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: January 2, 1999 Commission File Number: 1-10730
------------------- -------
HAEMONETICS CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 Wood Road, Braintree, MA 02184
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
------------------
Indicate by check mark whether the registrant (1.) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) (2.) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
26,941,042 shares of Common Stock, $ .01 par value, as of
---------------------------------------------------------
January 2, 1999
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. Financial Information
Consolidated Balance Sheets - January 2, 1999 2
and March 28, 1998
Consolidated Statements of Operations - 3
Three and Nine Months Ended January 2, 1999
and December 27, 1997
Consolidated Statements of Stockholders' Equity - 4
Nine Months Ended January 2, 1999
Consolidated Statements of Cash Flows - 5
Nine Months Ended January 2, 1999 and December 27, 1997
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial 11-19
Condition and Results of Operations
PART II. Other Information 20
Signatures 21
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share data)
January 2, March 28,
ASSETS 1999 1998
-----------------------
Current assets:
Cash and cash equivalents. $ 42,253 $ 21,766
Accounts receivable, less allowance of $765 at
January 2, 1999 and $818 at March 28, 1998 65,269 58,886
Inventories 64,045 61,664
Current investment in sales-type leases, net 12,423 11,887
Deferred tax asset 20,852 21,777
Other prepaid and current assets 12,525 15,170
---------------------
Total current assets 217,367 191,150
---------------------
Property, plant and equipment 179,753 170,261
Less accumulated depreciation (96,219) (86,042)
---------------------
Net property, plant and equipment 83,534 84,219
Other assets:
Investment in sales-type leases, net (long term) 28,450 38,596
Distribution rights, net. 11,062 10,718
Other assets, net 9,927 5,204
Property,plant and equipment and other assets net of
long-term liabilities of discontinued operations 2,897 6,806
---------------------
Total other assets 52,336 61,324
---------------------
Total assets $353,237 $336,693
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 12,579 $ 17,468
Accounts payable 11,463 21,689
Accrued payroll and related costs. 8,514 7,726
Accrued income taxes 11,676 5,750
Other accrued liabilities 14,807 15,132
Current liabilities and accrued losses net of current
assets of discontinued operations 6,386 10,593
---------------------
Total current liabilities 65,425 78,358
---------------------
Deferred income taxes 14,424 9,944
Long-term debt, net of current maturities 51,642 53,586
Other long-term liabilities 0 150
Stockholders' equity:
Common stock, $.01 par value; Authorized - 80,000,000
shares; Issued 29,698,011 shares at January 2, 1999;
29,341,648 shares at March 28, 1998 297 293
Additional paid-in capital 65,407 59,142
Retained earnings 205,737 190,757
Cumulative translation adjustments (3,746) (9,588)
---------------------
Stockholders' equity before treasury stock 267,695 240,604
Less: treasury stock 2,756,969 shares at cost
January 2, 1999 and 2,756,969 shares at cost
at March 28, 1998 45,949 45,949
---------------------
Total stockholders' equity 221,746 194,655
---------------------
Total liabilities and stockholders' equity $353,237 $336,693
=====================
Supplemental disclosure of balance sheet information:
Net debt $ 21,968 $ 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)
Three Months Ended Nine Months Ended
------------------- --------------------
Jan. 2, Dec. 27, Jan. 2, Dec. 27,
1999 1997 1999 1997
-------------------------------------------
Net revenues $67,958 $ 70,479 $207,741 $222,484
Cost of goods sold 36,730 35,078 108,779 115,261
-------------------------------------------
Gross profit 31,228 35,401 98,962 107,223
Operating expenses:
Research and development 3,906 4,227 11,035 13,812
Selling, general and administrative 20,101 20,926 65,496 63,021
Non-recurring restructuring expense 0 24,500 0 24,500
-------------------------------------------
Total operating expenses 24,007 49,653 76,531 101,333
-------------------------------------------
Operating income(loss) 7,221 (14,252) 22,431 5,890
Interest expense (1,051) (1,009) (3,062) (2,376)
Interest income 1,249 933 3,404 2,958
Other income (expense), net (45) 50 420 (52)
-------------------------------------------
Income from continuing operations
before provision for income taxes 7,374 (14,278) 23,193 6,420
Provision for income taxes 2,581 (4,997) 8,118 2,248
-------------------------------------------
Earnings from continuing operations $ 4,793 $ (9,281) $ 15,075 $ 4,172
===========================================
Discontinued operations:
Loss from operations, net of income tax
benefit of $52 in 1999 and $2,629 in 1997 (8) (2,396) (95) (5,337)
-------------------------------------------
Net Income $ 4,785 $(11,677) $ 14,980 $ (1,165)
===========================================
Basic income(loss) per common share
Continuing operations $ 0.178 $ (0.350) $ 0.565 $ 0.157
Discontinued operations (0.000) (0.090) (0.004) (0.201)
Net income (loss) 0.178 $ (0.440) 0.561 $ (0.044)
Income(loss) per common share assuming dilution
Continuing operations $ 0.175 $ (0.350) $ 0.559 $ 0.156
Discontinued operations 0.000 (0.090) (0.004) $ (0.20)
Net income (loss) 0.175 (0.440) 0.556 (0.044)
Weighted average shares outstanding
Basic 26,893 26,513 26,694 26,530
Diluted 27,408 26,528 26,953 26,661
The accompanying notes are an integral part of these
consolidated financial statements.
