FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the quarter ended: October 3, 1998 Commission File Number: 1-10730
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HAEMONETICS CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 Wood Road, Braintree, MA 02184
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(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
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Indicate by check mark whether the registrant (1.) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) (2.) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
26,661,617 shares of Common Stock, $ .01 par value, as of
---------------------------------------------------------
October 2, 1998
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. Financial Information
Consolidated Balance Sheets - October 3, 1998 2
and March 28, 1998
Consolidated Statements of Operations - 3
Three and Six Months Ended October 3, 1998
and September 27, 1997
Consolidated Statements of Stockholders' Equity - 4
Six Months Ended October 3, 1998
Consolidated Statements of Cash Flows - 5
Six Months Ended October 3, 1998 and September 27, 1997
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial 11-18
Condition and Results of Operations
PART II. Other Information 19-20
Signatures 21
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share data)
October 3, March 28,
ASSETS 1998 1998
-----------------------
Current assets:
Cash and cash equivalents $ 37,174 $ 21,766
Accounts receivable, less allowance of $755 at
October 3, 1998 and $818 at March 28, 1998 60,468 58,886
Inventories 67,698 61,664
Current investment in sales-type leases, net 11,835 11,887
Deferred tax asset 20,852 21,777
Other prepaid and current assets 9,257 15,170
----------------------
Total current assets 207,284 191,150
----------------------
Property, plant and equipment 172,503 170,261
Less accumulated depreciation (91,399) (86,042)
----------------------
Net property, plant and equipment 81,104 84,219
Other assets:
Investment in sales-type leases, net (long term) 32,220 38,596
Distribution rights, net 9,907 10,718
Other assets, net 9,637 5,204
Property,plant and equipment and other assets net of
long-term liabilities of discontinued operations 2,505 6,806
----------------------
Total other assets 54,269 61,324
----------------------
Total assets $342,657 $336,693
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 12,742 $ 17,468
Accounts payable 13,872 21,689
Accrued payroll and related costs 8,677 7,726
Accrued income taxes 11,044 5,750
Other accrued liabilities 16,325 15,132
Current liabilities and accrued losses net of
current assets of discontinued operations 4,269 10,593
----------------------
Total current liabilities 66,929 78,358
----------------------
Deferred income taxes 13,753 9,944
Long-term debt, net of current maturities 51,461 53,586
Other long-term liabilities 0 150
Stockholders' equity:
Common stock, $.01 par value; Authorized - 80,000,000 shares;
Issued 29,418,586 shares at October 3, 1998;
29,341,648 shares at March 28, 1998 294 293
Additional paid-in capital 60,432 59,142
Retained earnings 200,952 190,757
Cumulative translation adjustments (5,215) (9,588)
----------------------
Stockholders' equity before treasury stock 256,463 240,604
Less: treasury stock 2,756,969 shares at cost
at October 3, 1998 and 2,756,969 shares at cost
at March 28, 1998 45,949 45,949
----------------------
Total stockholders' equity 210,514 194,655
----------------------
Total liabilities and stockholders' equity $342,657 $336,693
======================
Supplemental disclosure of balance sheet information:
Net debt $ 27,029 $ 49,288
The accompanying notes are an integral part
of these consolidated financial statements.
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except share data)
Three Months Ended Six Months Ended
-------------------- ---------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
----------------------------------------------
Net revenues $67,787 $72,520 $139,783 $152,005
Cost of goods sold 36,023 37,786 72,049 80,183
--------------------------------------------
Gross profit 31,764 34,734 67,734 71,822
Operating expenses:
Research and development 3,326 4,657 7,129 9,585
Selling, general and administrative 20,531 21,383 45,395 42,095
--------------------------------------------
Total operating expenses 23,857 26,040 52,524 51,680
--------------------------------------------
Operating income 7,907 8,694 15,210 20,142
Interest expense (1,032) (810) (2,011) (1,367)
Interest income 1,072 1,075 2,155 2,025
Other income, net 245 (133) 465 (102)
--------------------------------------------
Income from continuing operations
before provision for income taxes 8,192 8,826 15,819 20,698
Provision for income taxes 2,867 3,089 5,537 7,245
--------------------------------------------
Earnings from continuing operations $ 5,325 $ 5,737 $ 10,282 $ 13,453
============================================
Discontinued operations:
Loss from operations, net of income tax
benefit of ($47) in 1998 and ($1583) in 1997 (30) (1,705) (87) (2,941)
--------------------------------------------
Net Income $ 5,295 $ 4,032 $ 10,195 $ 10,512
============================================
Basic income(loss) per common share
Continuing operations $ 0.200 $ 0.216 $ 0.387 $ 0.507
Discontinued operations (0.001) (0.063) (0.003) (0.110)
Net income (loss) 0.199 0.152 0.383 0.396
Income(loss) per common share assuming dilution
Continuing operations $ 0.198 $ 0.216 $ 0.385 $ 0.505
Discontinued operations (0.001) (0.064) (0.003) (0.110)
Net income (loss) 0.197 0.151 0.381 0.395
Weighted average shares outstanding
Basic 26,614 26,509 26,599 26,539
Diluted 26,832 26,620 26,729 26,633
The accompanying notes are an integral part
of these consolidated financial statements.
