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: December 29, 2001 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
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(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.
26,482,051 shares of Common Stock, $ .01 par value, as of
---------------------------------------------------------
December 29, 2001
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. Financial Information
Unaudited Consolidated Statements of Operations -
Three and Nine Months Ended December 29, 2001 and
December 30, 2000 2
Unaudited Consolidated Balance Sheets -
December 29, 2001 and March 31, 2001 3
Unaudited Consolidated Statements of Stockholders'
Equity - Nine Months Ended December 29, 2001 4
Unaudited Consolidated Statements of Cash Flows - Nine
Months Ended December 29, 2001 and December 30, 2000 5
Notes to Unaudited Consolidated Financial Statements 6-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-28
Quantitative and Qualitative Disclosures about Market Risk 29-30
PART II. Other Information 31
Signatures 32
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except share data)
Three Months Ended Nine Months Ended
--------------------- ---------------------
Dec. 29, Dec. 30, Dec. 29, Dec. 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues $84,411 $76,238 $240,916 $217,446
Cost of goods sold 43,176 37,219 123,569 111,560
-----------------------------------------------
Gross profit 41,235 39,019 117,347 105,886
Operating expenses:
Research and development 15,146 5,205 24,948 13,639
Selling, general and administrative 23,283 22,847 67,107 64,705
In process research and development (Note 10) - - - 18,606
Other unusual charges (Note 10) - 4,614
-----------------------------------------------
Total operating expenses 38,429 28,052 92,055 101,564
-----------------------------------------------
Operating income 2,806 10,967 25,292 4,322
Interest expense (895) (859) (2,858) (2,728)
Interest income 1,002 999 3,179 3,307
Other income, net 463 959 2,191 2,609
-----------------------------------------------
Income before provision for income taxes 3,376 12,066 27,804 7,510
Provision for income taxes 944 3,103 7,784 7,440
-----------------------------------------------
Income before cumulative effect of change in
accounting principle $ 2,432 $ 8,963 $ 20,020 $ 70
===============================================
Cumulative effect of change in accounting
principle, net of tax - - 2,304 0
-----------------------------------------------
Net income $ 2,432 $ 8,963 $ 22,324 $ 70
===============================================
Basic income per common share
Income before cumulative effect of change
in accounting principle $ 0.09 $ 0.35 $ 0.76 $ 0.00
Cumulative effect of change in accounting
principle, net of tax - - 0.09 -
Net income $ 0.09 $ 0.35 $ 0.85 $ 0.00
Diluted income per common share
Income before cumulative effect of change
in accounting principle $ 0.09 $ 0.35 $ 0.73 $ 0.00
Cumulative effect of change in accounting
principle, net of tax - - 0.08 -
Net income $ 0.09 $ 0.34 $ 0.82 $ 0.00
Weighted average shares outstanding
Basic 26,445 25,259 26,237 25,213
Diluted 27,525 25,991 27,240 25,820
The accompanying notes are an integral part of these consolidated financial
statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share data)
Dec. 29, March 31,
ASSETS 2001 2001
-------- ---------
Current assets:
Cash and short term investments $ 52,900 $ 41,441
Available-for-sale investments 46,538 33,042
Accounts receivable, less allowance of $1,382
at December 29, 2001 and $1,233 at March 31, 2001 64,115 59,842
Inventories 63,289 54,007
Current investment in sales-type leases, net 4,246 5,680
Deferred tax asset 17,815 19,982
Prepaid and other current assets 12,729 5,170
---------------------
Total current assets 261,632 219,164
---------------------
Property, plant and equipment 212,945 197,071
Less accumulated depreciation 129,245 113,820
---------------------
Net property, plant and equipment 83,700 83,251
Other assets:
Investment in sales-type leases, net 2,782 5,391
Other intangibles, less accumulated amortization of
$1,535 at December 29, 2001 and $599 at March 31, 2001 18,377 19,107
Goodwill, less accumulated amortization of $8,248 at
December 29, 2001 and $7,827 at March 31, 2001 12,063 14,426
Deferred tax asset 8,489 1,737
Other long-term assets 1,957 2,238
---------------------
Total other assets 43,668 42,899
---------------------
Total assets $389,000 $345,314
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt 34,220 22,438
Accounts payable 12,054 13,350
Accrued payroll and related costs 11,693 10,072
Accrued income taxes 14,888 14,791
Other accrued liabilities 16,144 18,796
---------------------
Total current liabilities 88,999 79,447
---------------------
Long-term debt, net of current maturities 41,137 47,281
Other long-term liabilities 2,998 3,070
Stockholders' equity:
Common stock, $.01 par value; Authorized - 80,000,000
shares; Issued 31,399,194 shares at December 29, 2001;
30,721,723 shares at March 31, 2001 314 307
Additional paid-in capital 103,077 87,958
Retained earnings 256,781 234,325
Other comprehensive loss (15,271) (17,618)
---------------------
Stockholders' equity before treasury stock 344,901 304,972
Less: treasury stock 4,917,143 shares at cost at
December 29, 2001 and 4,940,390 shares at cost at
March 31, 2001 89,035 89,456
---------------------
Total stockholders' equity 255,866 215,516
---------------------
Total liabilities and stockholders' equity $389,000 $345,314
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited- in thousands)
Common Stock Additional Other Total
------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive
Shares $ Capital Stock Earnings Income(loss) Equity Income (loss)
------ - ---------- -------- -------- ------------- ------------- -------------
Balance, March 31, 2001 30,722 $307 $ 87,958 $(89,456) $234,325 $(17,618) $215,516
Employee stock purchase
plan --- --- --- 421 132 --- 553
Exercise of stock options
and related tax benefit 678 7 15,119 --- --- --- 15,126
Net income --- --- --- --- 22,324 --- 22,324 $22,324
Foreign currency
translation adjustment --- --- --- --- --- (821) (821) (821)
Unrealized gain on
derivatives --- --- --- --- --- 3,168 3,168 3,168
-------
Comprehensive income --- --- --- --- --- --- --- $24,671
----------------------------------------------------------------------------------------------
Balance, December 29, 2001 31,400 $314 $103,077 $(89,035) $256,781 $(15,271) $255,866
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited- in thousands)
Nine Months Ended
---------------------
Dec. 29, Dec. 30,
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net income $ 22,324 $ 70
Adjustments to reconcile net income to
net cash provided by operating activities:
Non cash items:
Cumulative effect of change in accounting principle,
net of tax (2,304) ---
Depreciation and amortization 19,226 18,006
Deferred tax expense (4,503) (161)
In process research and development (Note 10) --- 18,606
Equity in losses of investment (Note 10) --- 1,353
Other unusual non-cash charges (Note 10) --- 1,282
Realized gain from exchange rate fluctuations (360) ---
Change in operating assets and liabilities:
Increase in accounts receivable - net (5,526) (1,821)
(Increase) decrease in inventories (13,348) 1,662
Decrease in sales-type leases (current) 1,421 1,681
Increase in prepaid income taxes (1,201) (1,224)
Decrease in other assets 1,329 212
Decrease in accounts payable, accrued
expenses and other current liabilities (1,936) (5,496)
---------------------
Net cash provided by operating activities 15,122 34,170
Cash Flows from Investing Activities:
Purchases of available-for-sale investments, net of maturities (71,274) (40,847)
Gross proceeds from sale of available-for-sale investments 57,779 43,699
Capital expenditures on property, plant and equipment, net of
retirements and disposals (15,515) (9,620)
Acquisition of Transfusion Technologies Corporation, net
of cash acquired --- (26,572)
Net decrease in sales-type leases (long-term) 2,606 4,108
---------------------
Net cash used in investing activities (26,404) (29,232)
---------------------
Cash Flows from Financing Activities:
(Payments) proceeds on long-term real estate mortgage (174) 9,652
Net increase (decrease) in short-term revolving
credit agreements 12,857 (14,138)
Net decrease in long-term credit agreements (5,706) (261)
Employee stock purchase plan purchases 553 434
Exercise of stock options and related tax benefit 15,126 4,986
Purchase of treasury stock --- (4,729)
---------------------
Net cash provided by (used in) financing activities 22,656 (4,056)
Effect of exchange rates on cash and cash equivalents 85 (145)
---------------------
Net increase in cash and cash equivalents 11,459 737
Cash and cash equivalents at beginning of period 41,441 25,911
---------------------
Cash and cash equivalents at end of period $ 52,900 $ 26,648
=====================
Non-cash investing and financing activities:
Transfers from inventory to fixed assets for Haemonetics
placement equipment $ 3,519 $ 5,348
Supplemental disclosures of cash flow information:
Interest paid $ 3,481 $ 3,206
Income taxes paid $ 7,059 $ 5,092
The accompanying notes are an integral part of these consolidated financial
statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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. Certain reclassifications were made to prior year balances to
conform to the presentation of the consolidated financial statements for
the nine months ended December 29, 2001. The accompanying unaudited
consolidated financial statements and notes should be read in conjunction
with the Company's audited annual consolidated financial statements.
2. FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to the last day
of March. Both fiscal year 2002 and 2001 include 52 weeks with the third
quarter of each fiscal year including 13 weeks.
3. ACCOUNTING FOR SHIPPING AND HANDLING COSTS
In the fourth quarter of fiscal year 2001, the Company adopted
Emerging Issues Task Force No. 00-10, ("EITF 00-10",) "Accounting for
Shipping and Handling Fees and Costs." The EITF concluded that amounts
billed to a customer in a sale transaction related to shipping and handling
should be classified as revenue. Prior to implementing EITF 00-10,
shipping and handling costs billed to a customer were netted against
shipping and handling costs recorded in cost of goods sold and selling,
general and administrative expenses. The third quarter of fiscal year 2001
has been adjusted to comply with this change in classification of freight
revenue.
The EITF consensus also requires an entity to disclose the amount of
shipping and handling costs and the line item on the income statement that
includes such costs if the costs are not in cost of goods sold and are
significant. Shipping and handling costs are included in costs of goods
sold with the exception of $1.1 million and $1.0 million for three months
ended December 29, 2001 and December 30, 2000 and $3.3 million and $2.9
million for the nine months ended December 29, 2001 and December 30, 2001,
respectively that are included in selling, general and administrative
expenses.
4. NEW PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement applies to goodwill and intangible
assets acquired after June 30, 2001, as well as goodwill and intangible
assets previously acquired. Under this statement goodwill as well as
certain other intangible assets, determined to have an infinite life, will
no longer be amortized. Instead these assets will be reviewed for
impairment on a periodic basis. The Company elected early adoption of SFAS
No. 142 during the first fiscal quarter ended June 30, 2001. The goodwill
associated with past acquisitions is no longer subject to amortization over
its estimated useful life. Such goodwill is subject to an annual
assessment of impairment by applying a fair-value based test. See Notes 5
and 6 for additional disclosure information required by SFAS No. 142.
In accordance with SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133," (collectively, SFAS No. 133, as amended) effective April 1, 2001.
These standards were adopted as of April 1, 2001 as a change in accounting
principle and cannot be applied retroactively to financial statements of
prior periods.
SFAS No. 133, as amended, 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.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, to the extent effective, and requires that the Company formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133, as amended, in part, allows
special hedge accounting for fair value and cash flow hedges. The
statement provides that the gain or loss on a derivative instrument
designated and qualifying as a fair value hedging instrument, as well as
the offsetting changes in the fair value of the hedged item attributable to
the hedged risk, be recognized currently in earnings in the same accounting
period. SFAS No. 133, as amended, provides that the effective portion of
the gain or loss on a derivative instrument designated and qualifying as a
cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same period
or periods during which the hedged forecasted transaction affects earnings.
The ineffective portion of a derivative's change in fair value is
recognized currently through earnings regardless of whether the instrument
is designated as a hedge.
The Company enters into forward exchange contracts to hedge the
anticipated cash flows from forecasted foreign currency denominated
revenues. The purpose of the Company's foreign hedging activities is to
minimize, for a period of time, the unforeseen impact on the Company's
results of operations of fluctuations in foreign exchange rates. The
Company also enters into forward contracts that settle within 35 days to
hedge certain inter-company receivables denominated in foreign currencies.
These derivative financial instruments are not used for trading purposes.
The cash flows related to the gains and losses on these foreign currency
hedges are classified in the consolidated statements of cash flows as part
of cash flows from operating activities.
At December 29, 2001, the Company had 29 forward contracts
outstanding, all maturing in less than twelve months, to exchange Euro
equivalent currencies and the Japanese yen primarily for U.S. dollars
totaling $106.3 million. Of these contracts, seven, totaling $23.5
million, represented contracts with zero fair value relating to inter-
company receivables established at quarter-end, that settle within 35 days
after quarter-end. The Company has designated the remainder of these
contracts as cash flow hedges intended to lock-in the expected cash flows
of forecasted foreign currency denominated revenues at the available spot
rate. The fair value of the forward contracts associated with changes in
points on forward contracts is excluded from the Company's assessment of
hedge effectiveness. At adoption, April 1, 2001, the Company recorded the
fair value of these contracts of $9.2 million as an asset on the balance
sheet. At adoption, the change in the fair value of the contracts
associated with changes in the spot rate as of April 1, 2001 of $4.6
million was recorded in other comprehensive income ($6.4 million less taxes
of $1.8 million). At adoption, the change in the fair value of the points
associated with forward contracts, which are excluded from the Company's
assessment of hedge effectiveness, totaled $2.3 million ($3.2 million less
taxes of $0.9 million) as of April 1, 2001. This amount was recorded as a
cumulative effect of a change in accounting principle.
At December 29, 2001, the fair value of the forward contracts was
$5.9 million. Of this amount, $3.2 million was recorded in other
comprehensive income, ($5.0 million less taxes of $1.8 million). For the
nine months ended December 29, 2001, the change in the fair value
attributable to points on forward contracts totaled approximately $2.3
million. This balance was excluded from the assessment of hedge
effectiveness and was recorded as part of other income, net for the nine
months ended December 29, 2001 in the Company's unaudited consolidated
statement of operations.
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
A summary of the accounting discussed above is as follows (in thousands):
Cumulative
Effect of Change
Other in Accounting
(Income)/Expense Asset-Forward Comprehensive Other (Income) Principle, net
Cash Flow Hedges - Debit (Credit) Contracts Income, net of tax Expense, net of tax
------------- ------------------ -------------- ----------------
At adoption, April 1, 2001,
of SFAS No. 133, net of tax $ 9,200 $(4,608) -- $(2,304)
For nine months ended
December 29, 2001 $(3,329) $ 1,440 $(2,328) --
--------------------------------------------------------------------
Balance $ 5,871 $(3,168)
Prior to the adoption of SFAS No. 133 as amended, the Company
recorded points associated with forward contracts as other income when the
transactions being hedged was recognized. Under SFAS No. 133 as amended,
these points are recorded on a fair value basis over the life of the
contracts. For the nine months ended December 29, 2001, income from points
on forward contracts was $5.5 million or $1.6 million higher than if
recorded under the provisions of SFAS No. 52, ("Foreign Currency
Translation.")
5. ACQUIRED OTHER INTANGIBLE ASSETS
As of December 29, 2001
---------------------------------
Gross Carrying Accumulated
Amount Amortization
(in thousands) (in thousands)
-------------- --------------
Asset Class:
Patents $ 6,494 $ 528
Unpatented technology 7,418 607
Customer contracts and related relationships 6,000 400
--------------------------
Total $19,912 $1,535
Aggregate amortization expense for amortized other intangible assets
for the three months and nine months ended December 29, 2001 is $318,000
and $936,000, respectively. Additionally, future amortization expense on
other intangible assets for each of the succeeding five fiscal years
approximates $1.7 million.