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
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 356 4 6,265 -- -- -- 6,268
Net Income -- -- -- -- 14,980 -- 14,980 14,980
Foreign currency translation
adjustment -- -- -- -- -- 5,842 5,842 5,842
-------------------------------------------------------------------------------------------
Balance, January 2, 1999 29,698 $297 $65,407 $(45,949) $205,737 $(3,746) $221,746 $20,822
===========================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Nine Months Ended
--------------------------
January 2, December 27,
1999 1997
--------------------------
Cash Flows from Operating Activities:
Net income(loss) $ 14,980 $ (1,165)
Less net loss from discontinued operations (95) (5,337)
-----------------------
Net income from continuing operations 15,075 4,172
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non cash items:
Depreciation, amortization and other 21,407 16,120
Restructuring charge -- 24,500
Deferred tax (benefit) expense 408 (190)
Change in operating assets and liabilities:
(Increase) in accounts receivable - net (4,802) (3,079)
(Increase) in inventories (775) (12,139)
(Increase) in sales-type leases (current) (1,450) (752)
(Increase) decrease in prepaid income taxes 8,262 (4,921)
(Increase) in other assets (6,397) (6,306)
(Decrease) in accounts payable, accrued
expenses and other current liabilities (2,501) (12,096)
-----------------------
Net cash provided by operating activities, continuing operations 29,227 5,309
-----------------------
Net cash (used in) operating activities, discontinued operations (14,932) (11,490)
-----------------------
Net cash provided by (used in) operating activities 14,295 (6,181)
Cash Flows from Investing Activities:
Capital expenditures on property, plant and equipment, net of
retirements and disposals (17,290) (17,543)
Net (increase) decrease in sales-type leases (long-term) 8,614 (7,850)
-----------------------
Net cash (used in) investing activities, continuing operations (8,676) (25,393)
-----------------------
Net cash provided by (used in) investing activities,
discontinued operations 14,536 (8,973)
-----------------------
Net cash provided by (used in) investing activities 5,860 (34,366)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (154) (137)
Net increase (decrease) in short-term revolving
credit agreements (4,438) 2,691
Net increase (decrease) in long-term credit agreements (1,666) 40,240
Exercise of stock options and related tax benefit 6,269 1,843
Purchase of treasury stock 0 (5,302)
-----------------------
Net cash provided by (used in) financing activities 11 39,335
Effect of exchange rates on cash and cash equivalents 321 165
-----------------------
Net increase (decrease) in cash and cash equivalents 20,487 (1,047)
Cash and cash equivalents at beginning of period 21,766 8,272
-----------------------
Cash and cash equivalents at end of period $ 42,253 $ 7,225
=======================
Supplemental disclosures of cash flow information:
Net (decrease) in cash and cash equivalents, discontinued operations $ (396) $(20,463)
Net increase in cash and cash equivalents, continuing operations $ 20,883 $ 19,416
Increase (decrease) in net debt $(26,745) $ 43,841
Interest paid $ 3,708 $ 1,009
Income taxes paid (refunded) $ (6,478) $ 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 ($3.7) million and ($9.6) million at January 2, 1999 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.