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional Cumulative Total
------------- Paid-in Treasury Retained Translation Stockholders' Comprehensive
Shares $'s Capital Stock Earnings Adjustment Equity Income
-----------------------------------------------------------------------------------------------
Balance, March 28, 1998 29,342 $293 $59,142 ($45,949) $190,757 ($9,588) $194,655
Employee stock purchase plan -- -- -- -- -- -- 0
Exercise of stock options
and related tax benefit 77 1 1,290 -- -- -- 1,291
Purchase of treasury stock -- -- -- -- -- --
Net Income -- -- -- -- 10,195 -- 10,195 10,195
Foreign currency translation
adjustment -- -- -- -- -- 4,373 4,373 4,373
--------------------------------------------------------------------------------------------
Balance, October 3, 1998 29,419 $294 $60,432 ($45,949) $200,952 ($5,215) $210,514 $14,568
============================================================================================
The accompanying notes are an integral part
of these consolidated financial statements
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Six Months Ended
-----------------------
October 3, Sept. 27,
1998 1997
-----------------------
Cash Flows from Operating Activities:
Net income $ 10,195 $ 10,512
Less net loss from discontinued operations (87) (2,941)
----------------------
Net income from continuing operations 10,282 13,453
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non cash items:
Depreciation, amortization and other 14,348 11,768
Deferred tax benefit (263) (109)
Change in operating assets and liabilities:
(Increase) in accounts receivable - net (526) (4,817)
(Increase) in inventories (5,286) (9,486)
(Increase) in sales-type leases (current) (862) (802)
Decrease in prepaid income taxes 8,179 33
(Increase) in other assets (1,388) (6,286)
Increase (Decrease) in accounts payable, accrued
expenses and other current liabilities 686 (6,824)
----------------------
Net cash provided by (used in) operating activities,
continuing operations 25,170 (3,070)
----------------------
Net cash (used in) operating activities,
discontinued operations (7,977) (9,404)
----------------------
Net cash provided by (used in) operating activities 17,193 (12,474)
Cash Flows from Investing Activities:
Capital expenditures on property, plant and equipment,
net of retirements and disposals (7,741) (14,042)
Net (increase) decrease in sales-type leases (long-term) 4,782 (9,664)
----------------------
Net cash (used in) investing activities, continuing operations (2,959) (23,706)
----------------------
Net cash provided by (used in) investing activities,
discontinued operations 5,866 (6,274)
----------------------
Net cash provided by (used in) investing activities 2,907 (29,980)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (101) (91)
Net increase (decrease) in short-term revolving
credit agreements (4,392) 4,207
Net increase (decrease) in long-term credit agreements (1,940) 40,058
Exercise of stock options and related tax benefit 1,291 1,826
Purchase of treasury stock 0 (5,302)
----------------------
Net cash provided by (used in) financing activities (5,142) 40,698
Effect of exchange rates on cash and cash equivalents 450 10
----------------------
Net increase (decrease) in cash and cash equivalents 15,408 (1,746)
Cash and cash equivalents at beginning of period 21,766 8,272
----------------------
Cash and cash equivalents at end of period $ 37,174 $ 6,526
======================
Supplemental disclosures of cash flow information:
Net (decrease) in cash and cash equivalents,
discontinued operations $ (2,111) $(15,678)
Net increase in cash and cash equivalents,
continuing operations $ 17,519 $ 13,932
Increase (decrease) in net debt $(21,841) $ 45,920
Interest paid $ 797 $ 1,009
Income taxes paid (refunded) $ (7,512) $ 14,059
======================
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The results of operations for the interim periods shown in this report
are not necessarily indicative of results for any future interim period or
for the entire fiscal year. The Company believes that the quarterly
information presented includes all adjustments (consisting only of normal,
recurring adjustments) that the Company considers necessary for a fair
presentation in accordance with generally accepted accounting principles.
The accompanying consolidated financial statements and notes should be read
in conjunction with the Company's audited annual financial statements.
2. FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to the last day
of March. As a result, current fiscal year 1999 includes 53 weeks as
compared to the normal 52 weeks. The additional week was added to the first
quarter ended July 4, 1998 which, as a result, included 14 weeks.
3. COMPREHENSIVE INCOME
In June 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) NO. 130, "Reporting Comprehensive Income." SFAS 130
requires the presentation, by major components and as a single total, the
change in the Company's net assets during a period from non-owner sources.
Currently, the Company's non-owner changes in equity are net income and the
foreign currency translation adjustments. Foreign currency translation
adjustments totaled ($5.2) million and ($9.6) million at July 4, 1998 and
March 28, 1998, respectively.
4. NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards board, (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 requires companies to present segment information
using the management approach. The management approach is based upon the
way that management organizes the segments within a Company for making
operating decisions and assessing performance. SFAS 131 is effective for
the Company's 1999 annual financial statements. Adoption of this standard
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivatives fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. The impacts of
adopting Statement 133 on the Company's financial statements or the timing
of adoption of Statement 133 have not been determined. However, it is
expected that the derivative financial instruments acquired in connection
with the Company's hedging program will continue to qualify for hedge
accounting.
5. FOREIGN CURRENCY
The Company enters into forward exchange contracts to hedge certain
firm sales commitments to customers that are denominated in foreign
currencies. The purpose of the Company's foreign hedging activities is to
reduce uncertainty associated with currency movement in future periods.
Gains and losses realized on these contracts are recorded in operations,
offsetting the related foreign currency transactions. The cash flows
related to the gains and losses on these foreign currency hedges are
classified in the statements of cash flows as part of cash flows from
operating activities.
At October 3, 1998 the Company had forward exchange contracts, all
having maturities of less than eighteen months, to exchange foreign
currencies (major European currencies and Japanese yen) for US dollars
totaling $157.1 million. Of that balance, $57.9 million represented
contracts for terms of 30 days or less. Gross unrealized gains from hedging
firm sales commitments at October 3, 1998, based on current spot rates, were
$3.9 million, $4.4 million of which represents forward points. Deferred
gains and losses are recognized in earnings when the transactions being
hedged are recognized. Management anticipates that the deferred amounts
will be offset by the foreign exchange effect on sales of product in future
periods.
6. INVENTORIES
Inventories are stated at the lower of cost or market and include the
cost of material, labor and manufacturing overhead. Cost is determined on
the first-in, first-out method.
Inventories consist of the following:
Oct 3, March 28,
1998 1998
--------------------
(in thousands)
Raw materials $13,578 $ 11,532
Work-in-process 7,216 5,878
Finished goods 46,904 44,254
-------------------
$67,698 $ 61,664
===================
7. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards board issued SFAS
NO. 128, "Earnings per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 supersedes
Accounting Principles Board Opinion No. 15 (APB 15) and establishes new
standards for the presentation of earnings per share. Under SFAS 128,
"Basic Earnings Per Share" excludes dilution and is computed by dividing
income available to common stockholders by weighted average shares
outstanding. "Diluted Earnings Per Share" reflects the effect of all
dilutive outstanding common stock equivalents. The following table provides
a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations, as required by SFAS 128:
For the three months ended
------------------------------
Oct 3, 1998 Sept 27, 1997
------------------------------
Basic EPS
- ---------
Net Income $ 5,295 $ 4,032
Weighted Average Shares 26,614 26,509
------------------------
Basic income per share $ .199 $ .152
========================
Diluted EPS
- -----------
Net Income $ 5,295 $ 4,032
Basic Weighted Average shares 26,614 26,509
Effect of Stock options 218 111
------------------------
Diluted Weighted Average shares 26,832 26,620
------------------------
Diluted income per share $ .197 $ .151
========================
For the six months ended
------------------------------
Oct 3, 1998 Sept 27, 1997
------------------------------
Basic EPS
- ---------
Net Income $10,195 $10,512
Weighted Average Shares 26,599 26,539
------------------------
Basic income per share $ .383 $ .396
========================
Diluted EPS
- -----------
Net Income $10,195 $10,512
Basic Weighted Average shares 26,599 26,539
Effect of Stock options 130 94
------------------------
Diluted Weighted Average shares 26,729 26,633
------------------------
Diluted income per share $ .381 $ .395
========================
8. DISCONTINUED OPERATIONS
On May 1, 1998, the Board of Directors announced a plan to discontinue
the Company's Blood Bank Management Services Business, ("BBMS").
Accordingly, the operating results for BBMS have been segregated from the
results for the continuing operations and reported as a separate line on the
consolidated statements of operations for all periods presented. To date,
the Company has sold three of its BBMS operations.
For the three and six months ended October 3, 1998, the operating loss
for BBMS was $2,463 and $ 5,137, respectively. These losses were charged to
the discontinued operations provision established in the fourth quarter of
fiscal year 1998.
The Operating losses for BBMS are detailed as follows:
For the three months ended For the six months ended
-------------------------- ------------------------
Oct 3, Sept.27 Oct 3, Sept.27
1998 1997 1998 1997
--------------------------------------------------
Net Revenues 5,201 4,093 11,292 6,936
Gross Profit 53 (198) 313 (224)
Operating expenses:
Research and Development -- 88 -- 164
Selling, general and administrative 2,516 2,277 5,450 4,038
-------------------------------------------------
Total operating expenses 2,516 2,365 5,450 4,202
Operating loss (2,463) (2,563) (5,137) (4,426)
Other expense (46) (61) (134) (100)
Tax benefit (878) (918) (1,845) (1,585)
-------------------------------------------------
Net loss (1,631) (1,705) (3,426) (2,941)
Charged to Reserve:
Operating loss (net of taxes) 1,601 -- 3,339 --
-------------------------------------------------
Reflected on Statement of Operations (30) (1,705) (87) (2,941)
====================================
Other income(expense) includes an allocation of corporate interest
expense of approximately $46,000 and $61,000 for the three months ended
October 3, 1998 and September 27, 1997, respectively and $134,000 and
$100,000 for the six months ended October 3, 1998 and September 27, 1997,
respectively. The allocation of corporate interest was calculated based
upon the percentage of net assets of BBMS to total domestic assets.
