 103,480 $ 86,985
Red Cell 23,927 15,455
Plasma 74,502 89,369
------------- -------------
201,909 191,809
Patient:
Surgical 67,996 59,392
Other 13,718 15,307
------------- -------------
Total revenues from external customers $ 283,623 $ 266,508
============= =============
16
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
16. REORGANIZATION
On August 12, 2003, during the second quarter of fiscal 2004, 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 during the first
nine months of fiscal 2004, included in selling, general and administrative
expenses, for severance and related costs of $2.7 million. All payments were
made during fiscal 2004.
17
ITEM 2. 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 collection facilities and not-for-profit blood
banks. We organize our business into two global product families: Donor and
Patient to better serve our customers and position us for continued growth.
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 and, in some cases, pay a fee for the use of our
equipment. This disposable revenue stream (including sales of disposables and
fees for the use of our equipment) accounted for approximately 89.9% and 90.1%
of our total revenues for the third quarters of fiscal 2005 and fiscal 2004,
respectively.
FINANCIAL SUMMARY
%
FOR THE QUARTER ENDED INCREASE/
----------------------------- (DECREASE)
JANUARY 1, DECEMBER 27, Q3FY05 VS.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2003 Q3FY04
- ------------------------------------ ------------- ------------- -------------
Net revenues $ 98,098 $ 90,737 8.1%
Gross Profit 51,781 43,390 19.3
% of net revenues 52.8% 47.8%
Operating income 15,300 14,373 6.4
% of net revenues 15.6% 15.8%
Provision for income tax 4,600 5,240 (12.2)
------------- -------------
% of net revenues 4.7% 5.7%
------------- -------------
Net income 11,007 9,314 18.2
% of net revenues 11.2% 10.3%
Earnings per share-diluted $ 0.42 $ 0.38 10.5%
18
Net revenues for the third quarter of fiscal 2005 increased 8.1% over the same
period in fiscal 2004. The favorable effects of foreign exchange contributed
6.1% to the increase. The remaining 2.0% increase resulted primarily from
increases in disposable revenue across our Blood Bank, surgical, and red cell
product lines partially offset by volume decreases in our plasma product
revenue.
Gross profit increased 19.3% versus Q3 fiscal 2004. The favorable effects of
foreign exchange accounted for a 12.3% increase in gross profit. The remaining
7.0% increase was due primarily to (i) the excess and obsolete inventory
provisions recorded last year related to the loss of the Alpha business and
other matters, (ii) the decrease in depreciation on our equipment at customer
sites and (iii) the change in the mix of products being sold, price improvements
and increased sales. Operating income increased 6.4% over Q3 fiscal 2004.
Operating income increased 30.2% due to foreign exchange. Excluding the effects
of foreign exchange, operating income decreased 23.8% because operating expenses
increased more than gross profit. Expenses increased due to new product costs,
reserves established for an intangible asset, and audit and legal related costs.
Net income increased 18.2% as compared to Q3 last year. Net income increased due
to the increase in operating income and lower tax expense.
RESULTS OF OPERATIONS
Q3 FISCAL 2005 AS COMPARED TO Q3 FISCAL 2004
NET REVENUES
BY GEOGRAPHY
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
United States $ 33,068 $ 30,372 $ 2,696 8.9%
International 65,030 60,365 4,665 7.7
------------- ------------- ------------- -------------
Net revenues $ 98,098 $ 90,737 $ 7,361 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 through independent distributors.
Approximately 66.3% and 66.5% of our revenues during the third quarters of
fiscal year 2005 and 2004, respectively, were generated outside the U.S.
Revenues in Japan accounted for approximately 28.3% and 29.1% of total revenues
for Q3 fiscal 2005 and 2004, respectively. Revenues in Europe accounted for
approximately 30.1% and 29.2% of our total revenues for Q3 fiscal 2005 and 2004,
respectively. International 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 U.S. dollar. The favorable effects of foreign exchange
resulted in a 6.1% increase in sales.
Please see section entitled "Foreign Exchange" in this management's discussion
for a more complete explanation of how foreign currency affects our business, as
well as our strategy for managing this exposure.
