UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 2014
Commission file number 001-14041
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2882273 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
400 Wood Road, Braintree, Massachusetts 02184-9114 (Address of principal executive offices) | (781) 848-7100 (Registrant’s telephone number) | |
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) | (Name of Exchange on Which Registered) | |
Common stock, $.01 par value per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the registrant) as of September 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter was $2,058,543,720 (based on the closing sale price of the registrant’s common stock on that date as reported on the New York Stock Exchange).
The number of shares of $0.01 par value common stock outstanding as of April 26, 2014 was 52,053,753.
Documents Incorporated By Reference
Portions of the definitive proxy statement for our Annual Meeting of Shareholders to be held on July 23, 2014 are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
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ITEM 1. BUSINESS
Company Overview
Haemonetics is a global healthcare company dedicated to providing innovative blood management solutions to our customers. Our comprehensive portfolio of integrated devices, information management, and consulting services offers blood management solutions for each facet of the blood supply chain, helping improve clinical outcomes and reduce costs for blood and plasma collectors, hospitals, and patients around the world. Our products and services help prevent a transfusion to a patient who does not need one and provide the right blood product, at the right time, in the right dose to the patient who does.
Blood and its components (plasma, platelets, and red cells) have many vital - and frequently life-saving - clinical applications. Plasma is used for patients with major blood loss and is manufactured into pharmaceuticals to treat a variety of illnesses and hereditary disorders such as hemophilia. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets treat cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.
Haemonetics is committed to helping our customers create and maintain a safe and efficient blood supply chain. Specifically, we develop and market a wide range of systems used with plasma and blood donors that collect and process blood into its components using both manual and automated methods. We also develop and market a variety of systems to hospitals that automate the cleaning and reinfusion of a surgical patient's own blood, automate the tracking and distribution of blood in the hospital, and enhance blood diagnostics. We also sell information technology platforms to promote efficient and compliant operations for all of our customer groups. Finally, we provide consulting services to reduce costs and improve operating efficiencies in blood management. By better understanding our customers' needs, we are creating comprehensive blood management solutions for blood collectors and healthcare systems in more than 100 countries around the world.
Haemonetics was founded in 1971 as a medical device company — a pioneer and market leader in developing and manufacturing automated blood component collection devices and surgical blood salvage devices. In May 1991, we completed an initial public offering and to this day remain an independent company. Several years ago, we embarked on a strategy to expand our markets and product portfolio to offer more comprehensive blood management solutions to our customers. Through internal product development and external acquisitions, we have significantly expanded our product offerings.
In 2012, we entered the market for manual whole blood collections with the acquisition of Pall Corporation’s blood collection, filtration and processing product lines and the business assets of Hemerus Medical, LLC, a company that develops innovative technologies for the collection of whole blood and processing and storage of blood components, including SOLX storage solutions. We paid $535.2 million in cash consideration for the Pall assets after post-closing adjustments for working capital and historical earnings levels. The acquisition was funded utilizing $475.0 million of loans and the remainder from cash on hand. We paid $24.1 million for the Hemerus assets and may pay an additional $3.0 million contingent upon receipt of an FDA approval of the SOLX solution for 24 hour storage of whole blood prior to processing. Additionally, up to $14.0 million may be paid dependent on future sales levels of SOLX-based products. We refer to these recently acquired businesses as the whole blood product line. These acquisitions provide access to the manual collection and whole blood markets and provide scope for introduction of automated solutions into those markets.
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Market and Products
Product Lines
We serve three markets: manufacturers of plasma derived pharmaceuticals, blood collectors, and hospitals. We report revenues for multiple product lines under four global product categories: Plasma, Blood Center, Hospital, and Software Solutions. “Plasma” includes plasma collection devices and consumables. “Blood Center” includes blood collection and processing devices and consumables. “Hospital” includes surgical blood salvage and blood demand diagnostic devices and consumables. “Software Solutions” includes information technology platforms and consulting services provided to all three markets. Although we address our customers' needs through multiple product lines, we manage our business as five operating segments based primarily on geography; North America Plasma, North America Blood Center and Hospital, Europe, Asia Pacific and Japan. However, for financial reporting purposes we aggregate our five operating segments into one reportable segment. Our chief operating decision maker ("CODM") principally uses consolidated financial results to make operating and strategic decisions. Design and manufacturing processes, as well as economic characteristics and the regulatory environment in which we operate, are largely the same for all operating segments.
The financial information required for segments is included herein in Note 15 of the financial statements, entitled Segment Information.