The remaining net assets of BBMS included in the consolidated balance
sheet for October 3, 1998 and March 28, 1998 are as follows:
October 3, March 28,
1998 1998
-----------------------
(in thousands)
Current Assets $ 4,510 $ 5,167
Net property, plant and equipment 3,802 8,217
Other assets 153 39
---------------------
Total assets $ 8,465 $13,423
Current liabilities and accrued losses $ 8,779 $15,760
Other long-term liabilities 1,450 1,450
---------------------
Total liabilities $10,229 $17,210
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
The table outlines the components of the consolidated statements of
income for continuing operations as a percentage of net revenues:
Percentage of Net Revenues Percentage Increase
Three Months Ended Three Months Ended
October 3, 1998 September 27, 1997 1998/97
- --------------------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% (6.5)%
Cost of goods sold 53.1 52.1 (4.7)
Gross Profit 46.9 47.9 (8.6)
Operating Expenses:
Research and development 4.9 6.4 (28.6)
Selling, general and administrative 30.3 29.5 (4.0)
------------------------------------------------
Total operating expenses 35.2 35.9 (8.4)
Operating income 11.7 12.0 (9.1)
Interest expense (1.5) (1.1) 27.4
Interest income 1.6 1.5 (0.3)
Other income (expense) 0.3 (0.2) (282.8)
------------------------------------------------
Income before provision for income taxes 12.1 12.2 (7.17)
Provision for income taxes 4.2 4.3 (7.17)
------------------------------------------------
Earnings from continuing operations 7.9% 7.9% (7.17)%
================================================
- --------------------------------------------------------------------------------------------------------
Three Months Ended October 3, 1998 Compared to Three Months Ended
September 27, 1997
Net revenues in 1998 decreased 6.5% to $67.8 million from $72.5
million in 1997. With currency rates held constant, net revenues were up
0.3%. Worldwide disposable sales decreased approximately 2.5%. With
currency rates held constant, disposable sales increased 4.7%. Sales of
disposables products accounted for approximately 94% and 90% of net revenues
for 1998 and 1997, respectively. Service revenues generated from equipment
repairs performed under preventive maintenance contracts or emergency
service billings domestically are included as part of disposables revenues
and accounted for approximately 0.8% and 0.6% of the Company's net revenues
for 1998 and 1997, respectively. Equipment revenues decreased approximately
41.9%. This decrease was partly a result of 1997 equipment sales to a U.S.
commercial plasma customer. International sales accounted for approximately
68% and 64% of net revenues for 1998 and 1997, respectively.
Gross profit in 1998 decreased $3.0 million from $34.7 million in
1997. As a percentage of net revenues, gross profit percent decreased by
1.0% to 46.9% in 1998 from 47.9% in 1997. At constant currency rates, gross
profit percent increased 2.5% or $1.8 million in 1998. The improvement in
gross profit at constant currency was the result of lower product costs,
$1.5 million of which were attributed to the cost saving initiatives
undertaken during the third quarter of last year.
The Company expended $3.3 million, 4.9% of net revenues, on research
and development in 1998 and $4.6 million, 6.4% of net revenues, in 1997. At
constant currency rates, the decrease in research and development
expenditures was $0.7 million compared to a year ago.
Selling, general and administrative expenses decreased to $20.5
million in 1998 from $21.4 million in 1997. At constant currency rates
selling, general and administrative expenses were up only slightly, at $0.2
million or 1.1% compared to a year ago.
Operating income, as a percentage of net revenues, decreased 0.3 % to
11.7% in 1998 from 12.0% in 1997. At constant currency rates, operating
income as a percentage of net revenues, increased 3.4 % from 1997 or $2.3
million. The $2.3 million increase in operating income was due largely to
improvements in gross profit totaling $1.8 million together with lower
operating expenses.
Interest expense increased in 1998 to $1.0 million from $.8 million in
1997 due to a higher average level of borrowings in the US, resulting from
the $40.0 million in fixed rate notes with a coupon rate of 7.05% issued by
the Company during the third quarter of last year. Interest income was
unchanged as increases in income earned on increased US cash balances were
offset by interest income reductions due to decreases in sales contract
balances.
Other income increased $.2 million from 1997 to 1998 due to increases
in income earned from points on hedging transactions.
The provision for income taxes, as a percentage of pretax income,
remained at 35.0% for both 1998 and 1997. The annualized rate for the full
12 months of fiscal 1999 is expected to be approximately 35%.