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
6. GOODWILL
The changes in the carrying amount for the nine months ended December
29, 2001 are as follows (in thousands):
Carrying amount as of March 31, 2001 $14,426
Adjustment due to a change in the valuation of
net operating losses acquired in September,
2000 as part of the Transfusion Technologies
acquisition. ($2,821 gross less $84 in
accumulated amortization.) (2,737)
Adjustment due to a change in the valuation of
the liabilities associated with the January,
2001 acquisition of the Alpha Therapeutic
Corporation plasma collection bottle plant. 878
Effect of change in rates used for translation (504)
-------
Carrying amount as of December 29, 2001 $12,063
=======
The proforma effect on prior year earnings of excluding amortization
expense, net of tax, is as follows (in thousands
except per share data):
For the three months For the nine months
ended ended
December 30, 2000 December 30, 2000
-------------------- -------------------
Reported net income $8,963 $ 70
Add: goodwill amortization 210 586
------------------------------
Adjusted net income $9,173 $ 656
==============================
Basic income per common share:
- ------------------------------
Reported net income $ 0.35 $0.00
Goodwill amortization 0.01 0.02
------------------------------
Adjusted net income $ 0.36 $0.02
==============================
Income per common share assuming full dilution:
- -----------------------------------------------
Reported net income $ 0.34 $0.00
Goodwill amortization 0.01 0.02
------------------------------
Adjusted net income $ 0.35 $0.02
==============================
With the adoption of SFAS No. 142, there were no changes to amortization
expense on acquired other intangible assets.
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
7. INVENTORIES
Inventories are stated at the lower of cost or market and include the
cost of material, labor and manufacturing overhead. Cost is determined on
the first-in, first-out method.
Inventories consist of the following:
December 29, 2001 March 31, 2001
----------------- --------------
(in thousands)
Raw materials $16,954 $16,015
Work-in-process 4,741 4,237
Finished goods 41,594 33,755
---------------------------
$63,289 $54,007
===========================
8. NET INCOME PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations, as
required by SFAS No. 128, "Earnings Per Share." Basic EPS is computed by
dividing reported earnings available to stockholders by weighted average
shares outstanding. Diluted EPS includes the effect of potential dilutive
common shares.
For the three months ended
---------------------------------------
December 29, 2001 December 30, 2000
----------------- -----------------
Basic EPS
Net income $ 2,432 $ 8,963
Weighted average shares 26,445 25,259
-----------------------------
Basic income per share $ 0.09 $ 0.35
-----------------------------
Diluted EPS
Net income $ 2,342 $ 8,963
Basic weighted average shares 26,445 25,259
Effect of stock options 1,080 732
-----------------------------
Diluted weighted average shares 27,525 25,991
-----------------------------
Diluted income per share $ 0.09 $ 0.34
-----------------------------
For the nine months ended
---------------------------------------
December 29, 2001 December 30, 2000
----------------- -----------------
Basic EPS
Net Income $22,324 $ 70
Weighted average shares 26,237 25,213
-----------------------------
Basic income per share $ 0.85 $ 0.00
-----------------------------
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Diluted EPS
Net income $22,324 $ 70
Basic weighted average shares 26,237 25,213
Effect of stock options 1,003 607
-----------------------------
Diluted weighted average shares 27,240 25,820
-----------------------------
Diluted income per share $ 0.82 $ 0.00
-----------------------------
9. SEGMENT INFORMATION
Segment Definition Criteria
The Company manages its business on the basis of one operating segment:
the design, manufacture and marketing of automated blood processing
systems. Haemonetics chief operating decision-maker uses consolidated
results to make operating and strategic decisions. Manufacturing
processes, as well as the regulatory environment in which the Company
operates, are largely the same for all product lines.
Product and Service Segmentation
The Company's principal product offerings include blood bank, red
cell, surgical and plasma collection products.
The blood bank products include machines and single use disposables
and solutions that perform "apheresis," the separation of whole blood into
its components and subsequent collection of certain components, including
platelets and plasma as well as the washing of red blood cells for certain
applications. The main devices used for these blood component therapies is
the MCS(R)+, mobile collection system and the Automated Cell Processing
("ACP") 215 system.
Red cell products include machines and single use disposables and
solutions that perform apheresis for the collection of red blood cells.
Devices used for the collection of red blood cells are the Red Cell 8150
and MCS(R) 9000.
Surgical products include machines and single use disposables that
perform intraoperative autologous transfusion ("IAT") or surgical blood
salvage, as it is more commonly known, in orthopedic and cardiovascular
surgical applications. Surgical blood salvage is a procedure whereby shed
blood is collected, cleansed and returned back to a patient. The devices
used in the surgical area are the OrthoPat(R) System, and a full line of
Cell Saver(R) autologous blood recovery systems.
Plasma collection products are machines, disposables and solutions
that perform apheresis for the separation of whole blood components and
subsequent collection of plasma. The device used in automated plasma
collection is the PCS(R)2.
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Three months ended (in thousands)
December 29, 2001 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers 30,225 2,652 18,367 29,425 3,742 84,411
December 30, 2000
-----------------
Revenues from external customers 29,019 2,085 17,621 23,445 4,068 76,238
Nine months ended (in thousands)
December 29, 2001 Blood Bank Red Cells Surgical Plasma Other Total
----------------- ---------- --------- -------- ------ ----- -----
Revenues from external customers 84,724 7,619 52,529 85,425 10,619 240,916
December 30, 2000
-----------------
Revenues from external customers 83,944 5,692 49,227 65,885 12,698 217,446
10. ACQUISITION
Transfusion Technologies
On September 18, 2000, the Company completed the acquisition of
Transfusion Technologies Corporation, a Delaware Corporation
("Transfusion") pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") dated September 4, 2000 among the Company, Transfusion,
Transfusion Merger Co., the holders of a majority of outstanding shares of
Preferred and Common Stock of Transfusion and certain principals of
Transfusion. The acquisition was effected in the form of a merger (the
"Merger") of Transfusion Merger Co., a wholly owned subsidiary of the
Company, with and into Transfusion. Transfusion was the surviving
corporation in the merger.
Transfusion Technologies designs, develops and markets systems for
the processing of human blood for transfusion to patients. Its systems are
based on centrifuge technology called the Dynamic Disk TM and consist of
sterile, single-use disposable sets and computer controlled
electromechanical devices that control the blood processing procedure. The
systems have applications in both autotransfusion and blood component
collection technologies.
The aggregate purchase price, before transaction costs and cash
acquired, of approximately $50.1 million was comprised of $36.5 million to
Transfusion's common and preferred stockholders, and warrant and option
holders, and $13.6 million, representing the economic value of the
Company's 19.8% preferred stock investment in Transfusion made in November
1999. The cash required to purchase the remaining 80.2% interest in
Transfusion, was $26.6 million, net of cash acquired.
The Transfusion merger was accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying
Consolidated Statement of Operations includes Transfusion Technologies'
results of operations commencing on the date of acquisition. The purchase
price was allocated to the net assets acquired based on the Company's
estimates of fair value at the acquisition date. The fair market value of
liabilities included in the net assets purchased was $6.3 million. The
excess of the purchase price over the fair market value of the net assets
acquired was recorded as goodwill in the amount of $2.8 million.
12
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
The allocation of the purchase price over the fair market value of
the assets acquired is as follows:
Consideration Paid for 80.2% $45,046
Plus other estimated transaction costs 1,607(i)
Total estimated purchase price 46,653
Less: estimated fair value of Transfusion'
identifiable net assets on September 15, 2000 43,832
Total estimated goodwill due to acquisition $ 2,821
Gross adjustment due to a change in the
valuation of acquired net operating losses
associated with the acquisition of Transfusion
Technologies recorded in September 2000 (2,821)
-------
Balance as of December 29, 2001 $ ---
(i) Transaction costs primarily include professional fees, costs to close
down the Transfusion Technologies' facility and severance costs.
In-Process Research and Development
Included in the purchase price allocation for the acquisition of
Transfusion Technologies was an aggregate amount of purchased in-process
research and development ("IPR&D") of $21.5 million, $2.9 million of which
is reflected in the restatement of the third quarter of fiscal year 2000
relative to Haemonetics' original 19.8% investment and $18.6 million of
which is reflected in the second quarter of fiscal year 2001. The values
represent purchased in-process technology that had not yet reached
technical feasibility and had no alternative future use. Accordingly, the
amounts were immediately expensed in the consolidated statement of
operations.