• | Plasma |
The Plasma Collection Market for Fractionation — Human plasma is collected and processed by bio-pharmaceutical companies into therapeutic and diagnostic products that aid in the treatment of immune diseases and coagulation disorders. While plasma is also used to aid patients with extreme blood loss, such as trauma victims, bio-pharmaceutical companies solely focus on plasma's pharmaceutical uses. Automated plasma collection technology allows for the safe and efficient collection of plasma. We manufacture and market plasma collection devices and respective disposables, but do not make plasma-derived pharmaceuticals.
Many bio-pharmaceutical companies are vertically integrated in all components of their business and thus are now collecting and fractionating the plasma required to manufacture their pharmaceuticals. This vertical integration paved the way for highly efficient plasma supply chain management and the plasma industry leverages information technology to manage operations from the point of plasma donation to fractionation to the production of the final product.
Haemonetics' Plasma Products — Our portfolio of products and services is designed to support multiple facets of plasma collector operations. We have a long-standing commitment to understanding our customers' collection and fractionation processes. As a result, we deliver product quality and reliability; design equipment that is durable, dependable, and easy to use; and provide comprehensive training support and strong business continuity practices.
Historically, plasma for fractionation was collected manually, which was time-consuming, labor-intensive, produced relatively poor yields, and posed risk to donors. Today, the vast majority of plasma collections worldwide are performed using automated collection technology because it is safer and more cost-effective. With our PCS® brand automated plasma collection technology, more plasma can be collected during any one donation event because the other blood components are returned to the donor through the sterile disposable sets used for the plasma donation procedure.
We offer “one stop shopping” to our plasma collection customers, enabling them to source from us the full range of products necessary for plasma collection and storage, including PCS® brand plasma collection equipment and consumables, plasma collection containers, and intravenous solutions. We also offer a robust portfolio of integrated information technology platforms for plasma customers to manage their donors, operations, and supply chain. Our products automate the donor interview and qualification process; streamline the workflow process in the plasma center; provide the controls necessary to evaluate donor suitability; determine the ability to release units collected; and manage unit distribution. With our software solutions, plasma collectors can manage processes across the plasma supply chain, react quickly to business changes, and identify opportunities to reduce costs.
Our plasma disposables product line represented 31.1%, 30.1%, and 35.5% of our total revenue in fiscal 2014, 2013 and 2012, respectively.
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• | Blood Center |
The Blood Collection Market for Transfusion — There are millions of blood donations throughout the world every year that produce blood products for transfusion to surgical, trauma, or chronically ill patients. Patients typically receive only the blood components necessary to treat a particular clinical condition: for example, red cells to surgical patients, platelets to cancer patients, and plasma to trauma victims.
Platelet therapy is frequently used to alleviate the effects of chemotherapy and help patients with bleeding disorders. Red cells are often transfused to patients to replace blood lost during surgery. Red cells are also transfused to patients with blood disorders, such as sickle cell anemia or aplastic anemia. Plasma, in addition to its role in creating life-saving pharmaceuticals, is frequently transfused to trauma victims and to replace blood volume lost during surgery.
The demand for blood varies across the world. While overall we expect total demand to remain stable, demand in individual markets can vary greatly. Highly populated emerging market countries are seeing demand growth as they expand healthcare coverage. As greater numbers of people gain access to more advanced medical treatment, demand for blood components, plasma-derived drugs, and surgical procedures increases. In more mature markets, the development of less invasive, lower blood loss procedures and better blood management has offset the demand increases from aging populations. This is particularly true in the United States, where we expect to see collections decline by approximately 10% in fiscal 2015.
Most donations worldwide are manual whole blood donations. In this process, whole blood is collected from the donor and then transported to a laboratory where it is separated into its components: red cells, platelets and/or plasma.
In addition to manual collections, there is a significant market for automated component blood collections. In this procedure, the blood separation process is automated and occurs in “real-time” while a person is donating blood. In this separation method, only the specific blood component targeted is collected, and the remaining components are returned to the blood donor. Automated blood component collection allows significantly more of the targeted blood component to be collected during a donation event, especially red cells where our automated system supports collection of two units from eligible donors.
Haemonetics’ Blood Center Products — Today, Haemonetics offers automated blood component and manual whole blood collection systems to blood collection centers to collect blood products efficiently and cost effectively.
We market the MCS® (Multicomponent Collection System) brand apheresis equipment which is designed to collect specific blood components integrated from the donor. Utilizing the MCS® automated platelet collection protocols, blood centers collect one or more therapeutic “doses” of platelets during a single donation. The MCS® two-unit protocol or double red cell collection device helps blood collectors optimize the collection of red cells by automating the blood separation function, eliminating the need for laboratory processing, and enabling the collection of two units of red cells from a single donor thus maximizing the amount of red cells collected per eligible donor and helping to mitigate red cell shortages in countries where this problem exists. Blood collectors can also use the MCS® system to collect one unit of red cells and a "jumbo" (double) unit of plasma, or one unit of red cells and one unit of platelets from a single donor. The MCS® plasma protocol provides the possibility to collect 600-800ml of plasma for transfusion to patients or for pharmaceutical industry use completes the comprehensive portfolio of different blood component collection options on this device.