Six Months Ended October 3, 1998 Compared to Six Months Ended
September 27, 1997
Percentage of Net Revenues Percentage Increase
Six Months Ended Six Months Ended
October 3, 1998 September 27, 1997 1998/97
Net revenues 100.0% 100.0% (8.0)%
Cost of goods sold 51.5 52.8 (10.1)
Gross Profit 48.5 47.2 (5.7)
Operating Expenses:
Research and development 5.1 6.3 (25.6)
Selling, general and administrative 32.5 27.6 7.8
------------------------------------------------
Total operating expenses 37.6 33.9 1.6
Operating income 10.9 13.3 (24.5)
Interest expense (1.4) (0.9) 47.1
Interest income 1.5 1.3 6.4
Other income 0.3 (0.1) (555.9)
------------------------------------------------
Income before provision for income taxes 11.3 13.6 (23.6)
Provision for income taxes 3.9 4.7 (23.6)
------------------------------------------------
Earnings from continuing operations 7.4% 8.9% (23.6)%
- --------------------------------------------------------------------------------------------------------
Net revenues in 1998 decreased 8.0% to $139.8 million from $152.0
million in 1997. At constant currency rates, sales decreased 2.3%. The
sales decrease at constant currency rates was partly a result of a loss of a
large domestic commercial plasma customer in Q3FY98 and equipment shipments
to China during the first quarter of 1997 that were not replicated in 1998.
Worldwide disposable sales decreased approximately .8%. At constant
currency rates, disposable sales increased 5.5%. Sales of disposables
products accounted for approximately 94% and 87% of net revenues for 1998
and 1997, respectively. Service revenues generated from equipment repairs
performed under preventive maintenance contracts or emergency service
billings domestically are included as part of disposables revenues and
accounted for approximately .8% and .6% of the Company's net revenues for
1998 and 1997, respectively. Equipment revenues decreased approximately
58.4%. The decrease was attributable to revenue in 1997 that was non-
recurring in 1998. Specifically, the 1997 revenue consisted of $6.0 million
in plasma equipment shipped to China and equipment sales to a U.S.
commercial plasma customer. International sales accounted for approximately
68% and 66% of net revenues for 1998 and 1997, respectively.
Gross profit in 1998 decreased $4.1 million from $71.8 million in
1997. As a percentage of net revenues, gross profit percent increased by
1.3% to 48.5% in 1998 from 47.2% in 1997. At constant currency, gross
profit as a percent of sales, increased 4.4% or $4.7 million. The
improvement in gross profit at constant currency was the result of lower
product costs, $3.0 million of which were cost saving initiatives undertaken
during the third quarter of last year.
The Company expended $7.1 million in 1998 on research and development
(5.1% of net revenues) and $9.6 million in 1997 (6.3% of net revenues). At
constant currency rates, the decrease in research and development
expenditures was $1.2 million compared to a year ago.
Selling, general and administrative expenses increased to $45.4
million in 1998 from $42.1 million in 1997 and increased as a percentage of
net revenues to 32.5% from 27.6%. At constant currency rates, selling,
general and administrative expenses increased $5.2 million or 13.0% from a
year ago. Approximately $2.6 million of the 1998 expense was related to a
provision for certain sales contract receivables upon the Company's
resolution of a dispute with the American Red Cross. In addition, $1.2
million was spent on the Company's Customer Oriented Re-design for
Excellence program ("CORE") and $1.8 million of expenses were incurred as a
result of the 14th week added to Q1FY99.
Operating income, as a percentage of net revenues, decreased 2.4% to
10.9% in 1998 from 13.3% in 1997. At constant currency, operating income,
as a percentage of net revenues, increased 0.7% or $0.7 million from 1997.
The improvement in operating income at constant currency was due to the
improvement in gross profit partially offset by an increase in selling,
general and administrative expenses, as a percentage of net revenues.
Interest expense increased in 1998 to $2.0 million from $1.4 million
in 1997 due to a higher average level of borrowings in the US, resulting
from the $40.0 million in fixed rate notes with a coupon rate of 7.05%
issued by the Company during the third quarter of last year. Interest
income increased $.2 million in 1998 to $2.2 million as a result of interest
earned on increased US cash balances.
Other income increased $.4 million from 1997 to 1998 due to increases
in income earned from points on hedging transactions.
The provision for income taxes, as a percentage of pretax income,
remained at 35.0% for both 1998 and 1997. The annualized rate for the full
12 months of fiscal 1999 is expected to be approximately 35%.
RESULTS OF DISCONTINUED OPERATIONS
Three Months Ended October 3, 1998 Compared to Three Months Ended
September 27, 1997
Net revenues increased 27.1% in 1998 to $5.2 million in 1998. Gross
profit in 1998 increased to $0.1 million in 1998 from $(0.2) million in 1997
and operating losses decreased 3.9% to $(2.5) million in 1998 from $(2.6)
million in 1997.
Six Months Ended October 3, 1998 Compared to Six Months Ended
September 27, 1997
Net revenues increased 62.8% in 1998 to $11.3 million in 1998. Gross
profit in 1998 increased to $0.3 million in 1998 from $(0.2) million in 1997
and operating losses increased 16.5% to $(3.4) million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its cash requirements principally from
internally generated cash flow and borrowings. The Company's need for funds
is derived primarily from capital expenditures, working capital and
discontinued operations.