19
BY PRODUCT TYPE
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Disposables $ 88,175 $ 81,783 $ 6,392 7.8%
Misc. & service 5,209 5,001 208 4.2%
Equipment 4,714 3,953 761 19.3%
------------- ------------- ------------- -------------
Net revenues $ 98,098 $ 90,737 $ 7,361 8.1%
============= ============= ============= =============
DISPOSABLES REVENUE BY PRODUCT LINE
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Donor:
Plasma $ 24,297 $ 26,830 $ (2,533) (9.4)%
Blood Bank 34,031 29,650 4,381 14.8
Red Cell 7,111 5,493 1,618 29.5
------------- ------------- ------------- -------------
Subtotal $ 65,439 $ 61,973 $ 3,466 5.6%
Patient:
Surgical 22,736 19,810 2,926 14.8%
------------- ------------- ------------- -------------
Total disposables revenue $ 88,175 $ 81,783 $ 6,392 7.8 %
============= ============= ============= =============
DONOR PRODUCTS
Donor products include the Plasma, Blood Bank and Red Cell product lines.
Disposable revenue for donor products increased 5.6% compared to the third
quarter of fiscal year 2004. Foreign exchange resulted in a 6.3% increase in
donor disposable revenue. The remaining decline of .7% was a result of a decline
in plasma product revenue, as more specifically detailed below, that was almost
entirely offset by increases in Red Cell and Blood Bank product revenue.
Plasma
Disposable revenue in the plasma product line decreased 9.4%. Foreign exchange
resulted in a 5.3% increase in plasma disposable revenue. The worldwide
commercial plasma collection market is experiencing lower plasma collections
both as a result of significant consolidation among plasma collectors and
fractionators and as a result of an oversupply of source plasma. Of the 14.7%
remaining decline, 8.7% is a result of plasma collection declines in Asia,
Europe and Japan, and a 6.0% decline is attributable to volume decreases in the
U.S. During the current quarter, the most significant factors affecting the U.S.
plasma business were the volume decrease resulting from the loss of our U.S.
customer, Alpha Therapeutic Corporation ("Alpha") (whose plasma collection
operations were purchased and closed by our only plasma competitor in October
2003, the third quarter of fiscal 2004.) and the closings, earlier in the year,
of certain plasma collection facilities by an existing customer, ZLB Behring.
20
Blood Bank
Blood Bank disposable revenues increased 14.8%. The favorable effects of foreign
exchange resulted in a 7.9% increase in Blood Bank disposable revenues as the
majority of our Blood Bank business is comprised of platelet disposable sales
and a majority of these sales occur in Europe and Japan. Two-thirds of the
remaining 6.9% increase in Blood Bank disposable revenue was attributable to
increases in intravenous solution sales. The remaining one-third, was as a
result of higher platelet collections in Asia.
Red Cell
Red Cell disposable revenue increased 29.5%. The favorable effects of foreign
exchange resulted in a 2.7% increase in red cell disposable revenues. Two thirds
of the remaining 26.8% increase is due primarily to the U.S. sales of our higher
priced filtered sets, which include a filter to remove white blood cells from
the collected blood. The remaining one-third is due to the increasing use of our
technology by blood collectors to increase the supply of red cells collected
from eligible donors, to reduce collection costs, and to improve operating
quality and efficiency.
PATIENT PRODUCTS
Surgical
The surgical blood salvage product line has two major brand platforms: the Cell
Saver(R) brand and the OrthoPAT(R) brand. Disposable revenue for the surgical
product line, in total, increased 14.8%. The favorable effects of foreign
exchange accounted for a 5.9% increase with the remaining 8.9% increase
attributable to increases in OrthoPAT disposable revenues.
Cell Saver disposables revenue increased 4.8% for the quarter. The favorable
effect of foreign exchange accounted for a 6.1% increase, the remaining decrease
of 1.3% was attributable to volume decreases.
OrthoPAT disposable revenues increased 61.1%. The favorable effects of foreign
exchange accounted for 4.8% of the increase in OrthoPAT disposable revenues. The
remaining 56.3% increase is a result of volume increases as orthopedic surgeons
continue to adopt surgical blood salvage as an effective alternative to using
blood from patient pre-donation or from donated blood in connection with hip and
knee replacements and other orthopedic surgeries and price improvements.
21
OTHER REVENUES
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Miscellaneous & Service $ 5,209 $ 5,001 $ 208 4.2%
Equipment 4,714 3,953 761 19.3%
------------- ------------- ------------- -------------
Total other revenues $ 9,923 $ 8,954 $ 969 10.8%
============= ============= ============= =============
Our miscellaneous and service revenue includes revenue from repairs performed
under preventive maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, Fifth
Dimension.
