UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 2, 2005. Commission file number 1-10730
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
(State of Incorporation) (I.R.S. Employer Identification No.)
400 Wood Road
Braintree, Massachusetts 02184-9114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 848-7100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes |X| No |_|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant (assuming for these purposes that all executive
officers and Directors are "affiliates" of the Registrant) as of October 2,
2004, the last business day of the registrant's most recently completed second
fiscal quarter was $837,000,000 (based on the closing sale price of the
Registrant's Common Stock on that date as reported on the New York Stock
Exchange).
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 9, 2005 was 33,784,300.
Documents Incorporated By Reference
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on July 27, 2005, are incorporated by reference in Part III.
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TABLE OF CONTENTS
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Page Number
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Item 1. Business........................................................................................3
(a) General History of the Business.............................................................3
(b) Financial Information about Industry Segments...............................................4
(c) Narrative Description of the Business.......................................................4
(d) Financial Information about Foreign and Domestic Operations and Export Sales...............12
Item 2. Properties.....................................................................................13
Item 3. Legal Proceedings..............................................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................................14
Item 5. Market For The Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................................16
Item 6. Selected Consolidated Financial Data...........................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....................................35
Item 8. Financial Statements and Supplementary Data....................................................36
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...........64
Item 9A. Controls and Procedures........................................................................64
Item 9B. Other Information..............................................................................66
Item 10. Directors and Executive Officers of the Registrant.............................................66
(a) Identification of Directors................................................................66
(b) Identification of Executive Officers.......................................................66
(c) Audit Committee Financial Expert...........................................................66
Item 11. Executive Compensation.........................................................................66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.66
Item 13. Certain Relationships and Related Transactions.................................................67
Item 14. Principal Accountant Fees and Services.........................................................67
Item 15. Exhibits and Financial Statement Schedules....................................................67
(a) Financial Statement Schedules..............................................................67
(b) Exhibits...................................................................................67
SIGNATURES
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ITEM 1. BUSINESS
(a) General History of the Business
Our Company was founded in 1971 and became publicly owned for the first time in
1979. In 1983, we were acquired by American Hospital Supply Corporation ("AHS").
When Baxter Travenol Laboratories, Inc. acquired AHS in 1985, Baxter divested
the Haemonetics business to address antitrust concerns related to the AHS
acquisition. As a result, we were purchased in December 1985 by investors that
included E. I. du Pont de Nemours and Company ("Du Pont") and present and former
Haemonetics employees. We were incorporated in Massachusetts in 1985. In May
1991, we completed an Initial Public Offering, at which time Du Pont divested
its interest.
We are a pioneer and a market leader in developing and manufacturing technology
that helps ensure a safe and adequate blood supply and that assists blood banks
and hospitals operate efficiently and in compliance with regulatory
requirements. To that end, throughout our history, we have been engaged in
manufacturing automated systems and single use consumables used in blood
donation, blood processing, and surgical salvage of blood. We also develop
associated data management technology.
We developed our first automated blood processing system in 1971 and for more
than 30 years we have innovated products and services that improve the safety
and practice of transfusion medicine. Our direct customers are blood and plasma
collectors, hospitals and hospital service providers.
In fiscal year 2004 we embarked upon two strategies: 1) leveraging the core
business to improve profitability and 2) expanding the business through internal
R&D, marketing partnerships, and acquisition. As a result of strategy 2, we have
broadened our core product portfolio to also include complementary products used
by our blood collection and hospital customers. Also in fiscal year 2004, we
reorganized into two global product families that address our ultimate customer
(our customers' customer): blood donors and surgical patients. Within these
product families we offer:
Donor Products
1) Our PCS(R) brand systems automate the collection of plasma from donors who
are often paid a fee for their donation. The collected plasma is then
generally processed into therapeutic pharmaceuticals.
2) Blood bank systems:
a) Our MCS(R) brand systems automate the collection of platelets from
volunteer donors. The systems enable the donation of a larger volume
of the donor's platelets, which are then generally given to cancer
patients and others with bleeding disorders.
b) Our ACP(R) brand systems automate the process used to freeze, thaw
and wash red blood cells. The ACP systems can also be used to wash
other cellular parts from red blood cells units before transfusion.
c) We also contract manufacture sterile intravenous solutions for
pharmaceutical customers. These solutions include generic drugs and
other custom drug products.
3) Other MCS systems automate the collection of red cells from volunteer
donors. These systems maximize the volume of red cells that can be
collected from one blood donation, thus helping to alleviate blood
shortages. The most predominant product in the red cell product line is
our double red cell collection technology which allows for two units of
red cells to be collected from one donor. Specialty protocols allowing for
the simultaneous collection of a unit of red cells and a unit of plasma or
a unit of red cells and a unit of platelets are also available in various
parts of the world.
Patient Products
1) Surgical blood salvage systems, used during and after surgery to collect a
patient's own blood for reinfusion, including:
a) Our Cell Saver(R) brand systems for higher blood loss surgeries and
trauma, and
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b) Our OrthoPAT(R) brand systems for lower, slower blood loss
procedures, typically orthopedic surgeries.
c) Our cardioPAT(TM) brand system for blood loss during and after
beating heart surgeries or for blood loss after various coronary
artery bypass graft ("CABG") surgeries. The cardioPAT is our newest
blood salvage system. The cardioPAT system entered limited market
release in April 2005.
Our principal operations are in the U.S., Europe, and Japan and other parts of
Asia. Our products are marketed in more than 50 countries around the world via a
direct sales force as well as some independent distributors and agents.
In fiscal year 2005, we remained focused on increasing sales of our newer red
cell collection technology and orthopedic surgical blood salvage system. In
addition to these existing product lines, however, we also prepared to expand
the business by completing our Core Competency Review Process which was
initiated in fiscal year 2004. The objective of the Core Competency Review was
to determine what competencies we uniquely possess that can be leveraged to grow
our business. We identified three: superior service, manufacturing process
management, and innovation. Finally, in fiscal year 2005, we focused resources
on five new products for introduction in fiscal year 2006.
(b) Financial Information about Industry Segments
Although we address our customer constituents through two global product
families (Donor and Patient), we manage our business as one operating segment:
automated blood processing systems. Our chief operating decision maker uses
consolidated financial results to make operating and strategic decisions.
Manufacturing processes, as well as the regulatory environment in which we
operate, are largely the same for all product lines.
The financial information required for the business segment is included herein
in Note 16 of the financial statements, entitled SEGMENT, GEOGRAPHIC AND
CUSTOMER INFORMATION.
(c) Narrative Description of the Business
(i) Products
We develop and market a variety of automated systems for blood donors and
patients world wide that collect, process, and surgically salvage their blood.
We also market data management systems through our subsidiary, Fifth Dimension
Information Systems ("Fifth Dimension") to promote efficient and compliant
operations of blood collectors, principally plasma collectors.
All of our blood systems involve the extracorporeal processing of human blood,
which is made up of components called red blood cells, plasma, platelets, and
white blood cells. Doctors today generally treat patients with a transfusion of
only the blood component needed, rather than with whole blood. The different
components have different clinical applications. For example, plasma derived
products treat a variety of illnesses and hereditary disorders such as
hemophilia; red cells treat trauma patients or patients undergoing major
surgeries involving high blood loss such as open heart surgery or organ
transplant, and platelets treat cancer patients undergoing chemotherapy.
With our automated blood collection systems, a blood donation can be targeted to
the specific blood component needed by a blood collector. More of that blood
component can be collected during any one donation event because the blood
component not targeted is returned to the donor through a sterile,
closed-circuit disposable set used for the blood donation procedure.
With our automated blood processing systems, blood collectors and hospitals can
freeze and thaw red cells so that they can maintain a frozen blood reserve.
Blood reserves are often maintained to adequately respond to large-scale
emergencies in which many people require blood transfusions or to treat patients
who require transfusions of very rare blood. Our blood processing systems can
also remove the plasma from red cells for patients who need specially treated
blood.
With our surgical blood salvage systems, medical teams can collect blood lost by
a surgical patient during or after the surgery, clean it, and make it available
for transfusion back to the patient. These systems ensure that elective surgery
will not be cancelled due to lack of available blood, and that a patient
receives the safest blood possible - his or her own.
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In every one of our major product offerings: plasma collection, platelet
collection, red cell collection, cell processing and surgical cell salvage, we
invented the technology that first created the market. We continue to innovate
our product offerings with next generation technologies.
Automated Plasma Collection and Data Management Systems
Automated plasma collection technology allows for the safe and efficient
collection of plasma from donors who are usually paid a fee for their blood
donation. The plasma which is collected is then further processed
("fractionated") by pharmaceutical companies into therapeutic and diagnostic
products that aid in the treatment of: immune diseases, inherited coagulation
disorders (e.g., hemophilia) and blood volume loss (e.g. from trauma). The
collected plasma is also used in the manufacture of vaccines and blood testing
and quality control reagents. Our role in the plasma industry is limited to the
supply of plasma collection and data management systems to plasma collectors.
Our business does not include the actual collection, fractionation, or
distribution of plasma-derived pharmaceuticals, businesses mostly conducted by
large multi-national pharmaceutical corporations.
Until automated plasma collection technology was pioneered and introduced by our
Company in the 1980s, plasma for fractionation was collected manually. Manual
collection was time-consuming, labor-intensive, produced relatively poor yields,
and posed risk to donors. Currently the vast majority of plasma collections
worldwide are performed using automated collection technology because it is safe
and cost-effective. We market our PCS2 automated plasma collection systems to
commercial plasma collectors as well as not-for-profit blood banks and
government affiliated plasma collectors worldwide.
We offer "one stop shopping" to our plasma collection customers, enabling them
to source from us the full range of products necessary for their plasma
collection operations. To that end, in addition to providing plasma collection
equipment and disposables, we offer plasma collection containers, intravenous
solutions necessary for plasma collection and storage, and data management
technology to automate plasma collectors' operations. Data management is
supplied through our subsidiary, Fifth Dimension, a leading provider of
information management products and services for plasma collectors and
fractionators. A majority of plasma collectors currently use manual systems to
track their donors and collected plasma. Fifth Dimension's sales are recorded in
the miscellaneous and service revenue line, although the majority of its sales
currently are to plasma collectors. Our strategy is to expand Fifth Dimension's
sales to not-for-profit blood collectors. We made initial headway into this
strategy in late fiscal year 2005 with an agreement to support the U.S.
Department of Defense's Blood Management Software System.
Blood Bank Systems
The Blood Collection Market for Transfusion
There are millions of blood donations throughout the world every year to obtain
blood products for transfusion to surgical, trauma, or chronically ill patients.
In the U.S. alone approximately 14 million units of blood are collected each
year.
Patients requiring blood are rarely transfused with whole blood. Instead, a
patient typically receives only the blood component necessary to treat their
clinical condition: red cells to surgical or trauma patients, platelets to
surgical or cancer patients, and plasma to surgical patients.
Worldwide demand for blood continues to rise as the population ages and more
patients have need for and access to medical therapies that require blood
transfusions. At the same time, tighter donor eligibility requirements to
improve blood safety have decreased the number of donors willing or able to
donate blood. Thus, this worldwide market is growing modestly in the low single
digits.
Most donations worldwide are non-automated procedures (also referred to as
"manual donations"). In a manual donation, a person donates about a pint of
whole blood, bleeding by gravity directly into a blood collection bag. After the
donation, a laboratory worker manually processes the blood and separates it into
its constituent parts: red cells, platelets and plasma. One pint of whole blood
contains one transfusible dose of red cells, one-half to one transfusible dose
of plasma, and one-fifth to one-eighth transfusible dose of platelets.
5
We do not sell blood collection disposables for the large, non-automated part of
the blood collection market for transfusions. Abbott Laboratories, Baxter
International, Pall Corporation, Terumo and others supply this market with whole
blood collection supplies such as needles, plastic blood bags, solutions and
tubing.
In contrast to manual collections, automated procedures eliminate the need to
manually separate whole blood at a remote laboratory. Instead the blood
separation process is automated and occurs "real-time" while the blood donor is
attached to the blood collection system. In this separation method, only the
specific blood component targeted is collected, and the remaining components are
returned to the blood donor. Among other things, automated blood collection
allows significantly more of the targeted blood component to be collected during
a donation event.
Today in the U.S., automated collection systems are used annually to collect
more than 550,000 red cell units and about 1.5 million platelet units (called
"single donor" platelets.) One donation from a single donor can produce enough
platelets for a transfusible dose as compared to a pooled platelet that combines
platelet fractions from 5-8 different whole blood donors).
Our products currently address the small part of the blood collection market
that uses automation to enhance blood collection safety and efficiency, as well
as regulatory compliance. Though we compete against large companies including
Baxter International and Gambro BCT, we are the only company whose business is
predominantly focused on automated blood collection.
Automated Platelet Collection Systems
Automated platelet collection systems collect one or more therapeutic "doses" of
platelets during a single donation by a volunteer blood donor. Platelets derived
from non-automated donations of whole blood (also called manual collections)
must be "pooled" together with platelets from 5 to 8 other manual donations to
make a single therapeutically useful dose because platelets are only a very
small portion of whole blood volume. We invented the automation of platelet
collection, resulting in improved platelet yields and improved patient safety.
Platelet therapy is frequently used to alleviate the side effects of bone marrow
suppression, a condition in which bone marrow is unable to produce a sufficient
quantity of platelets. Bone marrow suppression is most commonly a side effect of
chemotherapy. Physicians who prescribe platelet therapy have increasingly turned
to "single donor" platelet products (i.e., enough platelets collected from a
single donor, during an automated collection procedure, to constitute a
transfusible dose) to minimize a patient's exposure to multiple donors and
possible blood-borne diseases.
Related products that improve safety of platelets
Bacterial Detection
Over the past two years, bacterial detection of platelets has become an
important trend in the transfusion industry. To reduce risks to patients
receiving transfusions, the U.S. has implemented requirements that all platelets
be tested for bacteria and several European blood collection agencies are
evaluating bacterial screening. Bacterial contamination is one of the most
common causes of transfusion-related death, but it also has other risks which
can result in longer hospitalization. In February 2004, we reached an agreement
with Hemosystem SA to market its bacterial screening technology, Scansystem(R)
in Europe, the Middle East, Africa, and Latin America for the next three years.
As part of the agreement, we also assumed right of first refusal to market the
product in major Asian countries. Local European evaluations of Scansystem are
ongoing. Additionally, in the fourth quarter of fiscal year 2004, we announced
U.S. regulatory clearances for two blood sampling systems. The systems are
specifically designed to facilitate the collection of a sample of platelets for
the bacterial detection test. One system is integrated into our platelet
collection disposable kit and the other system can be used to sample platelets
collected through any other means.
Pathogen Reduction
Pathogen reduction technologies are processes to eliminate or reduce pathogens,
including viruses and bacteria, from blood prior to its transfusion to patients.
Pathogen reduction has been discussed by the transfusion community for many
years, and is in various stages of development and/or commercialization by
several companies, not including Haemonetics. In December 2001 we entered into
an agreement with Baxter International, Inc. ("Baxter") to enable us to
seamlessly integrate our platelet collection systems with InterSOL which is a
platelet storage solution
6
for use with the INTERCEPT(R) Platelet System for pathogen reduction of
platelets. To date, pathogen reduction of platelets is not routinely practiced
in most countries. However, because of our agreement with Baxter we are poised
to participate in this market should there be a trend toward pathogen reduction.
Automated Blood Cell Processing Systems
Our cell processing business is based on technology that enables users to add
and remove solutions or other substances to and from blood components. We have
several technologies that support this business.
The most significant technology allows the freezing and thawing of blood to
enable blood banks to better manage their red cell inventory. Although it has
been possible for many years to freeze red cells for up to ten years, the
freezing and thawing processes took place in a manual, open-circuit system,
which exposed red cells to the potential for bacterial contamination. Once the
cells were thawed, they had to be transfused within 24 hours. The ACP215
automated cell processing system extends thawed cells' shelf life to 14 days by
performing the freezing and thawing processes in an automated, closed-circuit
technology.
Automated Red Cell Collection Systems
See the section above entitled "Blood Bank Systems: Blood Collection for
Transfusion" to learn about the market for our red cell collection systems.
Automated red cell collection, a market we created, allows for the safe and
efficient collection of more red cells from a single blood donor than from
manual, whole blood collections. Most red cells are derived from manual
collection of whole blood, after which the components are separated. However,
this manual procedure involves time-consuming, error-prone secondary handling
and processing in a laboratory that tax a blood collector's limited resources.
Red cell shortages are a common problem plaguing many healthcare systems
worldwide, particularly the U.S.
Our MCS brand systems help blood collectors address their operational
challenges. The system automates the blood separation function, eliminating the
need for laboratory processing and enables the collection of two transfusible
doses of red cells from a single donor thus alleviating blood shortages. We call
this our two unit protocol or double red cell collection.
In addition to the two unit protocol, blood collectors can use the MCS brand
system to collect either one unit of red cells and a "jumbo" (double) unit of
plasma or one unit of red cells and one unit of platelets from a single donor or
they may leukoreduce their two unit red cell collections. Leukoreduction is the
removal of potentially harmful white blood cells from the blood. Leukoreduction
has been adopted in many countries worldwide, and an estimated 80% of all red
cells in the U.S. are now leukoreduced.
During fiscal year 2005, blood shortages continued and blood banks continued
their adoption of double red cell collection. United Blood Services, the second
largest collector of blood in the U.S., expanded its automated red cell program
to include our leukoreduction red cell collection kit. Throughout the year, the
American Red Cross also expanded its use of our technology. The American Red
Cross finished the fiscal year collecting approximately 3% of its red cell units
on our technology.
Since fiscal year 2003, we directed research and development resources to our
next generation automated red cell collector, called the Cymbal device (formerly
known as the Red Cell Collector). The Cymbal system is an automated device to
collect and process two units of red cells from donors which is smaller, lighter
and more portable than our current red cell collection technology. We continued
to advance the Cymbal system in fiscal year 2005. We expect CE marking of this
device during fiscal year 2006.
See the section entitled "Research and Development" for further discussion.
Surgical Blood Salvage Systems
Surgical blood salvage, also known as autotransfusion, involves the collection
of a patient's own blood during and after surgery, for reinfusion to that
patient. In surgical blood salvage, blood is suctioned from a wound site,
collected in a centrifuge, and cleaned and filtered to remove unwanted
substances from the recovered blood. The blood is transferred to a collection
bag and made available for transfusion back to the patient. This process occurs
in a sterile,
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closed-circuit; consumable set which sits inside our device. We market our
surgical blood salvage products to hospital-based medical specialists, primarily
cardiovascular, orthopedic, and trauma surgeons or to surgical suite service
providers.
Loss of blood is common in open heart, trauma, transplant, vascular, and
orthopedic procedures, and the need for transfusion of oxygen-carrying red cells
to make up for lost blood volume is routine. Prior to the introduction of our
technology, patients were transfused exclusively with blood from volunteer
donors. Donor blood carries various potential risks including (i) risk of
transfusion with the wrong blood type (the most common cause of
transfusion-related death), (ii) risk of transfusion reactions including death,
but more commonly chills, fevers or other side effects that can prolong a
patient's recovery, and (iii) risk of transfusion of blood with a blood-borne
disease or infectious agent.
As a result of numerous blood safety initiatives, today's blood transfusions are
extremely safe, especially in well developed and resourced health care systems.
However, transfusions are not risk free. Surgical blood salvage reduces or
eliminates a patient's dependence on blood donated from others and ensures that
the patient receives the safest blood possible - his or her own.
Surgical blood salvage is also a cost effective alternative for hospitals
compared to the total cost of transfusing donor blood. Blood shortages have also
reinforced the benefits of surgical blood salvage. As hospitals are forced to
consider canceling elective surgeries due to unavailability of blood, they can
turn to surgical blood salvage as a means of conserving their blood supply for
other patients.
We pioneered the first surgical blood salvage systems. Today, we market the Cell
Saver brand system which is targeted to procedures that involve rapid, high
volume blood loss such as cardiovascular surgeries, as well as the OrthoPAT
system which is targeted to orthopedic procedures that involve slower, lower
volume blood loss that often occurs well after surgery. We are currently in the
early stages of introducing the cardioPAT system for use in open heart surgeries
when there is less blood loss.
In fiscal year 2003, we announced a marketing agreement with Augustine Medical
Corporation International (a subsidiary of Arizant, Inc.) under which we now
market the Bair Hugger(R) surgical patient warming system in Japan. The Bair
Hugger system is a device and disposable blanket that warms a patient before,
during, and after surgery so that the patient's body temperature remains stable.
Published clinical studies demonstrate that maintaining normal body temperatures
during surgery can reduce the incidence of wound infection, bleeding, cardiac
events, and mortality. In fiscal year 2005, we renegotiated this contract,
extending it another three years and adding marketing of the Ranger(R) product
in Japan. The Ranger product is a fluid warming system for surgical patients.
(ii) Revenue Detail
We discuss our revenues using the following categories:
Disposables (the consumables used in blood collecting, processing, and salvaging
and fees for the use of our equipment.) Equipment (the sale of devices)
Miscellaneous and Service (including Fifth Dimension software management systems
and service contracts)
In fiscal year 2005, sales of disposable products accounted for approximately
89.3% of net revenues. Sales of our disposable products were 5.3% higher in 2005
than in 2004 and grew at a compound average annual growth rate of 5.7% for the
three years ended April 2 2005. The favorable effects of foreign exchange
contributed 5.0% of the 5.3% increase in net sales during fiscal year 2005 with
the remaining 0.3% increase resulting from increases in disposable revenues
across our blood bank, red cell and surgical and product lines due to unit
increases and product mix shifts. These increases were almost entirely offset by
decreases in our plasma product line. Sales of equipment accounted for
approximately 5.4% of net revenues in fiscal year 2005 and approximately 4.6% in
fiscal year 2004. The increase in equipment revenue during fiscal year 2005 is
largely attributable to the sale of MCS+ red cell collection devices to the
American Red Cross in the first quarter of fiscal year 2005).
Service and other miscellaneous revenues accounted for approximately 5.3% and
6.0% of net revenues in fiscal year 2005 and fiscal year 2004, respectively. The
decrease during fiscal year 2005 was due to reduced software revenue from Fifth
Dimension. Fifth Dimension currently sells its products primarily to plasma
customers who have been
8
negatively impacted by the recent volatility and consolidation in the worldwide
commercial plasma collection market.