An independent valuation was performed to assess and allocate a value
to the purchased IPR&D. The value represents the estimated fair market
value based on risk-adjusted future cash flows generated by the products
employing the in-process projects over a ten-year period. Estimated future
after-tax cash flows for each product were based on Transfusion
Technologies' and Haemonetics' estimates of revenue, operating expenses,
income taxes, and charges for the use of contributory assets.
Additionally, these cash flows were adjusted to compensate for the
existence of any core technology and development efforts that were to be
completed post-acquisition.
Revenues were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles, and the
estimated life of each product's underlying technology. Estimated
operating expenses include cost of goods sold, selling, general and
administrative, and research and development ("R&D") expenses. The
estimated R&D expenses include only those costs needed to maintain the
products once they have been introduced into the market. Operating expense
estimates were consistent with expense levels for similar products.
The discount rates used to present-value the projected cash flows
were based on a weighted average cost of capital relative to Transfusion
Technologies and its industry adjusted for the product-specific risk
associated with the purchased IPR&D projects. Product-specific risk
includes such factors as: the stage of completion of each project, the
complexity of the development work completed to date, the likelihood of
achieving technological feasibility, and market acceptance.
The forecast data employed in the valuation were based upon
projections created by Transfusion Technologies' management and Haemonetics
management's estimate of the future performance of the business. The
inputs used in valuing the purchased IPR&D were based on assumptions that
management believes to be reasonable but which are inherently uncertain and
unpredictable. These assumptions may be incomplete or inaccurate, and no
assurance can be given that unanticipated events or circumstances will not
occur. Accordingly, actual results may vary from the
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
forecasted results. While management believes that all of the development
projects will be successfully completed, failure of any of these projects
to achieve technological feasibility, and/or any variance from forecasted
results, may result in a material adverse effect on Haemonetics' financial
condition and results of operations.
A brief description of the IPR&D projects related to the acquisition
of Transfusion Technologies, including their estimated stage of completion
and associated discount rates, is outlined below.
Chairside Separator ("CSS"). The CSS is a portable, automated device
used for the donor-side collection and processing of a single unit of whole
blood into a unit of red cell concentrate and plasma. The system is
designed for use in a blood center, hospital, or mobile blood drive
location and can be powered either through a standard AC outlet or by DC
battery packs. Haemonetics estimates that the project was 95% completed at
the time of acquisition and product sales would commence by the fourth
quarter of 2002. The IPR&D value assigned to the CSS was $17.6 million. A
discount rate of 33% was employed in the analysis.
Red Cell Collector ("RCC"). The RCC is a portable, automated device
used for the collection and processing of two units of red blood cells from
donors. The system collects and automatically anticoagulates the whole
blood while separating it into red blood cells and plasma. The plasma and
500ml of saline is then re-infused back to the donor. The system is
designed for use in a blood center, hospital, or mobile blood drive
location and can be powered either through a standard AC outlet of by DC
battery packs. Haemonetics estimates that the project was 65% completed at
the time of acquisition and product sales would commence by the second
quarter 2003. The IPR&D value assigned to the RCC was $3.9 million. A
discount rate of 33% was employed in the analysis.
The following unaudited pro forma summary combines the consolidated
results of operations of Haemonetics Corporation and Transfusion
Technologies as if the acquisition had occurred as of the beginning of
fiscal year 2001 after giving effect to certain adjustments including
adjustments to reflect reductions in depreciation expense, increases in
intangible and goodwill amortization expense and lost interest income.
This pro forma summary is not necessarily indicative of the results of
operations that would have occurred if Haemonetics and Transfusion
Technologies had been combined during such periods. Moreover, the pro
forma summary is not intended to be indicative of the results of operations
to be attained in the future.
14
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--continued
Nine Months Ended
December 30, 2000
---------------------
(in thousands, except
per share amounts)
Net revenues $217,538
Operating income 17,359
Income from continuing operations 14,514
Basic and diluted income per common share
for continuing operations:
Basic $ 0.576
Diluted $ 0.562
Weighted average number of common shares
outstanding
Basic 25,213
Diluted 25,820
Other Unusual Charges
Unusual charges expensed as a result of the acquisition of
Transfusion Technologies amounted to $4.6 million for the nine months ended
December 30, 2000. Included in the unusual charges were $2.8 million in
bonuses paid to key Transfusion executives hired by Haemonetics and
severance to Haemonetics employees laid off due to overlaps created by the
merger, a $0.5 million write-off of an investment in a technology which the
Company decided not to pursue in lieu of the technologies acquired in the
merger, and the adjustment required to modify the 19.8% investment of
Transfusion by Haemonetics in November of fiscal year 2000 from the cost
method to the equity method of accounting as required by generally accepted
accounting principles. To effect this change, the historic cost of the
19.8% investment made by Haemonetics' was written down by its 19.8% share
of the monthly losses incurred by Transfusion Technologies from November of
fiscal year 2000 through the date of acquisition of the remaining 80.2%.
For fiscal year 2001, the charge to the statement of operations related to
this equity adjustment was $1.3 million for the nine months ended December
30, 2000. In addition, the Company restated its investment in Transfusion
on the balance sheet for losses incurred through April 1, 2000. Retained
earnings at April 1, 2000 was also reduced by $3.6 million, $0.7 million of
which related to the cost to equity method of accounting adjustment and
$2.9 million of which related to IPR&D attributable to Haemonetics' initial
investment.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended December 29, 2001 Compared to Three Months Ended
December 30, 2000
The table outlines the components of the consolidated statements of
income from operations as a percentage of net revenues:
Percentage of Net Revenue Percentage
------------------------------- Increase/(Decrease)
Three Months Ended (in actual dollars)
Dec. 29, 2001 Dec. 30, 2000 2001/2000
------------- ------------- -------------------
Net revenues 100.0% 100.0% 10.7%
Cost of goods sold 51.1 48.8 16.0
--------------------------------------------
Gross Profit 48.9 51.2 5.7
Operating Expenses:
Research and development 17.9 6.8 --%
Selling, general and administrative 27.6 30.0 1.9
--------------------------------------------
Total operating expenses 45.5 36.8 37.0
--------------------------------------------
Operating income 3.3 14.4 (74.4)
Interest expense (1.1) (1.1) 4.2
Interest income 1.2 1.3 0.3
Other income, net 0.6 1.2 (51.7)
--------------------------------------------
Income before provision for income taxes 4.0 15.8 (72.0)
Provision for income taxes 1.1 4.0 (69.6)
--------------------------------------------
Net income 2.9% 11.8% (72.9)%
============================================
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By geography: 2001 2000 as reported currency
- ------------- ---- ---- -------------- -----------
United States $32,261 $24,770 30.2% 30.2%
International 52,150 51,468 1.3 11.7
--------------------------------------------------
Net revenues $84,411 $76,238 10.7% 18.0%
16
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By product type: 2001 2000 as reported currency
- ---------------- ---- ---- -------------- -----------
Disposables $75,628 $68,936 9.7% 17.0%
Misc. & service 3,744 4,069 (8.0%) 3.0%
Equipment 5,039 3,233 55.9% 54.8%
--------------------------------------------------
Net revenues $84,411 $76,238 10.7% 18.0%
Percent Increase/(Decrease)
------------------------------
Disposable revenue Actual dollars At constant
By product line: 2001 2000 as reported currency
- ------------------ ---- ---- -------------- -----------
Surgical $16,779 $16,473 1.9% 8.3%
Bloodbank 27,640 27,384 0.9 9.9
Red cells 2,548 2,044 24.7 35.6
Plasma 28,661 23,035 24.4 29.7
--------------------------------------------------
Disposable revenues $75,628 $68,936 9.7% 17.0%
Net Revenues
Net revenues in 2001 increased 10.7% to $84.4 million from $76.2
million in 2000. With currency rates held constant, net revenues increased
18.0% from 2000 to 2001.