With the whole blood acquisition, Haemonetics now also offers a portfolio of products for manual whole blood collection and processing. The assets acquired from Pall Corporation provide us with filter technology and manufacturing capability as well as a broad portfolio of manual collection, filtration and processing products. Haemonetics' portfolio of disposable whole blood collection and component storage sets offer flexibility in collecting a unit of whole blood and the subsequent production and storage of the red blood cell, platelet, and/or plasma products, including options for in-line or dockable filters for leukoreduction of any blood component. In addition, our innovative AcrodoseSM product line provides a closed system for the pooling, storage, and bacteria testing of leukoreduced whole blood derived platelet concentrates, an AcrodoseSM Platelet, that is “transfusion ready” for the hospital. Use of Acrodose platelets lowers hospital handling costs by eliminating the need for pooling and bacteria testing at the hospital.
With the ACP® (Automated Cell Processor) brand, Haemonetics offers a small bench-top solution to automate the washing and freezing of red cell components in the lab. The automated red cell washing procedure removes plasma proteins within the red cell units to provide a safer product for transfusion to frequently transfused patients, neonates, or patients with a history of transfusion reactions. The automated glycerolization and deglycerolization steps are required to prepare red cells for frozen storage. Freezing the red cell units can expand the shelf life of these products
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up to 10 years. Customers utilize this technology to implement strategic red cell inventories for catastrophe cases, storage of rare blood types, or enhanced inventory management.
Our blood center disposables product line represented 41.5%, 40.1%, and 29.7% of our total revenue in fiscal 2014, 2013 and 2012, respectively.
• | Hospital |
The Transfusion Market for Hospitals — Loss of blood is common in many surgical procedures, including open heart, trauma, transplant, vascular, and orthopedic procedures, and the need for transfusion of oxygen-carrying red cells to make up for lost blood volume is routine. Patients commonly receive donor blood, referred to as “allogeneic blood,” which carries various risks including risk of transfusion with the wrong blood type; risk of transfusion reactions including death, but more commonly chills, fevers or other side effects that can prolong a patient’s recovery; and risk of transfusion of blood with a blood-borne disease or infectious agent.
An alternative to allogeneic blood is surgical cell salvage, also known as autotransfusion, which reduces or eliminates a patient’s need for blood donated from others and ensures that the patient receives the freshest and safest blood possible — his or her own. Surgical cell salvage involves the collection of a patient’s own blood during and after surgery, for reinfusion of red cells to that patient. Blood is suctioned from the surgical site or collected from a wound or chest drain, processed and washed through a centrifuge-based system that yields concentrated red cells available for transfusion back to the patient. This process occurs in a sterile, closed-circuit, single-use consumable set that is fitted into an electromechanical device. We market our surgical blood salvage products to surgical specialists, primarily cardiovascular, orthopedic, and trauma surgeons, and to surgical suite service providers.
With the whole blood acquisition, Haemonetics now offers filtration products for the hospital. These filters are used during the blood transfusion process for reduction of particulate debris, fat globules and leukocytes in the blood components.
Haemonetics’ Hospital Products — Haemonetics offers a range of blood management solutions that significantly improve a hospital's systems for acquiring blood, storing it in the hospital, and dispensing it efficiently and correctly. Over the last few years, hospitals have become more aware of their need to control costs and improve patient safety by managing blood more effectively. Our products and integrated solution platforms help hospitals optimize performance of blood acquisition, storage, and distribution.
Our TEG® Thrombelastograph Hemostasis Analyzer system is a blood diagnostic instrument that measures a patient's hemostasis or the ability to form and maintain blood clots. By understanding a patient’s clotting ability, clinicians can better plan for the patient’s care, deciding in advance whether to start or discontinue use of certain drugs or, determine the likelihood of the patient's need for a transfusion and which blood components will be most effective in stopping bleeding. Such planning supports better care, which can lead to lower hospital costs through a reduction in unnecessary donor blood transfusions, reduced adverse transfusion reactions, and shorter intensive care unit and hospital stays.
The Cell Saver® system is a surgical blood salvage system targeted to procedures that involve rapid, high-volume blood loss, such as cardiovascular surgeries. It has become the standard of care for high blood-loss surgeries. In fiscal 2012, we launched the Cell Saver® Elite® system, which is our most advanced autotransfusion option to minimize allogeneic blood use for surgeries with medium to high blood loss.