(iii) Marketing/Sales/Distribution
We market and sell our products to hospitals and hospital service providers,
blood systems and independent blood banks, commercial plasma collection centers,
and national health organizations through our own direct sales force (including
full-time sales representatives and clinical specialists) as well as independent
distributors. Sales representatives target the primary decision-makers within
each of those organizations.
In fiscal year 2005, for the fifth consecutive year, we received the Omega
NorthFace ScoreBoard Award for exemplary service to customers. This award is
presented to the highest-ranked organizations based on customer ratings of
firms' actual performance against customer expectations in areas such as phone
support, on-site operations, technical services, and training.
(iv) United States
In fiscal year 2005, approximately 34.3% of consolidated net sales were
generated in the U.S. where we use a direct sales force to sell the majority of
our products. We have an exclusive distribution agreement with Zimmer Holdings
Inc. for the sale and marketing of the OrthoPAT system within the U.S.
(v) Outside the United States
In fiscal year 2005, approximately 65.7% of consolidated net revenues were
generated through sales to non-U.S. customers. Our direct sales force in Europe
and Asia includes full-time sales representatives and clinical specialists based
in the United Kingdom, Germany, France, Sweden, the Netherlands, Italy, Austria,
Hong Kong, Canada, Japan, Switzerland, Czech Republic, China, Taiwan, and
Belgium. We also use various distributors to market our products in South
America, the Middle East, and parts of Europe and the Far East.
(vi) Research and Development
We operate research and development ("R&D") centers in Switzerland, Japan, and
the United States, so that protocol variations are incorporated to closely match
local customer requirements. In addition to the above R&D facilities, our Fifth
Dimension subsidiary maintains development operations in Edmonton, Alberta,
Canada.
Customer collaboration is also an important part of our technical strength and
competitive advantage. We have built consulting relationships with a significant
number of transfusion experts around the world. These individuals provide us
with ideas for new products and applications, enhanced protocols, and potential
test sites as well as objective evaluations and expert opinions regarding
technical and performance issues.
The development of extracorporeal blood processing systems has required us to
maintain technical expertise in various engineering disciplines, including
mechanical, electrical, software, biomedical, and materials. Innovations
resulting from these various engineering efforts enable us to develop systems
that are faster, smaller, and more user-friendly, or that incorporate additional
features important to our customer base.
Our expenditures for R&D were $20.0 million for fiscal year 2005(5.2% of sales),
$17.4 million for fiscal year 2004(4.8% of sales) and $19.5 million (5.8% of
sales) for fiscal year 2003. All R&D costs are expensed as incurred. We expect
to continue to invest resources in R&D.
In fiscal year 2005, R&D resources were allocated to completing work on a new
surgical blood salvage device, the cardioPAT, enhancements to the MCS platelet
collection platform, the Cymbal (formerly Red Cell Collector), two blood
collection software systems - E*Interview and HaemoConnect, as well as several
projects to enhance our current product portfolio. The cardioPAT surgical blood
salvage system is a small, portable, and operator-friendly surgical blood
salvage device designed to address lower volume blood loss during and after open
heart surgery. This device entered limited market release in early fiscal year
2006. Our new MCS platelet collection protocol adds several new enhancements in
response to customer feedback. This device entered clinical trials at the end of
fiscal year 2005.
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(vii) Manufacturing
Our principal manufacturing operations (equipment, disposables, and solutions)
are located in Braintree, Massachusetts; Leetsdale, Pennsylvania; Union, South
Carolina; and Bothwell, Scotland.
In general, our production activities occur in a controlled setting or
"cleanroom" environment. Each step of the manufacturing and assembly process is
quality checked, qualified, and validated. Critical process steps and materials
are documented to ensure that every unit is produced consistently and meets
performance requirements.
Some component manufacturing is performed by outside contractors according to
our specifications. We maintain important relationships with two Japanese
manufacturers that provide finished consumables in Singapore, Japan, and
Thailand. Certain parts and components are purchased from various single
sources. If necessary, we believe that, in most cases, alternative sources of
supply could be identified and developed within a relatively short period of
time. Nevertheless, an interruption in supply could temporarily interfere with
production schedules and affect our operations. All of our equipment and
disposable manufacturing sites are certified to the ISO 13485 standard and to
the Medical Device Directive allowing placement of the CE mark of conformity.
Each blood processing machine is designed in-house and assembled from components
that are either manufactured by us or by others to our specifications. The
completed instruments are programmed, calibrated, and tested to ensure
compliance with our engineering and quality assurance specifications. Inspection
checks are conducted throughout the manufacturing process to verify proper
assembly and functionality. When mechanical and electronic components are
sourced from outside vendors, those vendors must meet detailed qualification and
process control requirements. During fiscal year 2005, we manufactured
approximately 83% of our equipment. The remainder was manufactured for us by
outside contractors.
We have established a Customer Oriented Redesign for Excellence ("CORE")
program, which is based on the tenets of Total Quality of Management ("TQM") and
using Six Sigma Statistic methods. This program's goals include: 1) improving
customer satisfaction through top quality and on-time deliveries, 2) lowering
production costs, and 3) optimizing inventories.
(viii) Intellectual Property
We hold patents in the United States and many international jurisdictions on
some of our machines, processes, disposables and related technologies. These
patents cover certain elements of our systems, including protocols employed in
our equipment and certain aspects of our processing chambers and disposables.
Our patents may cover current products or may be defensive in that they are
directed to technologies not yet embodied in our current products. We also
license patent rights from third parties that cover technologies that we use or
plan to use in our business. We consider our patent rights to be important to
our business. To maintain our competitive position, we rely on the technical
expertise and know-how of our personnel and on our patent rights. We pursue an
active and formal program of invention disclosure and patent application in both
the United States and international jurisdictions. We own various trademarks
that have been registered in the United States and certain other countries.
Our policy is to obtain patent and trademark rights in the U.S. and foreign
countries where such rights are available and we believe it is commercially
advantageous to do so. However, the standards for international protection of
intellectual property vary widely. We cannot assure that pending patent and
trademark applications will result in issued patents and trademarks, that
patents issued to or licensed by us will not be challenged or circumvented by
competitors, or that our patents will not be found to be invalid.
(ix) Competition
We created our markets and have established a record of innovation and market
leadership in each of the areas in which we compete. Although we compete
directly with others, no one company competes with us across the full line of
products.
10
In order to remain competitive, we must continue to develop and acquire
cost-effective new products, technologies and services. We believe that our
ability to maintain a competitive advantage will continue to depend on a
combination of factors, including factors within our control (reputation,
regulatory approvals, patents, unpatented proprietary know-how in several
technological areas, product quality, safety and cost effectiveness and
continual and rigorous documentation of clinical performance) as well as factors
outside of our control (regulatory standards, medical standards and the practice
of medicine).
We innovated the plasma collection market. Prior to our invention of the PCS
system, plasma was collected manually, posing significant risks to donors. In
the automated plasma collection markets, we compete with Baxter International,
Inc. on the basis of quality, ease of use, services and technical features of
systems, and on the long-term cost-effectiveness of equipment and disposables.
To a much lesser degree, our automated systems also compete with manual
collection systems, which are less expensive, but are also slower, less
efficient, and clinically riskier. Baxter has pursued a strategy of developing
plasma collection sites and acquiring collection centers, which has altered the
competitive landscape and affected our sales. In October 2003, Baxter acquired
our largest U.S. plasma customer, Alpha Therapeutic Corporation ("Alpha"). Upon
Baxter's announcement of its acquisition of Alpha's business, Baxter closed 38
of 41 of the former Alpha centers and sold the remaining three centers. (These
three centers remain Haemonetics' customers.) While Baxter has closed some of
its plasma collection centers, there can be no assurance that it will not
acquire other plasma collection centers, some of which may currently use our
collection technology.
In the automated platelet collection markets, competition is based on continual
performance improvement, as measured by the time and efficiency of component
collection and the quality of the components collected. Our quality is
exceptional, as evidenced by more than 70% market share in Japan, where quality
is a leading purchasing consideration. Our major competitors in the automated
platelet collection market are Gambro BCT, Inc. and Baxter. Each of these
companies has taken a different technological approach in designing their
systems for the automated platelet collection market. In the platelet collection
market, we also compete with whole blood collections from which pooled platelets
are derived.
In the cell processing market, competition is based on level of automation,
labor-intensiveness, and system type (open versus closed). Open systems are
weaker in GMP compliance and blood processed through them has a 24 hour shelf
life. We do have open system cell processors which compete with Gambro BCT
systems. Our closed system cell processor gives blood processed through it a 14
day shelf life and has no competition.
Our most recent innovation is automated red cell collection which we pioneered
in the late 1990s. We preceded one competitor, Gambro BCT, Inc. to market by 2
years, and the other competitor, Baxter, to market by six years. However, it is
important to note that currently less than 1% of the forty million red cells
collected worldwide and about 4% of the fourteen million red cells collected in
the U.S. annually are collected via automation. So, we more often compete with
traditional (manual) methods of deriving red cells by collecting and separating
a pint of whole blood on the basis of total cost, process control, product
quality, and inventory management.
We invented surgical blood salvage, and the Cell Saver brand is recognized
worldwide. In this high blood loss surgical market, competition is based on
reliability, ease of use, service, support, and price. Each manufacturer's
technology is similar, and we compete principally with Medtronic, Fresenius, and
Sorin Biomedica.
In the orthopedic surgical blood salvage market there are no direct competitors.
The OrthoPAT system is the only system designed specifically for use in these
surgeries where a patient often bleeds more slowly, bleeds less, and bleeds well
after surgery.
Our technical staff is highly skilled, but many competitors have substantially
greater financial resources and larger technical staffs at their disposal. There
can be no assurance that such competitors will not direct substantial efforts
and resources toward the development and marketing of products competitive with
those of Haemonetics.
(x) Seasonality
Net revenues have historically been higher in the second half of our fiscal
year, reflecting principally the seasonal buying patterns of our customers. This
has proven true in four of our last five fiscal years with the exception being
fiscal year 2003 where the second half of our fiscal year had slightly lower
revenues due principally to market conditions in plasma.
11
(xi) Government Regulation
The products we manufacture and market are subject to regulation by the Center
of Biologics Evaluation and Research ("CBER") and the Center of Devices and
Radiological Health ("CDRH") of the United States Food and Drug Administration
("FDA"), and other non-United States regulatory bodies.
All medical devices introduced to the United States market since 1976 are
required by the FDA, as a condition of marketing, to secure either a 510(k)
pre-market notification clearance or an approved Pre-market Approval Application
("PMA"). In the United States, software used to automate blood center operations
and blood collections and to track those components through the system are
considered by FDA to be medical devices, subject to 510(k) pre-market
notification. Intravenous ("IV") solutions marketed by us for use with our
automated systems (blood anticoagulants and solutions for storage of red blood
cells) require us to obtain from CBER an approved New Drug Application ("NDA")
or Abbreviated New Drug Application ("ANDA"). A 510(k) pre-market clearance
indicates FDA's agreement with an applicant's determination that the product for
which clearance is sought is substantially equivalent to another legally
marketed medical device. The process of obtaining a 510(k) clearance may take up
to 24 months and involves the submission of clinical data and supporting
information. The process of obtaining NDA approval for solutions is likely to
take much longer than 510(k) approvals because the FDA review process is more
complicated.
We maintain customer complaint files, record all lot numbers of disposable
products, and conduct periodic audits to assure compliance with FDA regulations.
We place special emphasis on customer training and advise all customers that
blood processing procedures should be undertaken only by qualified personnel.
We are also subject to regulation in the countries outside the United States in
which we market our products. Many of the regulations applicable to our products
in such countries are similar to those of the FDA. However, the national health
or social security organizations of certain countries require our products to be
qualified by those countries before they can be marketed in those countries. We
have complied with these regulations and have obtained such qualifications.
Federal, state and foreign regulations regarding the manufacture and sale of
products such as ours are subject to change. We cannot predict what impact, if
any, such changes might have on our business.
(xii) Environmental Matters
We do not anticipate that compliance with federal, state, and local
environmental protection laws presently in effect will have a material adverse
impact upon our business or will require any material capital expenditures.
However, environmental laws, including those that regulate raw materials for
medical grade plastics, are subject to change. We cannot predict what impact, if
any, such changes might have on our business.
(xiii) Employees
As of April 2, 2005, we employed 1,546 persons assigned to the following
functional areas: manufacturing, 791; sales and marketing, 226; general and
administrative, 202; research and development, 138; and quality control and
field service, 189. We consider our employee relations to be satisfactory.
(xiv) Availability of Reports and Other Information
All of our corporate governance materials, including the Principles of Corporate
Governance, the Business Conduct Policy and the charters of the Audit,
Compensation, and Nominating and Governance Committees are published on the
Investor Relations section of our website at
http://www.haemonetics.com/site/content/investor/corp_gov.asp. Such information
is also available in print to any shareholder who requests it. All requests
should be directed to our Company's Secretary. On this web site the public can
also access, free of charge, our annual, quarterly and current reports and other
documents filed or furnished to the Securities and Exchange Commission as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The financial information required by this item is included herein in Note 16 of
the financial statements, entitled Segment, Geographic and Customer Information.
Sales to the Japanese Red Cross accounted for 23.7% of net
12
revenues in fiscal year 2005. No other customer accounted for more than 10% of
our net revenues. For more information concerning significant customers, see
subheading of Note 2 of the financial statements, entitled, Concentration of
Credit Risk and Significant Customers.
Cautionary Statement
Statements contained in this report, as well as oral statements we make which
are prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed," and similar expressions, are
intended to identify forward looking statements regarding events, conditions,
and financial trends that may affect our future plans of operations, business
strategy, results of operations, and financial position. These statements are
based on our current expectations and estimates as to prospective events and
circumstances about which we can give no firm assurance. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of our
actual future financial condition or results. These forward-looking statements,
like any forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include technological advances in the medical field
and our standards for transfusion medicine and our ability to successfully
implement products that incorporate such advances and standards, product demand
and market acceptance of our products, regulatory uncertainties, the effect of
economic and political conditions, the impact of competitive products and
pricing, foreign currency exchange rates, changes in customers' ordering
patterns, the effect of industry consolidation especially as seen in the Plasma
market, the effect of communicable diseases and the effect of uncertainties in
markets outside the U.S. (including Europe and Asia) in which we operate. The
foregoing list should not be construed as exhaustive.
ITEM 2. PROPERTIES
Our main facility is located on 14 acres in Braintree, Massachusetts. This
facility is located in a light industrial park and was constructed in the 1970s.
The building is approximately 180,000 square feet, of which 70,000 square feet
is devoted to manufacturing and quality control operations, 35,000 square feet
to warehousing, 68,000 square feet to administrative and research and
development activities and 7,000 square feet is available for expansion. See
Note 7 to the financial statements for details of our mortgage on the Braintree
facility.
On property adjacent to the Braintree facility we lease 43,708 of additional
office space. This facility is used for sales, marketing, finance and other
administrative services. Annual lease expense for this facility is $591,842.
We lease an 81,850 square foot facility in Leetsdale, Pennsylvania. This
facility is used for warehousing, distribution and manufacturing operations.
Annual lease expense is $311,330 for this facility.
We own a facility in Bothwell, Scotland used to manufacture disposable
components for European customers. The original facility is approximately 22,200
square feet. An addition of 18,000 square feet is currently under construction
with occupancy planed for early fiscal year 2006. This expansion will provide
10,000 square feet of warehouse space replacing space currently leased for this
purpose.
We own a facility in Union, South Carolina. This facility is used for the
manufacture of sterile solutions to support our blood bank (component therapy)
and plasma businesses. Additionally, this facility is engaged in contract
manufacturing of other sterile solutions for veterinary and pharmaceutical
customers. The facility is approximately 69,300 square feet.
We also lease a 61,000 square foot facility in Avon, Massachusetts. This
facility is used for warehousing and distribution of products. Annual lease
expense for this facility is $370,671.
Fifth Dimension, which develops and markets software for the blood bank and
plasma business, leases 13,799 square feet of office space in Edmonton, Alberta,
Canada. Annual lease expense if $161,906.
We also lease sales, service, and distribution facilities in Japan, Europe
(Austria, Belgium, Czech Republic, France, Germany, Italy, Sweden, Switzerland,
the Netherlands, and United Kingdom), China, Hong Kong and Taiwan to support our
international business.
13
ITEM 3. LEGAL PROCEEDINGS
We are presently engaged in various legal actions, and although our ultimate
liability cannot be determined at the present time, we believe that any such
liability will not materially affect our consolidated financial position or our
results of operations.
Our products are relied upon by medical personnel in connection with the
treatment of patients and the collection of blood from donors. In the event that
patients or donors sustain injury or death in connection with their condition or
treatment, we, along with others, may be sued, and whether or not we are
ultimately determined to be liable, we may incur significant legal expenses. In
addition, such litigation could damage our reputation and, therefore, impair our
ability to market our products or to obtain professional or product liability
insurance or cause the premiums for such insurances to increase. We carry
product liability coverage. While we believe that the aggregate current coverage
is sufficient, there can be no assurance that such coverage will be adequate to
cover liabilities which may be incurred. Moreover, we may in the future be
unable to obtain product and professional liability coverages in amounts and on
terms that we find acceptable, if at all.
In order to aggressively protect our intellectual property throughout the world,
we have a program of patent disclosures and filings in markets where we conduct
significant business. While we believe this program is reasonable and adequate,
the risk of loss is inherent in litigation as different legal systems offer
different levels of protection to intellectual property, and it is still
possible that even patented technologies may not be protected absolutely from
infringement.
On January 21, 2004, we filed a claim for binding arbitration against Baxter,
seeking an arbitration award that compels Baxter to honor numerous supply
contracts it assumed when Baxter purchased the plasma collection operations of
Alpha Therapeutic Corporation, our largest plasma customer, or to pay us
damages. The matter was tried before an arbitration panel for three weeks ending
April 1, 2005. The arbitration panel issued its decision on May 20, 2005 and
awarded the Company $27.8 million in damages plus legal costs
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
The information concerning our Executive Officers is as follows. Executive
officers are elected by and serve at the discretion of our Board of Directors.
PETER ALLEN joined our Company in 2003 as President, Donor Division. Prior to
joining our Company, Mr. Allen was Vice President of The Aethena Group, a
private equity firm providing services to the global healthcare industry. From
1998 to 2001, he held various positions including Vice President of Sales and
the Oncology Business at Syncor International, a provider of radiopharmaceutical
and comprehensive medical imaging services. Previously, he held executive level
positions in sales, marketing and operations in DataMedic, Inc., Enterprise
Systems, Inc./HBOC, and Robertson Lowstuter, Inc. Mr. Allen has also worked in
sales at American Hospital Supply Corporation and Baxter International, Inc.
BRIAN CONCANNON joined our Company in 2003 as President, Patient Division. Prior
to joining our Company, Mr. Concannon was President, Northeast Region, Cardinal
Health Medical Products and Services. From 1996 to 1999, he was with Allegiance
Healthcare, most recently holding the position of Vice President, Distribution
Sales and Operations. Mr. Concannon has also held various sales and marketing
positions at American Hospital Supply Corporation and Baxter Healthcare
Corporation.
ROBERT EBBELING joined our Company in 1987 as Manager of Injection Molding.
Throughout his career at our Company, Mr. Ebbeling has held various management
and executive positions in manufacturing and operations. In 1996, he was
appointed to Senior Vice President, Manufacturing. In February 2003, Mr.
Ebbeling was promoted to Executive Vice President, Manufacturing, and then in
August 2003, he was promoted to Vice President, Operations. Prior to joining our
Company, Mr. Ebbeling was Vice President, Manufacturing, for Data Packaging
Corporation.
14
DR. ULRICH ECKERT joined our Company in 1995 as Vice President, Haemonetics
Germany. In 1998 and 2001, Dr. Eckert assumed additional responsibility for
European plasma marketing and our Nordic countries' subsidiaries respectively.
In 2002, he was promoted to President, Europe and Latin America. Prior to
joining our Company, Dr. Eckert spent eight years with Apple Computer where his
most recent responsibility was Director, Business Systems for Germany, Austria
and Switzerland.
ALICIA R. LOPEZ joined our Company in 1988 as General Counsel and Director of
Human Resources. Throughout her career at Haemonetics, Ms. Lopez has held
various executive positions with responsibilities over legal, human resources,
administration, regulatory affairs, and investor relations. Since 1990, she has
served as Secretary to the Board of Directors. In 2000, Ms. Lopez was appointed
Senior Vice President. In 2003, Ms. Lopez was named Vice President and General
Counsel and in 2004 she was promoted to General Counsel and Vice President of
Administration. Prior to joining our Company, Ms. Lopez was a litigation
associate with the law firm of Sullivan & Worcester.
BRAD NUTTER joined our Company in 2003 as Board Member, President and Chief
Executive Officer. Prior to joining our Company, Mr. Nutter was President and
Chief Executive Officer of Gambro Healthcare, an international dialysis
provider, a division of Gambro AB. From 1997 to 2000, he was Executive Vice
President and Chief Operating Officer of Syncor International, an international
provider of radiopharmaceuticals and medical imaging. Previously, Mr. Nutter
held senior level positions at American Hospital Supply Corporation and Baxter
International, Inc.
DR. MARK POPOVSKY joined our Company in 2000 as Senior Vice President and
Corporate Medical Director. Prior to joining our Company, he served in the
capacity of Chief Medical Officer & Chief Executive Officer at the American Red
Cross - New England Region for 15 years. He is currently an Associate Professor
of Pathology at Harvard Medical School and Beth Israel Deaconess Medical Center
in Boston. Dr. Popovsky received his transfusion medicine training at the
National Institutes of Health and Mayo Clinic. At Mayo Clinic he was the
Director of Transfusion & Intravenous Services for 3 years. He serves on 7
editorial boards and is the author of more than three hundred peer-reviewed
publications in transfusion medicine.
RONALD J. RYAN joined our Company in 1998 as Senior Vice President and Chief
Financial Officer. In 2003, Mr. Ryan was named Vice President and Chief
Financial Officer. Prior to joining our Company, he held the position of Chief
Financial Officer and later Senior Vice President of Operations with Converse
Inc. From 1984 to 1990, Mr. Ryan was Vice President of Finance and Business
Planning for the Europe, Middle East and Africa Division of Bristol-Myers
Squibb.