Disposable sales increased 9.7% year over year at actual rates. With
currency rates held constant, disposable sales increased 17.0%. Year over
year constant currency disposable sales growth was a result of disposable
growth in worldwide Surgical (up 8.3%), worldwide Bloodbank (up 9.9%),
worldwide Red Cells (up 35.6%), and worldwide Plasma (up 29.7%). The
constant currency growth in the worldwide Surgical disposable sales is
mainly attributed to volume increases of existing products in the Japanese
and European markets and the success of the Company's recently launched
OrthoPAT(R) products in the U.S. orthopedic market. Worldwide, the
OrthoPAT(R) accounted for 6.3% or 75% of the constant currency growth in
surgical disposable sales. Worldwide Bloodbank disposable sales increased
as compared to 2000 as a result of volume increases in platelet disposable
sales in Japan and volume increases in the U.S. market resulting from the
rollout of the Automated Cell Processing ("ACP") 215 system. The growth in
worldwide Red cell sales is attributed to volume increases in the U.S.
market and to favorable mix influences in the European distributor market.
The growth of Red cells was unfavorably impacted by the events of September
11, 2001 and by the recently announced delay in the rollout of the double
red cell technology by the American Red Cross ("ARC"). The ARC is awaiting
approval from the Food and Drug Administration on software and standard
operating procedure upgrades necessary to expand its red cell program
beyond its four current pilot sites. The growth in worldwide Plasma
disposables sales is attributed to volume increases of products sold in the
U.S. due to the continued upturn in plasma collections as demand for source
plasma outpaces supply. Of the 29.7% constant currency Plasma growth,
approximately 11.0% of it was due to sales of bottles resulting from the
17
Company's acquisition of the plasma container business in the fourth
quarter of last year and from the sales of Haemonetics brand anticoagulant
solution introduced to the Company's Plasma product line last year.
At actual rates and at constant currency, sales of disposable
products, excluding service and other miscellaneous revenue, accounted for
89.6% and approximately 90.4% of net revenues for 2001 and 2000,
respectively.
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues accounted for 4.5% of the Company's net revenues, at
actual rates and constant currency for 2001. Service revenue generated
from equipment repairs performed under preventive maintenance contracts or
emergency service billings and miscellaneous revenues accounted for 5.4% of
the Company's net revenues, at actual rates and 5.2% at constant currency
for 2000.
Equipment revenues increased 55.9% from $3.2 million in 2000 at
actual rates and increased 54.8% or $1.8 million year over year with
currency rates held constant. The 54.8% increase is attributable to sales
of surgical machines and the new ACP 215 system domestically.
At actual rates, international sales accounted for 61.8% and 67.5% of
net revenues for 2001 and 2000, respectively. At constant currency,
international sales accounted for 62.5% and 66.0% of net revenues for 2001
and 2000, respectively. As in the U.S., sales outside the U.S. are
susceptible to risks and uncertainties from regulatory changes, the
Company's ability to forecast product demand and market acceptance of the
Company's products, changes in economic conditions, the impact of
competitive products and pricing, changes in health care policy and the
events of September 11, 2001 and their aftermath.
Gross profit
Gross profit of $41.2 million for the three months ended December 29,
2001 increased $2.2 million or 5.7% from $39.0 million for the three months
ended December 30, 2000. At constant currency, gross profit as a percent
of sales increased by 0.8% and increased in dollars by $7.0 million or
19.9% from 2000 to 2001. The $7.0 million constant currency gross profit
increase from 2000 was primarily a result of higher sales, efficiency gains
due to higher manufacturing volumes, and cost reductions.
In 1998, the Company initiated the Company's Customer Oriented
Redesign for Excellence ("CORE") Program to increase operational
effectiveness and improve all aspects of customer service. The CORE
Program is based on Total Quality of Management ("TQM") principles, and the
Program aims to increase the efficiency, and the quality of processes and
products, and to improve the quality of management at Haemonetics. For the
three months ending December 29, 2001, the CORE program has generated
approximately $1.8 million of cost savings benefiting the Company's gross
profit from initiatives to lower product costs through automation.
Expenses
The Company expended $15.1 million (17.9% of net revenues) on
research and development in 2001 and $5.2 million (6.8% of net revenues) in
2000. The increase in expenditures for research and development was
primarily due to a $10.0 million payment made to acquire rights to a
technology currently under development. Excluding this expenditure and at
constant currency rates, research and development as a percent of sales
decreased by 0.8% and increased in dollars by $0.2 million from 2000 to
2001. The increase in research and development is a result of the
Company's objective to reinvest available funds into new product
development.
Selling, general and administrative expenses increased $0.4 million
from $22.8 million in 2000 to approximately $23.3 million in 2001. At
constant currency, selling, general and administrative expenses increased
$2.0 million from 2000 yet decreased 2.1% as a percent of sales from 2000
to 2001. Higher sales and increased spending behind the Company's new
product sales and marketing activities contributed to the increase in
selling, general and administrative dollars spent and to the decrease as a
percentage of sales. The CORE Program is not expected to have
18
a notable impact in savings related to selling, general and administrative
expenses during the current year as most savings are expected in cost of
goods sold.
Operating Income
Operating income, as a percentage of net revenues, decreased to 3.3%
from 14.4% in 2000. At constant currency, operating income decreased $5.3
million and decreased 7.8 percentage points as a percent of sales from
11.4% in 2000. The $5.3 million decrease in operating income resulted
from the $10.0 million payment in the current year to acquire the rights to
technology currently under development, increases in selling, general and
administrative expenses year over year, offset by $7.0 million of constant
currency improvement in gross profit in 2001 as compared to 2000.
Other Income, Net
Interest expense in 2001 was relatively flat as compared to 2000.
Because 92% of the Company's long-term debt is at fixed rates, the Company
has not benefited from lower interest rates in the marketplace. Interest
income was also relatively unchanged year over year as lower interest rates
have offset the benefit from higher cash balances under investment. Other
income net decreased $0.5 million due to a decline in income earned from
points on forward contracts, which was offset by the reduction of
amortization expense as a result of the Company's adoption of Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and
Other Intangible Assets," effective April 1, 2001 which required that the
Company cease amortization of goodwill.
Taxes
The provision for income taxes, as a percentage of pretax income, was
28.0% for the three months ended December 29, 2001 and 25.7% for the three
months ended December 30, 2000. The 25.7% rate in the third quarter of
last year reflects a year to date adjustment decreasing the Company's year
to date tax provision from 28% to 27%.
19
Nine Months Ended December 29, 2001 Compared to Nine Months Ended December
30, 2000
Percentage of Net Revenues Percentage
Nine Months Ended Increase/(Decrease)
------------------------------- (in actual dollars)
Dec. 29, 2001 Dec. 30, 2000 2001/2000
------------- ------------- -------------------
Net revenues 100.0% 100.0% 10.8%
Cost of goods sold 51.3 51.3 10.8
Gross Profit 48.7 48.7 10.8
Operating Expenses:
Research and development 10.4 6.3 82.9
Selling, general and administrative 27.9 29.7 3.7
In process research and development -- 8.6 (100.0)
Other unusual charges -- 2.1 (100.0)
---------------------------------------------
Total operating expenses 38.3 46.7 (9.4)
---------------------------------------------
Operating income 10.4 2.0 --
Interest expense (1.2) (1.3) 4.8
Interest income 1.3 1.5 (3.9)
Other income, net 1.0 1.2 (16.0)
---------------------------------------------
Income before provision for income taxes 11.5 3.4 --
Provision for income taxes 3.2 3.4 4.6
---------------------------------------------
Income before cumulative effect of change in
accounting 8.3 -- --
Cumulative effect of change in accounting
principle, net of tax 1.0 -- 100.0
---------------------------------------------
Net income 9.3% -- --
=============================================
20
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By geography: 2001 2000 as reported currency
- ------------- ---- ---- -------------- -----------
United States $ 91,044 $ 69,961 30.1% 30.1%
International 149,872 147,485 1.6 6.4
----------------------------------------------------
Net revenues $240,916 $217,446 11.5% 14.2%
Percent Increase/(Decrease)
------------------------------
Actual dollars At constant
By product type: 2001 2000 as reported currency
- ---------------- ---- ---- -------------- -----------
Disposables $218,332 $195,845 11.5% 14.6%
Misc. & service 10,619 12,698 (16.4) (8.8)
Equipment 11,965 8,903 34.4 37.3
----------------------------------------------------
Net revenues $240,916 $217,446 10.8% 14.2%
----------------------------------------------------
Percent Increase/(Decrease)
------------------------------
Disposable revenue Actual dollars At constant
By product line: 2001 2000 as reported currency
- ------------------ ---- ---- -------------- -----------
Surgical $ 48,967 $ 45,559 7.5% 11.5%
Bloodbank 78,258 79,474 (1.5) 1.6
Red cells 7,487 5,573 34.3 43.9
Plasma 83,620 65,239 28.2 29.8
----------------------------------------------------
Disposable revenues $218,332 $195,845 11.5% 14.6%
Net Revenues
Net revenues in 2001 increased 10.8% to $240.9 million from $217.4
million in 2000. With currency rates held constant, net revenues increased
14.2% from 2000 to 2001.