The OrthoPAT® surgical blood salvage system is targeted to orthopedic procedures, such as hip and knee replacements, which involve slower, lower volume blood loss that often occurs well after surgery. The system is designed to remain with the patient following surgery, to recover blood and produce a washed red cell product for autotransfusion. Its Quick-Connect feature permits customers to utilize the blood processing set selectively, depending on the patient's need.
Our IMPACT® Online web-based software platform, which monitors and measures improvements in a hospital’s blood management practices, provides hospitals with a baseline view of their transfusion practices and helps monitor their blood management performance. Business consulting solutions are offered to support process excellence and blood management efforts to our customers on an as needed basis.
Our hospital consumables product line represented 13.3%, 14.7%, and 16.6% of our total revenue in fiscal 2014, 2013 and 2012, respectively.
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• | Software Solutions |
Haemonetics' Software Products and Services — We have a suite of integrated software solutions for improving efficiencies and helping ensure donor and patient safety. This includes solutions for blood drive planning, donor recruitment and retention, blood collection, component manufacturing and distribution, transfusion management, and remote blood allocation. For our plasma customers, we also provide information technology platforms for managing donors and information associated with the collection of plasma products within fractionation facilities. While each Haemonetics information technology platform can be used independently, our mission to provide "Arm to Arm®" blood management solutions means they can also work together through integration to further improve process workflows. Also, the ability to evaluate information based on the integration of these systems allows customers to continually improve their business processes. Leveraging information to make more informed decisions is a significant component of Haemonetics' overall commitment to improving blood management systems globally.
Integrated Blood Management Solutions —Combining software solutions with devices, we meet our goal of offering customers powerful tools for improving blood management while driving growth of our consumables. For example, a hospital may use our consulting services to analyze its blood management practices and recommend changes in practice. Then, the hospital can leverage our systems and services to analyze blood utilization, manage blood inventory, and potentially reduce demand for donated blood. Finally, hospitals can use our IMPACT® Online blood management business intelligence portal to monitor the results of its new blood management practices. The positive patient impact and reduced costs from this integrated blood management approach can be significant. Likewise, by understanding best practices, blood demand, and discreet patient needs, hospitals can more frequently deploy our devices for hemostasis diagnosis and cell salvage to ensure best patient care.
While each of our products, platforms, and services can be marketed individually, our blood management solutions vision is to offer integrated closed-loop solutions for blood supply chain management. Our software solutions — information technology platforms and consulting services — can be combined with our devices and sold through our plasma, blood center, and hospital sales forces.
Our software products help hospitals track and safely deliver stored blood products. SafeTrace Tx® is our software solution that helps manage blood product inventory, perform patient cross-matching, and manage transfusions. In addition, our BloodTrack® suite of solutions manages tracking and control of blood products from the hospital blood center through to transfusion to the patient. “Smart” refrigerators located in or near operating suites, emergency rooms, and other parts of the hospital dispense blood units with secure control and automated traceability for efficient documentation. With our more comprehensive offerings, hospitals are better able to manage processes across the blood supply chain and identify increased opportunities to reduce costs and enhance processes.
We believe a key example of our blood management solutions is the potential to balance blood demand with supply and mitigate shortages of blood components and reduce collection costs. Our software solutions, such as our SafeTrace® and El Dorado Donor® donation and blood unit management systems, span blood center operations and automate and track operations from the recruitment of the blood donor to the disposition of the blood product. Our Hemasphere® software solution provides support for more efficient blood drive planning, and Donor Doc® and e-Donor® software help to improve recruitment and retention. Combined, our solutions help blood collectors improve the safety, regulatory compliance, and efficiency of blood collection and supply.
Our software solutions product line represented 7.5%, 7.8%, and 9.7% of our total revenue in fiscal 2014, 2013 and 2012, respectively.
Marketing/Sales/Distribution
We market and sell our products to bio-pharmaceutical companies, blood collection groups and independent blood centers, hospitals and hospital service providers, group purchasing organizations and national health organizations through our own direct sales force (including full-time sales representatives and clinical specialists) as well as independent distributors. Sales representatives target the primary decision-makers within each of those organizations.
United States
In fiscal 2014, 2013 and 2012 approximately 53.4%, 51.0%, and 48.4%, respectively, of consolidated net revenues were generated in the U.S., where we primarily use a direct sales force to sell our products.
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Outside the United States
In fiscal 2014, 2013 and 2012 approximately 46.6%, 49.0%, and 51.6%, respectively, of consolidated net revenues were generated through sales to non-U.S. customers. Outside the United States, we use a combination of direct sales force and distributors.