DR. YUTAKA SAKURADA joined our Company in 1991 as Board Member and President,
Haemonetics Japan. In 2001, Dr. Sakurada was promoted to Chairman and CEO of
Haemonetics Japan. In 2003, he was named President Japan/Asia in addition to his
responsibilities as Chairman and CEO of Haemonetics Japan. Prior to joining our
Company, Dr. Sakurada was Managing Director of Kuraray Plastic Company Ltd., a
diversified synthetic fiber company, in Japan. From 1985 to 1989, Dr. Sakurada
was a member of the Board of Kuraray.
WILLIAM STILL joined our Company in 2004 as Vice President of Strategic
Marketing and Business Development. Prior to joining our Company, Mr. Still was
Senior Director, Business Development for Advanced Respiratory Inc. From 1996 to
2001, he was with St. Jude Medical, most recently holding the position of Sr.
Associate, Business Development. Mr. Still has also held the position of Finance
Manager for St. Jude's Cardiac Surgery Group.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under symbol HAE. The
following table sets forth for the periods indicated the high and low sales
prices of such common stock, which represent actual transactions as reported by
the New York Stock Exchange.
---------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------
Fiscal year ended April 2, 2005:
- -------------------------------------------------------------------------------------------------------------------
Market price of
Common Stock
High $31.70 $33.25 $37.25 $45.23
Low $24.95 $26.52 $31.50 $34.07
- ----------------------------------------------
Fiscal year ended April 3, 2004:
- ----------------------------------------------
Market price of
Common Stock
High $23.75 $24.30 $24.00 $32.50
Low $17.35 $16.30 $21.70 $23.52
- ----------------------------------------------
There were approximately 461 holders of record of the Company's common stock as
of May 9, 2005. The Company has never paid cash dividends on shares of its
common stock and does not expect to pay cash dividends in the foreseeable
future.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Haemonetics Corporation and Subsidiaries Five-Year Review
(in thousands, except share and employee data)
Summary of Operations 2005 2004 2003 2002 2001
- ------------------------------------------------------------------- --------- --------- --------- ---------
Net revenues $ 383,598 $ 364,229 $ 336,956 $ 319,969 $ 293,860
Cost of goods sold 185,722 190,693 182,260 165,135 151,447
--------- --------- --------- --------- ---------
Gross profit 197,876 173,536 154,696 154,834 142,413
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 19,994 17,398 19,512 19,512 19,039
Selling, general and administrative 118,039 108,845 97,705 88,874 86,734
Acquired research and development -- -- -- 10,000 18,606
Other unusual charges -- -- -- -- 4,614
--------- --------- --------- --------- ---------
Total operating expenses 138,033 126,243 117,217 118,386 128,993
--------- --------- --------- --------- ---------
Operating income 59,843 47,293 37,479 36,448 13,420
Other income (expense), net (2) (1,481) 1,128 2,057 3,906
--------- --------- --------- --------- ---------
Income before provision for income taxes 59,841 45,812 38,607 38,505 17,326
Provision for income taxes 20,202 16,492 10,228 10,782 10,090
--------- --------- --------- --------- ---------
Income before cumulative effect of a change
in accounting principle 39,639 29,320 28,379 27,723 7,236
--------- --------- --------- --------- ---------
Cumulative effect of a change in accounting
principle -- -- -- 2,304(a) --
--------- --------- --------- --------- ---------
Net income $ 39,639 $ 29,320 $ 28,379 $ 30,027 $ 7,236
========= ========= ========= ========= =========
Income per share:
Basic $ 1.55 $ 1.20 $ 1.15 $ 1.15 $ 0.29
Diluted $ 1.52 $ 1.19 $ 1.13 $ 1.11 $ 0.28
Weighted average number of shares 25,523 24,435 24,591 26,214 25,299
Common stock equivalents 622 260 457 941 706
--------- --------- --------- --------- ---------
Weighted average number of common and common
equivalent shares 26,145 24,695 25,048 27,155 26,005
========= ========= ========= ========= =========
Financial and Statistical Data: 2005 2004 2003 2002 2001
- ------------------------------------------------------------------- --------- --------- --------- ---------
Working capital $ 255,689 $ 185,606 $ 122,880 $ 148,737 $ 139,717
--------- --------- --------- --------- ---------
Current ratio 3.9 2.9 2.2 2.8 2.8
Property, plant and equipment, net $ 69,337 $ 78,030 $ 83,987 $ 84,877 $ 83,251
--------- --------- --------- --------- ---------
Capital expenditures $ 17,530 $ 13,862 $ 16,715 $ 23,509 $ 16,146
Depreciation and amortization $ 27,756 $ 30,149 $ 28,431 $ 25,616 $ 24,499
--------- --------- --------- --------- ---------
Total assets $ 467,757 $ 407,394 $ 359,485 $ 364,921 $ 345,314
Total debt $ 45,843 $ 58,260 $ 70,617 $ 72,143 $ 69,719
--------- --------- --------- --------- ---------
Stockholders' equity $ 355,135 $ 279,749 $ 223,237 $ 236,824 $ 215,516
Return on average equity 12.5% 11.7% 12.3% 13.3% 3.5%
Debt as a % of stockholders' equity 12.9% 20.8% 31.6% 30.5% 32.3%
--------- --------- --------- --------- ---------
Employees 1,546 1,438 1,497 1,498 1,357
Net revenues per employee $ 248 $ 253 $ 225 $ 214 $ 217
--------- --------- --------- --------- ---------
(a) Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, as amended, which resulted in the
recognition of $2.3 million as a cumulative effect of a change in
accounting principle, net of tax. This amount is the change in the fair
value of forward contracts related to forward points, which the Company
excludes from its assessment of hedge effectiveness.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Business
We design, manufacture and market automated systems for the collection,
processing and surgical salvage of donor and patient blood, including the
single-use disposables used with our systems and related data management
software. Our systems allow users to collect and process only the blood
component(s) they target, plasma, platelets, or red blood cells, increasing
donor and patient safety as well as collection efficiencies. Our systems consist
of proprietary disposable sets that operate on our specialized equipment. Our
data management systems are used by blood collectors to improve the safety and
efficiency of blood collection logistics by eliminating previously manual
functions at commercial plasma and not-for-profit blood banks.
We either sell our devices to customers (equipment revenue) or place our devices
with customers subject to certain conditions. When the device remains our
property, the customer has the right to use it for a period of time as long as
they meet certain conditions we have established, which among other things,
generally include one or more of the following:
o Purchase and consumption of a minimum level of disposable products
o Payment of monthly rental fees
o An asset utilization performance metric, such as performing a
minimum level of procedures per month per device.
Our disposable revenue stream (including sales of disposables and fees for the
use of our equipment) accounted for approximately 89% of our total revenues for
fiscal years 2005, 2004 and 2003.
Product Families
Our donor products include systems to collect plasma, platelets and red cells
from blood donors. We market our donor products primarily to blood collectors
which include both for-profit plasma collectors and not-for-profit blood banks.
Our patient products include systems to collect (during and after surgery), wash
and filter unwanted substances from the blood prior to reinfusion to the
surgical patient. We market these patient products to hospitals and hospital
service providers.
Miscellaneous and service revenue includes revenue generated from equipment
repairs performed under preventive maintenance contracts or emergency service
billings, as well as revenue from software sales.
Donor Products
Plasma
o Plasma collection systems - These systems are used by plasma
collectors to collect the plasma component of a donor's whole
blood. The plasma is sold to fractionators for processing into
therapeutic pharmaceuticals and vaccines. Automated plasma
collection is a safe and cost-effective improvement to manual
(non-automated) plasma collection which is time-consuming,
labor-intensive, produces relatively poor yields, and poses
risk to donors. Currently the majority of plasma collections
worldwide are automated collections.
Blood Bank
o Platelet collection systems - These systems are used by blood
collectors to collect the platelet component of a donor's
whole blood. Platelets are transfused to cancer patients whose
platelets have been depleted as a result of chemotherapy.
Before the advent of our platelet collection technology, the
"pooling" or combination of platelets from six to eight
different donors was the only alternative to
18
prepare a single therapeutic dose for transfusion to a
patient. Our MCS(R) line of products allows the collection of
a sufficient number of platelets from only one donor to
produce one or two therapeutic doses.
o Cell Processing systems - These systems are used to freeze,
thaw and wash red cells, which enables blood collectors to
better manage their red cell inventories. In a liquid state,
red cells must be transfused within 42 days whereas frozen red
cells may be stored for up to ten years. Previous generation
freezing technology required that red cells be transfused
within 24 hours after thawing; our ACP(R) 215 systems allow
red cells to be transfused for up to 14 days post thaw.
o Intravenous solutions - We contract manufacture sterile
intravenous solutions for pharmaceutical customers. These
solutions include generic drugs and other custom drug
products.
Red Cell
o Red Cell collection systems-These systems are used to automate
the collection of red cells from blood donors with protocols
that allow for the collection of two units of red cells, a
unit of red cells and a unit of plasma, or a unit of red cells
and a unit of platelets. The systems improve the blood
collector's operational efficiency by increasing the volume of
blood components collected per donation event and eliminating
manual processing. The most frequently used red cell
collection protocol collects twice the number of red cells
than the traditional (non-automated) collection method and
helps blood systems address red cell shortages that commonly
plague health care systems.
Patient Products
Surgical
o Surgical blood salvage systems - These systems are used by
hospitals to collect a patient's own blood during or after
surgery for reinfusion to the patient, mitigating or
eliminating the need for transfusion of donated blood. We
market Cell Saver(R) brand systems for higher blood loss
procedures such as cardiovascular surgeries and the OrthoPAT
(R) brand system for lower blood loss orthopedic surgeries.
The cardioPAT brand system is our newest product, targeted at
beating heart and other cardiovascular surgeries that result
in bleeding during and after surgery.
Financial Summary
For the years ended
---------------------------------------- %Increase/ %Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands, except per share data) 2005 2004 2003 05 vs. 04 04 vs. 03
--------- --------- ---------- ---------- ----------
Net revenues $ 383,598 $ 364,229 $ 336,956 5.3% 8.1%
Gross profit 197,876 173,536 154,696 14.0% 12.2%
% of net revenues 51.6% 47.6% 45.9%
Operating income 59,843 47,293 37,479 26.5% 26.2%
% of net revenues 15.6% 13.0% 11.1%
Provision for income tax 20,202 16,492 10,228 22.5% 61.2%
% of net revenues 5.3% 4.5% 3.0%
Net income $ 39,639 $ 29,320 $ 28,379 35.2% 3.3%
% of net revenues 10.3% 8.0% 8.4%
Earnings per share-diluted $ 1.52 $ 1.19 $ 1.13 27.7% 5.3%
Net revenues for fiscal year 2005 increased 5.3% over fiscal year 2004. The
favorable effects of foreign exchange contributed 5.0% of the increase with the
remaining 0.3% resulting from increases in disposable revenues across our blood
bank, red cell and surgical product lines due to unit increases and product mix
shifts. These increases were
19
almost entirely offset by decreases in our plasma product line. Gross profit
increased 14.0% over fiscal year 2004. The favorable effects of foreign exchange
accounted for 9.8% of the increase in gross profit. The remaining 4.2% increase
was due primarily to (i) a change in the mix of products being sold, ii) a
decrease in depreciation on our equipment at customer sites and (iii) the excess
and obsolete inventory provisions recorded in fiscal year 2004 related to the
loss of our Alpha business and other matters. Operating income increased 26.5%
over fiscal year 2004. The favorable effects of foreign exchange accounted for
27.8% of the increase. The remaining decrease of 1.3% resulted as gross profit
improvements were more than offset by increases in operating expenses. Net
income increased 35.2% over fiscal year 2004. The favorable effects of foreign
exchange accounted for 28.9% of the increase. The remaining increase of 6.3% was
due to a decrease in other expense, net, including interest expense and interest
income, and lower tax expense.
Net revenues for fiscal year 2004 increased 8.1% over fiscal year 2003. The
favorable effects of foreign exchange contributed 5.2% of the increase with the
remaining 2.9% resulting from disposable increases in our blood bank, red cell,
and surgical product lines and price increases, partly offset by decreases in
our plasma product line. During fiscal year 2004, higher sales, the positive
effects of foreign exchange, and cost reductions resulted in a gross profit
increase of 12.2% and an operating income increase of 26.2% over fiscal year
2003. Net income increased 3.3% as compared to fiscal year 2003. This increase
was a reflection of higher operating income partly offset by the increase in our
income tax rate to 36% in fiscal year 2004 versus 26.5% in fiscal year 2003 due
to a $4.0 million tax refund recorded during fiscal year 2003.
The comparisons to fiscal year 2004 are impacted by the fact that fiscal year
2004 included 53 weeks, while fiscal years 2005 and 2003 each included 52 weeks,
resulting from the policy that we use to determine our fiscal year end. The 53rd
week in fiscal year 2004 gave rise to both additional revenues and operating
expenses.
Market Trends
Plasma Market
Despite the continued increase in demand for plasma derived pharmaceuticals,
particularly intravenous immunoglobulin ("IVIG"), three significant factors have
influenced demand in the worldwide commercial plasma collection markets:
o The commercial plasma industry experienced significant consolidation
among plasma collectors and fractionators. Industry consolidation
impacts us when a collector changes the total number of its
collection centers, the total number of collections performed per
center or changes the plasma collection system (Haemonetics or
competitive technology) used to perform some or all of those
collections.
o In fiscal year 2005 fewer collection procedures were performed
worldwide as a result of an oversupply of source plasma. In the
U.S., our customers have recently observed an increase in the number
of collection being performed by some customers. Accordingly, we
believe that the inventory of source plasma has largely stabilized
in the U.S. In Europe, we understand from customers that supply is
beginning to come into alignment with demand and so we expect
collections should level off in the near future. In Japan, there is
a still an oversupply of plasma.
o Reimbursement guidelines affect the demand for end product
pharmaceuticals.
o The newer plasma fractionation facilities make more efficient use of
plasma in their production processes, utilizing less plasma to make
similar quantities of pharmaceuticals and vaccines.
During the fourth quarter of fiscal year 2005, we entered into a long term
supply agreement with ZLB Plasma Services ("ZLB") to be its exclusive provider
of plasma collection technology in the U.S.
20
Blood Bank Market
Despite modest to moderate increases in the demand for platelets in our major
markets, improved collection efficiencies that increase the yield of platelets
per collection have resulted in a flat market for disposables.
We expect our sales of intravenous solutions that we produce under contract for
pharmaceutical companies to level off in the near term.
Red Cell Market
Blood demands, a need for greater operating efficiency, and a stringent
regulatory environment continue to drive demand for our red cell products. Our
business continues to grow as we gain new customers and expand our penetration
at existing customer sites. Additionally, our sales continue to increase as more
customers have migrated to our higher-priced filtered disposable sets which
support our customers' good manufacturing processes by reducing manual
processing.
Surgical Market
The part of the U.S. surgical blood salvage market that is aimed at higher blood
loss cardiovascular procedures is declining and may continue to decline due to
improved surgical techniques minimizing blood loss and a decrease in the number
of open-heart (bypass) surgeries performed. As technology improves, as seen by
the continuous improvements made to coronary stents and angioplasty, the
preference of surgeons may shift to minimally invasive surgical procedures,
further reducing the number of open-heart surgeries performed.
The main driver of growth is the lower blood loss orthopedic procedures served
by our OrthoPAT system. We sell the OrthoPAT system through a distributor in the
U.S. and direct in our other major markets.
RESULTS OF OPERATIONS
Net Revenues
By geography
% %
Increase / Increase /
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
---------- ---------- ---------- ---------- ----------
United States $ 131,632 $ 126,872 $ 127,241 3.8% (0.3)%
International 251,966 237,357 209,715 6.2 13.2
---------- ---------- ---------- ---------- ----------
Net revenues $ 383,598 $ 364,229 $ 336,956 5.3% 8.1%
========== ========== ========== ========== ==========
International Operations and the Impact of Foreign Exchange
Our principal operations are in the U.S., Europe, Japan and other parts of Asia.
Our products are marketed in more than 50 countries around the world via a
direct sales force as well as independent distributors.
Approximately 66%, 65% and 62% of our revenues were generated outside the U.S.
during fiscal year 2005, 2004 and 2003, respectively. During fiscal years 2005,
2004 and 2003, revenues from Japan accounted for approximately 27%, 27% and 28%
of our total revenues, respectively and revenues from Europe comprised
approximately 30%, 30% and 26% of our total revenues, respectively. These sales
are primarily conducted in local currencies, specifically the Japanese Yen and
the Euro. Accordingly, our results of operations are significantly affected by
changes in the value of the Yen and the Euro relative to the U.S. dollar. The
favorable effects of foreign exchange resulted in a 5.0 % increase in sales,
which was the majority of the 5.3% increase in total sales from fiscal year 2004
21
to 2005. From fiscal year 2003 to fiscal year 2004, the favorable effects of
foreign exchange accounted for 5.2% of the 8.1% increase in total sales.
Please see section entitled "Foreign Exchange" in management's discussion for a
more complete discussion of how foreign currency affects our business and our
strategy to manage this exposure.
By product type
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
----------- ----------- ----------- ----------- -----------
Disposables $ 342,730 $ 325,540 $ 298,220 5.3% 9.2%
Misc. & service 20,173 22,002 18,355 (8.3) 19.9
Equipment 20,695 16,687 20,381 24.0 (18.1)
----------- ----------- ----------- ----------- -----------
Net revenues $ 383,598 $ 364,229 $ 336,956 5.3% 8.1%
=========== =========== =========== =========== ===========
Disposables revenue by product line
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
----------- ----------- ----------- ----------- -----------
Donor:
Plasma $ 97,250 $ 114,346 $ 114,436 (15.0)% (0.1)%
Blood Bank 130,427 112,209 99,921 16.2 12.3
Red Cells 28,676 22,321 15,542 28.5 43.6
----------- ----------- ----------- ----------- -----------
Subtotal $ 256,353 $ 248,876 $ 229,899 3.0% 8.3%
Patient:
Surgical 86,377 76,664 68,321 12.7% 12.2%
----------- ----------- ----------- ----------- -----------
Total disposables revenue $ 342,730 $ 325,540 $ 298,220 5.3% 9.2%
=========== =========== =========== =========== ===========
Donor
Donor products include the plasma, blood bank and red cell product lines.
Disposable revenue for donor products increased 3.0% during fiscal year 2005
compared to fiscal year 2004 and 8.3% during fiscal year 2004 compared to fiscal
year 2003.
22
Plasma
During fiscal year 2005, plasma disposable revenue decreased 15.0%. The
favorable effects of foreign exchange resulted in a 4.3% increase. Of the 19.3%
remaining decrease, 58% is attributable to the U.S., 17% to Europe, 13% to Asia
and 12% to Japan. Worldwide, fewer plasma collections were performed during the
current fiscal year due to an over supply of source plasma. In the U.S. some
customer specific factors also contributed to lower unit sales, including the
loss of our largest U.S. customer, Alpha Therapeutic Corporation ("Alpha"), half
way through fiscal year 2004 and the closings early in fiscal year 2005 of
certain plasma collection facilities by an another customer, ZLB.
During fiscal year 2004, plasma disposable revenues remained flat. The favorable
effects of foreign exchange resulted in a 4.0% increase. An entirely offsetting
decrease resulted in the latter half of the year with the loss of our largest
U.S. customer, Alpha, partly offset by increases in Europe and Asia.
Blood Bank
During fiscal year 2005, blood bank disposable revenues increased 16.2%.The
favorable effects of foreign exchange resulted in a 6.7% increase. Of the
remaining 9.5% increase, 41% is attributable to the U.S., 28% to Asia and 27% to
Japan. The increase in the U.S. was due to sales of intravenous solutions that
we produce for pharmaceutical companies. The increase in Asia was due to lower
than normal platelet collections during fiscal year 2004 due to the impact of
the SARS virus. The increase in Japan was primarily due to a product mix shift
from non-filtered platelet collection sets in fiscal year 2004 to higher-priced
filtered sets in fiscal year 2005. Filtered sets include integrated blood
filters to remove white cells from platelets.
During fiscal year 2004, blood bank disposable revenues increased 12.3%. The
favorable effects of foreign exchange resulted in a 6.1% increase. The remaining
6.2% increase was a result of market share gains in Japan and Europe.
Red Cell
During fiscal year 2005, red cell disposable revenue increased 28.5%. The
favorable effects of foreign exchange resulted in a 2.6% increase. Of the
remaining 25.9% increase, 91% is attributable to the U.S. and 9% to Europe. The
increases in both the U.S and Europe are primarily due to an increase in units
sold and by a product shift to higher priced filtered sets, which include a
filter to remove white blood cells from the collected blood.
During fiscal year 2004, red cell disposable revenue increased 43.6%. The
favorable effects of foreign exchange resulted in a 4.3% increase. Of the
remaining 39.3% increase, 97% is attributable to the U.S., primarily due to an
increase in units sold and by a product shift to higher priced filtered sets,
which include a filter to remove white blood cells from the collected blood.
Patient
Surgical
The surgical blood salvage product line has two major brand platforms: the Cell
Saver(R) brand and the OrthoPAT(R) brand. During fiscal year 2005, disposable
revenue for the surgical product line increased 12.7%. The favorable effects of
foreign exchange accounted for a 5.1% increase with the remaining 7.6% increase
attributable to increases in OrthoPAT disposable revenues.
Cell Saver disposables revenue increased 4.7% as compared to fiscal year 2004.
The favorable effect of foreign exchange accounted for a 5.3% increase. The
remaining 0.6% decrease was due to a reduction in U.S. unit sales partially
offset by the favorable effect of price increases.
OrthoPAT disposable revenues increased 51.4%. The favorable effects of foreign
exchange accounted for 4.1% of the increase. Of the remaining 47.3% increase,
61% is attributable to the U.S, 32% to Europe, and 5% to Japan. The increases
are occurring as orthopedic surgeons continue to adopt surgical blood salvage as
an effective alternative to patient pre-donation or donated blood during hip and
knee replacements and other orthopedic surgeries and due to price improvements.
23
During fiscal year 2004, disposable revenue for the surgical product line, in
total, increased 12.2%. The favorable effects of foreign exchange accounted for
a 5.6% increase with the remaining 6.6% increase attributable to increases in
OrthoPAT disposable revenues.
Other Revenues
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
----------- ----------- ----------- ----------- -----------
Miscellaneous & Service $ 20,173 $ 22,002 $ 18,355 (8.3)% 19.9%
Equipment 20,695 16,687 20,381 24.0 (18.1)
----------- ----------- ----------- ----------- -----------
Total other revenues $ 40,868 $ 38,689 $ 38,736 5.6% (0.1)%
=========== =========== =========== =========== ===========
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.