Miscellaneous and service revenue increased 4.2%. The favorable effects of
foreign currency accounted for nearly all of the increase in miscellaneous and
service revenues.
Revenue from equipment sales increased 19.3%. The favorable effects of foreign
exchange accounted for a 5.1% increase with the remaining 14.2% increase largely
attributable to equipment sales in the European Blood Bank market and to the
U.S. military. Equipment sales generally fluctuate from period to period.
GROSS PROFIT
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Gross Profit $ 51,781 $ 43,390 $ 8,391 19.3%
% of net revenues 52.8% 47.8%
Gross profit increased 19.3% versus Q3 fiscal 2004. The favorable effects of
foreign exchange accounted for a 12.3% increase in gross profit. The remaining
7.0% increase was due to (i) a $1.2 million excess and obsolete inventory
provision booked during Q3 fiscal 2004, including $0.7 million relating to the
loss of the Alpha business (See Plasma Revenue sales discussion), (ii) a
decrease in depreciation on our equipment at customer sites and (iii) a change
in the mix of products being sold, price improvements and increased sales.
OPERATING EXPENSES
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Research and development $ 6,584 $ 4,072 $ 2,512 61.7%
Selling, general and
administrative 29,897 24,945 $ 4,952 19.9%
------------- ------------- ------------- -------------
Total operating expenses $ 36,481 $ 29,017 $ 7,464 25.7%
------------- ------------- ------------- -------------
% of net revenues 37.2% 32.0%
22
RESEARCH AND DEVELOPMENT
For the third quarter of fiscal 2005 Research and Development expenses increased
61.7%. Foreign exchange resulted in a 1.9% increase in research and development
expenses. Approximately 70% of the remaining 59.8% increase was due to the
recognition of a $1.7 million in impairment charge during the third quarter of
fiscal year 2005 to write down the value of a previously acquired intangible
asset. (See Acquired Intangible Assets note for more discussion).
Approximately 30% of the remaining 59.8% increase was due to increases in
project spending during the third quarter of fiscal year 2005 as compared to the
third quarter of fiscal year 2004. As planned, research and development spending
increased primarily on new products currently in our Research and Development
pipeline. A significant amount of the increased spending was directed to our
new, multi component collection platform.
SELLING, GENERAL AND ADMINISTRATIVE
For the third quarter of fiscal 2005 selling, general and administrative
expenses increased 19.9%.
Foreign exchange resulted in a 3.7% increase in selling, general and
administrative expenses. A majority of the remaining 16.2% increase was due to
higher costs related to (i) increased personnel-related expenses in marketing
and sales to support our new products and a higher level of sales, (ii)
increased costs due to our compliance effort under Section 404 of the Sarbanes
/Oxley Act of 2002 and (iii) increased legal costs.
OPERATING INCOME
JANUARY 1, DECEMBER 27, $ %
(in thousands) 2005 2003 CHANGE CHANGE
- ------------------------ ------------- ------------- ------------- -------------
Operating Income $ 15,300 $ 14,373 $ 927 6.4%
% of net revenues 15.6% 15.8%
Operating income increased 6.4% over Q3 fiscal 2004. Operating income increased
30.2% due to foreign exchange. Excluding the effects of foreign exchange,
operating income decreased 23.8% because operating expenses increased more than
gross profit. Higher operating expenses were caused by new product costs,
reserves established for an intangible asset, and audit and legal related costs.
OTHER INCOME, NET
JANUARY 1, DECEMBER 27, $ %
(in thousands) 2005 2003 CHANGE CHANGE
- ------------------------ ------------- ------------- ------------- -------------
Interest expense $ (553) $ (682) 129 18.9%
Interest income 598 805 (207) (25.7)%
Other income, net 262 58 204 -%
------------- ------------- ------------- -------------
Total other income, net $ 307 $ 181 $ 126 69.6%
============= ============= ============= =============
23
Several factors contributed to the increase in total other income, net: (1) a
decrease in interest expense as we had lower average debt outstanding as
compared to fiscal 2004, (2) an increase in other income, net as a result of
increases in hedge points and foreign exchange transaction gains over the third
quarter of fiscal year 2004 partially offset by increases in miscellaneous
expenses (such as royalty expense,) (3) offset by a decrease in interest income
due to $0.6 million in interest income booked in the third quarter of fiscal
2004 associated with an income tax refund, partially offset by an increase in
interest income in the third quarter of fiscal 2005 due to higher cash balances.