Research and Development
Our research and development centers in the United States and Switzerland ensure that protocol variations are incorporated to closely match local customer requirements. In addition, our Haemonetics Software Solutions also maintains development operations in Canada and France.
Customer collaborations are also an important part of our technical strength and competitive advantage. These collaborations with customers and transfusion experts provide us with ideas for new products and applications, enhanced protocols, and potential test sites as well as objective evaluations and expert opinions regarding technical and performance issues.
The development of blood component separation products and extracorporeal blood typing and screening systems has required us to maintain technical expertise in various engineering disciplines, including mechanical, electrical, software, and biomedical engineering and material science. Innovations resulting from these various engineering efforts enable us to develop systems that are faster, smaller, and more user-friendly, or that incorporate additional features important to our customer base.
Research and development expense was $54.2 million in fiscal 2014, $44.4 million in fiscal 2013 and $36.8 million in fiscal 2012, representing approximately 5.0% - 6.0% of our net sales each year.
In fiscal 2014, research and development resources were allocated to supporting next generation plasma collection and software systems, a new TEG® Thrombelastograph Hemostasis Analyzer, and several other enhancements to both our whole blood and legacy product portfolios.
Manufacturing
Our principal manufacturing operations are located in the United States, Mexico, Scotland and Switzerland.
These include facilities in Mexico and Puerto Rico purchased in 2012 as part of our acquisition of the whole blood business from Pall Corporation.
On May 1, 2013, we announced a plan to pursue identified Value Creation and Capture (“VCC”) opportunities. These
include: (i) investment in product line extensions, next generation products and growth platforms; (ii) enhancement of commercial execution capabilities by implementing go-to-market and other strategies to enable global profitable revenue growth; and (iii) transformation of the manufacturing network to best support these commercial strategies while optimizing expense levels. Collectively, these are opportunities to position us for increased competitiveness and growth.
Our manufacturing network transformation plan, part of our larger VCC initiative previously announced, now includes (i) discontinuing manufacturing activities at our Braintree, Massachusetts and Ascoli-Piceno, Italy facilities, (ii) consulting with employee representatives regarding ceasing operations and closure of our manufacturing facility in Bothwell, Scotland, (iii) creating a technology center of excellence for product development, (iv) expansion of our current facility in Tijuana, Mexico, (v) engaging Sanmina Corporation as a contract manufacturer to produce certain medical equipment, and (vi) building a new manufacturing facility in Malaysia closer to our customers in Asia.
In general, our production activities occur in controlled settings or “clean room” environments. Each step of the manufacturing and assembly process is quality checked, qualified, and validated. Critical process steps and materials are documented to ensure that every unit is produced consistently and meets performance requirements. Our equipment and disposable manufacturing sites are certified to the ISO 13485 standard and to the Medical Device Directive allowing placement of the CE mark of conformity.
Plastics are the principal component of our disposable products. Contracts with our suppliers help mitigate some of the short-term effects of price volatility in this market. However, increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Contractors manufacture some component-sets according to our specifications. We maintain important relationships with two Japanese manufacturers that produce finished consumables in Singapore, Japan, and Thailand. Certain parts and components are purchased from sole source vendors. We believe that if necessary, alternative sources of supply are available in most cases, and could be secured within a relatively short period of time. Nevertheless, an interruption in supply could temporarily interfere with production schedules and affect our operations.
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Each blood processing machine is designed in-house and assembled by us or our contracted manufacturer from components that are manufactured to our specifications. The completed instruments are programmed, calibrated, and tested to ensure compliance with our engineering and quality assurance specifications. Inspection checks are conducted throughout the manufacturing process to verify proper assembly and functionality. When mechanical and electronic components are sourced from outside vendors, those vendors must meet detailed qualification and process control requirements.
Intellectual Property
We consider our intellectual property rights to be important to our business. We rely on patent, trademark, copyright, and trade secret laws, as well as provisions in our agreements with third parties to protect our intellectual property rights. We hold patents in the United States and many international jurisdictions on some of our machines, processes, disposables and related technologies. These patents cover certain elements of our systems, including protocols employed in our equipment and certain aspects of our processing chambers and disposables. Our patents may cover current products, products in markets we plan to enter, or products in markets we plan to license, or the patents may be defensive in that they are directed to technologies not currently embodied in our current products. We may also license patent rights from third parties that cover technologies that we plan to use in our business. To maintain our competitive position, we rely on the technical expertise and know-how of our personnel and on our patent rights. We pursue an active and formal program of invention disclosure and patent application in both the United States and foreign jurisdictions. We own various trademarks that have been registered in the United States and certain other countries.