During fiscal year 2005, miscellaneous and service revenue decreased 8.3%. The
favorable effects of foreign currency accounted for a 3.6% increase. Of the
remaining 11.9% decrease, 74% 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.
During fiscal year 2004, miscellaneous and service revenue increased 19.9%. The
favorable effects of foreign currency accounted for a 4.3% increase. The
remaining 15.6% increase resulted from several factors, most notably: (i)
preventive maintenance contract increases in line with the increasing installed
base of automated red cell collection devices, and (ii) increased software
revenues from Fifth Dimension.
During fiscal year 2005, revenue from equipment sales increased 24.0%. The
favorable effects of foreign exchange accounted for a 3.4% increase. The
remaining increase of 20.6% was due to a large sale to a U.S. red cell customer
during fiscal year 2005. Equipment sales fluctuate from period to period.
During fiscal year 2004, revenue from equipment sales decreased 18.1%. The
favorable effects of foreign exchange accounted for a 6.8% increase. The
remaining decrease of 24.9% was primarily attributable to fiscal year 2003 sales
to a Japanese blood bank customer, to European plasma customers and to the U.S.
military that were not duplicated in fiscal year 2004.
24
Gross profit
% %
Increase/ Increase/
April 2, April 3, March 29, Decrease Decrease
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
---------- ---------- ---------- ---------- ----------
Gross profit $ 197,876 $ 173,536 $ 154,696 14.0% 12.2%
% of net sales 51.6% 47.6% 45.9%
During fiscal year 2005, gross profit increased 14.0%. The favorable effects of
foreign exchange accounted for a 9.8% increase. The remaining 4.2% increase was
due primarily to (i) a change in the mix of products being sold, ii) a decrease
in depreciation on our equipment at customer sites and (iii) the excess and
obsolete inventory provisions recorded in fiscal year 2004 related to the loss
of our Alpha business and other matters.
During fiscal year 2004, gross profit increased 12.2%. The favorable effects of
foreign exchange accounted for a 6.5% increase. The remaining 5.7% was due
primarily to the impact of our higher sales including price increases.
Operating Expenses
% %
Increase/ Increase/
April 2, April 3, March 29, Decrease Decrease
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
---------- ---------- ---------- ---------- ----------
Research and development $ 19,994 $ 17,398 $ 19,512 14.9% (10.8)%
Selling, general and
administrative 118,039 108,845 97,705 8.4 11.4
---------- ---------- ---------- ---------- ----------
Total operating expenses $ 138,033 $ 126,243 $ 117,217 9.30% 7.70%
========== ========== ========== ========== ==========
% of net sales 36.0% 34.7% 34.8%
Research and Development
During fiscal year 2005, research and development expenses increased 14.9%. The
effect of foreign exchange accounted for 2.1% of the increase. Approximately 77%
of the remaining 12.8% 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 Note 6 for more
discussion).The majority of the remaining increase was due to increased new
product spending during the second half of fiscal year 2005. The most
significant amount of the increased spending was directed to our new, multi
component collection and Cell Saver platforms.
During fiscal year 2004, research and development expenses decreased 10.8%. The
effect of foreign exchange accounted for a 0.5% increase. Approximately 80% of
the remaining 11.3% decrease was related to lower costs as a result of personnel
reductions.
Selling, General and Administrative
During fiscal year 2005, selling, general and administrative expenses increased
8.4 %. The effect of foreign exchange accounted for 3.2% of the increase. The
majority of the remaining 5.2% increase was due to (i) higher
25
personnel-related expenses in marketing and sales to support our new products
and a higher level of sales, (ii) increased legal costs, (iii) increased costs
due to compliance with Section 404 of the Sarbanes/Oxley Act of 2002 and (iv)
increased costs associated with the conversion of the newly awarded ZLB business
to our devices. 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 during
fiscal year 2004 as part of our reorganization.
During fiscal year 2004, selling, general and administrative expenses increased
11.4%. The effect of foreign exchange accounted for 6.8% of the increase. The
remaining 4.6% increase was a result of the $2.7 million of severance costs
recognized in fiscal year 2004 related to our reorganization.
Operating income
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
------------ ----------- ----------- ---------- -----------
Operating Income $ 59,843 $ 47,293 $ 37,479 26.5% 26.2%
% of net sales 15.6% 13.0% 11.1%
During fiscal year 2005, operating income increased 26.5%. The favorable effects
of foreign exchange accounted for a 27.8% increase. The remaining 1.3% decrease
is due to gross profit improvements that were offset by increases in operating
expenses.
During fiscal year 2004, operating income increased 26.2%. The favorable effects
of foreign exchange accounted for a 9.0% increase. The remaining 17.2% increase
is a result of improving gross profit from sales increases and cost reductions
and lower research and development spending partly offset by increased selling,
general and administrative expenses due to our fiscal year 2004 reorganization.
Other income (expense), net
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
(in thousands) 2005 2004 2003 05 vs. 04 04 vs. 03
----------- ----------- ----------- ----------- -----------
Interest expense $ (2,361) $ (2,903) $ (3,495) (18.7)% (16.9)%
Interest income 2,233 1,848 2,214 20.8 (16.5)
Other income(expense), net 126 (426) 2,409 (129.6) (117.7)
----------- ----------- ----------- ----------- -----------
Total other (expense),
income, net $ (2) $ (1,481) $ 1,128 (99.9)% (231.3)%
=========== =========== =========== =========== ===========
During fiscal year 2005, several factors contributed to the decrease in total
other expense, net: (i) a decrease in interest expense as we had lower average
debt outstanding as compared to fiscal year 2004, (ii) an increase in interest
income due to higher cash balances during the year, partially offset by $0.6
million in interest income in fiscal year 2004 associated with an income tax
refund and (iii) an increase in other income, net as a result of increases in
points on forward contracts over fiscal year 2004. Points on forward contracts
are amounts, either expensed or earned, based on the interest rate differential
between two foreign currencies in a forward hedge contract.
26
During fiscal year 2004, interest expense decreased due to lower average debt
balances as nearly all of our long-term debt is at fixed rates. Interest income
decreased due primarily to lower investment yields on higher average cash
investment balances. Other expense, net increased due primarily to a decrease in
income earned from points on forward contracts in fiscal year 2004.
Taxes
% %
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
2005 2004 2003 0 5vs. 04 04 vs. 03
-------- -------- --------- ---------- ----------
Reported Tax Rate 33.8% 36.0% 26.5% (2.2)% 9.5%
The reduction in the reported tax rate in fiscal year 2005 as compared to fiscal
year 2004 resulted from several factors, including:
o An increase in tax exempt interest income
o Higher current year U.S. export tax benefits, as well as additional export
tax benefits realized in connection with the filing of our fiscal year
2004 tax return.
o A reduction in foreign taxes, due to the reversal of previously
established tax reserves related to a local Japanese tax matter.
The reduction in the reported tax rate in fiscal year 2004 as compared to fiscal
year 2003 resulted from a $4.0 million tax refund recorded in fiscal year 2003.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 of our consolidated
financial statements. While all of these significant accounting policies impact
our financial condition and results of operations, we view certain of these
policies as critical. Policies determined to be critical are those policies that
have the most significant impact on our financial statements and require
management to use a greater degree of judgment and/or estimates. Actual results
may differ from those estimates.
The accounting policies identified as critical are as follows:
Revenue Recognition
We recognize revenues in accordance with generally accepted accounting
principles ("GAAP") as outlined in Staff Accounting Bulletin ("SAB") No. 104
which requires that four basic criteria be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists, (2) product delivery,
including customer acceptance, has occurred or services have been rendered, (3)
the price is fixed or determinable and (4) collectibility is reasonably assured.
We believe that our revenue recognition policy is critical because revenue is a
very significant component of our results of operations.
We record software sales in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended, and in instances where services are
essential to the functionality of the software, as is the case in the majority
of Fifth Dimensions software sales, revenue is recognized in accordance with SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
27
In accordance SOP 97-2, when the services are essential to the functionality of
the software, or payment of the license fees are dependent upon the performance
of the services, the software license, configuration, training and
implementation fees are recognized under the contract method of accounting using
labor hours to measure the completion percentage. In order to apply the contract
method of accounting, management is required to estimate the number of hours
needed to complete a particular project. As a result, recognized revenues and
profits are subject to revisions as the contract progresses to completion.
Inventories
Inventories are stated at the lower of the actual cost to purchase and/or
manufacture or the current estimated market value of the inventory. On a
quarterly basis, inventory quantities on hand are reviewed and an analysis of
the provision for excess and obsolete inventory is performed based primarily on
our estimates of product demand and production requirements for the next
twenty-four months. A change in the estimated timing or amount of demand for our
products could result in additional provisions for excess inventory quantities
on hand. Any significant unanticipated changes in demand could have a
significant impact on the value of our inventory and reported operating results.
Goodwill and Other Intangible Assets
Purchase accounting requires extensive use of accounting estimates and judgments
to allocate the purchase price to the fair market value of the assets and
liabilities purchased, with the excess value, if any, being classified as
goodwill. In addition, as described in Notes 3 and 6 of our consolidated
financial statements, as a result of our acquisitions, values were assigned to
intangible assets for patented and unpatented technologies and customer
contracts and related relationships. For those assets with finite lives, useful
lives were assigned to these intangibles and they will be amortized over their
remaining life. We review our intangible assets and their related useful lives
at least once a year to determine if any adverse conditions exist that would
indicate the carrying value of these assets may not be recoverable. We conduct
more frequent impairment assessments if certain conditions exist, including: a
change in the competitive landscape, any internal decisions to pursue new or
different technology strategies, a loss of a significant customer, or a
significant change in the market place including changes in the prices paid for
our products or changes in the size of the market for our products.
An impairment results if the carrying value of the asset exceeds the sum of the
future undiscounted cash flows expected to result from the use and disposition
of the asset. The amount of the impairment would be determined by comparing the
carrying value to the fair value of the asset. Fair value is generally
determined by calculating the present value of the estimated future cash flows
using an appropriate discount rate. The projection of the future cash flows and
the selection of a discount rate require significant management judgment. The
key variables that management must estimate include sales volume, prices,
inflation, product costs, capital expenditures and sales and marketing costs.
For developed technology (patents and other technology) that have not been
deployed we also must estimate the likelihood of both pursuing a particular
strategy and the level of expected market adoption.
Significant judgment is involved in making these estimates. Future write-downs
may be required if the value of the assets become impaired.
In fiscal year 2005, 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 categorized as other technology. The impairment was triggered by our
re-evaluation of our plans to deploy such technology.
Property, Plant and Equipment
Property, plant and equipment are depreciated over their useful lives. Useful
lives are based on our estimate of the period that the assets will generate
revenue. Any change in conditions that would cause us to change our estimate as
to the useful lives of a group or class of assets may significantly impact our
depreciation expense on a prospective basis. Haemonetics equipment includes
devices that we have placed at our customers under contractual arrangements that
allow them to use the device in exchange for rental payments or the purchase of
disposables. In addition to periodically reviewing the useful lives of these
devices, we also periodically perform reviews to determine if a group of these
devices is impaired. To conduct these reviews we must estimate the future amount
and timing of demand for these devices. Changes in expected demand can result in
additional depreciation expense,
28
which is classified as cost of goods sold. Any significant unanticipated changes
in demand could have a significant impact on the value of equipment and our
reported operating results.
Income Taxes
In preparing our consolidated financial statements, income tax expense is
calculated for all jurisdictions in which we operate. This process involves
estimating actual current taxes due plus assessing temporary differences arising
from differing treatment for tax and accounting purposes that are recorded as
deferred tax assets and liabilities. Deferred tax assets are periodically
evaluated to determine their recoverability. A valuation allowance is
established and a corresponding additional income tax expense is recorded in our
consolidated statement of income if their recovery is not likely. The provision
for income taxes could also be materially impacted if actual taxes due differ
from our earlier estimates. As of April 2, 2005, a valuation allowance of $0.4
million existed on our balance sheet. The total net deferred tax asset as of
April 2, 2005 was $13.9 million.
We file income tax returns in all jurisdictions in which we operate. We
established reserves to provide for additional income taxes that may be due in
future years as these previously filed tax returns are audited. These reserves
have been established based on management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments made as events occur that warrant modification.
Liquidity and Capital Resources
The following table contains certain key performance indicators that depict our
liquidity and cash flow position:
April 2, April 3, March 29,
2005 2004 2003
---------- ---------- ----------
(dollars in thousands)
Cash & cash equivalents $ 185,815 $ 79,467 $ 49,885
Working capital $ 255,689 $ 185,606 $ 122,880
Current ratio 3.9 2.9 2.2
Net cash (debt) position (1) $ 139,972 $ 59,857 $ (20,773)
Days sales outstanding (DSO) 70 76 80
Disposables finished goods inventory turnover 4.9 5.7 4.6
(1) Net cash position is the sum of cash, cash equivalents and
short-term investments 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 systems to improve our product life cycle management), acquisitions,
new business and product development and working capital for at least the next
twelve months.
For the years ended
$ $
Increase/ Increase/
April 2, April 3, March 29, (Decrease) (Decrease)
2005 2004 2003 05 vs. 04 04 vs. 03
----------- ----------- ----------- ----------- -----------
(In thousands)
Net cash provided by (used in):
Operating activities $ 71,207 $ 76,771 $ 46,978 $ (5,564) $ 29,793
Investing activities 19,428 (48,682) 16,174 68,110 (64,856)
Financing activities 14,531 718 (49,001) 13,813 49,719
Effect of exchange rate changes on cash (1) 1,182 775 821 407 (46)
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents $ 106,348 $ 29,582 $ 14,972 $ 76,766 $ 14,610
=========== =========== =========== =========== ===========
29
Cash Flow Overview:
(1) The balance sheet is affected by spot exchange rates used to
translate local currency amounts into U.S. dollars. In comparing
spot exchange rates at April 2, 2005 versus April 3, 2004 and at
April 3, 2004 versus March 29, 2003, the European currencies,
primarily the Euro, and the Yen have strengthened against the U.S.
dollar. In accordance with GAAP, we have removed the effect of
foreign currency throughout our cash flow statement, except for its
effect on our cash and cash equivalents.
FISCAL 2005 AS COMPARED TO FISCAL 2004
Operating Activities:
Net cash provided by operating activities decreased $5.6 million in 2005 due
primarily to:
o $14.0 million more cash used by inventory during fiscal year 2005 as
inventory balances decreased during fiscal year 2004
o $8.7 million more cash used due to increased income tax prepayments
offset by;
o $11.3 million more cash provided by net income adjusted for non-cash
items
o $7.5 million less cash used by accounts payable and accrued expenses
due primarily to an increase in accrued income taxes in fiscal year
2005 versus fiscal year 2004
Investing Activities:
Net cash provided by investing activities increased $68.1 million as a result
of:
o $77.3 million from the liquidation of our short-term investments in
fiscal year 2005.
o $4.1 million from an 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 during fiscal year 2005 offset by;
o $9.6 million in increased investments. We invested $5.0 million in
the preferred stock of a private company, $0.6 million to secure a
related license agreement and $4.0 million to acquire patents.
o $3.7 million more capital expenditures during fiscal year 2005 as
compared to fiscal year 2004.
During fiscal year 2005, we had capital expenditures of $17.5 million.
Financing Activities:
Net cash provided by financing activities increased by $13.8 million. The
increase was due to:
o $8.1 million in increased proceeds from stock option exercises
during fiscal year 2005.
30
o $5.7 million due to a fiscal year 2004 decrease in short-term debt
in Japan for working capital purposes.
FISCAL 2004 AS COMPARED TO FISCAL 2003
Operating Activities:
Net cash provided by operating activities increased $29.8 million in 2004 due
primarily to:
o a $2.7 million increase in net income adjusted for non-cash items,
o a $12.1 million increase in cash provided from accounts receivable
due to the timing of customer payments, particularly in Japan, with
the 53rd week in fiscal year 2004, and
o $14.8 million increase in cash provided by reduced investments in
inventory.
Investing Activities:
Net cash used in investing activities increased $64.9 million as a result of:
o $71.3 million in increased cash spent on short-term investments in
fiscal year 2004 due to the reinvestment in fiscal year 2004 of
investments liquidated in fiscal year 2003 offset by;
o $0.8 million from an increase in proceeds in fiscal year 2004 as
compared to fiscal year2003 from the sale of property, plant and
equipment,
o $2.8 million less cash spent on capital expenditures during fiscal
year 2004, and
o $2.8 million more spent in fiscal year 2003 for pathogen reduction
technology.
During fiscal year 2004, we had capital expenditures of $13.9 million.
Financing Activities:
Net cash provided by financing activities increased by $49.7 million. The change
was driven by the following factors:
o $50.2 million repurchases of our stock in fiscal year 2003 and no
repurchases in fiscal year 2004,
o $13.2 million from increased stock option exercises in fiscal year
2004, and
o a $13.7 million decrease in the short-term debt primarily in Japan
for working capital purposes.
Contractual Obligations and Contingencies
A summary of our contractual and commercial commitments as of April 2, 2005, is
as follows (for more information concerning our debt see Note 7 to the
consolidated financial statements and for our operating lease obligations see
Note 9):
Payments Due by Period
----------------------------------------------------------------------------
Contractual Obligations Less than 1
(in thousands) Total year 1-3 years 3-5 years After 5 years
----------- ----------- ----------- ----------- -------------
Debt $ 45,843 $ 26,612 $ 12,555 $ 1,332 $ 5,344
Operating Leases 15,435 6,152 5,911 2,337 1,035
Purchase commitments* 47,766 47,068 698 -- --
----------- ----------- ----------- ----------- -----------
Total $ 109,044 $ 79,832 $ 19,164 $ 3,669 $ 6,379
=========== =========== =========== =========== ===========
31
* Includes amounts we are committed to spend on purchase orders entered in
the normal course of business for capital equipment and for the purpose of
manufacturing our products including contract manufacturers, specifically
Nova Biomedical, for the purchase of devices and JMS Co. LTD, and Kawasumi
Laboratories for the manufacture of certain disposable products. The
majority of our operating expense spending does not require any advance
commitment.
Contingent Commitments
As a result of our fiscal year 2005 license arrangement for blood processing
technology, our fiscal year 2002 acquisition of Fifth Dimension, and our fiscal
year 2002 agreement with Baxter related to pathogen reduction technology, we are
contingently obligated to make certain payments. The fiscal year 2005 license
arrangement involves certain potential payments of up to $12.4 million if the
technology reaches certain performance milestones. In addition, if the specified
deliverables are completed, the agreement calls for minimum royalty payments for
future commercial sales of products that incorporate this technology. The Fifth
Dimension acquisition involves certain potential payments of up to $4.1 million
(of which $2.0 million has already been paid). Therefore our current potential
obligation is $2.1 million should sales of the Fifth Dimension software products
exceed certain cumulative levels prior to the end of fiscal year 2008. The
pathogen reduction agreement calls for us to make total potential payments of up
to $14.5 million as regulatory approvals are received in various markets. Out of
the $14.5 million of potential payments, we paid $3.8 million in the fourth
quarter of fiscal year 2003 as initial regulatory approvals were obtained in the
European market. No payments were made in fiscal year 2005 or fiscal year 2004.
If and when additional approvals are obtained, we will capitalize these payments
as other technology, an intangible asset and amortize over their useful life.
Inflation
We do not believe that inflation has had a significant impact on our results of
operations for the periods presented. Historically, we believe we have been able
to minimize the effects of inflation by improving our manufacturing and
purchasing efficiency, by increasing employee productivity and by adjusting the
selling prices of new products we introduce.
Foreign Exchange
Approximately 66% of our sales are generated outside the U.S. in local
currencies, yet our reporting currency is the U.S. dollar. Our primary foreign
currency exposures in relation to the U.S. dollar are the Japanese Yen and the
Euro. Foreign exchange risk arises because we engage in business in foreign
countries in local currency. Exposure is partially mitigated by producing and
sourcing product in local currency and expenses incurred by local sales offices.
However, whenever the U.S. dollar strengthens relative to the other major
currencies, there is an adverse affect on our results of operations and
alternatively, whenever the U.S. dollar weakens relative to the other major
currencies there is a positive effect on our results of operations.
It is our policy to minimize for a period of time, the unforeseen impact on our
financial results of fluctuations in foreign exchange rates by using derivative
financial instruments known as forward contracts to hedge the anticipated cash
flows from forecasted foreign currency denominated sales. Hedging through the
use of forward contracts does not eliminate the volatility of foreign exchange
rates, but because we generally enter into forward contracts one year out, rates
are fixed for a one-year period, thereby facilitating financial planning and
resource allocation. We enter into forward contracts that mature one month prior
to the anticipated timing of the forecasted foreign currency denominated sales.
These contracts are designated as cash flow hedges intended to lock in the
expected cash flows of forecasted foreign currency denominated sales at the
available spot rate. Actual spot rate gains and losses on these contracts are
recorded in sales, at the same time the underlying transactions being hedged are
recorded.
We compute a composite rate index for purposes of measuring, comparatively, the
change in foreign currency hedge spot rates from the hedge spot rates of the
corresponding period in the prior year. The relative value of currencies in the
index is weighted by sales in those currencies. The composite was set at 1.00
based upon the weighted rates at March 31, 1997. The composite rate is presented
in the period corresponding to the maturity of the underlying forward contracts.
32
The favorable or (unfavorable) changes are in comparison to the same period of
the prior year. A favorable change is presented when we will obtain relatively
more U.S. dollars for each of the underlying foreign currencies than we did in
the prior period. An unfavorable change is presented when we obtain relatively
fewer U.S. dollars for each of the underlying foreign currencies than we did in
the prior period. These indexed hedge rates impact sales, and as a result also
gross profit, operating income and net income, in our consolidated 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
------------------------ ------------------------
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 2.8%
2006 Total 0.89 5.1%
FY2007 Q1 0.89* 4.5%
NOTE: Represents hedges for April and May FY07.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004), "Shared-Based payments", ("SFAS No.
123R") which is a revision of FASB Statement No. 123, ("SFAS No. 123")
Accounting for Stock Based Compensation. SFAS No. 123R supersedes Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No.123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statements based on their fair values. The disclosure only approach permitted by
SFAS No. 123 and elected by us, is no longer an alternative effective with our
fiscal year 2007. Accordingly, the adoption of SFAS No. 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
No. 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. We are currently evaluating which
fair value method we will use to adopt the requirements of SFAS No. 123R.