Disposable sales increased 11.5% year over year at actual rates.
With currency rates held constant, disposable sales increased 14.6%. Year
over year constant currency disposable sales growth was a result of
disposable growth in worldwide Surgical (up 11.5%), worldwide Bloodbank (up
1.6%), worldwide Red Cells (up 43.9%), and worldwide Plasma (up 29.8%).
The constant currency growth in the worldwide Surgical disposable sales is
mainly
21
attributed to volume increases of existing products in the European market
and the success of the Company's newly acquired OrthoPAT(R) product in the
U.S. orthopedic market. Worldwide, the OrthoPAT(R) accounted for 8.0% of
the constant currency growth in Surgical disposable sales. Worldwide
Bloodbank disposable sales increased as compared to 2000 as a result of
volume increases in the U.S. market resulting from the rollout of the
Automated Cell Processing ("ACP") 215 system. The growth in worldwide Red
cell sales is primarily attributed to volume increase in the U.S. market.
The growth in worldwide Plasma disposables sales is attributed to volume
increases in the U.S. market due to the continued upturn in plasma
collections as demand for source plasma outpaces supply. Of the 29.8%
constant currency Plasma growth, approximately 18.5% of it was due to sales
of bottles resulting from the Company's acquisition of the plasma container
business in the fourth quarter of last year and from the sales of
Haemonetics brand anticoagulant solution newly introduced to the Company's
Plasma product line last year.
Sales of disposable products, excluding service and other
miscellaneous revenue, accounted for 90.7% and 90.1% of net revenues for
2001 and 2000, receptively. At constant currency these sales accounted for
90.6% and 90.3% of net revenues for 2001 and 2000, respectively.
Service revenue generated from equipment repairs performed under
preventive maintenance contracts or emergency service billings and
miscellaneous revenues at actual rates accounted for 4.4% and 5.9% of the
Company's net revenues for 2001 and 2000, respectively. At constant
currency these sales accounted for 4.5% and 5.6% of the Company's net
revenues for 2001 and 2000, respectively.
Equipment revenues increased 34.4% from $8.9 million in 2000 at
actual rates and increased 37.3% year over year with currency rates held
constant. The 37.3% constant currency increase was a result of increased
equipment revenues primarily in the U.S. and in Europe. This increase is
attributable to sales of platelet and plasma machines in Europe and to
sales of the new ACP technology domestically.
At actual rates, international sales accounted for 62.2% and 67.9% of
net revenues for 2001 and 2000, respectively. At constant currency,
international sales accounted for 63.1% and 67.3% of net revenues for 2001
and 2000, respectively, As in the U.S., sales outside the U.S. are
susceptible to risks and uncertainties from regulatory changes, the
Company's ability to forecast product demand and market acceptance of the
Company's products, changes in economic conditions, the impact of
competitive products and pricing, changes in health care policy and the
events of September 11, 2001 and their aftermath.
Gross profit
Gross profit of $117.3 million for the nine months ended December 29,
2001 increased $11.5 million from $105.9 million for the nine months ended
December 30, 2000. At constant currency, gross profit as a percent of
sales increased by 1.3% and increased in dollars by $17.4 million or 17.3%
from 2000 to 2001. The $17.4 million constant dollar gross profit increase
from 2000 was primarily a result of higher sales and efficiency gains due
to higher manufacturing volumes and cost reductions.
For the nine months ending December 29, 2001, the CORE program has
contributed approximately $3.1 million of cost savings benefiting the
Company's gross profit. The estimated savings for the full twelve months
of fiscal year 2002 approximates $4.0 million and will stem from
initiatives to lower product costs by automating and redesigning the way
certain products are made so that less material and labor is needed, and by
negotiating lower material prices with vendors. These savings are expected
to be partially offset by increases in other product costs.
Expenses
The Company expended $24.9 million (10.4% of net revenues) on
research and development in 2001 and $13.6 million (6.3% of net revenues)
in 2000. The increase in expenditures for research and development was
primarily due to a $10.0 million payment made to acquire rights to a
technology currently under development. Excluding this expenditure and at
constant currency rates, research and development as a percent of sales
increased by 0.1% and
22
increased in dollars by $1.7 million from 2000 to 2001. The increase in
research and development was a result of the Company's objective to
reinvest available funds into new product development.
Selling, general and administrative expenses increased $2.4 million
from $64.7 million in 2000 to approximately $67.1 million in 2001. At
constant currency, selling, general and administrative expenses increased
$6.1 million from 2000 yet decreased 1.2% as a percent of sales from 2000
to 2001. Higher sales and increased spending behind the Company's new
product sales and marketing activities contributed to the increase in
selling, general and administrative dollars spent and to the decrease as a
percentage of sales. The CORE Program is not expected to have a notable
impact in savings on selling, general and administrative expenses during
the current year as most savings are expected in cost of goods sold.
In Process Research and Development (IPR&D)
Upon consummation of the Transfusion Technologies acquisition in the
second quarter of fiscal 2001, the Company incurred costs representing the
value of the research and development projects. Included in the purchase
price allocation for the acquisition of Transfusion Technologies was an
aggregate amount of purchased in-process research and development ("IPR&D")
of $21.5 million, $2.9 million of which is reflected in the restatement of
fiscal year 2000 relative to Haemonetics' original 19.8% investment. The
values represent purchased in-process technology that had not yet reached
technical feasibility and had no alternative future use. Accordingly, the
amounts were immediately expensed in the consolidated statement of
operations (see Note 10 in the unaudited consolidated financial statements
for further discussion of the acquisition and IPR&D charges).
An independent valuation was performed to assess and allocate a value
to the purchased IPR&D. The value represents the estimated fair market
value based on risk-adjusted future cash flows generated by the products
employing the in-process technology over a 10-year period. Estimated
future after-tax cash flows for each product were based on Transfusion's
and Haemonetics' estimates of revenue, operating expenses, income taxes,
and charges for the use of contributory assets. Additionally, these cash
flows were adjusted to compensate for the existence of any core technology
and development efforts that were to be completed post-acquisition.
Revenues were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles, and the
estimated life of each product's underlying technology. Estimated
operating expenses include cost of goods sold, selling, general and
administrative, and research and development ("R&D") expenses. The
estimated R&D expenses include only those costs needed to maintain the
products once they have been introduced into the market. Operating expense
estimates were consistent with expense levels for similar products.
The discount rates used to present-value the projected cash flows
were based on a weighted average cost of capital relative to Transfusion
Technologies and its industry adjusted for the product-specific risk
associated with the purchased IPR&D projects. Product-specific risk
includes such factors as: the stage of completion of each project, the
complexity of the development work completed to date, the likelihood of
achieving technological feasibility and market acceptance.
The forecast data employed in the valuation were based upon
projections created by Transfusion's management and Haemonetics
management's estimate of the future performance of the business. The
inputs used in valuing the purchased IPR&D were based on assumptions that
management believes to be reasonable, but which are inherently uncertain
and unpredictable. These assumptions may be incomplete or inaccurate, and
no assurance can be given that unanticipated events or circumstances will
not occur. Accordingly, actual results may vary from the forecasted
results. While management believes that all of the development projects
will be successfully completed, failure of any of these projects to achieve
technological feasibility, and/or any variance from forecasted results, may
result in a material adverse effect on Haemonetics' financial condition and
results of operations.
A brief description of the IPR&D projects related to the acquisition
of Transfusion, including their estimated stage of completion and
associated discount rates is outlined below.