Also, the Company enters into contracts that typically settle within 35 days
to hedge the results of exchange rate movements on certain intercompany
receivables denominated in foreign currencies. Gains and losses realized on
all of 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 January 2, 1999, the Company had forward exchange contracts, all
having maturities of less than fifteen months, to exchange foreign
currencies (major European currencies and Japanese yen) for US dollars
totaling $165.5 million. Of that balance, $52.9 million represents
contracts related to intercompany receivables that will settle within 30
days. Gross unrealized losses from hedging firm sales commitments at
January 2, 1999, based on current spot rates, were ($7.4) million, $4.0
million of which represents forward points. Deferred gains and losses are
recognized in earnings when the transactions being hedged are recognized.
Management anticipates that the deferred amounts will be offset by the
foreign exchange effect on sales of product in future periods.
At January 2, 1999, the Company had the following significant foreign
exchange contracts to hedge certain firm sales commitments denominated in
foreign currency outstanding:
Hedged (BUY) / SELL Weighted Forward US$ @ Unrealized
Currency Local Currency Contract Rate Forward Rate Gain / (Loss) Maturity
Euro Equivalent 8,213,099 $1.106 $ 9,644,551 $ (562,705) Jan-Mar 1999
Euro Equivalent 8,033,888 $1.111 $ 9,478,560 $ (551,700) Apr-Jun 1999
Euro Equivalent 7,943,508 $1.205 $ 9,415,381 $ 152,745 Jul-Sep 1999
Euro Equivalent 8,620,513 $1.213 $10,265,639 $ 189,759 Oct-Dec 1999
Japanese Yen 1,500,000,000 124.3 per US$ $13,263,973 $(1,199,559) Jan-Mar 1999
Japanese Yen 1,500,000,000 133.1 per US$ $13,426,316 $(2,155,457) Apr-Jun 1999
Japanese Yen 1,750,000,000 137.9 per US$ $15,848,935 $(3,156,300) Jul-Sep 1999
Japanese Yen 1,970,000,000 126.9 per US$ $18,042,134 $(2,514,355) Oct-Dec 1999
Japanese Yen 1,670,000,000 125.4 per US$ $15,466,014 $(2,152,200) Jan-Mar 2000
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:
Jan. 2, March 28,
1999 1998
------- ---------
(in thousands)
Raw materials $12,284 $11,532
Work-in-process 5,309 5,878
Finished goods 46,452 44,254
-------------------
$64,045 $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
------------------------------
Jan. 2, 1999 Dec. 27, 1997
------------ --------------
Basic EPS
- ---------
Net Income(loss) $ 4,785 $(11,677)
Weighted Average Shares 26,893 26,513
------------------------
Basic income(loss) per share $ .178 $ (.440)
========================
Diluted EPS
- -----------
Net Income(loss) $ 4,785 $(11,677)
Basic Weighted Average shares 26,893 26,513
Effect of Stock options 515 15
------------------------
Diluted Weighted Average shares 27,408 26,528
------------------------
Diluted income (loss) per share $ .175 $ (.440)
========================
For the nine months ended
------------------------------
Jan. 2, 1999 Dec. 27, 1997
------------------------------
Basic EPS
- ---------
Net Income(loss) $14,980 $ (1,165)
Weighted Average Shares 26,694 26,530
------------------------
Basic income(loss) per share $ 0.561 $ (0.044)
========================
Diluted EPS
- -----------
Net Income(loss) $14,980 $ (1,165)
Basic Weighted Average shares 26,694 26,530
Effect of Stock options 259 131
------------------------
Diluted Weighted Average shares 26,953 26,661
------------------------
Diluted income (loss) per share $ 0.556 $ (0.044)
========================
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 five of its BBMS operations.