However, had we adopted SFAS No.
33
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income
and earnings per share in Note 2 to our consolidated financial statements.
The FASB recently issued, FASB Statement SFAS No. 151, "Inventory Costs," ("SFAS
No. 151") an amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter
4. 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 No. 151 on April 3, 2005 at the beginning of our
fiscal year 2006. The clarification provided by SFAS No. 151 is consistent with
our current accounting policy, and accordingly we expect no impact from the
adoption of this statement.
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was enacted.
The AJCA provides a deduction from income for qualified domestic production
activities that will be phased in beginning in 2006 and fully implemented in
2010. The AJCA also provides a two-year phase-out for the existing
extra-territorial income exclusion on foreign sales. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities by the American Jobs Creation Act of 2004. It is our intent to
maximize this deduction and we are currently evaluating the impact this will
have on our future consolidated statements of income and financial position.
The AJCA also provides a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction, provided certain criteria are met. At this time it is not practical
to determine if this temporary incentive is appropriate for us or to estimate
the amount of tax that would be required to be provided upon repatriation.
Accordingly, until our evaluation is complete, we will not change our current
intention to permanently reinvest accumulated earnings of our foreign
subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we make which
are prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed," and similar expressions, are
intended to identify forward looking statements regarding events, conditions,
and financial trends that may affect our future plans of operations, business
strategy, results of operations, and financial position. These statements are
based on our current expectations and estimates as to prospective events and
circumstances about which we can give no firm assurance. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of our
actual future financial condition or results. These forward-looking statements,
like any forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include technological advances in the medical field
and our standards for transfusion medicine and our ability to successfully
implement products that incorporate such advances and standards, product demand
and market acceptance of our products, regulatory uncertainties, the effect of
economic and political conditions, the impact of competitive products and
pricing, the impact of industry consolidation, foreign currency exchange rates,
changes in customers' ordering patterns, the effect of industry consolidation as
seen in the Plasma market, the effect of communicable diseases and the effect of
uncertainties in markets outside the U.S. (including Europe and Asia) in which
we operate. The foregoing list should not be construed as exhaustive.
34
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign exchange risk
and interest rate risk.
FOREIGN EXCHANGE RISK
See the section entitled Foreign Exchange for a discussion of how foreign
currency affects our business. It is our policy to minimize for a period of
time, the unforeseen impact on our financial results of fluctuations in foreign
exchange rates by using derivative financial instruments known as forward
contracts to hedge anticipated cash flows from forecasted foreign currency
denominated sales. We do not use the financial instruments for speculative or
trading activities. At April 2, 2005, we held the following significant foreign
exchange contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated sales outstanding:
(BUY) / SELL Weighted Spot Weighted Forward
Hedged Currency Local Currency Contract Rate Contract Rate Fair Value Maturity
- --------------- -------------- ------------- ----------------- -------------- -----------------
Euro 5,300,000 $1.200 $1.198 $(501,792) Apr-May 2005
Euro 7,400,000 $1.227 $1.226 $(514,750) June-Aug 2005
Euro 8,300,000 $1.302 $1.308 $ 50,191 Sep-Nov 2005
Euro 8,8500,000 $1.306 $1.320 $ 105,808 Dec 2005-Feb 2006
Japanese Yen 1,050,000,000 110.9 per US$ 108.6 per US$ $(133,072) Apr-May 2005
Japanese Yen 1,720,000,000 110.0 per US$ 107.7 per US$ $(187,848) June-Aug 2005
Japanese Yen 1,835,000,000 105.5 per US$ 102.9 per US$ $ 416,930 Sep-Nov 2005
Japanese Yen 1,625,000,000 104.5 per US$ 101.3 per US$ $ 453,353 Dec 2005-Feb 2006
---------
$(311,180)
=========
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 $11.5 million increase
in the fair value of the forward contracts; whereas a 10% weakening of the U.S.
dollar would result in a $12.9 million decrease in the fair value of the forward
contracts.
INTEREST RATE RISK
All of our long-term debt is at fixed rates. Accordingly, a change in interest
rates has an insignificant effect on our interest expense amounts. The fair
value of our long-term debt, however, does change in response to interest rates
movements due to its fixed rate nature. At April 2, 2005, the fair value of our
long-term debt was approximately $1.6 million higher than the value of the debt
reflected on our financial statements. This higher fair market is entirely
related to our $11.4 million, 7.05% fixed rate senior notes and our $7.8
million, 8.41% real estate mortgage.
At April 3, 2004, the fair value of our long-term debt was approximately $2.6
million higher than the value of the debt reflected on our financial statements.
This higher fair market is entirely related to our $17.1 million, 7.05% fixed
rate senior notes and our $8.3 million, 8.41% real estate mortgage.
Using scenario analysis, if we changed the interest rate on all long-term
maturities by 10% from the rate levels that existed at April 2, 2005 the fair
value of our long-term debt would change by approximately $0.3 million.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, accounts receivable and
investment in sales type lease receivables. Sales to one unaffiliated Japanese
customer, the Japanese Red Cross Society, amounted to $91.0 million, $87.6
million and $79.0 million in 2005, 2004 and 2003, respectively. Accounts
receivable balances attributable to this customer accounted for 18.7%, 22.0% and
23.6% of our consolidated accounts receivable at fiscal year 2005, 2004 and
2003, respectively. While the accounts receivable related to the Japanese Red
Cross Society may be significant, we do not believe the credit loss risk to be
significant given the consistent payment history by this customer.
Certain other markets and industries can expose us to concentrations of credit
risk. For example, in our commercial plasma business, we tend to have only a few
customers in total but they are large in size. As a result our accounts
receivable extended to any one of these commercial plasma customers can be
somewhat significant at any point in time.
35
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended
---------------------------------------------
April 2, April 3, March 29,
2005 2004 2003
---------------------------------------------
Net revenues $ 383,598 $ 364,229 $ 336,956
Cost of goods sold 185,722 190,693 182,260
---------------------------------------------
Gross profit 197,876 173,536 154,696
---------------------------------------------
Operating expenses:
Research and development 19,994 17,398 19,512
Selling, general and administrative 118,039 108,845 97,705
---------------------------------------------
Total operating expenses 138,033 126,243 117,217
---------------------------------------------
Operating income 59,843 47,293 37,479
Interest expense (2,361) (2,903) (3,495)
Interest income 2,233 1,848 2,214
Other income (expense), net 126 (426) 2,409
---------------------------------------------
Income before provision for income taxes 59,841 45,812 38,607
Provision for income taxes 20,202 16,492 10,228
---------------------------------------------
Net income $ 39,639 $ 29,320 $ 28,379
=============================================
Basic income per common share
Net income $ 1.55 $ 1.20 $ 1.15
Income per common share assuming dilution
Net income $ 1.52 $ 1.19 $ 1.13
Weighted average shares outstanding
Basic 25,523 24,435 24,591
Diluted 26,145 24,695 25,048
36
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 2, 2005 April 3, 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 185,815 $ 79,467
Short term investments -- 38,650
Accounts receivable, less allowance of $2,074 in 2005 and $2,261 in 2004 80,719 82,640
Inventories, net 53,088 52,235
Deferred tax asset, net 13,785 21,856
Prepaid expenses and other current assets 10,204 6,601
------------ ------------
Total current assets 343,611 281,449
Property, plant and equipment:
Land, building and building improvements 36,579 33,966
Plant equipment and machinery 66,578 63,866
Office equipment and information technology 39,333 39,600
Haemonetics equipment 130,128 131,689
------------ ------------
Total property, plant and equipment 272,618 269,121
Less: accumulated depreciation 203,281 191,091
------------ ------------
Net property, plant and equipment 69,337 78,030
Other assets:
Other intangibles, less amortization of $9,327 in 2005 and $5,569 in 2004 25,827 24,784
Goodwill 18,193 17,242
Deferred tax asset, long term 102 --
Other long-term assets 10,687 5,889
------------ ------------
Total other assets 54,809 47,915
------------ ------------
Total assets $ 467,757 $ 407,394
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 26,612 $ 32,818
Accounts payable 11,111 14,249
Accrued payroll and related costs 15,998 14,547
Accrued income taxes 12,417 7,967
Other liabilities 21,784 26,262
------------ ------------
Total current liabilities 87,922 95,843
Deferred tax liability, net -- 1,682
Long-term debt, net of current maturities 19,231 25,442
Other long-term liabilities 5,469 4,678
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, $0.01 par value; Authorized - 80,000,000 shares;
Issued - 26,177,468 shares in 2005 and 32,647,910 shares in 2004 262 326
Additional paid-in capital 121,803 127,744
Retained earnings 233,769 322,291
Accumulated other comprehensive loss (699) (6,535)
------------ ------------
Stockholders' equity before treasury stock 355,135 443,826
Less: Treasury stock at cost - 7,568,289 shares in 2004 -- 164,077
------------ ------------
Total stockholders' equity 355,135 279,749
------------ ------------
Total liabilities and stockholders' equity $ 467,757 $ 407,394
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
37
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Common Stock Additional Other Total
---------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive
Shares $'s Capital Stock Earnings Loss Equity Income
------------------------------------------------------------------------------------------------
Balance, March 30, 2002 31,454 $315 $ 104,261 ($115,949) $ 264,592 ($16,395) $ 236,824
================================================================================
Employee stock purchase plan -- -- 16 780 -- -- 796
Exercise of stock options
and related tax benefit 211 2 4,493 -- -- -- 4,495
Purchase of treasury stock -- -- -- (50,166) -- -- (50,166)
Net income -- -- -- -- 28,379 -- 28,379 $ 28,379
Net change in minimum pension
liability -- -- -- -- -- (424) (424) (424)
Foreign currency translation
adjustment -- -- -- -- -- 8,028 8,028 8,028
Unrealized loss on derivatives -- -- -- -- -- (4,695) (4,695) (4,695)
---------
Comprehensive income -- -- -- -- -- -- -- $ 31,288
-----------------------------------------------------------------------------------------------
Balance, March 29, 2003 31,665 $317 $ 108,770 ($165,335) $ 292,971 ($13,486) $ 223,237
================================================================================
Employee stock purchase plan -- -- (393) 1,258 -- -- 865
Exercise of stock options
and related tax benefit 983 9 19,367 -- -- -- 19,376
Net income -- -- -- -- 29,320 -- 29,320 $ 29,320
Net change in minimum pension
liability -- -- -- -- -- 35 35 35
Foreign currency translation
adjustment -- -- -- -- -- 8,934 8,934 8,934
Unrealized loss on derivatives -- -- -- -- -- (2,018) (2,018) (2,018)
---------
Comprehensive income -- -- -- -- -- -- -- $ 36,271
-----------------------------------------------------------------------------------------------
Balance, April 3, 2004 32,648 $326 $ 127,744 ($164,077) $ 322,291 ($6,535) $ 279,749
================================================================================
Employee stock purchase plan -- -- 10 919 -- -- 929
Exercise of stock options
and related tax benefit 1,055 11 28,971 -- -- -- 28,982
Net income -- -- -- -- 39,639 -- 39,639 $ 39,639
Net change in minimum pension
liability -- -- -- -- -- 129 129 129
Foreign currency translation
adjustment -- -- -- -- -- 1,939 1,939 1,939
Unrealized loss on derivatives -- -- -- -- -- 3,768 3,768 3,768
---------
Comprehensive income -- -- -- -- -- -- -- $ 45,475
Reclassification of treasury
stock to common stock (7,526) (75) (34,922) 163,158 (128,161)
-----------------------------------------------------------------------------------------------
Balance, April 2, 2005 26,177 $262 $ 121,803 -- $ 233,769 ($699) $ 355,135
================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
38
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
April 2, April 3, March 29,
2005 2004 2003
---------- ---------- ----------
Cash Flows from Operating Activities:
Net income $ 39,639 $ 29,320 $ 28,379
Adjustments to reconcile net income to net cash provided by operating activities:
Non cash items:
Depreciation and amortization 27,576 30,149 28,431
Impairment of intangible assets 1,700 -- --
Deferred tax expense 3,965 1,338 4,030
Gain on sales of plant, property and equipment (3,594) (1,547) (873)
Tax benefit related to exercise of stock options 3,729 2,191 538
Unrealized gain from hedging activities (1,296) (984) (2,762)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 3,025 3,697 (8,365)
(Increase) decrease in inventories (4,730) 9,267 (5,486)
(Increase) decrease in prepaid income taxes (4,274) 4,408 (1,315)
Decrease in other assets and other long-term liabilities 2,121 3,123 2,340
Increase (decrease) in accounts payable and accrued expenses 3,346 (4,191) 2,061
---------- ---------- ----------
Net cash provided by operating activities 71,207 76,771 46,978
Cash Flows from Investing Activities:
Purchases of short-term investments (49,800) (44,150) (11,670)
Gross proceeds from sale of short-term investments 88,450 5,500 44,306
Capital expenditures on property, plant and equipment (17,530) (13,862) (16,715)
Proceeds from sale of property, plant and equipment 8,917 4,850 4,053
Acquisition of patents (4,019) -- --
Acquisition of software development company and milestone payments (1,020) (1,020) (3,800)
Investment in preferred stock (5,570) -- --
---------- ---------- ----------
Net cash provided by (used in) investing activities 19,428 (48,682) 16,174
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (457) (420) (386)
Net (decrease) increase in short-term revolving credit agreements (5,480) (11,198) 2,513
Payments on long-term credit agreements (5,714) (5,714) (5,714)
Employee stock purchase plan 929 865 796
Exercise of stock options 25,253 17,185 3,956
Purchase of treasury stock -- -- (50,166)
---------- ---------- ----------
Net cash provided by (used in) financing activities 14,531 718 (49,001)
Effect of Exchange Rates on Cash and Cash Equivalents 1,182 775 821
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents 106,348 29,582 14,972
Cash and Cash Equivalents at Beginning of Year 79,467 49,885 34,913
---------- ---------- ----------
Cash and Cash Equivalents at End of Period $ 185,815 $ 79,467 $ 49,885
========== ========== ==========
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements of Haemonetics
equipment $ 4,180 $ 7,478 $ 10,699
========== ========== ==========
Reclassification from long-term credit agreements to short-term
credit agreements $ -- $ -- $ 2,489
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,357 $ 2,806 $ 3,227
========== ========== ==========
Income taxes paid $ 12,764 $ 14,014 $ 6,625
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
39
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1. DESCRIPTION OF THE BUSINESS
We design, manufacture and market automated systems and single-use disposables
for the collection, processing and surgical salvage of blood as well as
associated data management technology. In addition, we are engaged in marketing
partnerships under which we sell other products supporting the blood collection
and surgical industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Our fiscal year ends on the Saturday closest to the last day in March. Fiscal
year 2005 includes 52 weeks, fiscal year 2004 included 53 weeks and fiscal year
2003 included 52 weeks.
Principles of Consolidation
The accompanying consolidated financial statements include all accounts
including those of our subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Our revenue recognition policy is to recognize revenues from product sales,
software and services in accordance with SAB No. 104, "Revenue Recognition in
Financial Statements" which requires that revenues are recognized when
persuasive evidence of an arrangement exists, product delivery, including
customer acceptance, has occurred or services have been rendered, the price is
fixed or determinable and collectibility is reasonably assured.
Product Revenues
Product sales consist of the sale of our equipment devices, the related
disposables used in these devices and intravenous solutions manufactured for
pharmaceutical companies. On product sales, revenue is recognized when both the
title and risk of loss have transferred to the customer as determined by the
shipping terms and all post delivery obligations have been achieved to the full
satisfaction of the customer. Examples of common post delivery obligations are
installation and training. For product sales to our distributors, we recognize
revenue for both equipment and disposables revenue upon shipment of these
products to our distributors. Our standard contracts with our distributors state
that title to the equipment passes to the distributors at point of shipment to a
distributor's location. The distributors are responsible for shipment to the end
customer along with installation, training and acceptance of the equipment by
the end customer. All shipments to distributors are at contract prices and
payment is not contingent upon resale of the product.
Software Revenues
Software sales consist of the sale of our donor management information
technology developed by our subsidiary, Fifth Dimension. In most cases, as
services are essential to the functionality of our software revenue is
recognized in accordance with SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" which requires that the
software license, configuration, training and implementation fees are recognized
under the contract method of accounting using labor hours to measure the
completion percentage. As the number of hours through completion may change, our
revenues and profits are subject to revisions as the contract progresses. We
recorded $4.7 million, $6.6 million and $5.0 million of software revenue in
fiscal year 2005, 2004 and 2003, respectively.
Service Revenues
Service revenues are recognized ratably over the contractual periods or as the
services are provided.
40
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Multiple element arrangements
When more than one element such as equipment, disposables and services are
contained in a single arrangement, we allocate revenue between the elements
based on each element's relative fair value, provided that each element meets
the criteria for treatment as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
stand alone basis and there is objective and reliable evidence of the fair value
of the undelivered items. Fair value is generally determined based upon the
price charged when the element is sold separately.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could vary from the amounts derived
from our estimates and assumptions.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries are translated at the rate of
exchange at year-end while sales and expenses are translated at an average rate
in effect during the year. The net effect of these translation adjustments is
shown in the accompanying financial statements as a component of stockholders'
equity. Foreign currency transaction gains and losses are included in other
income, net on the consolidated statements of income.
Cash and Cash Equivalents
Cash equivalents include various instruments such as money market funds, U.S.
government obligations and commercial paper with maturities of three months or
less at date of acquisition. Cash and cash equivalents are recorded at cost,
which approximates fair market value.
Short Term Investments
As of April 3, 2004, all our short term investments, consisted of auction rate
debt securities and were categorized as available for sale under the provisions
of SFAS Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly, our investments in these securities are
recorded at cost, which approximates fair value due to their variable interest
rates, which typically reset every 28 to 35 days. Despite the long-term nature
of the stated contractual maturities of these investments, we have the ability
to liquidate these securities prior to their stated maturity date. As a result
of the resetting variable rates, we had no cumulative gross unrealized or
realized holding gains or losses from these investments during fiscal year 2005
or 2004. All income generated from these investments was recorded as interest
income. As of April 2, 2005, we held no short term investments. Proceeds from
these short term investments totaled approximately $88.5 million and $5.5
million during fiscal year 2005 and fiscal year 2004, respectively. During
fiscal year 2003, we held short-term investments, other than auction rate
securities, with maturities greater than three months but equal to or less than
12 months. All of these investments were classified as available-for-sale and
were carried at fair value with realized gains and losses calculated based on
the specific identification method and included in other income, net on our
consolidated statements of income. During 2003, proceeds from these investment
securities sales totaled approximately $44.3 million with realized gains of
approximately $30,300.
Allowance for Doubtful Accounts
We establish a specific allowance for customers when we become aware they will
not be able to meet their financial obligation. Customer accounts are reviewed
individually on a regular basis and appropriate reserves are established as
deemed appropriate. We also maintain a general reserve using a percentage based
upon an aging method. We establish percentages for balances not yet due and past
due accounts based on past experience.
41
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, accounts receivable and
investment in sales type lease receivables. Sales to one unaffiliated Japanese
customer, the Japanese Red Cross Society, amounted to $91.0 million, $87.6
million and $79.0 million for 2005, 2004 and 2003, respectively. Accounts
receivable balances attributable to this customer accounted for 18.7%, 22.0% and
23.6% of our consolidated accounts receivable at fiscal year end 2005, 2004 and
2003, respectively. While the accounts receivable related to the Japanese Red
Cross Society may be significant, we do not believe the credit loss risk to be
significant given the consistent payment history by this customer.
Cost Method Investment
We account for our private equity investment for which fair value is not readily
determinable in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock". Each reporting period, we evaluate
our investment for impairment if an event or circumstance occurs that is likely
to have a significant adverse effect on the fair value of the investment.
Examples of such events or circumstances include a significant deterioration in
the business prospects of the investee; a significant adverse change in the
economic or technological environment of the investee; and a significant doubt
about the investee's ability to continue as a going concern. If there are no
identified events or changes in circumstances that may have a significant
adverse effect on the fair value of the cost method investment, the fair value
of the investment is not calculated as it is not practicable to do so in
accordance with paragraphs 14 and 15 of FASB Statement No. 107, "Disclosures
about Fair Value of Financial Instruments." If we identify an impairment
indicator, we will estimate the fair value of the investment and compare it to
its carrying value. We have determined there are no impairment indicators
present during 2005 on our cost method investment with a carrying value of $5.0
million. This investment originated during fiscal year 2005 when we invested in
a private company with blood processing technology under development. This
investment is classified as other long-term assets in our consolidated balance
sheets.
Property, Plant and Equipment
Property, Plant and Equipment is recorded at historical cost. We provide for
depreciation and amortization by charges to operations using the straight-line
method in amounts estimated to recover the cost of the building and
improvements, equipment, and furniture and fixtures over their estimated useful
lives as follows:
Estimated
Asset Classification Useful Lives
- ------------------------------------------- -------------
Building 30 Years
Building and leasehold improvements 5-25 Years
Plant equipment and machinery 3-10 Years
Office equipment and information technology 4-8 Years
Haemonetics equipment 2-4 Years
Depreciation expense was $25.5 million, $28.3 million and $26.6 million for
fiscal years 2005, 2004 and 2003, respectively.
Leasehold improvements are amortized over the lesser of their useful lives or
the term of the lease. Maintenance and repairs are charged to operations as
incurred. When equipment and improvements are sold or otherwise disposed of, the
asset cost and accumulated depreciation are removed from the accounts, and the
resulting gain or loss, if any, is included in the statements of income. Fully
depreciated assets are removed from the accounts when they are no longer in use.
42
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Haemonetics Equipment
Our equipment is comprised of medical devices installed at customer sites. These
devices remain our property. Generally the customer has the right to use it for
a period of time as long as they meet the conditions we have established, which
among other things, generally include one or more of the following:
o Purchase and consumption of a minimum level of disposable products
o Payment of monthly rental fees
o An asset utilization performance metric, such as performing a
minimum level of procedures per month per device
Periodically we review the useful lives of our devices and perform reviews to
determine if a group of these devices is impaired. To conduct these reviews we
estimate the future amount and timing of demand for these devices. Changes in
expected demand can result in additional depreciation expense, which is
classified as cost of goods sold. Any significant unanticipated changes in
demand could impact the value of our devices and our reported operating results.