23
Chairside Separator ("CSS"). The CSS is a portable, automated device
used for the donor-side collection and processing of a single unit of whole
blood into a unit of red cell concentrate and plasma. The system is
designed for use in a blood center, hospital, or mobile blood drive
location and can be powered either through a standard AC outlet or by DC
battery packs. At the time of the acquisition, Haemonetics estimated that
the CSS project was 95% complete and that product sales would commence by
the fourth quarter of fiscal 2002. The IPR&D value assigned to the CSS was
$17.6 million. A discount rate of 33% was employed in the analysis.
The Company now considers the CSS project 100% complete, having
completed the clinical safety study on July 13, 2001 and submission of the
510K to the Food and Drug Administration ("FDA") on September 22, 2001.
Product sales will commence upon approval by the FDA which could be one
year, or greater, from the submission date.
Red Cell Collector ("RCC"). The RCC is a portable, automated device
used for the collection and processing of two units of red blood cells from
donors. The system collects and automatically anticoagulates the whole
blood while separating it into red blood cells and plasma. The plasma and
500 ml of saline is then re-infused back to the donor. The system is
designed for use in a blood center, hospital, or mobile blood drive
location and can be powered either through a standard AC outlet or by DC
battery packs. At the time of the acquisition, Haemonetics estimated that
the RCC project was 65% complete and that product sales would commence by
the second quarter 2003. The IPR&D value assigned to the RCC was $3.9
million. A discount rate of 33% was employed in the analysis.
As of December 29, 2001, the estimated percent completion of the RCC
project is 68%. The expected date that product sales will commence is
fiscal year 2004. Estimates for cost of sales, S, G&A costs and income tax
rates relative to the RCC project remain unchanged. Significant design,
software programming, disposable set development and sourcing requirements
are still to be completed. In addition, clinical trials will be conducted
prior to submission of a 510K to the FDA. The estimated cost to be
incurred to develop the purchased in-process RCC technology into a
commercially viable product is approximately $1.5 million in fiscal 2002,
$1.9 million in fiscal 2003 and $1.0 million in fiscal 2004.
Other Unusual Charges
Unusual charges expensed as a result of the acquisition of
Transfusion Technologies amounted to $4.6 million and included $2.8 million
in bonuses paid to key Transfusion Executives hired by Haemonetics and
severance to employees laid off due to overlaps created by the merger, a
$0.5 million write-off of an investment in fluid warming technology which
Haemonetics decided not to pursue in lieu of the technologies acquired in
the merger, and the adjustment required to modify the 19.8% investment of
Transfusion by Haemonetics in November of fiscal year 2000 from the cost
method to the equity method of accounting as required by generally accepted
accounting principles. To effect this change, the historic cost of the
19.8% investment made by Haemonetics was written down by its 19.8% share of
the monthly losses incurred by Transfusion Technologies from November of
fiscal year 2000. For fiscal year 2001, the charge to the statement of
operations related to this cost to equity adjustment was $1.3 million for
the nine months ended December 30, 2000.
Operating Income
Operating income, as a percentage of net revenues, increased to 10.4%
from 2.0% in 2000. At constant currency, operating income increased $22.9
million and increased 9.3 percentage points as a percent of sales from
operating income of 0.7% in 2000. The $22.9 million increase in operating
income resulted from $17.4 million of constant currency improvement in
gross profit year over year, $23.2 million of unusual charges and IPR&D,
in the prior year offset by increases in the current year in both
research and development and selling, general and administrative expenses.
24
Foreign Exchange
The Company generates approximately 62% of its revenues outside the
U.S. in foreign currencies. As such, the Company uses a combination of
business and financial tools comprised of various natural hedges,
(offsetting exposures from local production costs and operating expenses),
and forward contracts to hedge its balance sheet and P&L exposures.
Hedging through the use of forward contracts does not eliminate the
volatility of foreign exchange rates, but because the Company generally
enters into forward contracts one year out, rates are fixed for a one-year
period, thereby facilitating financial planning and resource allocation.
The Company computes a composite rate index for purposes of
measuring, comparatively, the change in foreign currency hedge spot rates
from the hedge spot rates of the corresponding period in the prior year.
The relative value of currencies in the index corresponds to the value of
sales in those currencies. The composite was set at 1.00 based upon the
weighted rates at March 31, 1997.
For fiscal year 2001 and 2002, the indexed hedge rates were 9.1% more
favorable and 2.0% less favorable than the respective prior years. For the
second and third quarters of fiscal 2002, the indexed hedge spot rates
appreciated 3.3% and depreciated 8.6%, respectively and for the second and
third quarters of fiscal 2003, the indexed hedge spot rates depreciated
10.3% and 8.1%, respectively over the corresponding quarters of the
preceding years. These indexed hedge rates represent the change in spot
value (value on the day the hedge contract is undertaken) of the
Haemonetics specific hedge rate index. These indexed hedge rates impact
sales in the Company's financial statements.
The final impact of currency fluctuations on the results of
operations is dependent on the local currency amounts hedged and the actual
local currency results.
Composite Index Favorable/(Unfavorable)
Hedge Spot Rates Change vs Prior Year
---------------- -----------------------
FY1999 Q1 0.98 (9.4%)
Q2 1.06 (13.4%)
Q3 1.03 (5.9%)
Q4 1.05 (7.4%)
1999 Total 1.03 (9.1%)
FY2000 Q1 1.10 (10.8%)
Q2 1.09 (2.8%)
Q3 1.04 (0.6%)
Q4 1.07 (1.0%)
2000 Total 1.07 (3.9%)
FY2001 Q1 1.04 5.4%
Q2 1.00 8.2%
Q3 0.92 12.9%
Q4 0.97 10.2%
2001 Total 0.98 9.1%
FY2002 Q1 0.99 5.2%
Q2 0.97 3.3%
Q3 1.01 (8.6%)
Q4 1.05 (7.5%)
2002 Total 1.00 (2.0%)
25
FY2003 Q1 1.09 (8.9%)
Q2 1.08 (10.3%)
Q3 1.10 (8.1%)
Other Income, Net
Interest expense for the nine months ended December 29, 2001 was
relatively flat as compared to 2000. Because 92% of the Company's long-
term debt is at fixed rates the Company has not benefited from lower
interest rates in the marketplace. Interest income was also relatively
flat from 2000 to 2001 as lower interest rates have offset the benefit from
higher cash balances under investment. Other income net decreased $0.4
million due to a decline in income earned from points on forward contracts,
which was offset by the reduction of amortization expense as a result of
the Company's adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," effective April 1, 2001 which required that the Company cease
amortization of goodwill.
Taxes
The provision for income taxes, as a percentage of pretax income, was
28.0% for the nine months ended December 29, 2001 and 27.0% for the nine
months ended December 30, 2000 before the effect of the Company's
acquisition of Transfusion Technologies (See Note 10 to the unaudited
consolidated financial statements).
Cumulative Effect of Accounting Change, Net of Tax
In accordance with Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No. 133,"
(collectively, SFAS No. 133, as amended) effective, April 1, 2001, the
beginning of the Company's 2002 fiscal year. As required, these standards
were adopted as a change in accounting principle and accordingly, the
effect at adoption of $3.2 million was shown net of taxes of $0.9 million
as a cumulative effect of a change in accounting principle on the face of
the unaudited consolidated statements of operations in the nine months
ended December 29, 2001.
26
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, acquisitions, new
business development and working capital.
During the nine months ended December 29, 2001, the Company increased
its cash balances, before the effect of exchange rates, by $11.4 million
from operating, investing and financing activities, which represents an
increase in cash of $10.5 million from the $0.9 million generated in the
Company's operating, investing and financing activities during the nine
months ended December 30, 2000. The $10.5 million of additional cash
generated results from the additional $26.7 million provided by the
Company's financing activities in 2001, $2.8 million less cash spent on
investing activities, offset by $19.0 million of additional cash utilized
by the Company's operating activities.