Our policy is to obtain patent and trademark rights in the U.S. and foreign countries where such rights are available and we believe it is commercially advantageous to do so. However, the standards for international protection of intellectual property vary widely. We cannot assure that pending patent and trademark applications will result in issued patents and registered trademarks, that patents issued to or licensed by us will not be challenged or circumvented by competitors, or that our patents will not be determined invalid.
Competition
We have established a record of innovation and leadership in each of the areas in which we compete. To remain competitive, we must continue to develop and acquire new cost-effective products, information technology platforms, and business services. We believe that our ability to maintain a competitive advantage will continue to depend on a combination of factors. Some factors are largely within our control such as: (i) maintenance of a positive reputation among our customers, (ii) development of new products which meet our customer's needs, (iii) obtaining regulatory approvals for our products in key markets, (iv) obtaining patents which protect our innovations, (v) development and protection of proprietary know-how in important technological areas, (vi) product quality, safety and cost effectiveness and (vii) continual and rigorous documentation of clinical performance. Other factors are outside of our control. We could see changes in regulatory standards or clinical practice which favor a competitor's technology or reduce revenues in key areas of our business. For example, in fiscal 2014, we have seen changes in blood management practices at hospitals resulting in reduced demand for red cells and accordingly, decreased red cell and whole blood revenues.
In addition, we face competition from several large, global companies with product offerings similar to ours, such as Terumo BCT, Sorin Biomedica and Fresenius SE & Co. KGaA. Terumo and Fresenius, in particular, have significantly greater financial and other resources than we do and are strong competitors in a number of our businesses. The following provides an overview of the key competitors in each of our four global product categories.
• | Plasma |
In the automated plasma collection market, we principally compete with Fresenius, which acquired Fenwal, Inc. in November 2012, on the basis of quality, reliability, ease of use, services and technical features of the collection systems, and on the long-term cost-effectiveness of equipment and disposables. In China, the market is populated by local producers of a product that is intended to be similar to ours. Recently, those competitors have expanded to markets beyond China, into European and South American countries.
• | Blood Center |
We have several competitors in the Blood Center product lines, some of which compete across all blood components and others that are more specialized.
Terumo BCT, and Fresenius are our major competitors in platelet collection. In platelet collections, there are two areas of competition - automated collection and pooled random donor. In the automated collection area, competition is based on continual performance improvement, as measured by the time and efficiency of platelet collection and the
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quality of the platelets collected. Each of these companies has taken a different technological approach in designing their systems for automated platelet collection. In addition to automated platelet collection offerings, we now also compete in the pooled random donor platelet segment from whole blood collections from which pooled platelets are derived with the Acrodose product or buffy coat pooling sets.
Terumo BCT and Fresenius (following its acquisition of Fenwal in 2012) are also competitors in the automated red cell collection market. However, it is important to note that most double red cell collection is done in the US and less than 10% of the red cells collected in the U.S. annually are collected via automation. Therefore, we also compete with the traditional method of collecting red cells from the manual collection of whole blood. As discussed in our Company Overview, we entered the whole blood collections market during fiscal 2013 through the acquisition of the whole blood business from Pall Corporation. We compete on the basis of total cost, type-specific collection, process control, product quality, and inventory management.
Our whole blood business faces competition on the basis of quality and price. In North America, Europe and Asia-Pacific our main competitors are Fresenius, MacoPharma and Terumo BCT. We do not have significant whole blood revenues in Japan today. We have a competitive cost advantage in the supply of filtration needed for leukoreduced whole blood collection because we are vertically integrated in the production of our own filters.
In the cell processing market, competition is based on the level of automation, labor-intensiveness, and system type (open versus closed). Open systems may be weaker in good manufacturing process compliance. Moreover, blood processed through open systems has a 24-hour shelf life. With the ACP® (automated cell processor) brand, Haemonetics offers a closed system cell processor which gives blood processed through it, a 14-day shelf life. We compete with Terumo BCT's open systems in this market.
• | Hospital |
Within our hospital business, in the diagnostics market, the TEG Thrombelastograph Hemostasis Analyzer is used primarily in surgical applications. One direct competitor, ROTEM, is a competitor in Europe and in the United States. Other competitive technologies include standard coagulation tests and platelet function testing. The TEG analyzer competes with other laboratory tests based on its ability to provide a complete picture of a patient's hemostasis at a single point in time, and the ability to measure the clinically relevant platelet function for an individual patient.
In the intraoperative surgical blood salvage market, competition is based on reliability, ease of use, service, support, and price. For high-volume platforms, each manufacturer's technology is similar, and our Cell Saver technology competes principally with Sorin Biomedica, Medtronic, and Fresenius.
In the perioperative surgical blood salvage market, our OrthoPAT system competes primarily against (i) non-automated processing systems whose end product is an unwashed red blood cell unit for transfusion to the patient, (ii) transfusions of donated blood and (iii) coagulation therapies such as tranexamic acid.