INCOME TAXES
For the current quarter, the income tax provision, as a percentage of pretax
income, was 29.5% as compared to 36% for the third quarter of fiscal 2004. The
reduction in the reported tax rate resulted from several factors:
. A reduction in the natural tax rate from 36% to 35% or $0.4 million
due to increases in export tax credits and tax exempt interest income
. $0.3 million tax reserve release due to the statute of limitations for
previously filed tax returns expiring.
. $0.4 million in additional export tax benefits attributable to tax
returns filed
We expect our natural tax rate to approximate 35.0% for the remainder of fiscal
2005.
24
FINANCIAL SUMMARY
FOR THE NINE MONTHS ENDED %
------------------------------- INCREASE/
JANUARY 1, DECEMBER 27, (DECREASE)
(in thousands, except per share data) 2005 2003 FY05 vs. FY04
- ---------------------------------------- -------------- -------------- --------------
Net revenues $ 283,623 $ 266,508 6.4%
Gross Profit 144,430 124,833 15.7
% of net revenues 50.9% 46.8%
Operating income 44,173 31,942 38.3
% of net revenues 15.6 12.0
Provision for income tax 14,046 11,134 26.2
-------------- --------------
% of net revenues 5.0 4.2
-------------- --------------
Net income 29,701 19,792 50.1
% of net revenues 10.5 7.4
Earnings per share-diluted 1.15 0.81 42.0
Net revenues for the first nine months of fiscal 2005 increased 6.4% over the
same period in fiscal 2004. The favorable effects of foreign exchange
contributed 5.2% to the increase. The remaining 1.2% increase resulted from
increases in disposable revenue across our Blood Bank, surgical, and red cell
product lines, and increases in equipment revenue. These increases were almost
entirely offset by volume decreases in our plasma product line and in
miscellaneous and service revenue.
Gross profit increased 15.7% versus the first nine months of fiscal 2004. The
favorable effects of foreign exchange accounted for a 9.9% increase in gross
profit. The remaining 5.8% increase was due primarily to (i) a change in the mix
of products being sold, price improvements and increased sales, (ii) a decrease
in depreciation on our equipment at customer sites and (iii) the excess and
obsolete inventory provisions recorded last year related to the loss of the
Alpha business and other matters. Operating income increased 38.3% over the
first nine months of fiscal 2004. Operating income increased 29.3% due to
foreign exchange. The remaining increase of 9.0% is due to gross profit
improvements, partially offset by increases in operating expenses. Net income
increased 50.1% as compared to the first nine months of last year due to higher
operating income and lower tax expense.
25
RESULTS OF OPERATIONS
FISCAL 2005 AS COMPARED TO FISCAL 2004
NET REVENUES
BY GEOGRAPHY
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
United States $ 96,374 $ 94,241 $ 2,133 2.3%
International 187,249 172,267 14,982 8.7
------------- ------------- ------------- -------------
Net revenues $ 283,623 $ 266,508 $ 17,115 6.4%
============= ============= ============= =============
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 through independent distributors.
Approximately 66.0% and 64.6% of our revenues during the first nine months of
fiscal year 2005 and 2004, respectively, were generated outside the U.S.
Revenues in Japan accounted for approximately 28.1% and 27.3% of total revenues
for the first nine months of fiscal 2005 and 2004, respectively. Revenues in
Europe accounted for approximately 29.5% and 28.8% of our total revenues for the
first nine months of fiscal 2005 and fiscal 2004, respectively. International
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 U.S. dollar. The
favorable effects of foreign exchange resulted in a 5.2% increase in sales.
Please see section entitled "Foreign Exchange" in this management's discussion
for a more complete explanation of how foreign currency affects our business, as
well as our strategy for managing this exposure.
BY PRODUCT TYPE
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Disposables $ 255,938 $ 239,650 $ 16,288 6.8%
Misc. & service 13,718 15,307 (1,589) (10.4)
Equipment 13,967 11,551 2,416 20.9
------------- ------------- ------------- -------------
Net revenues $ 283,623 $ 266,508 $ 17,115 6.4%
============= ============= ============= =============
26
DISPOSABLES REVENUE BY PRODUCT LINE
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Donor:
Plasma $ 74,021 $ 87,139 $ (13,118) (15.1)%
Blood Bank 98,138 82,330 15,808 19.2
Red Cell 20,225 15,139 5,086 33.6
------------- ------------- ------------- -------------
Subtotal $ 192,384 $ 184,608 $ 7,776 4.2%
Patient:
Surgical 63,554 55,042 8,512 15.5%
------------- ------------- ------------- -------------
Total disposables revenue $ 255,938 $ 239,650 $ 16,288 6.8%
============= ============= ============= =============
DONOR PRODUCTS
Donor products include the Plasma, Blood Bank and Red Cell product lines.