During the six months ended October 3, 1998, the Company increased its
cash balances by $15.4 million from operating, investing and financing
activities which represents an increase of $17.1 million from the $1.7
million utilized by the Company's operating, investing and financing
activities during the six months ended September 27, 1997. Without the
effect of exchange rates, the increase in cash balances was $16.7 million.
The $16.7 million increase was largely a result of $62.5 million net cash
provided by the Company's operating and investing activities offset by $45.8
million of less cash from the Company's financing activities.
Operating Activities:
The Company generated $25.1 million in cash from operating activities
of continuing operations in 1998 as compared to $3.1 million utilized during
1997. The $28.2 million increase year over year in operating cash flow from
continuing operations was a result of a $4.3 million decrease in account
receivable investment; a $4.2 million decrease in inventory investment; an
$8.1 million increase in prepaid income tax benefits as a result of a $7.7
refund received related to last year's losses; a $4.8 million decrease in other
assets uses; and a $7.5 million swing in accounts payable, accrued expenses and
other current liabilities. These increased sources of cash were offset by a
decrease in net income adjusted for non-cash items of $0.7 million.
Investing Activities:
The Company utilized $3.0 million in cash for investing activities
from continuing operations in 1998, a decrease of $20.7 million from 1997.
During the six months ended October 3, 1998, the Company incurred $7.7
million in capital expenditures net of retirements and disposals. Included
in this amount is a $0.2 million net decrease in long-term demonstration
assets. During the six months ended September 27, 1997, the Company
utilized $14.0 million for capital expenditures net of retirements and
disposals, including $1.8 million net decrease in long-term demonstration
assets. The $6.3 million decrease in expenditures on property, plant and
equipment, commercial plasma machines and other revenue generating assets
from 1997 to 1998 is due primarily to lower commercial plasma machine
placements. Finally, the Company reduced its investment in long-term sales-
type leases by $4.7 million in 1998, compared with an increased investment
of $9.6 million in 1997.
Financing Activities:
During the six months ended October 3, 1998 the Company's operations
generated cash from operating and investing activities and as a result paid
down a portion of debt.
Net debt decreased $21.8 million to $27.0 million in 1998.
The Company does not expect to repurchase any shares during the
current fiscal year. During 1997, the Company used $5.3 million to
repurchase shares of treasury stock.
At October 3, 1998, the Company had working capital of $140.4 million.
This reflects an increase of $27.6 million in working capital for the six
months ended October 3, 1998. The Company believes its sources of cash are
adequate to meet its projected needs.
Discontinued Operations:
During the six months ended October 3, 1998, discontinued operations
utilized $2.1 million from operating and investing activities, a decrease in
cash flow utilization of $13.6 million from the $15.7 million utilized
during the six months ended September 27, 1998. The decrease in cash flow
utilization was a result of the sale of Orange County Blood Services
(Pacific Blood Services), Tri-Counties Blood Bank and Kansas Blood Services
during the second quarter of 1998.
YEAR 2000 COMPLIANCE UPDATE
Haemonetics is aware of the potential for industry wide business
disruption that could occur due to problems related the "Year 2000 issue."
It is the belief of Haemonetics Management that the Company has a prudent
plan in place to address these issues within the Company and its supply
chain. The components of its plan include: an assessment of internal
systems for modification and/or replacement; communication with external
vendors to determine their state of readiness to maintain an uninterrupted
supply of goods and services to Haemonetics; an evaluation of equipment sold
by Haemonetics to customers as to the ability of the equipment to work
properly after the turn of the century; an evaluation of production
equipment as to its ability to function properly after the turn of the
century; an evaluation of facility related issues; the retention of
technical and advisory expertise to ensure that prudent action steps are
being taken; and the development of a contingency plan.
State of Readiness
Haemonetics has developed a comprehensive plan to reduce the
probability of operational difficulties due to Year 2000 related failures.
While there is still a significant amount of work to do the Company believes
that it is on track towards a timely completion. Overall Haemonetics
estimates that it has completed an inventory covering approximately 90% of
systems related Year 2000 exposures and is developing an inventory of
potential non-systems exposures. The Company continues to make progress in
remediating known Year 2000 systems exposures and is gathering information
on where exposures exist in non-systems areas. The Company continues to
develop remediation approaches as additional issues are identified.
Internal Systems (IT)
The process Haemonetics is following to achieve Year 2000
compliance for internal IT systems is as follows:
1. Develop an inventory of all IT components (hardware, software)
2. Determine the Year 2000 compliance status of each
3. Determine the importance of YEAR 2000 compliance for each
component (implications of failure)
4. Prioritize non-compliant components based on importance
5. Determine method to be used to achieved compliance for each
component (modify, replace, cease use)
6. Complete the planned action
7. Test the component
The initial inventory of all IT components in use throughout the
Company has been completed. The initial assessment of Year 2000 status for
all components has been completed. Twelve systems, all commercial packages,
are used company-wide for business transaction processing and accounting.