• | Software Solution |
In the software market, we compete with MAK Systems, Mediware, Sunquest Information Systems and applications developed internally by our customers. These companies provide software to blood and plasma collectors and to hospitals for managing donors, collections, and blood units. None of these companies competes with Haemonetics' non-software products.
Our technical staff is highly skilled, but certain competitors have substantially greater financial resources and larger technical staffing at their disposal. There can be no assurance that competitors will not direct substantial efforts and resources toward the development and marketing of products competitive with those of Haemonetics.
Significant Customers
There were no customers that accounted for greater than 10% of our net revenues in fiscal 2014. The Japanese Red Cross Society (JRC) represented 10.1% of our net revenues in fiscal 2013.
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Government Regulation
Medical Device Regulation
The products we manufacture and market are subject to regulation by the Center of Biologics Evaluation and Research (“CBER”) and the Center of Devices and Radiological Health (“CDRH”) of the United States Food and Drug Administration (“FDA”), and other non-United States regulatory bodies.
All medical devices introduced to the United States market since 1976 are required by the FDA, as a condition of marketing, to secure either a 510(k) pre-market notification clearance or an approved premarket approval application (“PMA”). In the United States, software used to automate blood center operations and blood collections and to track those components through the system are considered by FDA to be medical devices, subject to 510(k) pre-market notification. Intravenous solutions (blood anticoagulants and solutions for storage of red blood cells) marketed by us for use with our manual collection and automated systems requires us to obtain an approved New Drug Application (“NDA”) or Abbreviated New Drug Application (“ANDA”) from CBER. A 510(k) pre-market clearance indicates FDA’s agreement with an applicant’s determination that the product for which clearance is sought is substantially equivalent to another legally marketed medical device. The process of obtaining a 510(k) clearance may involve the submission of clinical data and supporting information. The process of obtaining NDA approval for solutions is likely to take much longer than 510(k) clearances because the FDA review process is more complicated.
The FDA’s Quality System regulations set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for inspections of our facilities. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacturing and marketing of our products. We maintain customer complaint files, record all lot numbers of disposable products, and conduct periodic audits to assure compliance with FDA regulations. We place special emphasis on customer training and advise all customers that device operation should be undertaken only by qualified personnel.
The FDA can ban certain medical devices; detain or seize adulterated or misbranded medical devices; order repair, replacement or refund of these devices; and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations.
We are also subject to regulation in the countries outside the United States in which we market our products. The member states of the European Union (EU) have adopted the European Medical Device Directives, which create a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to obtain CE Marking for their products. Outside of the EU, many of the regulations applicable to our products are similar to those of the FDA. However, the national health or social security organizations of certain countries require our products to be registered by those countries before they can be marketed in those countries.
We have complied with these regulations and have obtained such registrations where we market our products. Federal, state and foreign regulations regarding the manufacture and sale of products such as ours are subject to change. We cannot predict what impact, if any, such changes might have on our business.
Conflict Minerals
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of "Conflict Minerals" mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. The conflict minerals include tin, tantalum, tungsten and gold, and their derivatives. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. There will be additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products.
Other Regulation
We are also subject to various environmental, health and general safety laws, directives and regulations both in the U.S. and abroad. Our operations, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. We believe that sound environmental, health and safety performance contributes to our competitive strength while benefiting our customers, shareholders and employees.
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Environmental Matters
Failure to comply with international, federal and local environmental protection laws or regulations could have an adverse impact on our business or could require material capital expenditures. We continue to monitor changes in U.S. and international environmental regulations that may present a significant risk to the business, including laws or regulations relating to the manufacture or sale of products using plastics.
Employees
As of March 29, 2014, we employed the full-time equivalent of 3,782 persons assigned to the following functional areas: manufacturing, 2,172; sales and marketing, 767; general and administrative, 284; research and development, 261; and quality control and field service, 298.
Availability of Reports and Other Information
All of our corporate governance materials, including the Principles of Corporate Governance, the Business Conduct Policy and the charters of the Audit, Compensation, and Nominating and Governance Committees are published on the Investor Relations section of our website at http://phx.corporate-ir.net/phoenix.zhtml?c=72118&p=irol-IRHome. On this web site the public can also access, free of charge, our annual, quarterly and current reports and other documents filed or furnished to the Securities and Exchange Commission, or SEC, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we make which are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. These statements are based on our current expectations and estimates as to prospective events and circumstances about which we can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of our actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: the effects of disruption from the manufacturing transformation making it more difficult to maintain relationships with employees and timely deliver high quality products, unexpected expenses incurred during our VCC initiatives, technological advances in the medical field and standards for transfusion medicine, our ability to successfully implement products that incorporate such advances and standards, demand for whole blood and blood components, product quality, market acceptance, regulatory uncertainties, the ability of our contract manufacturing vendors to timely supply high quality goods, the effect of economic and political conditions, the impact of competitive products and pricing, blood product reimbursement policies and practices, foreign currency exchange rates, changes in customers’ ordering patterns including single-source tenders, the effect of industry consolidation as seen in the plasma and blood center markets, the effect of communicable diseases and the effect of uncertainties in markets outside the U.S. (including Europe and Asia) in which we operate and such other risks described under Item 1A. Risk Factors included in this report. The foregoing list should not be construed as exhaustive.