Disposable revenue for all donor products increased 4.2% compared to the first
nine months of fiscal year 2004. The favorable effects of foreign exchange
resulted in a 5.3% increase in donor disposable revenue. Red cell and Blood Bank
product revenues increases were more than offset by a decline in plasma product
revenue, as more specifically detailed below, resulting in a net decrease in
donor disposable revenue of 1.1%.
Plasma
Disposable revenue in the plasma product line decreased 15.1%. Foreign exchange
resulted in a 4.4% increase in plasma disposable revenues. The worldwide
commercial plasma collection market is experiencing lower plasma collections
both as a result of significant consolidation among plasma collectors and
fractionators and as a result of an oversupply of source plasma. Of the
remaining 19.5% decline, 12.8% is attributable to volume decreases in the U.S.
To date, the most significant factor affecting the U.S. plasma business has been
the loss of our U.S. customer, Alpha Therapeutic Corporation ("Alpha") whose
plasma collection operations were purchased and closed by our only plasma
competitor in October 2003, the third quarter of fiscal 2004. Also affecting the
volume of U.S. plasma collections, has been the closings of certain plasma
collection facilities earlier in the year by another existing customer, ZLB
Behring. The remaining 6.7% decrease in plasma revenue is a result of plasma
collection declines in Europe, Asia and Japan.
Blood bank
Blood bank disposable revenues increased 19.2%. The favorable effects of foreign
exchange resulted in a 6.8% increase in Blood Bank disposable revenues as the
majority of our Blood Bank business is comprised of platelet disposable sales
and the majority of these sales occur in Europe and Japan. Approximately 10.8%
of the remaining 12.4% increase in Blood Bank disposable revenues is
attributable to Japan, the U.S. and Asia. A 4.6% increase in Blood Bank
disposable revenue was a result of the following two factors in Japan: (i)
platelet market share gains in Japan achieved in the fourth quarter of fiscal
year 2004, which we sustained during fiscal year 2005 and (ii) a product mix
shift from non-filtered platelet collection sets in fiscal year 2004 to
higher-priced filtered sets in fiscal year 2005. A 3.3% increase in Blood Bank
disposable revenue was due to increases in intravenous solution sales in the
U.S. There was a 2.9% increase in Blood Bank disposable revenue over the
comparable period last year because last fiscal year's platelet collections in
Asia decreased as a result of fewer Asian blood collections due to the impact on
the region from the SARS virus.
27
Red Cell
Red Cell disposable revenue increased 33.6%. The favorable effects of foreign
exchange resulted in a 2.6% increase in red cell disposable revenues.
Approximately 60% of the remaining 31.0% increase is due primarily to the U.S.
sales of our higher priced filtered sets, which include a filter to remove white
blood cells from the collected blood. The remaining 40% is due to the increasing
use of our technology by blood collectors to increase the supply of red cells
from eligible donors, to reduce collection costs, and to improve operating
quality and efficiency.
PATIENT PRODUCTS
Surgical
The surgical blood salvage product line has two major brand platforms: the Cell
Saver(R) brand and the OrthoPAT(R) brand. Disposable revenue for the surgical
product line increased 15.5%. The favorable effects of foreign exchange resulted
in a 5.3% increase with the remaining 10.2% increase largely attributable to
increases in OrthoPAT disposable revenues.
Cell Saver disposables revenue increased 5.9% during fiscal 2005. The favorable
effects of foreign exchange resulted in a 5.6% increase. The remaining 0.3%
increase is due primarily to an increase in volume in our European markets. In
Europe, the Cell Saver system is used in both high and low blood loss surgeries,
including the orthopedic market.
OrthoPAT disposable revenues increased 66.9%. The favorable effects of foreign
exchange accounted for a 4.2% of the increase in OrthoPAT disposable revenues.
The remaining 62.7% increase is due to disposable volume increases as orthopedic
surgeons continue to adopt surgical blood salvage as an effective alternative to
using blood from patient pre-donation or from donated blood in connection with
hip and knee replacements and other orthopedic surgeries and price improvements.