The Company's initial assessment indicates that 7 of these systems are Year
2000 compliant. The Company is on schedule to have eight systems compliant
by December 31, 1998 and all twelve by June 30, 1999. There are
approximately 70 other business applications in use by the Company that are
less critical. Through a combination of modification, replacement and
decommissioning, Year 2000 compliance on these applications is expected by
June 30, 1999. The Company has completed an initial assessment of its IT
infrastructure (servers, networks, phone systems, system software) and plans
to have all items remediated, replaced, or decommissioned by June 30, 1999.
In addition, the Company intends to test critical components of
infrastructure and applications.
Suppliers
The Company is in the process of communicating with our external
vendors of goods and services to gain an understanding of their state of
readiness to maintain an uninterrupted supply to Haemonetics. The Company
has sent letters to over 1,000 vendors outlining its approach towards the
Year 2000 issue and asking for the vendors' commitment to resolve any issues
they may have. The Company has also asked the vendors to complete a short
questionnaire and to inform the Company of any known compliance issues. The
Company is beginning the process of identifying vendors it views as critical
to its business. A critical vendor is one who's inability to continue to
provide goods and services would have a serious adverse impact on our
ability to produce, deliver, and collect payment for Haemonetics goods
and/or services. Senior management members are coordinating the
identification of these vendors for their respective business units. These
vendors will be contacted by the senior management member responsible for
the business relationship and will be requested to complete a detailed
questionnaire on Year 2000. Haemonetics may also request the right to visit
and/or audit one or more of these companies to validate their Year 2000
readiness.
Production Equipment
The Company is in the process of completing an inventory of production
equipment currently used at Haemonetics. The Year 2000 readiness of this
equipment will be determined through communication with the equipment
manufacturers and testing where appropriate. The Company is in the process
of creating an inventory of production equipment and at this time is not
aware of any production equipment which is affected by the Year 2000 issue.
The objective is to have the inventory completed by December 31, 1998. The
Company's intends to repair or replace non-compliant production equipment
prior to operating difficulties. Haemonetics remains aware of the potential
for imbedded logic within microchips to cause equipment failure. The
Company believes that its action plan provides a prudent approach towards
evaluating production equipment, however, it may be impracticable or
impossible to test certain items of production equipment for Year 2000
readiness. To the extent such untested equipment is not Year 2000 ready, it
may fail to operate on January 1, 2000, resulting in possible production
delays.
Facility Related Issues
The Company is in the process of completing an inventory and
evaluating facilities related equipment such as security, heating, elevator,
telephone and other service equipment with the potential for Year 2000
related failures. The Year 2000 readiness of this equipment will be
determined through communication with the equipment manufacturers and
testing where appropriate. The Company is in the process of creating an
inventory of facilities related equipment and at this time is not aware of
any facilities related equipment which is affected by the Year 2000 issue.
The objective is to have the inventory completed by December 31, 1998. The
Company intends to repair or replace non-compliant facilities related
equipment prior to operating difficulties. Haemonetics remains aware of the
potential for imbedded logic within microchips to cause equipment failure.
The Company believes that its action plan provides a prudent approach
towards evaluating facilities equipment, however, it may be impracticable or
impossible to test certain items of facilities related equipment for Year
2000 readiness. To the extent such untested equipment is not Year 2000
ready, it may fail to operate on or after January 1, 2000, resulting in
possible interruptions of security, heating, elevator, telephone and other
services.
Technical and Advisory Expertise
Haemonetics has engaged a leading professional services and consulting
firm experienced in Year 2000 compliance to assist in project planning,
testing methodologies, and evaluating its Year 2000 remediation activities.
Haemonetics Products
The Company produces products in two major categories: equipment and
the single use disposables which are used in the equipment for each
procedure. The disposables have no date related functions aside from lot
numbering and expiry dating printed on the packaging. The equipment itself
does not rely on date related data for its mechanical function. There is no
calendar related logic in the Haemonetics software that controls the
function of the machine. The Company is continuing to test its equipment to
evaluate any potential for issues related to logic embedded within
microchips. At this time the Company is not aware of any material issues
related to equipment it sells which would prevent its customers from
continuing their operations or which would impact the safety of patients or
donors in any way.
Costs
Haemonetics is evaluating the total cost of Year 2000 compliance. At
this time the Company estimates that the total cost of completing Year 2000
related activities will be between $3 million and $4 million. This amount
includes both IT and non-IT related expenses. Of this amount, approximately
50% has already been spent representing 30% of the total IT budget during
the spending period. The Company anticipates capital expenditures to total
between $1 million and $1.5 million and expense to total $2 million to $2.5
million. This amount includes the replacement of hardware and applications
that are outdated and were due for replacement regardless of Year 2000
issues.