Expenditures for normal maintenance and repairs are charged to expense as
incurred.
Accounting for Long-Lived Assets
Goodwill and Other Intangible Assets
We account for our intangible assets at historical cost. Intangible assets
acquired in a business combination, including purchased research and
development, are recorded under the purchase method of accounting at their
estimated fair values at the date of acquisition. Goodwill represents the excess
purchase price over the fair value of the net tangible and other identifiable
intangible assets acquired. We amortize our other intangible assets over their
useful lives, as applicable.
Goodwill and certain other intangible assets, determined to have an indefinite
life, are not amortized. Instead these assets are reviewed for impairment at
least annually in accordance with SFAS Statement No. 142, "Goodwill and Other
Intangible Assets." We perform our annual impairment test on January 1st (or the
first business day immediately following that date). As we only have one
reporting unit, the test is based on a fair value approach, which uses our
market capitalization as the basis reduced by the excess of the fair market
value of our long-term debt over its carrying value, as identified in our
assessment of interest rate risk of the entity as a whole. The test showed no
evidence of impairment to our goodwill and other indefinite lived assets for
fiscal 2005 or fiscal 2004.
We review our intangible assets and their related useful lives at least once a
year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. We conduct more frequent
impairment assessments if certain conditions exist, including: a change in the
competitive landscape, any internal decisions to pursue new or different
technology strategies, a loss of a significant customer, or a significant change
in the market place including changes in the prices paid for our products or
changes in the size of the market for our products.
An impairment results if the carrying value of the asset exceeds the sum of the
future undiscounted cash flows expected to result from the use and disposition
of the asset. The amount of the impairment would be determined by comparing the
carrying value to the fair value of the asset. Fair value is generally
determined by calculating the present value of the estimated future cash flows
using an appropriate discount rate. The projection of the future cash flows and
the selection of a discount rate require significant management judgment. The
key variables that management must estimate include sales volume, prices,
inflation, product costs, capital expenditures and sales and marketing costs.
For developed technology that has not been deployed we also must estimate the
likelihood of both pursuing a particular strategy and the level of expected
market adoption.
If the estimate of an intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over the revised remaining useful life.
43
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Research and Development Expenses
All research and development costs are expensed as incurred. Research and
development expense was $20.0 million for fiscal year 2005, $17.4 million for
fiscal year 2004 and $19.5 million for fiscal year 2003.
Accounting for Shipping and Handling Costs
Shipping and handling costs are included in costs of goods sold with the
exception of $4.9 million for fiscal year 2005, and $5.1 million for both fiscal
years 2004 and 2003 that are included in selling, general and administrative
expenses.
Income Taxes
In preparing our consolidated financial statements, the income tax provision is
calculated for all jurisdictions in which we operate. This process involves
estimating actual current taxes due plus assessing temporary differences arising
from differing treatment for tax and accounting purposes that are recorded as
deferred tax assets and liabilities. Deferred tax assets are periodically
evaluated to determine their recoverability and a valuation allowance is
established with a corresponding additional income tax provision recorded in our
consolidated statements of income if their recovery is not considered likely.
The provision for income taxes could also be materially impacted if actual taxes
due differ from our earlier estimates. As of April 2, 2005, a $0.4 million
valuation allowance existed on our balance sheet. The total net deferred tax
asset as of April 2, 2005 was $13.8 million.
We file income tax returns in all jurisdictions in which we operate. We
establish reserves to provide for additional income taxes that may be due in
future years as these previously filed tax returns are audited. These reserves
have been established based on management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments made as events occur that warrant modification.
Foreign Currency
We enter into forward exchange contracts to hedge the probable cash flows from
forecasted inter company 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
forward exchange contracts are recorded at fair value and are included in other
current assets or other current liabilities on our consolidated balance sheets.
The gains or losses on the forward exchange contracts designated as hedges are
recorded in net revenues on our consolidated statements of income when the
underlying hedge transaction effects earning. 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. In the event the hedged forecasted transaction does not occur, or it
becomes probable that it will not occur, the Company would reclassify the
effective portion of any gain or loss on the related cash flow hedge from other
comprehensive income to retained earnings at that time. The ineffective portion
of a derivative's change in fair value is recognized currently in other income,
net on our consolidated statements of income.
Accounting for Stock-Based Compensation
We have adopted the disclosure only provisions for employee stock-based
compensation under SFAS Statement 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 APB Opinion No.
25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no
accounting recognition is given to options granted to employees and directors at
fair market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity. Had compensation costs
under our stock-based compensation plans been determined based on the fair value
model of SFAS Statement No. 123, as amended by SFAS Statement No.148, the effect
on our earnings per share would have been as follows:
44
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
------------------------------------------
April 2, April 3, March 29,
2005 2004 2003
---------- ---------- ----------
(in thousands, except per share amounts)
Net income (as reported): $ 39,639 $ 29,320 $ 28,379
Deduct: Total stock-based employee compensation expense
determined under the fair value method for all awards, net of
tax $ (5,255) $ (4,938) $ (6,805)
---------- ---------- ----------
Pro Forma Net Income: $ 34,384 $ 24,382 $ 21,574
========== ========== ==========
Earnings per share:
Basic
As Reported $ 1.55 $ 1.20 $ 1.15
Pro forma $ 1.35 $ 1.00 $ 0.88
Diluted
As Reported $ 1.52 $ 1.19 $ 1.13
Pro forma $ 1.32 $ 0.99 $ 0.86
For purposes of the pro forma disclosure, any compensation cost on fixed awards
with pro rata vesting is recognized on a straight-line basis over the award's
vesting period and the fair value of each option is estimated on the date of
grant using the Black-Scholes single option-pricing model with the following
weighted average assumptions:
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Volatility 31.7% 29.0% 28.3%
Risk-Free Interest Rate 4.2% 3.6% 5.0%
Expected Life of Options 7 yrs. 7 yrs. 7 yrs.
The weighted average grant date fair value of options granted during 2005, 2004
and 2003 was approximately $11.41 $8.81 and $13.13, respectively.
The fair values of shares purchased under the Employee Stock Purchase Plan are
estimated using the Black-Scholes single option-pricing model with the following
weighted average assumptions:
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Volatility 36.5% 32.5% 32.7%
Risk-Free Interest Rate 1.7% 1.3% 1.5%
Expected Life of Options 6 mos. 6 mos. 6 mos.
The weighted average grant date fair value of the six-month option inherent in
the Purchase Plan was $7.15, $4.95 and $7.11 in fiscal year 2005, 2004 and 2003,
respectively. We have never paid cash dividends on shares of our common stock;
accordingly there is no dividend yield for fiscal year 2005, 2004 or 2003.
New Accounting Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123R (revised 2004), "Share-Based
Payments", which is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123R supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". SFAS No.123R requires all share-based payments to
employees, including grants of employee stock options, to be
45
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
recognized in the income statements based on their fair values. The disclosure
only approach permitted by SFAS No. 123 and elected by us, is no longer an
alternative effective with our fiscal year 2007. Accordingly, the adoption of
SFAS No. 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 No. 123R cannot be predicted at this
time because it will depend on levels of share-based payments granted in the
future. We are currently evaluating which fair value method we will use to adopt
the requirements of SFAS No. 123R. However, had we adopted SFAS No. 123R in
prior periods, the impact of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro forma net income and earnings
per share in Note 2 to our consolidated financial statements.
The FASB recently issued, FASB Statement No. 151, "Inventory Costs," ("SFAS No.
151") an amendment of ARB No. 43, Chapter 4. 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 No. 151 on
April 3, 2005 at the beginning of our fiscal year 2006. The clarification
provided by SFAS No. 151 is consistent with our current accounting policy, and
accordingly we expect no impact from the adoption of this statement.
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was enacted.
The AJCA provides a deduction from income for qualified domestic production
activities that will be phased in beginning in 2006 and fully implemented in
2010. The AJCA also provides a two-year phase-out for the existing
extra-territorial income exclusion on foreign sales. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities by the American Jobs Creation Act of 2004." It is our intent to
maximize this deduction and we are currently evaluating the impact this will
have on our future consolidated statements of income and financial position.
The AJCA also provides a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction, provided certain criteria are met. At this time it is not practical
to determine if this temporary incentive is appropriate for us or to estimate
the amount of tax that would be required to be provided upon repatriation.
Accordingly, until our evaluation is complete, we will not change our current
intention to permanently reinvest accumulated earnings of our foreign
subsidiaries.
Reclassifications
Since April 2003, we have invested in auction-rate securities. In fiscal year
2005, we concluded that it was appropriate to classify our auction rate
securities as short term investments. Previously, such investments had been
classified as cash and cash equivalents. Accordingly, we have revised the
classification to report these securities as short-term investments in our
fiscal year 2004 consolidated balance sheet by reclassifying $38.7 million from
Cash & Cash Equivalents to Short-term Investments. We held no auction rate
securities in our portfolio at April 2, 2005. We have also made corresponding
adjustments to our consolidated statements of cash flows to reflect the gross
purchases and sales of these securities as investing activities rather than as a
component of cash and cash equivalents. This change in classification does not
affect previously reported cash flows from operations or from financing
activities in our consolidated statements of cash flows or our previously
reported consolidated statements of income for any period. Certain other
reclassifications have been made to prior years' amounts to conform to the
current year's presentation.
3. OTHER INTANGILBE ASSET ACQUISITIONS AND INVESTMENTS
Other Technology
During the third quarter of fiscal year 2005, we entered into an exclusive
license arrangement with a private company related to the use of its technology
in our blood processing applications. We paid an initial $0.6 million related to
this license and made an investment in the private company of $5.0 million. The
total $5.6 million is
46
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
classified as other long-term assets in our consolidated balance sheet. In
connection with the agreement, future potential payments are payable if the
technology reaches certain performance milestones. The potential payments total
$12.4 million and will be capitalized as other technology if paid. In addition,
if the specified deliverables are completed, the agreement calls for minimum
royalty payments for future commercial sales of products that incorporate this
technology. The license is classified as "Other Technology" and is assigned an
estimated useful life of 15 years.
Patents
During the second quarter of fiscal year 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.
4. PRODUCT WARRANTIES
We provide a warranty on parts and labor for one year after the sale and
installation of each device. We also warrant our disposable products through
their use or expiration. We estimate our potential warranty expense based on our
historical warranty experience, and we periodically assess the adequacy of our
warranty accrual and make adjustments as necessary.
April 2, 2005 April 3, 2004
------------- -------------
Warranty accrual as of the beginning of the period $ 677 $ 1,056
Warranty Provision 2,348 1,882
Warranty Spending (2,322) (2,261)
---------- ----------
Warranty accrual as of the end of the period $ 703 $ 677
========== ==========
5. INVENTORIES, NET
Inventories are stated at the lower of cost or market and include the cost of
material, labor and manufacturing overhead. Cost is determined on the first-in,
first-out basis.
Inventories consist of the following:
April 2, 2005 April 3, 2004
------------- -------------
(in thousands)
Raw materials $ 12,388 $ 11,630
Work-in-process 6,067 5,340
Finished goods 34,633 35,265
---------- ----------
$ 53,088 $ 52,235
========== ==========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal year 2005, 2004 and
2003 are as follows (in thousands):
47
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Carrying amount as of March 29, 2003 $ 16,010
Effect of change in rates used for translation 1,232
--------
Carrying amount as of April 3, 2004 17,242
Earn-out payment 1,020
Effect of change in rates used for translation (69)
--------
Carrying amount as of April 2, 2005 $ 18,193
========
Other Intangible Assets
Other intangible assets include the value assigned to license rights and other
technology, patents, customer contracts and relationships, software technology,
and a trade name. The estimated useful lives for all of these intangible assets,
excluding the trade name as it is considered to have an indefinite life, are 6
to 20 years. In fiscal year 2005, 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 classified as Other Technology. The charge was included
in amortization expense in our consolidated statements of income. 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.
Aggregate amortization expense for amortized other intangible assets for fiscal
year 2005 is $3.7 million. Additionally, expected future amortization expenses
on other intangible assets approximate $2.4 million for fiscal year 2006, $2.8
million for fiscal year 2007, and $2.7 million for fiscal years 2008 through
2010.
As of April 2, 2005
Gross Carrying Accumulated Weighted
Amount Amortization Average Useful
(in thousands) (in thousands) Life (in years)
-------------- -------------- ---------------
Amortized Intangibles
Patents $ 10,389 $ 2,321 14
Other technology 12,358 4,020 15
Customer contracts and related relationships 11,909 2,986 15
--------- ---------
Subtotal $ 34,656 $ 9,327 15
Indefinite Life Intangibles Trade name 498 -- Indefinite
--------- ---------
Total Intangibles $ 35,154 $ 9,327
========= =========
48
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As of April 3, 2004
Gross Carrying Accumulated Weighted
Amount Amortization Average Useful
(in thousands) (in thousands) Life (in years)
-------------- -------------- ---------------
Amortized Intangibles
Patents $ 6,371 $ 1,594 14
Other technology 11,754 1,810 15
Customer contracts and related relationships 11,738 2,165 15
--------- ---------
Subtotal $ 29,863 $ 5,569 15
Indefinite Life Intangibles Trade name 490 -- Indefinite
--------- ---------
Total Intangibles $ 30,353 $ 5,569
========= =========
Another change to the net carrying value of our intangible assets from April 3,
2004 to April 2, 2005 was the effect of rate changes in the translation of the
intangibles of our Canadian subsidiary.
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
April 2, 2005 April 3, 2004
------------- -------------
(in thousands)
Real estate mortgage $ 8,299 $ 8,755
Senior notes 17,143 22,857
Haemonetics Japan Co. Ltd. 20,401 26,648
---------- ----------
$ 45,843 $ 58,260
Less - Current portion 26,612 32,818
---------- ----------
$ 19,231 $ 25,442
========== ==========
Real Estate Mortgage Agreement
In December 2000 we entered into a $10.0 million real estate mortgage agreement
(the "Mortgage Agreement") with an investment firm. The Mortgage Agreement
requires principal and interest payments of $0.1 million per month for a period
of 180 months, commencing February 1, 2001. The entire balance of the loan may
be repaid at any time after February 1, 2006, subject to a prepayment premium,
which is calculated based upon the change in the current weekly average yield of
Ten (10)-year U.S. Treasury Constant Maturities, the principal balance due and
the remaining loan term. The Mortgage Agreement provides for interest to accrue
on the unpaid principal balance at a
49
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
rate of 8.41% per annum. Borrowings under the Mortgage Agreement are secured by
the land, building and building improvements at our headquarters and
manufacturing facility in the U.S. with a collective carrying value of
approximately $8.3 million and $9.9 million as of April 2, 2005 and April 3,
2004, respectively. There are no financial covenants in the terms and conditions
of this agreement.
Senior Notes
We have $17.1 million of 7.05% Senior Notes due in 2007 (the "Senior Notes"). We
are required to make annual prepayments of principal each year in the amount of
$5.7 million, which began October 15, 2001 and conclude with the final principal
payment on October 15, 2007.
Interest on the Senior Notes is computed on the basis of a 360-day year of
twelve 30-day months on the unpaid balance at the rate of 7.05% per annum,
payable semiannually, on April 15 and October 15 each year. The Senior Notes
contain affirmative and negative covenants and restrictions including but not
limited to minimum stockholders' equity and ratio requirements of consolidated
funded indebtedness to consolidated total capitalization and priority
indebtedness to consolidated stockholders equity.
Haemonetics Japan Co. Ltd.
At April 2, 2005, Haemonetics Japan Co. Ltd. had 2.2 billion Japanese Yen,
equivalent to U.S. $20.4 million, in unsecured debt outstanding. All of this
debt is short term, maturing in less than 12 months.
Other Non-U.S. Borrowings
The weighted average short-term rates for U.S. and non-U.S. borrowings were
1.88%, 1.76% and 1.62% as of April 2, 2005, April 3, 2004 and March 29, 2003,
respectively.
As of April 2, 2005, notes payable and long-term debts mature as follows:
Fiscal Year Ending (in thousands)
-------------------------- --------------
2006 $ 26,612
2007 6,254
2008 6,301
2009 638
2010 694
2011 and thereafter 5,344
--------
$ 45,843
========
8. INCOME TAXES
Domestic and foreign income before provision for income tax is as follows:
Years Ended
-----------------------------------------------
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
(in thousands)
Domestic $47,092 $29,685 $28,310
Foreign 12,749 16,127 10,297
------- ------- -------
Total $59,841 $45,812 $38,607
The income tax provision contains the following components:
50
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Years Ended
--------------------------------------------
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
(in thousands)
Current
Federal $ 9,875 $ 8,459 $ 1,092
State 1,663 946 981
Foreign 5,258 5,749 4,125
-------- -------- --------
Total current $ 16,796 $ 15,154 $ 6,198
-------- -------- --------
Deferred
Federal 4,912 1,172 4,171
State (420) (33) (193)
Foreign (1,086) 199 52
-------- -------- --------
Total deferred $ 3,406 $ 1,338 $ 4,030
-------- -------- --------
Total tax expense $ 20,202 $ 16,492 $ 10,228
======== ======== ========
Included in the federal income tax provisions for fiscal years 2005, 2004 and
2003 are approximately $1.1 million, $0.6 million and $0.4 million,
respectively, provided on foreign source income of approximately $3.1 million,
$1.7 million, and $0.9 million for fiscal year 2005, 2004 and 2003,
respectively, for taxes which are payable in the United States.
Tax effected, significant temporary differences comprising the net deferred tax
asset (liability) are as follows:
Years Ended
------------------------------
April 2, 2005 April 3, 2004
------------- -------------
(in thousands)
Depreciation $ (2,373) $ (2,965)
Amortization (2,639) (3,004)
Inventory 7,829 15,530
Hedging 510 2,605
Accruals and reserves 4,405 1,950
Net operating loss carryforward 4,280 6,058
Tax credit carryforward 2,253 378
---------- ----------
Gross Deferred Taxes $ 14,265 $ 20,552
Less valuation allowance (378) (378)
---------- ----------
Net deferred taxes $ 13,887 $ 20,174
---------- ----------
At April 2, 2005, we have approximately $12.1 million in U.S. acquisition
related net operating loss carryforwards subject to separate limitations that
will expire beginning in 2019. We have $3.1 million in federal and state tax
credits subject to separate limitations that will expire beginning in 2007.
We file income tax returns in all jurisdictions in which we operate. We
established reserves to provide for additional income taxes that may be due in
future years as these previously filed tax returns are audited. These reserves
have been established based on management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments made as events occur that warrant modification.
We do not provide U.S. taxes on our foreign subsidiaries' undistributed earnings
as they are deemed to be permanently reinvested outside the U.S. Non-US income
taxes are, however, provided on these foreign subsidiaries' undistributed
earnings. Upon repatriation, we provide the appropriate U.S. income taxes on
these earnings.
51
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The income tax provision from operations differs from tax provision computed at
the 35% U.S. federal statutory income tax rate due to the following:
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
(in thousands)
Tax at federal statutory rate $ 20,944 35.0% $ 16,034 35.0% $ 13,512 35.0%
Extraterritorial Income Exclusion (1,198) (2.0) (659) (1.4) (1,961) (5.1)
Difference between US and foreign tax 246 0.4 574 1.2 (1,522) (3.9)
State income taxes net of federal benefit 668 1.1 593 1.3 512 1.3
Tax exempt interest (594) (1.0) -- -- -- --
Other, net 136 0.3 (50) (.1) (313) (0.8)
-------------------------------------------------------------------------
Reported income tax provision $ 20,202 33.8% 16,492 36.0% $ 10,228 26.5%
======== ====== ======== =
9. COMMITMENTS AND CONTINGENCIES
We lease facilities and certain equipment under operating leases expiring at
various dates through fiscal year 2013. Facility leases require us to pay
certain insurance expenses, maintenance costs and real estate taxes.
Approximate future basic rental commitments under operating leases as of April
2, 2005 are as follows:
Fiscal Year Ending (in thousands)
2006 $ 6,152
2007 3,634
2008 2,277
2009 1,120
2010 1,217
Thereafter 1,035
--------
$ 15,435
========
Rent expense in fiscal year 2005, 2004 and 2003 was $6.8 million, $4.9 million
and $4.0 million respectively.
We are presently engaged in various legal actions, and although ultimate
liability cannot be determined at the present time, we believe, based on
consultation with counsel, that any such liability will not materially affect
our consolidated financial position and results of operations.
On January 21, 2004 we filed a claim for binding arbitration against Baxter
International, Inc., seeking an arbitration award that compels Baxter to honor
its obligations to Haemonetics in the contracts it assumed, or to pay us
damages. Provisions in our supply contracts signed with Alpha include
protections in case of a change in ownership. In particular the contracts
required that if Alpha were sold, the buyer must assume the obligations of the
contracts. The arbitration panel issued its decision on May 20, 2005 and awarded
the Company $27.8 million in damages plus legal costs. We will record any
amounts awarded in the period in which we are certain of the amount and that
collection is probable.
As a result of our fiscal year 2005 license arrangement for blood processing
technology, our fiscal year 2002 acquisition of Fifth Dimension, and our fiscal
year 2002 agreement with Baxter related to pathogen reduction technology, we are
contingently obligated to make certain payments. The fiscal year 2005 license
arrangement
52
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
involves certain potential payments of up to $12.4 million if the technology
reaches certain performance milestones. In addition, if the specified
deliverables are completed, the agreement calls for minimum royalty payments for
future commercial sales of products that incorporate this technology. The Fifth
Dimension acquisition involves certain potential payments of up to $4.1 million
(of which $2.0 million has already been paid). Therefore our current potential
obligation is $2.1 million should sales of the Fifth Dimension software products
exceed certain cumulative levels prior to the end of fiscal year 2008. The
pathogen reduction agreement calls for us to make total potential payments of up
to $14.5 million as regulatory approvals are received in various markets. Out of
the $14.5 million of potential payments, we paid $3.8 million in the fourth
quarter of fiscal year 2003 as initial regulatory approvals were obtained in the
European market. No payments were made in fiscal year 2005 or fiscal year 2004.