OTHER REVENUES
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Miscellaneous & Service $ 13,718 $ 15,307 $ (1,589) (10.4)%
Equipment 13,967 11,551 2,416 20.9%
------------- ------------- ------------- -------------
Total other revenues $ 27,685 $ 26,858 $ 827 3.1%
============= ============= ============= =============
28
Our miscellaneous and service revenue includes revenue from repairs performed
under preventive maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, Fifth
Dimension.
Miscellaneous and service revenue decreased 10.4%. The favorable effects of
foreign currency accounted for a 3.9% increase. One-half of the remaining 14.3%
decrease in miscellaneous and service revenue was due to reduced software
revenue from Fifth Dimension. Fifth Dimension currently sells its products
primarily to plasma customers who have been negatively impacted by the recent
volatility and consolidation in the worldwide commercial plasma collection
market. The remaining one-half of the decrease is due to declines in
miscellaneous and service revenues.
Revenue from equipment sales increased 20.9%. The favorable effects of foreign
exchange accounted for a 3.9% increase. The remaining increase of 17.0% was due
to a large sale to a red cell customer during the first quarter of fiscal 2005.
Equipment sales fluctuate from period to period.
GROSS PROFIT
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Gross Profit $ 144,430 $ 124,833 $ 19,597 15.7%
% of net revenues 50.9% 46.8%
Gross profit increased 15.7% versus the first nine months of fiscal 2004. The
favorable effects of foreign exchange accounted for a 9.9% increase in gross
profit. The remaining 5.8% increase was due to (i) a change in the mix of
products being sold, price improvements and increased sales, (ii) a decrease in
depreciation on our equipment at customer sites and (iii) a $1.2 million excess
and obsolete inventory provision booked during Q3 fiscal 2004, including $0.7
million relating to the loss of the Alpha business (See Plasma Revenue sales
discussion).
OPERATING EXPENSES
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Research and development $ 14,891 $ 13,691 $ 1,200 8.8
Selling, general and administrative
85,366 79,200 6,166 7.8%
------------- ------------- ------------- -------------
Total operating expenses 100,257 $ 92,891 $ 7,366 7.9%
------------- ------------- ------------- -------------
% of net revenues 35.4% 34.9%
29
RESEARCH AND DEVELOPMENT
For the first nine months of fiscal 2005 research and development expenses
increased 8.8%. Foreign exchange resulted in a 1.9% increase in research and
development expenses. The remaining 6.9% increase is due to the recognition of a
$1.7 million impairment charge to write down the value of a previously acquired
intangible, (See Acquired Intangible Assets footnote for more discussion)
partially offset by the lower fiscal year 2005 personnel related expenses as a
result of our second quarter fiscal year 2004 restructuring.
SELLING, GENERAL AND ADMINISTRATIVE
For the first nine months of fiscal 2005 selling, general and administrative
expenses increased 7.8%. Foreign exchange resulted in a 3.5% increase in
selling, general and administrative expenses. The majority of the remaining 4.3%
increase was due to (i) higher fiscal 2005 selling, general and administrative
costs as compared to fiscal 2004 relative to personnel-related expenses in
marketing and sales to support our new products and a higher level of sales,
(ii) increased costs due to our compliance effort under Section 404 of the
Sarbanes /Oxley Act of 2002 and (iii) increased legal costs. The effect of these
higher costs was partially offset by a year over year decrease in expense due to
the $2.7 million in severance costs charged to selling, general and
administrative expenses during the first nine months of fiscal 2004 as part of
our reorganization.
OPERATING INCOME
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Operating Income $ 44,173 $ 31,942 $ 12,231 38.3%
% of net revenues 15.6% 12.0%
Operating income increased 38.3% over the first nine months of fiscal 2004.
Operating income increased 29.3% due to foreign exchange. The remaining increase
of 9.0% is due to gross profit improvements, partially offset by increases in
operating expenses.