Contingency Plan
Although the Company believes that it is taking prudent action related
to the identification and resolution of issues related to the Year 2000, its
assessment is still in progress. As the Company better understands the
state of readiness within its unique set of business partners, production
processes, and internal systems, it will develop a formal contingency plan
to alleviate the impact of high potential or serious failures. Until the
contingency plan is completed, the Company does not possess the information
necessary to estimate the potential impact of Year 2000 compliance issues
relating to it IT systems, non-IT systems, its vendors, it customers, and
other parties. The Company anticipates having this contingency plan
outlined by March 31, 1999. The components of this plan will likely include
raw material and finished goods inventory levels, alternative suppliers, and
backup systems. The Company may never be able to know with certainty
whether certain key vendors are compliant, including those outside the
United States. Failure of key vendors to make their computer systems Year
2000 compliant could result in delayed deliveries of products to the
Company. If such delays are extended, they could have a material adverse
effect on the Company's business and financial results. There are also
technical vagaries to logic embedded within microchips that may prove
impracticable or impossible to test. To the extent such microchips are not
Year 2000 compliant, this could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Risks
The Company continues to evaluate the risks associated with potential
Year 2000 related failures. The failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers, the Company is unable to determine at
this time whether the consequences of Year 2000 failures will have a
material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and,
in particular, about the Year 2000 compliance and readiness of its critical
vendors. The Company believes that, with the implementation of new business
systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements contained in this report, as well as oral statements made
by the Company that 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 the
Company's future plans of operations, business strategy, results of
operations and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which the Company can give no firm assurance. Further,
any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes 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 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 unanticipated. Such risks and uncertainties include
technological advances in the medical field and the Company's ability to
successfully implement products that incorporate such advances, product
demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customers'
ordering patterns, the effect of uncertainties in markets outside the U.S.
including Europe and Asia in which the Company operates and the implications
of Year 2000 including but not limited to the cost and expense of updating
software and hardware and any potential system interruptions. The foregoing
list should not be construed as exhaustive.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
July 22, 1998. At the meeting, Yutaka Sakurada and Donna C.E.
Williamson were reelected as directors for terms ending in 2001.
In addition, the Stockholders approved the Haemonetics
Corporation 1998 Stock Option Plan for Non-Employee Directors and
approved the Haemonetics Corporation 1998 Employee Stock Purchase
plan.
The votes as to such matters were as follows:
1. Election of Directors:
For Withheld
--- --------
Yutaka Sakurada 22,444,917 79,322
Donna C.E. Williamson 22,443,528 80,711
2. Approval of 1998 Stock Option Plan for Non-Employee Directors:
For Against Abstain
--- ------- -------
15,458,691 5,638,315 1,427,233
3. Approval of 1998 Employee Stock Purchase Plan:
For Against Abstain
--- ------- -------
18,145,619 2,956,872 1,421,748
4. Election of Arthur Andersen LLP as independent public
accountants:
For Against Abstain
--- ------- -------
22,481,579 32,572 10,088
Item 5. Other Information
-----------------
In a press release, dated October 26, 1998, the Company announced
the appointment of two additional outside board members, Dr.
Harvey Klein and N. Colin Lind, bringing the outside board
membership from four members to six. The internal board
membership remains at two for a total board membership of eight.
Dr. Klein is the Chief of the Department of Transfusion Medicine
at the Warren G. Magnuson Clinical Center of the National
Institutes of Health. He is also currently Vice President of the
American Association of Blood Banks, Member of the Committee of
Revision and Chairman of the Panel for Blood and Blood Products
of the US Pharmacopoeia, and a member of the Transfusion Medicine
Subcommittee of the American Society of Hematology.
Colin Lind is managing director of Richard C. Blum & Associates,
L.P., a long term strategic investment firm based in San
Francisco which currently owns 14.9% of Haemonetics' outstanding
common stock. Mr. Lind has been a partner of Richard Blum for
twelve years and shares responsibility for approximately $1.8
billion in assets under management.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a). Exhibits
The following exhibits will be filed as part of this form 10-Q:
Exhibit 27 Financial Data Schedule
(b). Reports on Form 8-K.
none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAEMONETICS CORPORATION
Date: November 13, 1998 By: /s/ James L. Peterson
----------------- --------------------------------
James L. Peterson, President and
Chief Executive Officer
Date: November 13, 1998 By: /s/ Ronald J. Ryan, Sr.
----------------- ---------------------------------
Ronald J. Ryan, Sr. Vice President and
Chief Financial Officer, (Principal
Accounting Officer)
5
6-MOS
APR-03-1999
OCT-03-1998
37,174
0
61,223
755
67,698
207,284
172,503
91,399
342,657
66,929
51,461
0
0
294
210,220
342,657
139,783
139,783
72,049
72,049
7,129
0
2,011
15,819
5,537
10,282
(87)
0
0
10,195
.38
.38
5
6-MOS
MAR-28-1998
SEP-27-1997
6,640
0
79,082
648
65,145
184,908
208,370
96,346
366,873
68,816
49,973
0
0
293
231,108
366,873
152,005
152,005
80,183
80,183
9,585
0
1,367
20,698
7,245
13,453
(2,941)
0
0
10,512
.40
.40