If and when additional approvals are obtained, we will capitalize these payments
as other technology, an intangible asset and amortize over their useful life.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, receivables and short-term debt
approximate their carrying value due to their short term maturities. As noted
below, the fair value of our auction rate securities also approximates their
carrying value due to their variable interest rates, which typically reset every
28 to 35 days. (See Note 2) The carrying value and estimated fair values of our
other significant financial instruments are as follows:
(in thousands) April 2, 2005 April 3, 2004
----------------------------- ------------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Assets
Short term investments -- -- $ 38,650 $ 38,650
Liabilities
Long-term debt $ 19,231 $ 20,866 $ 25,442 $ 28,057
Foreign exchange contracts 311 311 6,066 6,066
-------------------------------------------------------------
$ 19,542 $ 21,177 $ 31,508 $ 34,123
=============================================================
The fair value of long term debt was calculated based upon the current market
interest rates for debt of similar maturity and credit rating. The fair value of
our foreign exchange contracts was based upon the market rates at the fiscal
year end for the remaining life of the contract. The estimates provided are not
necessarily indicative of the amounts we would realize in a current market
exchange.
11. CAPITAL STOCK
Common Stock Repurchase Program
We made no stock repurchases during fiscal year 2005 and fiscal year 2004.
During fiscal year 2003, we repurchased 1,850,150 shares of our outstanding
common stock at an average prevailing price of $27.11. This includes 829,700
shares repurchased under a 10b5-1 Plan, adopted March 29, 2002; 100,050 shares
repurchased under a 10b5-1 Plan adopted July 29, 2002; and 427,600 shares
repurchased under a 10b5-1 Plan adopted October 28, 2002. We expect any
repurchased shares to be made available for issuance pursuant to our employee
benefit and incentive plans and for other corporate purposes.
53
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On July 1, 2004, the Massachusetts Business Corporation Act (the "MBCA") became
effective and eliminated the concept of treasury shares. Under the MBCA, shares
repurchased by Massachusetts corporations constitute authorized but unissued
shares. As a result, at April 2, 2005, all of our shares in treasury were
automatically retired reducing the number of common shares issued and
outstanding. The value previously attributed to treasury shares was charged to
additional paid-in capital and retained earnings. The amount allocated to
additional paid-in-capital (APIC) was calculated as of April 2, 2005 based upon
the average per share value of APIC (determined using the then number of shares
outstanding) multiplied by the number of shares in treasury. The residual value
was charged to retained earnings.
Stock Plans
We have a long-term incentive stock option plan, (the "Long-term Incentive
Plan") under which a maximum of 3,500,000 shares of our common stock may be
issued pursuant to incentive and non-qualified stock options granted to our key
employees, officers and directors. The Long-term Incentive Plan is administered
by the Compensation Committee of the Board of Directors (the "Committee")
consisting of two or more independent members of our Board of Directors. The
exercise price, for both incentive and non-qualified options granted under the
Long-term Incentive Plan is determined by the Committee, but in no event shall
such option price be less than the fair market value of the common stock at the
time the option is granted. Options become exercisable in a manner determined by
the Committee, generally over a four year period for employees and immediately
at time of grant for non-employee directors, and all options expire not more
than 10 years from the date of the grant. At April 2, 2005, there were 2,536,718
options outstanding under this plan and 612,375 shares available for future
grant.
We had a non-qualified stock option plan under which options were granted to
non-employee directors and two previous plans under which options were granted
to key employees, consultants and advisors. During fiscal year 2005, 2004 and
2003, our recorded stock option compensation expense related to grants to
consultants and advisors was immaterial. At April 2, 2005, there were 929,111
options outstanding related to these plans. No further options will be granted
under these plans.
We have an Employee Stock Purchase Plan (the "Purchase Plan") under which a
maximum of 375,000 shares (subject to adjustment for stock splits and similar
changes) of common stock may be purchased by eligible employees. Substantially
all of our full-time employees are eligible to participate in the Purchase Plan.
The Purchase Plan provides for two "purchase periods" within each of our fiscal
years, the first commencing on November 1 of each year and continuing through
April 30 of the next calendar year, and the second commencing on May 1 of each
year and continuing through October 31 of such year. Shares are purchased
through an accumulation of payroll deductions (of not less than 2% nor more than
15% of compensation, as defined) for the number of whole shares determined by
dividing the balance in the employee's account on the last day of the purchase
period by the purchase price per share for the stock determined under the
Purchase Plan. The purchase price for shares is the lower of 85% of the fair
market value of the common stock at the beginning of the purchase period, or 85%
of such value at the end of the purchase period.
During fiscal year 2005, there were 42,381 shares purchased at prices ranging
from $19.60 to $24.00 per share under the Purchase Plan. During fiscal year
2004, there were 57,807 shares purchased at prices ranging from $14.86 to $15.07
per share under the Purchase Plan. During fiscal year 2003, there were 36,997
shares purchased at prices ranging from $18.03 to $28.17 per share under the
Purchase Plan. A summary of stock option activity for the three years ended
April 2, 2005 is as follows:
Weighted Average
Shares Exercise Price per Share
Outstanding at March 29, 2003 4,755,178 $24.14
Granted 766,000 $22.59
Exercised (983,061) $17.46
Terminated (550,422) $27.71
----------
Outstanding at April 3, 2004 3,987,695 $25.00
Granted 651,400 $26.84
Exercised (1,055,466) $23.93
Terminated (117,800) $28.72
----------
Outstanding at April 2, 2005 3,465,829 $25.54
========== ======
Exercisable at March 29, 2003 2,841,486 $20.83
========== ======
Exercisable at April 3, 2004 2,576,042 $23.61
========== ======
Exercisable at April 2, 2005 2,107,683 $24.58
========== ======
54
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes information about stock options outstanding at
April 2, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Weighted
Number Average Number
Range of Exercise Outstanding At Outstanding Weighted Average Exercisable At Weighted Average
Prices April 2, 2005 Contractual Life Exercise Price April 2, 2005 Exercise Price
- ----------------- ------------- ---------------- -------------- ------------- --------------
$15.16 - $22.64 1,248,972 5.92 $ 19.57 916,472 $ 18.69
$22.72 - $30.19 1,162,192 7.57 $ 25.79 553,638 $ 25.31
$30.39 - $38.27 1,054,665 6.73 $ 32.34 637,573 $ 32.41
--------- ---- ------- --------- -------
Total 3,465,829 6.72 $ 25.54 2,107,683 $ 24.58
========= ==== ======= ========= =======
12. EARNINGS PER SHARE ("EPS")
The following table provides a reconciliation of the numerators and denominators
reflected in the basic and diluted earnings per share computations, as required
by SFAS No. 128, "Earnings Per Share," ("EPS").
Basic EPS is computed by dividing reported earnings available to stockholders by
the weighted average shares outstanding. Diluted EPS also includes the effect of
dilutive potential common shares.
55
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Years Ended
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
(Dollars and shares in thousands except per share amounts)
Basic EPS
Net income $39,639 $29,320 $28,379
Weighted average shares 25,523 24,435 24,591
------- ------- -------
Basic income per share $ 1.55 $ 1.20 $ 1.15
======= ======= =======
Diluted EPS
Net income $39,639 $29,320 $28,379
Basic weighted average shares 25,523 24,435 24,591
Dilutive effect of stock options 622 260 457
------- ------- -------
Diluted weighted average shares 26,145 24,695 25,048
Diluted income per share $ 1.52 $ 1.19 $ 1.13
======= ======= =======
During 2005, 2004 and 2003 approximately 0.5 million, 2.7 million and 2.1
million potentially dilutive common shares, respectively, were not included in
the computation of diluted earnings per share because exercise prices were
greater than the average market price of the common shares.
13. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-owner changes
in stockholders' equity. For us, all other non-owner changes are primarily
foreign currency translation; the change in our net minimum pension liability
and the changes in fair value of the effective portion of our outstanding cash
flow hedge contracts.
The reconciliation of the components of accumulated other comprehensive loss is
as follows:
Unrealized Minimum
Foreign (loss) gain on pension
Currency derivatives liability
(in thousands): Translation (net of tax) (net of tax) Total
Balance as of March 29, 2003 $ (10,654) $ (2,408) $ (424) $ (13,486)
Changes during the year 8,934 (2,018) 35 6,951
----------- ----------- ----------- -----------
Balance as of April 3, 2004 $ (1,720) $ (4,426) $ (389) $ (6,535)
Changes during the year 1,939 3,768 129 5,836
----------- ----------- ----------- -----------
Balance as of April 2, 2005 $ 219 $ (658) $ (260) $ (699)
=========== =========== =========== ===========
56
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
A summary of the components of other comprehensive income is as follows:
Years Ended
----------------------------------------------------
(In thousands) April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Net income $ 39,639 $ 29,320 $ 28,379
============ ============ ============
Other comprehensive income:
Foreign currency translation 1,939 8,934 8,028
Unrealized loss on cash flow hedges, net of tax (80) (8,973) (7,519)
Reclassifications into earnings of cash flow hedge losses, net of tax 3,848 6,955 2,824
Minimum pension liabilities adjustment, net of tax 129 35 (424)
------------ ------------ ------------
Total comprehensive income $ 45,475 $ 36,271 $ 31,288
============ ============ ============
14. RETIREMENT PLANS
Defined Contribution Plans
We have a Savings Plus Plan that is a 401(k) plan that allows our U.S. employees
to accumulate savings on a pre-tax basis. In addition, matching contributions
are made to the Plan based upon pre-established rates. Our matching
contributions amounted to approximately $1.9 million in 2005, $1.8 million in
2004 and $1.7million in 2003. Upon Board approval, additional discretionary
contributions can also be made. No discretionary contributions were made for the
Savings Plan in fiscal year 2005, 2004 or 2003.
One of our subsidiaries also has a defined contribution plan. Both the employee
and the employer make contributions to the plan. The employer contributions to
this plan were $0.4 million, $0.5 million and $0.6 million in fiscal year 2005,
2004 and 2003, respectively.
Defined Benefit Plans
Two of our subsidiaries have defined benefit pension plans covering
substantially all full time employees at those subsidiaries. Net periodic
benefit costs for the plans in the aggregate include the following components
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
(in thousands)
Service cost $ 580 $ 496 $ 436
Interest cost on benefit obligation 157 129 125
Expected return on plan assets (143) (197) 155
Recognized net actuarial loss (gain) 85 176 (173)
Settlements 24 23 --
Amortization of unrecognized prior service cost (37) (35) (66)
Amortization of unrecognized gain 47 53 20
Amortization of unrecognized initial obligation 23 22 20
----------- ----------- -----------
$ 736 $ 667 $ 517
=========== =========== ===========
57
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The activity under those defined benefit plans is as follows:
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Change in Benefit Obligation:
Benefit Obligation, beginning of year $ (5,576) $ (4,087) $ (2,806)
Service cost (580) (496) (436)
Interest cost (157) (129) (125)
Benefits paid 244 64 18
Actuarial (gain) loss 86 (261) (238)
Effect of special termination benefits 116 -- --
Currency translation (353) (667) (500)
---------- ---------- ----------
Benefit obligation, end of year $ (6,220) $ (5,576) $ (4,087)
========== ========== ==========
Change in Plan Assets:
Fair value of plan assets, beginning of year $ 3,001 $ 2,017 $ 1,600
Company contributions 518 467 419
Benefits paid (220) (41) (18)
Actual (gain) loss on plan assets 143 197 (155)
Currency translation (87) 361 171
---------- ---------- ----------
Fair value of Plan Assets, end of year $ 3,355 $ 3,001 $ 2,017
========== ========== ==========
Funded Status ($2,865) ($2,575) ($2,070)
Unrecognized net actuarial loss 661 905 645
Unrecognized initial obligation 271 303 284
Unrecognized prior service cost (288) (335) (325)
---------- ---------- ----------
Net amount recognized ($2,221) ($1,702) ($1,466)
========== ========== ==========
Amounts recognized on the balance sheet:
Prepaid pension asset $ 414 $ 304 $ 188
Accrued pension liability 2,184 1,240 935
Accumulated other comprehensive items pre-tax 518 766 719
---------- ---------- ----------
Net amount recognized $ 3,116 $ 2,310 $ 1,842
========== ========== ==========
One of the benefit plans is funded through assets of the Company. Accordingly
that plan has no assets included in the information presented above. The assets
of the other plan are less than the accumulated benefit obligation.
The weighted average rates used to determine the net periodic benefit costs were
as follows:
58
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Discount rate 2.9% 2.8% 3.0%
Rate of increased salary levels 1.9% 1.7% 1.3%
Expected long-term rate of return on assets 2.0% 2.0% 1.0%
We have no other material obligation for post-retirement or post-employment
benefits.
15. TRANSACTIONS WITH RELATED PARTIES
We issue loans to employees for relocation costs and other personal purposes.
The amount of these loans, which is included in other assets, amounted to
approximately $0.2 million, $0.3 million and $0.7 million in fiscal year 2005,
2004 and 2003, respectively. These loans are payable within five years. Certain
loans are interest bearing, and interest income is recorded on these loans when
collected. Certain loans have forgiveness provisions based upon continued
service or compliance with various guidelines. The outstanding loan balance is
amortized as a charge to operating expense as such amounts are forgiven.
Additionally, we have made two $1.0 million earn-out payments to 6 Encore Inc.
(formerly Fifth Dimension Information Systems, Inc.), in accordance with the
Asset Purchase Agreement, dated December 12, 2001, as amended, in which
Haemonetics Enterprises, Inc. and Haemonetics Canada Ltd. purchased the assets
of Fifth Dimension Information Systems, Inc. The President and principal
shareholder of 6 Encore Inc. is Brad Lazaruik, former Haemonetics Vice
President, (President, Fifth Dimension division). The payments were made during
fiscal year 2005 and 2003 respectively. There remains possible future payments
to be made to 6 Encore Inc. of $2.1 million if sales of certain software
products exceed certain cumulative levels prior to the end of fiscal year 2008.
16. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Segment Definition Criteria
We manage our business on the basis of one operating segment: the design,
manufacture and marketing of automated blood processing systems. Our chief
operating decision-maker uses consolidated results to make operating and
strategic decisions. Manufacturing processes, as well as the regulatory
environment in which we operate, are largely the same for all product lines.
Product and Service Segmentation
We have two families of products: (1) those that serve the donor and (2) those
that serve the patient. Under the donor family of products we have included
blood bank, red cell and plasma collection products. The patient products are
the surgical collection products.
Donor
The blood bank products include machines, single use disposables and solutions
that perform "apheresis," (the separation of whole blood into its components and
subsequent collection of certain components, including platelets and plasma), as
well as the washing of red blood cells for certain procedures. In addition, the
blood bank product line includes solutions used in non-apheresis applications.
The main devices used for these blood component therapies are the MCS(R)+ mobile
collection system and the ACP(R) 215 automated cell processing system.
59
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Red cell products include machines and single use disposables and solutions that
perform apheresis for the collection of red blood cells. Devices used for the
collection of red blood cells are the MCS(R)+ 8150 mobile collection systems.
Plasma collection products are machines, disposables and solutions that perform
apheresis for the separation of whole blood components and subsequent collection
of plasma. The devices used in automated plasma collection are the PCS(R)2
plasma collection system and the Superlite(TM).
Patient
Surgical products include machines and single use disposables that perform
surgical blood salvage in orthopedic and cardiovascular surgical applications.
Surgical blood salvage is a procedure whereby shed blood is collected, cleansed
and made available to be transfused back to the patient. The devices used in the
surgical area are the OrthoPAT(R) and the Cell Saver(R) autologous blood
recovery systems.
Other
Other revenue includes revenue generated from equipment repairs performed under
preventative maintenance contracts or emergency service billings and
miscellaneous sales, including revenue from our software division, Fifth
Dimension, acquired on January 1, 2002. Fifth Dimension provides collection and
data management systems to plasma collectors.
Revenues from External Customers:
Years ended (in thousands)
April 2, 2005 April 3, 2004 March 29, 2003
------------- ------------- --------------
Disposable Revenues by Product Family
Donor:
Blood Bank $ 130,427 $ 112,209 $ 99,921
Red Cell 28,676 22,321 15,542
Plasma 97,250 114,346 114,436
------------ ------------ ------------
$ 256,353 $ 248,876 $ 229,899
Patient:
Surgical 86,377 76,664 68,321
------------ ------------ ------------
Disposables revenue $ 342,730 $ 325,540 $ 298,220
Equipment 20,695 16,687 20,381
Misc & Service 20,173 22,002 18,355
------------ ------------ ------------
Total revenues from external customers $ 383,598 $ 364,229 $ 336,956
============ ============ ============
60
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Geographic Segmentation
Years ended (in thousands)
April 2, 2005
Other North Total North
United States America America Japan Other Asia Total Asia Germany
------------- ----------- ----------- ----- ---------- ---------- -------
Sales $ 131,632 $ 3,275 $ 134,907 $ 104,963 $ 28,489 $ 133,452 $ 32,318
Total Assets 326,127 3,463 329,590 43,014 8,500 51,514 15,130
Long-Lived
Assets 76,578 3,163 79,741 15,623 2,457 18,080 4,830
April 3, 2004
Other North Total North
United States America America Japan Other Asia Total Asia Germany
------------- ----------- ----------- ----- ---------- ---------- -------
Sales $ 126,872 $ 3,271 $ 130,143 $ 99,626 $ 27,129 $ 126,755 $ 33,489
Total Assets 269,743 3,354 273,097 48,314 8,363 56,677 13,698
Long-Lived
Assets 82,728 3,050 85,778 18,316 2,294 20,610 5,209
March 29, 2003
Other North Total North
United States America America Japan Other Asia Total Asia Germany
------------- ----------- ----------- ----- ---------- ---------- -------
Sales $ 127,241 $ 2,746 $ 129,987 $ 94,215 $ 24,654 $ 118,869 $ 30,125
Total Assets 228,560 3,666 232,226 $ 48,343 6,866 55,209 14,028
Long-Lived
Assets 96,437 3,077 99,514 17,060 2,594 19,654 5,244
April 2, 2005
Total
France United Kingdom Italy Austria Other Europe Total Europe Consolidated
------ -------------- ----- ------- ------------ ------------ ------------
Sales $ 23,512 $ 5,351 $ 16,423 $ 8,882 $ 28,753 $ 115,239 $ 383,598
Total Assets 10,401 6,537 21,529 2,940 30,116 86,653 467,757
Long-Lived
Assets 1,181 3,048 3,112 720 13,434 26,325 124,146
April 3, 2004
Total
France United Kingdom Italy Austria Other Europe Total Europe Consolidated
------ -------------- ----- ------- ------------ ------------ ------------
Sales $ 20,666 $ 3,556 $ 13,936 $ 8,332 $ 27,352 $ 107,331 $ 364,229
Total Assets 11,401 6,225 19,577 2,821 23,898 77,620 407,394
Long-Lived
Assets 1,509 3,030 2,380 882 6,547 19,557 125,945
March 29, 2003
Total
France United Kingdom Italy Austria Other Europe Total Europe Consolidated
------ -------------- ----- ------- ------------ ------------ ------------
Sales $ 18,065 $ 3,221 $ 10,376 $ 7,000 $ 19,313 $ 88,100 $ 336,956
Total Assets 15,067 4,689 16,697 2,474 19,095 72,050 359,485
Long-Lived
Assets 1,699 2,377 1,846 905 4,714 16,785 135,953
61
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. REORGANIZATION
On August 12, 2003, we announced a reorganization of our business into two
global product families: donor and patient. This reorganization redefined our
customer and allowed us to expand our customer base to better position us for
future growth. As a result of the reorganization, we reduced our worldwide
workforce of 1,500 employees by approximately 4%. No facilities were closed. The
reductions resulted in a charge, included in selling, general and administrative
expenses, for severance and related costs of $2.7 million. A summary of activity
follows (in thousands):
Balance as of March 29, 2003 $ --
Total charges 2,690
Severance and related costs paid 2,690
------
Balance as of April 3, 2004 $ --
======
18. SUMMARY OF QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter**
------- ------- ------- ---------
Fiscal year ended April 2, 2005:
Net revenues $ 94,602 $ 90,923 $ 98,098 $ 99,975
Gross profit 47,100 45,549 51,781 53,446
Operating income 14,962 13,911 15,300 15,670
Net income 9,820 8,874 11,007 9,938
Share data:
Net Income:
Basic $ 0.39 $ 0.35 $ 0.43 $ 0.38
Diluted $ 0.38 $ 0.34 $ 0.42 $ 0.37
Fiscal year ended April 3, 2004:
Net revenues $ 88,283 $ 87,488 $ 90,737 $ 97,721
Gross profit 39,835* 41,608* 43,390* 48,703*
Operating income 8,435* 9,134* 14,373* 15,351*
Net income 4,983 5,495 9,314 9,528
Share data:
Net Income:
Basic $ 0.21 $ 0.23 $ 0.38 $ 0.38
Diluted $ 0.21 $ 0.23 $ 0.38 $ 0.37
* Certain cost reductions were reclassified into gross profit from other
income and expense so amounts differ from what was originally reported in
fiscal year 2004.
** The fourth fiscal quarter of fiscal year 2004 includes 14 weeks due to our
policy for determining our fiscal year end.
62
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Haemonetics Corporation:
We have audited the accompanying consolidated balance sheets of Haemonetics
Corporation (a Massachusetts corporation) and its subsidiaries as of April 2,
2005 and April 3, 2004, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended April 2, 2005. Our audits also included the financial statement schedule
listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Haemonetics
Corporation and subsidiaries at April 2, 2005 and April 3, 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 2, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Haemonetics
Corporation's internal control over financial reporting as of April 2, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 3, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 3, 2005
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) regarding the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that as of the end of the period covered by
this report, our disclosure controls and procedures are effective to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within those entities.
B) Reports on Internal Control
Management's Annual Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). The Company's internal control system was designed
to provide reasonable assurance to the Company's management and Board of
directors regarding the preparation and fair presentation of published financial
statements.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of April 2, 2005. In making this assessment,
the management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment we believe that, as of April 2, 2005, the
Company's internal control over financial reporting is effective based on those
criteria.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management's assessment of the effectiveness of its internal control over
financial reporting as of April 2, 2005 has been attested to by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included herein.
64
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Haemonetics Corporation:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting, that
Haemonetics Corporation maintained effective internal control over financial
reporting as of April 2, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Haemonetics
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Haemonetics Corporation maintained
effective internal control over financial reporting as of April 2, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Haemonetics Corporation maintained, in all material respects,
effective internal control over financial reporting as of April 2, 2005, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Haemonetics Corporation as of April 2, 2005 and April 3, 2004, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended April 2, 2005 of Haemonetics Corporation
and our report dated June 3, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 3, 2005
65
C) Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recently completed fiscal year that
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning our directors and compliance with Section 16(a)
of the Securities Exchange Act of 1934 required by this Item is incorporated by
reference to our Proxy Statement for the Annual Meeting to be held July 27,
2005.