OTHER EXPENSE, NET
(in thousands)
$ %
JANUARY 1, DECEMBER 27, INCREASE/ INCREASE/
2005 2003 (DECREASE) (DECREASE)
------------- ------------- ------------- -------------
Interest expense $ (1,850) $ (2,235) $ 385 17.2%
Interest income 1,463 1,274 189 14.8
Other (expense) , net (39) (55) 16 29.1
------------- ------------- ------------- -------------
Total other expense, net $ (426) $ (1,016) $ 590 58.1%
------------- ------------- ------------- -------------
30
Several factors contributed to the decrease in total other expense, net: (1) a
decrease in interest expense as we had lower average debt outstanding as
compared to fiscal 2004, (2) an increase in interest income due to higher cash
balances during the year, partially offset by $0.6 million in interest income
booked in the third quarter of fiscal 2004 associated with an income tax refund
and (3) a decrease in other expense, net as a result of increases in hedge
points and foreign exchange transaction gains over the third quarter of fiscal
year 2004 partially offset by increases in miscellaneous expenses (such as
royalty expense.)
INCOME TAXES
For the first nine months of fiscal 2005, the income tax provision, as a
percentage of pretax income, was 32.1% as compared to 36.0% for the first nine
months of fiscal 2004. The reduction in the reported tax rate resulted from
several factors:
.. A reduction in the natural tax rate from 36% to 35%or $0.4 million due to
increases in export tax credits and tax exempt interest income.
.. $0.6 million tax reserve release related to the resolution of a Japanese
tax matter
.. $0.3 million tax reserve release due to the statute of limitations for
previously filed tax returns expiring.
.. $0.4 million in additional export tax benefits attributable to tax returns
filed.
LIQUIDITY AND CAPITAL RESOURCES
The following table contains certain key performance indicators we believe
depict our liquidity and cash flow position:
JANUARY 1, APRIL 3,
(dollars in thousands) 2005 2004
- --------------------------------------------- ------------ ------------
Cash & cash equivalents $ 160,276 $ 118,117
Working capital $ 233,511 $ 185,606
Current ratio 3.5 2.9
Net cash position (1) $ 111,055 $ 59,857
Days sales outstanding (DSO) 74 76
Disposables finished goods inventory turnover
5.8 5.7
(1) Net cash position is the sum of cash and cash equivalents less total debt.
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 software systems to improve our product life cycle management),
31
acquisitions, new business and product development and working capital for at
least the next twelve months.
CASH FLOW OVERVIEW:
FOR THE NINE MONTHS ENDED
---------------------------
JANUARY 1, DECEMBER 27,
2005 2003 CHANGE
------------ ------------ ------------
(In thousands)
Net cash provided by (used in):
Operating activities $ 48,463 $ 47,171 $ 1,292
Investing activities (16,555) (7,060) (9,495)
Financing activities 9,425 6,362 3,063
Effect of exchange rate changes on cash (1)
826 824 2
------------ ------------ ------------
Net increase in cash and cash equivalents
$ 42,159 $ 47,297 $ (5,138)
------------ ------------ ------------
(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 during the
nine months ended fiscal 2005 versus the nine months ended fiscal 2004, the
European currencies and the Japanese Yen have weakened against the U.S. dollar.
In accordance with GAAP, only the effect of foreign currency on cash is included
on our cash flow statement.
FISCAL 2005 AS COMPARED TO FISCAL 2004
OPERATING ACTIVITIES:
Net cash provided by operating activities was $48.5 million for the first nine
months of fiscal 2005, an increase of $1.3 million from the same period in the
prior year, due primarily to:
. $11.8 million more cash provided by net income adjusted for non-cash
items
. $6.3 million less cash used by accounts payable and accrued expenses
due primarily to lower tax payments in fiscal 2005, offset by
. $1.5 million more cash used by increases in accounts receivable
balances
. $8.8 million more cash used by inventory during fiscal 2005 as
inventory balances decreased during the first nine months of fiscal
2004
. $4.9 million more cash used due to increased income tax prepayments
. $1.6 million more cash used in other assets and other long-term
liabilities due primarily to fiscal 2005 increases in insurance
prepayments. Insurance prepayments are higher in fiscal 2005 as
compared to fiscal 2004 due both to rate increases and timing of
payments.
INVESTING ACTIVITIES:
Net cash from investing activities decreased $9.5 million as a result of $9.6
million in increased investments. During the current quarter we invested $5.0
million in the preferred stock of a private
32
company and $0.6 million to secure a related license agreement and during the
second quarter of fiscal 2005, we spent $4.0 million to acquire patents. The
increase in proceeds from the sale of property, plant and equipment, due
primarily to a significant sale of our equipment to a red cell customer at the
end of the first quarter of fiscal 2005, was offset by the increase in capital
expenditures during the current fiscal year.