Operating Activities:
The Company generated $15.1 million in cash from operating activities
during the nine months ended December 29, 2001 as compared to $34.1 million
generated during the nine months ended December 30, 2000. The $19.0
million decrease in operating cash flow from fiscal year 2001 to fiscal
year 2002 was mainly a result of a $15.0 million increase in inventories
due to higher raw material, work in process and finished good levels needed
to support higher sales and a $4.8 million decrease in net income adjusted
for depreciation, amortization and other non-cash items
The Company measures its performance using an operating cash flow
metric defined as net income adjusted for depreciation, amortization and
other non-cash items; capital expenditures for property, plant and
equipment together with the investment in Haemonetics equipment at customer
sites, including sales-type leases; and the change in operating working
capital, including change in accounts receivable, inventory, accounts
payable and accrued expenses, excluding tax accounts and the effects of
currency translation. This alternative measure of operating cash flows is
a non-GAAP measure that may not be comparable to similarly titled measures
reported by other companies. It is intended to assist readers of the
report who employ "free cash flow" and similar measures that do not include
tax assets and liabilities, equity investments and other sources and uses
that are outside the day-to-day activities of a Company.
As measured by the Company's operating cash flow metric, the Company
generated $21.0 million and $33.8 million of operating cash during the nine
months ended December 29, 2001 and December 30, 2000, respectively. The
$21.0 million of operating cash flow generated for the nine months ended
December 29, 2001 resulted from $32.4 million of net income before a $10.0
million cash payment made by the Company in the current year to acquire
rights to a technology currently under development, $7.4 million from the
reduction of the Company's net investment in property, plant and equipment
and sales-type leases offset by $18.8 million from increased working
capital investment, primarily due to higher inventories and higher accounts
receivable. The $33.8 million of operating cash generated for the nine
months ended December 30, 2000 was calculated excluding the $26.6 million
of cash spent to acquire Transfusion Technologies. The $33.8 million of
operating cash flow resulted from $25.3 million of net income adjusted for
non-cash items, $3.0 million from reduced working capital investment,
primarily due to lower inventories partly offset by higher accounts
receivable and lower accrued payables and payroll, and $11.5 million from
the reduction of the Company's net investment in property, plant and
equipment and sales-type leases. The working capital and capital
investment components of the Company's operating cash flow metric have been
adjusted by non-cash transfers (transfers from inventory to property, plant
and equipment), which amounted to approximately $3.5 million and $5.3
million during the nine-month periods for 2001 and 2000, respectively.
27
Investing Activities
The Company utilized $26.4 million in cash for investing activities
during the nine months ended December 29, 2001, a decrease of $2.8
million from the same period a year ago. The decreased utilization of cash
is largely due to the Company's prior year acquisition of Transfusion
Technologies for $26.6 million offset by current year increases in the
Company's investments into available-for-sale securities and plant property
and equipment assets.
Financing Activities
During the nine months ended December 29, 2001, the Company generated
$26.7 million more cash from its financing activities than during the nine
months ended December 30, 2000 due to a $27.0 million increase in short-
term credit agreements in 2001 as compared to 2000, a $10.1 million
increase in cash from stock option exercises in 2001 and $4.7 million in
cash savings as a result of the Company's decision not to purchase any
treasury shares during the nine months ended December 29, 2001. These
additional sources of cash were offset partially by the $5.7 million
payment made in 2001 on the Company's senior notes and by the Company's
refinancing of its Braintree headquarters real estate mortgage in 2000.
The $27.0 million increase in short-term credit agreements in 2001 as
compared to 2000 was due largely to additional borrowings of $10.6 million
in Japan in 2001 and $15.0 million in debt reductions in 2000 as the
Company paid both the remaining $8.0 million balance on its Braintree
Headquarter real estate mortgage and $7.0 million in Japanese short term
debt. The level of cash generated from stock option exercises in the next
months will be dependent on the Company's stock price.
At December 29, 2001, the Company had working capital of $172.6
million. This reflects an increase of $41.7 million in working capital from
the nine months ended December 30, 2000.
Inflation
The Company does not believe that inflation has had a significant
impact on the Company's results of operations for the periods presented.
Historically, the Company believes it has been able to minimize the effects
of inflation by improving its manufacturing and purchasing efficiency, by
increasing employee productivity and by reflecting the effects of inflation
in the selling prices of new products it introduces each year.
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.
28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.
Foreign exchange risk
Approximately 62% of the Company's revenues are generated outside the
U.S., yet the Company's reporting currency is the U.S. dollar. Foreign
exchange risk arises because the Company engages in business in foreign
countries in local currency. Exposure is partially mitigated by producing
and sourcing product in local currency. Accordingly, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an
adverse affect on the Company's results of operations and alternatively,
whenever the U.S. dollar weakens relative to the other major currencies,
there is a positive effect on the Company's results of operations.
It is the Company's policy to minimize, for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments known as forward
contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated revenues. The Company also enters into forward
contracts that settle within 35 days to hedge certain intercompany
receivables denominated in foreign currencies. Actual gains and losses on
all forward contracts are recorded in operations, offsetting the gains and
losses on the underlying transactions being hedged. These derivative
financial instruments are not used for trading purposes. The Company's
primary foreign currency exposures in relation to the U.S. dollar are the
Japanese Yen and the Euro.
At December 29, 2001, the Company had the following significant
foreign exchange contracts to hedge the anticipated cash flows from
forecasted foreign currency denominated revenues outstanding:
Currency Local Currency Contract Rate Current FWD Gain/(Loss) Gain/(Loss) Maturity
-------- -------------- ------------- ----------- ----------- ----------- --------
Euro 8,150,000 $0.918 7,153,427 $ 326,488 313,090 Jan-Mar 2002
Euro 7,450,000 $0.867 6,519,132 $ (59,417) (56,056) Apr-Jun 2002
Euro 7,600,000 $0.885 6,636,723 $ 91,892 86,351 Jul-Sept 2002
Euro 5,750,000 $0.876 5,016,840 $ 17,925 16,844 Oct-Dec 2002
Japanese Yen 1,775,000,000 113.0 per US$ 13,593,646 $2,119,854 2,025,890 Jan-Mar 2002
Japanese Yen 1,750,000,000 116.5 per US$ 13,466,196 $1,553,781 1,462,425 Apr-Jun 2002
Japanese Yen 1,850,000,000 118.7 per US$ 14,318,015 $1,271,143 1,194,497 Jul-Sept 2002
Japanese Yen 1,300,000,000 119.9 per US$ 10,122,140 $ 717,582 674,314 Oct-Dec 2002
-------------------------------------------------------------
Total: 76,826,119 6,039,248 5,717,355
=============================================================
The Company estimated the change in the fair value of all forward
contracts assuming both a 10% strengthening and weakening of the U.S.
dollar relative to all other major currencies. In the event of a 10%
strengthening of the U.S. dollar, the change in fair value of all forward
contracts would result in a $10.1 million unrealized gain; whereas a 10%
weakening of the U.S. dollar would result in a $11.4 million unrealized
loss.
Interest Rate Risk
Approximately 92% of the Company's long-term debt is at fixed rates.
Accordingly, a change in interest rates has an insignificant effect on the
Company's interest expense. The fair value of the Company's long-term
debt, however, would change in response to interest rates movements due to
its fixed rate nature. At December 29, 2001, the fair value of the
Company's long-term debt was approximately $3.2 million higher than the
value of the debt reflected on the Company's financial statements. This
higher fair market is primarily related to the $34.3 million,
29
7.05% fixed rate senior notes the Company holds. These notes collectively
represent approximately 69% of the Company's outstanding long-term
borrowings at December 29, 2001. At December 30, 2000, the fair value of
the Company's long-term debt was approximately $4.3 million higher than the
value of the debt reflected on the Company's consolidated financial
statements.
Using a scenario analysis, the Company evaluated the impact on all
long-term maturities of changing the interest rate 10% from the rate levels
that existed at December 29, 2001. The effect was a change in the fair
value of the Company's long-term debt, of approximately $0.8 million.
30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
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.
---------------------------------
None
31
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAEMONETICS CORPORATION
Date: February 6, 2002 By: /s/ James L. Peterson
--------------------------------
James L. Peterson, President and
Chief Executive Officer
Date: February 6, 2002 By: /s/ Ronald J. Ryan
--------------------------------
Ronald J. Ryan, Senior Vice
President and Chief Financial
Officer, (Principal Accounting
Officer)
32