(b) The information concerning our Executive Officers is set forth at the end of
Part I hereof.
(c) The balance of the information required by this item including information
concerning our Audit Committee and the Audit Committee Financial Expert and
compliance with Item 401 of S-K is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting to be held July 27, 2005. We have adopted
a Code of Ethics that applies to our chief executive officer, chief financial
officer and senior financial officers. The Code of Ethics is incorporated into
the Company's Code of Business Conduct located on the Company's internet web
site at http://www.haemonetics.com/site/content/investor/investor.asp and it is
available in print to any shareholder who requests it. Such requests should be
directed to our Company's Secretary.
We intend to disclose any amendment to, or waiver from, a provision of its code
of ethics that applies to our chief executive officer, chief financial officer
and senior financial officers and that relates to any element of the Code of
Ethics definition enumerated in Item 406 of Regulation S-K by posting such
information on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference in our Proxy
Statement for the Annual Meeting to be held. July 27, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item concerning security ownership of certain
beneficial owners and management is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting to be held July 27, 2005
Stock Plans
The following table below sets forth information as of April 2, 2005 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance.
(a)
Number of (c)
securities to be Number of securities
issued upon (b) available for future
exercise of Weighted average issuance under
outstanding exercise price of equity compensation
options, outstanding plans(excluding
warrants and options, warrants securities reflected
rights and rights in columns (a) (1)
---------------- ----------------- ---------------------
Plan Category
Equity Compensation Plans approved by security holders 3,465,829 $ 25.54 774,064
Equity compensation plans not approved by security holders -0- -0- -0-
--------- ---------- -------
Total 3,465,829 $ 25.54 774,064
(1) Includes 161,689 shares available for purchase under the Employee Stock
Purchase Plan in future purchase periods.
66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference in our Proxy
Statement for the Annual Meeting to be held July 27, 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this report:
(a) Financial Statements are included in Part II of this report
Financial Statements required by Item 8 of this Form
Consolidated Statements of Income.................................36
Consolidated Balance Sheets.......................................37
Consolidated Statements of Stockholders' Equity...................38
Consolidated Statements of Cash Flows.............................39
Notes to Consolidated Financial Statements........................40
Report of Independent Registered Public Accounting Firm...........63
Schedules required by Article 12 of Regulation S-X
II Valuation and Qualifying Accounts..............................73
All other schedules have been omitted because they are not applicable or
not required.
(b) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index at page 69, which is incorporated herein by reference.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HAEMONETICS CORPORATION
By: /s/ Brad Nutter
---------------------------------
Brad Nutter, President
and Chief Executive Officer
Date: June 3, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- --------------------------------------------------- ------------
/s/ Ronald A. Matricaria Chairman of the Board June 3, 2005
- ---------------------------------
Ronald A. Matricaria
/s/ Brad Nutter President and Chief Executive Officer, Director
- --------------------------------- (Principal Executive Officer) June 3, 2005
Brad Nutter
/s/ Ronald J. Ryan Vice President and Chief Financial Officer,
- --------------------------------- (Principal Financial Officer) June 3, 2005
Ronald J. Ryan
/s/ Susan M. Hanlon Vice President Planning and Control (Principal
- --------------------------------- Accounting Officer) June 3, 2005
Susan M. Hanlon
/s/ Yutaka Sakurada President, Haemonetics Japan/Asia and Chairman and
- --------------------------------- CEO, Haemonetics Japan Director June 3, 2005
Yutaka Sakurada
/s/ Benjamin L. Holmes Director June 3, 2005
- ---------------------------------
Benjamin L. Holmes
/s/ Lawrence C. Best Director June 3, 2005
- ---------------------------------
Lawrence C. Best
/s/ Susan Bartlett Foote Director June 3, 2005
- ---------------------------------
Susan Bartlett Foote
/s/ Ronald G. Gelbman Director June 3, 2005
- ---------------------------------
Ronald G. Gelbman
/s/ Pedro Granadillo Director June 3, 2005
- ---------------------------------
Pedro Granadillo
68
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number and Description of Exhibit
3. Articles of Organization
3A* Articles of Organization of the Company effective August 29, 1985, as
amended December 12, 1985 and May 21, 1987 (filed as Exhibit 3A to the Company's
Form S-1 No. 33-39490 and incorporated herein by reference).
3B* Form of Restated Articles of Organization of the Company (filed as
Exhibit 3B to the Company's Form S-1 No. 33-39490 and incorporated herein by
reference).
3C* Articles of Amendment to the Articles of Organization of the Company
filed May 8, 1991 with the Secretary of the Commonwealth of Massachusetts (filed
as Exhibit 3E to the Company's Amendment No. 1 to Form S-1 No. 33-39490 and
incorporated herein by reference).
3D* By-Laws of the Company, as amended March 31, 2005( filed as Exhibit
10.1 to the Company's Form 8-K No. 1-10730 dated April 6, 2005 and incorporated
herein by reference).
4. Instruments defining the rights of security holders
4A* Specimen certificate for shares of common stock (filed as Exhibit 4B
to the Company's Amendment No. 1 to Form S-1 No. 33-39490 and incorporated
herein by reference).
10. Material Contracts
10A* The 1990 Stock Option Plan, as amended (filed as Exhibit 4A to the
Company's Form S-8 No. 33-42006 and incorporated herein by reference).
10B* Form of Option Agreements for Incentive and Non-qualified Options
(filed as Exhibit 10B to the Company's Form S-1 No. 33-39490 and incorporated
herein by reference).
10C* Lease dated July 17, 1990 between the Buncher Company and the Company
of property in Pittsburgh, Pennsylvania (filed as Exhibit 10K to the Company's
Form S-1 No. 33-39490 and incorporated herein by reference).
10D* Lease dated July 3, 1991 between Wood Road Associates II Limited
Partnership and the Company for the property adjacent to the main facility in
Braintree, Massachusetts (filed as Exhibit 10M to the Company's Form 10-K No.
1-10730 for the year ended March 28, 1992 and incorporated herein by reference).
10E* Amendment No. 1 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company for the child care facility
(filed as Exhibit 10N to the Company's Form 10-K No. 1-10730 for the year ended
March 28, 1992 and incorporated herein by reference).
10F* Amendment No. 2 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company (filed as Exhibit 10S to the
Company's Form 10-K No. 1-10730 for the year ended April 3, 1993 and
incorporated herein by reference).
10G* Real Estate purchase agreement dated May 1, 1994 between 3M UK
Holding PLC and the Company (filed as Exhibit 10AA to the Company's Form 10-K
No. 1-10730 for the year ended April 1, 1995 and incorporated herein by
reference).
10H* 1992 Long-Term Incentive Plan (filed as Exhibit 10V to the Company's
Form 10-K No. 1-10730 for the year ended April 3, 1993 and incorporated herein
by reference).
69
10I* Purchase agreement dated October 1, 1994 between Kuraray Co. and the
Company (filed as Exhibit 10AC to the Company's Form 10-K No. 1-10730 for the
year ended April 1, 1995 and incorporated herein by reference).
10J* First Amendment to lease dated July 17, 1990 between Buncher Company
and the Company of property in Pittsburgh, Pennsylvania (filed as Exhibit 10AI
to the Company's Form 10-Q No. 1-10730 for the quarter ended December 28, 1996
and incorporated herein by reference).
10K* Amendment, dated April 18, 1997 to the 1992 Long-Term Incentive Plan
(filed as Exhibit 10V to the Company's Form 10-K No. 1-10730 for the year ended
April 3, 1993 and incorporated herein by reference).
10L* Note Purchase agreement whereby Haemonetics Corporation authorized
sale of $40,000,000, 7.05% Senior Notes due October 15, 2007 (filed as Exhibit
10A to the Company's Form 10-Q No. 1-10730 for the quarter ended September 27,
1997 and incorporated herein by reference).
10M* 1998 Employee Stock Purchase Plan (filed as Exhibit 10Z to the
Company's Form 10-K No. 1-10730 for the year ended March 28, 1998 and
incorporated herein by reference).
10N* 1998 Stock Option Plan for Non-Employee Directors. (filed as Exhibit
10AA to the Company's Form 10-K No. 1-10730 for the year ended March 28, 1998
and incorporated herein by reference).
10O* Lease, dated July 29, 1997 between New Avon Limited Partnership and
the Company for the property in Avon, Massachusetts (filed as Exhibit 10AB to
the Company's Form 10-K No. 1-10730 for the year ended March 28, 1998 and
incorporated herein by reference).
10P* Agreement and Plan of Merger dated September 4, 2000 between
Haemonetics Corporation and Transfusion Technologies Corporation (filed as
Exhibit 2.1 to the Company's Form 8-K No. 1-14041 dated September 29, 2000 and
incorporated herein by reference).
10Q* Amendment dated September 29, 2000 to the 7.05% Senior Notes (filed
as Exhibit 10A to the Company's Form 10-Q No. 1-10730 for the quarter ended
September 30, 2000 and incorporated herein by reference).
10R* Haemonetics Corporation 2000 Long-term Incentive Plan (filed as
Exhibit 10A to the Company's Form 10-Q No. 1-10730 for the quarter ended
December 30, 2000 and incorporated herein by reference).
10S* Note and Mortgage dated December 12, 2000 between the Company and
General Electric Capital Business Asset Funding Corporation relating to the
Braintree facility (filed as Exhibit 10B to the Company's Form 10-Q No. 1-10730
for the quarter ended December 30, 2000 and incorporated herein by reference).
10T* Amendment No. 3 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership and the Company, dated April 1, 1997 (filed as
Exhibit 10AA to the Company's Form 10-K No. 1-10730 for the year ended March 30,
2002 and incorporated herein by reference).
10U* Amendment No. 4 to Lease dated July 3, 1991 between Wood Road
Associates II Limited Partnership, as assigned to Trinet Essential Facilities
XXIX, Inc., effective June 18, 1998, and the Company, dated February 25, 2002.
(filed as Exhibit 10AB to the Company's Form 10-K No. 1-10730 for the year ended
March 30, 2002 and incorporated herein by reference).
10V* Employment Agreement between the Company and Ronald J. Ryan. (filed
as Exhibit 10.2 to the Company's Form 10-Q No. 1-10730 for the quarter ended
June 29, 2002and incorporated herein by reference).
10W* Employment agreement between Brad Nutter and Haemonetics Corporation.
( filed as Exhibit 10AE to the Company's Form 10-K No. 1-10730 for the year
ended March 29, 2003 and incorporated herein by reference).
70
10X * First Amendment of lease dated July 29, 1997 between New Avon
Limited Partnership and the Company for the property in Avon, Massachusetts. (
filed as Exhibit 10AF to the Company's Form 10-K No. 1-10730 for the year ended
March 29, 2003 and incorporated herein by reference).
10Y * Second Amendment to lease dated July 17, 1990 between Buncher
Company and the Company for the property in Pittsburgh, Pennsylvania.( filed as
Exhibit 10AG to the Company's Form 10-K No. 1-10730 for the year ended March 29,
2003 and incorporated herein by reference).
10Z* Form of Option Agreements for Non-Qualified stock options for the
1992 Long-Term Incentive Plan for Employees. (filed as Exhibit 10AH to the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AA* Form of Option Agreements for Non-Qualified stock options for the
1998 Stock Option Plan for Non-Employee Directors. (filed as Exhibit 10AI to the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AB* Form of Option Agreement for Non-Qualified stock options for the
2000 Long Term-Incentive Plan for Employees. (filed as Exhibit 10AJto the
Company's Form 10-K No. 1-10730 for the year ended March 29, 2003 and
incorporated herein by reference).
10AC* Form of Option Agreements for Non-Qualified stock options for the
2000 Long- Term Incentive Plan for Non-Employee Directors. (filed as Exhibit
10AK to the Company's Form 10-K No. 1-10730 for the year ended March 29, 2003
and incorporated herein by reference).
10AD* Employment Agreement between the Company and Robert Ebbeling. (filed
as Exhibit 10AL to the Company's Form 10-K No. 1-10730 for the year ended March
29, 2003.)
10AE* Employment agreement between the Company and Peter Allen (filed as
Exhibit 10.1 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AF* Employment agreement between the Company and Brian Concannon (filed
as Exhibit 10.2 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AG* Employment agreement between the Company and Alicia Lopez (filed as
Exhibit 10.3 to the Company's Form 10-Q No 1-10730 for the quarter ended
September 27, 2003 and incorporated herein by reference).
10AH* Second Amendment of lease dated July 29, 1997 between New Avon
Limited Partnership and the Company for the property in Avon,
Massachusetts(filed as Exhibit 10AM to the Company's Form 10-K No 1-10730 for
the year ended April 3, 2004 and incorporated herein by reference).
10AI* Third Amendment of lease dated July 29, 1997 between New Avon
Limited Partnership and the Company for the property in Avon, Massachusetts
(filed as Exhibit 10AN to the Company's Form 10-K No 1-10730 for the year ended
April 3, 2004 and incorporated herein by reference).
10AJ* Summary of the Employment Agreement between Haemonetics Corporation
and Dr. Ulrich Exckert (filed as Exhibit 10AO to the Company's Form 10-K No
1-10730 for the year ended April 3, 2004 and incorporated herein by reference).
10AK Amendment dated April 22, 2005 to the 7.05% Senior Notes.
71
21 Subsidiaries of the Company
23.1 Consent of the Independent Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002,
of Brad Nutter, President and Chief Executive Officer of the Company
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley of 2002, of
Ronald J. Ryan, Vice President and Chief Financial Officer of the Company
32.1 Certification Pursuant to 18 United States Code Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Brad
Nutter, President and Chief Executive Officer of the Company
32.2 Certification Pursuant to 18 United States Code Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Ronald J. Ryan, Vice President and Chief Financial Officer of the Company
* Incorporated by reference
(All other exhibits are inapplicable.)
72
SCHEDULE II
HAEMONETICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to
Beginning of Costs Charged to Other Write-Offs (Net Balance at End
Period and Expenses Accounts of Recoveries) of Period
------------ ------------ ---------------- --------------- --------------
For Year Ended April 2, 2005
Allowance for Doubtful Accounts $ 2,261 $ 782 $ -- $ (969) $ 2,074
For Year Ended April 3, 2004
Allowance for Doubtful Accounts $ 1,449 $ 809 $ -- $ 3 $ 2,261
For Year Ended March 29, 2003
Allowance for Doubtful Accounts $ 1,298 $ 149 $ -- $ 2 $ 1,449
Purchase Accounting Reserves $ 44 $ (44) $ -- $ -- $ --
73
EXHIBIT 10AK
EXECUTION
AMENDMENT TO NOTE PURCHASE AGREEMENTS
This AMENDMENT TO NOTE PURCHASE AGREEMENTS (the "Amendment") is made as of
April 22, 2005, by and among ALLSTATE LIFE INSURANCE COMPANY ("Allstate"),
EMPLOYERS INSURANCE OF WAUSAU A MUTUAL COMPANY ("Wausau"), STATE FARM LIFE
INSURANCE COMPANY ("State Farm"), NATIONWIDE MUTUAL FIRE INSURANCE COMPANY
("Nationwide")(Allstate, Wausau, State Farm and Nationwide are hereinafter
referred to collectively as the "Noteholders") and HAEMONETICS CORPORATION, a
Massachusetts corporation (the "Company").
All capitalized terms not defined herein but defined in certain Note
Purchase Agreements, each dated as of October 15, 1997 (as amended and
supplemented from time to time, the "Note Purchase Agreements"), by and among
the Noteholders and the Company, pursuant to which the Company issued certain
7.05% Senior Notes in the original aggregate principal amount of $40,000,000.00
(the "Notes") shall have the meanings given to such terms in the Note Purchase
Agreements.
Preliminary Statements:
A. The Noteholders are the current beneficial holders of all of the issued
and outstanding Notes; and
B. The Company has requested that Section 10.6 of the Note Purchase
Agreement be amended in order to permit the Company to invest in certain money
market funds, repurchase agreements, tax exempt obligations, and euro dollar
time deposits and other types of liquid investments, all as more particularly
described herein; and
C. The Noteholders are willing to accommodate with the foregoing request,
subject to the terms and conditions of this Amendment;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Amendment to Note Purchase Agreements. The first sentence of Section 10.6
of each of the Note Purchase Agreements is hereby amended by replacing the
period contained therein with a semicolon, and inserting thereafter the
following:
"(j) Investments by the Company or any Subsidiary in money market funds
(taxable or tax exempt) that are rated AAA by Standard & Poor's Ratings Group
and or Aaa by Moody's Investors Service, Inc.;
(k) Investments by the Company or any Subsidiary in repurchase agreements
fully collateralized with U.S. Treasury Securities with a term of not more than
30 days and not to exceed $10.0 million with any one issuer for securities
described in clause (f) above and entered into with a financial institution
described in clause (g) above;
74
(l) Investments by the Company or any Subsidiary in auction rate
securities and variable rate demand obligations rated A by Standard & Poor's
Ratings Group and or A2 by Moody's Investors Service, Inc. or better and not to
exceed $15.0 million with any one issuer; and
(m) Investments by the Company or any Subsidiary in Eurodollar time or
demand deposits of non-U.S. banks rated A by Standard & Poor's Ratings Group and
or A2 by Moody's Investors Service, Inc. or better and not to exceed $25.0
million with any one issuer."
2. Waiver. Each of the Noteholders hereby waives any Default or Event of
Default which may have occurred due to any past failure of the Company to comply
with the provisions of Section 10.6 of the Note Purchase Agreements. The
foregoing waiver shall operate solely with respect to the specific matter
described herein and shall not be construed as a waiver of any other Default or
Event of Default.
3. Ratification of Note Purchase Agreements and Notes. Subject to the
amendments expressly set forth in Section 1 of this Amendment, the Company
hereby ratifies and reaffirms all of the terms and provisions of the Note
Purchase Agreements and the Notes and hereby expressly acknowledges and confirms
that the terms and provisions of each thereof, as amended hereby, shall and do
remain in full force and effect.
4. Miscellaneous. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears hereon, and all of which shall together constitute
one and the same instrument. This Amendment shall become binding when one or
more counterparts hereof, individually or taken together, shall bear the
signatures of the Company and the Required Holders.
This Amendment shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
This Amendment and all questions relating to its validity, interpretation,
performance and enforcement shall be governed by and construed in accordance
with the laws of the State of Illinois, notwithstanding any conflict-of-law
provisions to the contrary.
75
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered under seal by their proper and duly authorized
officers as of the date first above written.
ALLSTATE LIFE INSURANCE COMPANY
By : s/ Carrie A. Cazolas
-------------------------------------------------
Name: Carrie A. Casolas
Title:
Its duly authorized officer
By : s/ Jerry D.Zinkula
-------------------------------------------------
Name:Jerry D. Zinkula
Title:
Its duly authorized officer
NATIONWIDE INDEMNITY COMPANY
(AS SUCCESSOR TO EMPLOYERS INSURANCE
OF WAUSAU A MUTUAL COMPANY)
By : s/ Joseph P. Young
-------------------------------------------------
Name: Joseph P. Young
Title:
Its duly authorized officer
STATE FARM LIFE INSURANCE COMPANY
By : s/ Jeffrey T. Attwood
-------------------------------------------------
Name: Jeffrey T. Attwood
Title:
Its duly authorized officer
By : s/ Larry Rottunda
-------------------------------------------------
Name: s/ Larry Rottunda
Title: Assistant Secretary
Its duly authorized officer
NATIONWIDE MUTUAL
FIRE INSURANCE COMPANY
By : s/ Joseph P. Young
-------------------------------------------------
Name: Joseph P. Young
Title:
Its duly authorized officer
HAEMONETICS CORPORATION
By : s/ Ronald J. Ryan
-------------------------------------------------
Name: Ronald J. Ryan
Title: Vice President and Chief Financial Officer
Its duly authorized officer
76
EXHIBIT 21
SUBSIDIARIES OF HAEMONETICS CORPORATION
Name Jurisdiction of Incorporation
- ------------------------------------------------------- -----------------------------
Haemonetics S.A. Switzerland
Haemonetics Scandinavia, AB Sweden
Haemonetics GmbH Germany
Haemonetics France S.A.R.L. France
Haemonetics Limited England
Haemonetics (U.K.) Limited Scotland
Haemonetics Japan K.K. Japan
Haemonetics Belgium N.V. Belgium
Haemonetics B.V. Netherlands
Haemonetics Italia S.R.L. Italy
Haemonetics GesmbH Austria
Haemonetics Asia Inc., with branch in Taiwan Delaware
Haemonetics Hong Kong Ltd. Hong Kong
Haemonetics CZ, s.p.o.l., S.r.o. Czech Republic
Haemonetics Medical Devices (Shanghai) Trading Co. Ltd. People's Republic of China
Transfusion Technologies Corporation Delaware
Haemonetics Charitable Foundation Massachusetts
Haemonetics Enterprises Inc. Delaware
Haemonetics Canada, Ltd. Canada
77
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-42005, 33-42006, 33-70932, 33-70934, 33-80652, 333-61453, 333-61455,
333-60020 and 333-62598) of our reports dated June 3, 2005, with respect to the
consolidated financial statements and schedule of Haemonetics Corporation,
Haemonetics Corporation management's assessment of the effectiveness of internal
control over financial reporting, and the effectiveness of internal control over
financial reporting of Haemonetics Corporation included in the Annual Report
(Form 10-K) for the year ended April 2, 2005.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 3, 2005
78
EXHIBIT 31.1
CERTIFICATION
I, Brad Nutter, President and Chief Executive Officer of Haemonetics
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K 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 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: June 3, 2005 /s/ Brad Nutter
-------------- --------------
Brad Nutter,
President and Chief Executive Officer
(Principal Executive Officer)
79
EXHIBIT 31.2
CERTIFICATION
I, Ronald J. Ryan, Vice President and Chief Financial Officer of Haemonetics
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K 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 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)) )) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: June 3, 2005 /s/ Ronald J. Ryan
-------------- -----------------
Ronald J. Ryan,
Vice President and Chief Financial Officer
(Principal Financial Officer)
80
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 Annual Report of Haemonetics Corporation (the "Company")
on Form 10-K for the fiscal year ending April 2, 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: June 3, 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.
81
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 Annual Report of Haemonetics Corporation (the "Company")
on Form 10-K for the fiscal year ending April 2, 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: June 3, 2005
/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.
82