During the first nine months of fiscal 2005, we had capital expenditures of
$13.0 million, an increase of $3.5 million over the first nine months of fiscal
2004.
FINANCING ACTIVITIES:
Net cash provided by financing activities increased $3.1 million primarily due
to an increase in proceeds from stock option exercises during the first nine
months of fiscal 2005.
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.
FOREIGN EXCHANGE
Foreign exchange risk arises because we engage in business in foreign countries
in local currency. Approximately 66.0% 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. 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.
33
The favorable or (unfavorable) changes are in comparison to the same period of
the prior year. A favorable change is presented 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 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 0.92 5.2%
Q2 0.91 9.1%
Q3 0.87 5.7%
Q4 0.86* 3.3%
---------------- -------------------------
2006 Total 0.90 4.5%
* NOTE: Represents hedges for January FY06.
34
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB statement No. 123 (revised 2004), "Share-Based Payments", (SFAS 123R) which
is a revision of FASB Statement No. 123, (SFAS 123) Accounting for Stock Based
Compensation. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. The disclosure only approach permitted by
SFAS 123 and elected by us, is no longer an alternative. Accordingly, the
adoption of SFAS 123R's fair value method will have a significant impact on the
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net income and earnings per share in Note 3 to the consolidated
financial statements.
The FASB recently issued, FASB Statement No. 151, "Inventory Costs", (SFAS 151),
an amendment of ARB No. 43, Chapter 4 (FASB 151). The amendment clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials should be recognized as current-period charges. It also clarifies that
the required allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. We will adopt SFAS 151 on April 3,
2005 at the beginning of our fiscal year 2006. The clarification provided by
SFAS 151 is consistent with our current accounting policy, and accordingly we
expect no impact from the adoption of this statement.
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, , 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.
35
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 January 1, 2005, we had the following significant foreign
exchange contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated sales outstanding:
HEDGED (BUY) / SELL WEIGHTED SPOT WEIGHTED FORWARD
CURRENCY LOCAL CURRENCY CONTRACT RATE CONTRACT RATE FAIR VALUE MATURITY
- -------------------- -------------- ----------------------- ----------------------- -------------- --------------
Euro 5,850,000 $ 1.243 $ 1.234 $ (745,399) Jan-Feb 2005
Euro 7,600,000 $ 1.196 $ 1.192 $ (1,278,860) Mar-May 2005
Euro 7,400,000 $ 1.227 $ 1.226 $ (1,004,502) Jun-Aug 2005
Euro 8,300,000 $ 1.302 $ 1.308 $ (486,466) Sep-Nov 2005
Japanese Yen 1,175,000,000 107.0 per US$ 105.7 per US$ $ (308,852) Jan-Feb 2005
Japanese Yen 1,650,000,000 110.4 per US$ 108.3 per US$ $ (881,704) Mar-May 2005
Japanese Yen 1,720,000,000 110.0 per US$ 107.7 per US$ $ (939,778) Jun-Aug 2005
Japanese Yen 1,835,000,000 105.5 per US$ 102.9 per US$ $ (375,522) Sep-Nov 2005
--------------
Total: $ (6,021,082)
==============
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 $11.9 million increase
in the fair value of the forward contracts; whereas a 10% weakening of the U.S.
dollar would result in a $13.3 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 rate
movements due to its fixed rate nature.
36
At January 1, 2005, the fair value of our long-term debt was approximately $1.8
million higher than the value of the debt reflected on our financial statements.
This higher fair market is entirely related to our $11.5 million, 7.05% fixed
rate senior notes and our $7.9 million, 8.41% real estate mortgage.
At December 27, 2003, the fair value of 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.
Using scenario analysis, if interest rate on all long-term maturities changed by
10% from the rate levels that existed at January 1, 2005 the fair value of our
long-term debt would change by approximately $0.3 million.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, as of January 1, 2005, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer (the Company's 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
nine months ended January 1, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity 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
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 adtopted 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
38
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 9, 2005 By: s/Brad Nutter
-----------------------------------
Brad Nutter, President and
Chief Executive Officer
Date: February 9, 2005 By: s/ Ronald J. Ryan
-----------------------------------
Ronald J. Ryan, Vice President and
Chief Financial Officer
(Principal Financial Officer)
39
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 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 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 9, 2005
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 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 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 9, 2005
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 January 1, 2005 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 9, 2005
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 January 1, 2005 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 9, 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.