For the three and nine months ended January 2, 1999, the operating
loss for BBMS was $2,035 and $7,172, 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 nine months ended
-------------------------- -------------------------
Jan 2, Dec 27, Jan 2, Dec 27,
1999 1997 1999 1997
------------------------------------------------------
Net Revenues 3,216 5,303 14,508 12,239
Gross Profit (321) 95 (8) (128)
Operating expenses:
Research and Development -- 97 -- 261
Selling, general and administrative 1,882 2,906 7,638 6,944
--------------------------------------------------
Total operating expenses 1,882 3,003 7,638 7,205
Operating loss (2,203) (2,908) (7,646) (7,333)
Other expense (13) (78) (147) (178)
Tax benefit (717) (1,045) (2,562) (2,629)
--------------------------------------------------
Net loss (1,499) (1,941) (5,231) (4,882)
Charged to Reserve:
Operating loss (net of taxes) 1,491 -- 5,136 --
--------------------------------------------------
Reflected on Statement of Operations (8) (1,941) (95) (4,882)
==================================================
Other income(expense) includes an allocation of corporate interest expense
of approximately $13,000 and $78,000 for the three months ended January 2,
1999 and December 27, 1997, respectively and $147,000 and $178,000 for the
nine months ended January 2, 1999 and December 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 January 2, 1999 and March 28, 1998 are as follows:
January 2, March 28,
1999 1998
-----------------------
(in thousands)
Current Assets $ 3,514 $ 5,167
Net property, plant and equipment 4,209 8,217
Other assets 138 39
--------------------
Total assets $ 7,861 $13,423
Current liabilities and accrued losses $ 9,900 $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
operations for continuing operations as a percentage of net revenues:
Percentage of Net Revenues Percentage Increase
Three Months Ended Three Months Ended
January 2, 1999 December 27, 1997 1999/97
- ----------------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0 % (3.6)%
Cost of goods sold 54.0 49.8 4.7
Gross Profit 46.0 50.2 (11.8)
Operating Expenses:
Research and development 5.8 6.0 (7.6)
Selling, general and administrative 29.6 29.6 (3.9)
Non-recurring restructuring expense -- 34.8 (100.0)
Total operating expenses 35.4 70.4 (51.7)
Operating income (loss) 10.6 (20.2) (150.67)
Interest expense (1.5) (1.4) 4.2
Interest income 1.8 1.3 33.9
Other income (expense) -- -- (190.0)
--------------------------------------------
Income before provision for income
taxes 10.9 (20.3) (151.7)
Provision for income taxes 3.8 (7.1) (151.7)
--------------------------------------------
Earnings from continuing operations 7.1% (13.2)% (151.6)%
============================================
- ----------------------------------------------------------------------------------------------------
Three Months Ended January 2, 1999 Compared to Three Months Ended
December 27, 1997
Net revenues in 1999 decreased 3.6% to $68.0 million from $70.5
million in 1997. With currency rates held constant, net revenues were down
1.7%. Worldwide disposable sales decreased approximately .4%. With
currency rates held constant, disposable sales increased 0.8%. The 0.8%
increase in sales was a net result of disposable growth in Europe, Japan,
the U.S. blood bank and the U.S. surgical businesses offset by decreases in
Asia and in the U.S. plasma businesses. The decrease in the U.S. plasma
business was due to 1997 shipments to a former customer which were not
repeated in 1999. Japan disposable sales increased by a 9.0% in average
weekly demand after allowing that 1997 included extra selling prior to the
holidays as compared to 1999. Sales of disposable products accounted for
approximately 92% and 89% of net revenues for 1999 and 1997, respectively.
Service revenues generated from equipment repairs performed under preventive
maintenance contracts or emergency service billings in the U.S. are included
as part of disposable revenues and accounted for approximately 0.8% and 0.7%
of the Company's net revenues for 1999 and 1997, respectively. Equipment
revenues decreased approximately 30% year over year, a 21.6% decrease at
constant currency. The 21.6% decrease was attributed to decreases in both
the world wide surgical and world wide blood bank markets and is largely the
result of a policy change toward placing equipment versus selling it under
long-term sales contracts. International sales accounted for approximately
69% of net revenues for both 1999 and 1997.
Gross profit in 1999 of $31.2 million decreased $4.2 million from
1997. As a percentage of net revenues, gross profit percent decreased by
4.2% to 46% in 1999 from 50.2% in 1997. Of the 4.2% decrease in gross
profit percent, 3.9% was due to currency. At constant currency rates, gross
profit percent decreased 0.8% or $1.1 million from 1997. The decrease in
gross profit margin was largely due to the slowdown in production levels to
accommodate the $4.2 million decrease in inventory during the third quarter
of 1999. This gross profit reflects labor cost savings generated by the
Customer Oriented Re-design for Excellence (CORE) Program.
The Company expended $3.9 million (5.8% of net revenues) on research
and development in 1999 and $4.2 million (6.0% of net revenues) in 1997. At
constant currency rates, research and development expenditures were
relatively unchanged from the third quarter last year.
Selling, general and administrative expenses decreased to $20.1
million in 1999 from $20.9 million in 1997. At constant currency rates
selling, general and administrative expenses were down $0.5 million or 2.6%
compared to a year ago.
Operating income before the 1997 $24.5 million restructure charge, as
a percentage of net revenues, decreased 3.9 % to 10.6% in 1999 from 14.5% in
1997. At constant currency rates, operating income before restructuring
charge as a percentage of net revenues, decreased 0.7 % from 1997 or $0.5
million. The $0.5 million decrease in operating income was due to the
decrease in gross profit partly offset by lower selling, general and
administrative expenses.
Interest expense of $1.1 million was unchanged from 1997. Interest
income increased $0.3 million from $0.9 million in 1997 due to growing cash
balances in the U. S. partly offset by lower interest on sales type leases.
Other income (expense) decreased $.1 million from 1997 to 1999 due to
higher net foreign exchange expense mostly offset by lower amortization
expense.
The provision for income taxes, as a percentage of pretax income,
remained at 35.0% for both 1999 and 1997. The annualized rate for the full
12 months of fiscal 1999 is expected to be approximately 35%.
Nine Months Ended January 2, 1999 Compared to Nine Months Ended
December 27, 1997
Percentage of Net Revenues Percentage Increase
Nine Months Ended Nine Months Ended
January 2, 1999 December 27, 1997 1999/97
- ----------------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% (6.6)%
Cost of goods sold 52.4 51.8 (5.6)
Gross Profit 47.6 48.2 (7.7)
Operating Expenses:
Research and development 5.3 6.2 (20.1)
Selling, general and administrative 31.5 28.3 3.9
Non-recurring restructuring expense -- 11.0 100.0
Total operating expenses 36.8 45.5 (24.5)
Operating income 10.8 2.7 280.8
Interest expense (1.5) (1.0) 28.9
Interest income 1.7 1.3 15.1
Other income 0.2 (0.1) (907.7)
--------------------------------------------
Income before provision for income
taxes 11.2 2.9 261.3
Provision for income taxes 3.9 1.0 261.1
--------------------------------------------
Earnings from continuing operations 7.3% 1.9% 261.4%
============================================
Net revenues in 1999 decreased 6.6% to $207.7 million from $222.5
million in 1997. At constant currency rates, sales decreased 2.1%. World
wide disposable sales decreased approximately .7%. At constant currency,
disposable sales were up 3.4% year over year due to gains in the three major
geographic markets (U.S., Europe and Japan), with the exception that the
U.S. plasma business was down due to 1997 shipments to a former customer
which were not repeated in 1999. Sales of disposable products accounted for
approximately 94% and 88% of net revenues for 1999 and 1997, respectively.
Service revenues generated from equipment repairs performed under preventive
maintenance contracts or emergency service billings in the U.S. are included
as part of disposable revenues and accounted for approximately .8% and .7%
of the Company's net revenues for 1999 and 1997, respectively. Equipment
revenues decreased approximately 50%. At constant currency, the decrease
was 40.1%, occurring in all three worldwide markets. The decrease in
equipment sales is largely the result of a policy change toward placing
equipment versus selling it under long-term sales contracts. In addition,
1997 revenues included $6.0 million of plasma equipment shipments to China
and equipment sales to a U.S. plasma customer that were not repeated in
1999. International sales accounted for approximately 68% and 67% of net
revenues for 1999 and 1997, respectively. The first three quarters of
fiscal 1999 included 40 weeks versus 39 in fiscal 1998.
Gross profit in the first nine months of 1999 decreased $8.3 million
from $107.2 million in 1997. As a percentage of net revenues, gross profit
percent decreased by 0.6% to 47.6% in 1999 from 48.2% in 1997. At constant
currency, gross profit as a percent of sales, increased 2.7% or $3.6
million. The improvement in gross profit at constant currency was the
result of lower product costs from cost saving initiatives undertaken during
the third quarter of last year and cost savings generated by the Customer
Oriented Re-design for Excellence (CORE) Program.
The Company expended $11.0 million in the nine months of 1999 on
research and development (5.3% of net revenues) and $13.8 million in 1997
(6.2% 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 $65.5
million in 1999 from $63.0 million in 1997 and increased as a percentage of
net revenues to 31.5% from 28.3%. At constant currency rates, selling,
general and administrative expenses increased $4.7 million or 7.7% from a
year ago. Approximately $2.6 million of the 1999 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, $1.8
million was spent on the Company's Customer Oriented Re-design for
Excellence ("CORE") program and $1.8 million of expenses were incurred as a
result of the 14th week added to the first quarter of fiscal 1999. These
increases were partially offset by cost savings realized in the delivery of
product to customers as part of the Company's CORE program.
Operating income before the 1997 $24.5 million restructure charge, as
a percentage of net revenues, decreased 2.9% to 10.8% in 1999 from 13.7% in
1997. At constant currency, operating income before restructuring charge,
as a percentage of net revenues, increased 0.2% from 1997. The improvement
in operating income at constant currency was due to the improvement in gross
profit offset by an increase in selling, general and administrative
expenses, as a percentage of net revenues.
Interest expense increased in 1999 to $3.1 million from $2.4 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 $.4 million in 1999 to $3.4 million as a result of interest
earned on increased US cash balances offset by lower interest income on
sales contracts.
Other income increased $.4 million from 1997 to 1999 due to lower
amortization expense year over year partly offset by higher net foreign
exchange expense.
The provision for income taxes, as a percentage of pretax income,
remained at 35.0% for both 1999 and 1997. The annualized rate for the full
12 months of fiscal 1999 is expected to be approximately 35%.
RESULTS OF DISCONTINUED OPERATIONS (BLOOD BANK MANAGEMENT
SERVICES BUSINESS, "BBMS")
Three Months Ended January 2, 1999 Compared to Three Months Ended
December 27, 1997
Net revenues decreased 39.4% in 1999 to $5.3 million. Gross profit
decreased to ($0.3) million in 1999 from $0.1 million in 1997 and operating
losses decreased 30.0% to $(2.0) million in 1999 from $(2.9) million in
1997. During the quarter, the Company completed the sale of two additional
blood centers, Arizona Blood Institute and Texas Blood Services.
Nine Months Ended January 2, 1999 Compared to Nine Months Ended
December 27, 1997
Net revenues increased 18.5% in 1999 to $14.5 million. Gross profit in
1999 increased to close to break even from $(0.1) million in 1997 and
operating losses decreased 2.2% to $(7.2) million in 1999. The Company has
completed the sale of Orange County Blood Services (Pacific Blood Services),
Tri-Counties Blood Bank, Kansas Blood Services, Arizona Blood Institute and
Texas Blood Services during the nine months ended January 2, 1999.
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 nine months ended January 2, 1999, the Company increased
its cash balances by $20.5 million from operating, investing and financing
activities which represents an increase of $21.5 million from the $1.0
million utilized by the Company's operating, investing and financing
activities during the nine months ended December 27, 1997. Without the
effect of exchange rates, the increase in cash balances was $21.4 million.
The $21.4 million increase was largely a result of $60.7 million net cash
provided by the Company's operating and investing activities offset by $39.3
million of less cash from the Company's financing activities.
Operating Activities:
The Company generated $29.2 million in cash from operating activities
of continuing operations in 1999 as compared to $5.3 million generated
during 1997. The $23.9 million increase year over year in operating cash
flow from continuing operations was a result of a $16.8 million increase in
net income adjusted for depreciation, amortization and other non-cash items;
a $11.3 million decrease in inventory investment; a $13.2 million increase
in prepaid income tax benefits as a result largely of a $7.7 refund received
related to last year's losses; and a $9.6 million swing in accounts payable,
accrued expenses and other current liabilities. These increased sources of
cash were offset by a decrease in net income of $24.5 million related to the
restructuring charge, an increase in account receivable investment of $1.7
million and other uses of $ 0.8 million.
Investing Activities:
The Company utilized $8.7 million in cash for investing activities
from continuing operations in 1999, a decrease of $16.7 million from 1997.
During the nine months ended January 2, 1999, the Company incurred $17.2
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 nine months ended December 27, 1997, the Company
utilized $17.5 million for capital expenditures net of retirements and
disposals, including $0.1 million net decrease in long-term demonstration
assets. Finally, the Company reduced its investment in long-term sales-type
leases by $8.6 million in 1999, compared with an increased investment of
$7.8 million in 1997.
Financing Activities:
During the nine months ended January 2, 1999 the Company's continuing
operations generated cash from operating and investing activities after
investments. The discontinued operations utilized $20 million less cash year
over year. As a result, the Company paid down a portion of debt and
increased cash balances.
Net debt decreased $26.7 million to $21.9 million in 1999.
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 January 2, 1999, the Company had working capital of $151.9 million.
This reflects an increase of $39.1 million in working capital for the nine
months ended January 2, 1999. The Company believes its sources of cash are
adequate to meet its projected needs.
Discontinued Operations:
During the nine months ended January 2, 1999, discontinued operations
utilized $0.4 million from operating and investing activities; a decrease in
cash flow utilization of $20.1 million from the $20.5 million utilized
during the nine months ended December 27, 1997. 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,
Texas Blood Services and Arizona Blood Institute during the nine months
ended 1999.
OTHER ITEMS
As reported on the Company's January 29, 1999 third quarter earnings
release, the Company ended its distributor relationship with the Bentley
Laboratories division of Baxter Healthcare Corporation effective January 1,
1999. Bentley Laboratories distributed the Company's autotransfusion
products in the U.S. open-heart market. The Company anticipates that its
gross margin in the U.S. surgical business will improve.
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 98% 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. Thirteen systems, all
commercial packages, are used company-wide for business transaction
processing and accounting. The current status is nine of these
thirteen systems are Year 2000 compliant. The Company is on schedule
to have the remaining 4 systems compliant by June 30, 1999. We have
identified 194 other business applications in use by the Company that
are less critical. Of these systems 149 are currently compliant.
Through a combination of modification, replacement and
decommissioning, Year 2000 compliance of the 45 remaining applications
is expected by June 30, 1999. The Company has completed an 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 is in the
process of testing critical components of infrastructure and
applications that we have assessed as compliant.
Suppliers
The Company is in the process of communicating with its external
vendors of goods and services to gain an understanding of their state
of Year 2000 readiness and their ability 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. They
have also been asked to complete a short questionnaire and to inform
us of any know compliance issues. The Company has received many
responses to the questionnaire and is in the process of reviewing
them. The Company has sent a detailed questionnaire to 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 the Company's 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. Many of these vendors
have been contacted and requested to complete the detailed
questionnaire on Year 2000. The Company anticipates contacting the
remaining vendors by March 31, 1999. 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 has completed an inventory of production equipment
currently used at Haemonetics. The Year 2000 readiness of this
equipment is being determined through communication with the equipment
manufacturers and testing where appropriate. Through this inventory
and assessment process the Company at this time is not aware of any
production equipment whose current or anticipated use is affected by
the Year 2000 issue. In the event that any Year 2000 issues are
identified in the future, it is the Company's intention to repair or
replace non-compliant production equipment prior to operating
difficulties, or develop alternative means of operation. Haemonetics
remains aware of the potential for imbedded logic within microchips to
cause equipment failure. The Company believes that its action plan
provides a sound 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. At this time the Company
is not aware of any facilities related equipment which is affected by
the Year 2000 issue. The Company's objective is to have this
inventory completed by March 31, 1999. 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 thorough 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 makes products in two major categories: blood
processing equipment and the single use disposables that are used in
this 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 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 would be between $3 million and $4 million. This amount
includes both IT and non-IT related expenses. Of this amount, approximately
55% has already been spent representing 30% of the total IT budget during
the spending period. Approximately 30% of the spending to date has been on
capital investments. 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 appropriate 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. 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.
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 business, financial condition, and results of
operations. 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 business, financial condition, and results of operations.
The Company's 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 Company's Year 2000 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
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
None
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: February 11, 1999 By: /s/ JAMES L. PETERSON
---------------------------
James L. Peterson,
President and Chief Executive Officer
Date: February 11, 1999 By: /s/ RONALD J. RYAN
---------------------------
Ronald J. Ryan, Sr. Vice President
and Chief Financial Officer,
(Principal Accounting Officer)
5
9-MOS
APR-03-1999
JAN-02-1999
42,253
0
66,034
765
64,045
217,367
179,753
96,219
353,237
65,425
51,642
0
0
297
221,449
353,237
207,741
207,741
108,779
108,779
11,035
0
3,062
23,193
8,118
15,075
(95)
0
0
14,980
0.56
0.56
5
9-MOS
MAR-28-1998
DEC-27-1997
7,330
0
79,333
926
60,781
187,805
200,408
92,688
359,431
73,924
50,143
0
0
293
218,770
359,431
222,484
222,484
115,261
115,261
13,812
0
2,376
6,420
2,248
4,172
(5,337)
0
0
(1,165)
(0.04)
(0.04)