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ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements on page 10 and page 40.
If we are unable to successfully expand our product lines through internal research & development and acquisitions, our business may be materially and adversely affected.
Continued growth of our business depends on our maintaining a pipeline of profitable new products and successful improvements to our existing products. This requires accurate market analysis and carefully targeted application of intellectual and financial resources toward technological innovation or acquisition of new products. The creation and adoption of technological advances is only one step. We must also efficiently develop the technology into a product which confers a competitive advantage, represents a cost effective solution or provides improved clinical outcomes. The risks of missteps and set backs are an inherent part of the innovation and development processes in the medical device industry.
If we are unable to successfully grow our business through marketing partnerships and acquisitions, our business may be materially and adversely affected.
Promising partnerships and acquisitions may not be completed for reasons such as competition among prospective partners or buyers, our inability to reach satisfactory terms, or the need for regulatory approvals. Any acquisition that we complete may be dilutive to earnings and require the investment of significant resources. The economic environment may constrain our ability to access the capital needed for acquisitions and other capital investments.
A significant portion of our revenue derives from the sale of blood collection supplies. The decline in the number of blood collection procedures may have an adverse effect on our business, financial condition and results of operations.
Sales to blood collectors represented 48.3% of our consolidated disposables revenues in fiscal 2014. In certain markets, changes in medical protocols and the development of less invasive, lower blood loss procedures has reduced the number of transfusions of red blood cells, which has in turn led to a decline in the number of blood collection procedures. This is particularly true in the United States, where we expect to see collections decline by approximately 10% in fiscal 2015. If we are unable to gain and maintain higher market share, lower procedure levels could result in lower net revenues and higher product costs.
Consolidation of the healthcare providers and blood collectors has increased demand for price concessions and caused the exclusion of suppliers from significant market segments, which could have an adverse effect on our business, financial condition and results of operations.
The costs of healthcare in the United States have risen significantly over the past decade. Numerous initiatives and reform by legislators, regulators and third-party payers to curb these costs has reduced reimbursement rates which is causing hospitals to consolidate into larger integrated delivery networks and group purchasing organizations in an effort to reduce administrative costs and increase purchasing power. This consolidation has resulted in greater pricing pressure on suppliers, decreased average selling prices and a greater the number of sole source relationships. This pressure impacts our Hospital and Blood Center businesses.
The expansion among hospitals in the United States of group purchasing organizations, integrated delivery networks and large single accounts directly puts price pressure on our Hospital business. It also puts price pressure on our United States Blood Center customers who are also facing reduced demand for red cells. Our Blood Center customers have responded to this pressure by creating their own group purchasing organizations and resorting to single source tenders to create incentives for suppliers, including us, to significantly reduce prices.
We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and competitors. This may exert further downward pressure on the prices of our products and adversely impact our business, financial condition or results of operations.
Quality problems with our processes, goods, and services could harm our reputation for producing high-quality products and erode our competitive advantage, sales, and market share.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our products and services. If we fail to meet these standards or fail to adapt to evolving standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could decline.
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As approximately half of our revenue comes from outside the United States, we are subject to geopolitical risk, economic volatility, anti-corruption laws, export and import restrictions, local regulatory authorities and the laws and medical practices in foreign jurisdictions.
We do business in over 100 countries, including significant business in Russia and China. We have distributors in 90 of those countries. This exposes us to geopolitical risk, economic volatility, anti-corruption laws, export and import restrictions, local regulatory authorities and the laws and medical practices in foreign jurisdictions.
If there are sanctions or restrictions on the flow of capital which prevent product importation or receipt of payments in Russia or China, our business could be adversely affected.
Our international operations are governed by the U.S. Foreign Corrupt Practices Act (FCPA) and other similar anti-corruption laws in other countries. Generally, these laws prohibit companies and their business partners or other intermediaries from making improper payments to foreign governments and government officials in order to obtain or retain business. Global enforcement of such anti-corruption laws has increased in recent years, including aggressive investigations and enforcement proceedings. While we have an active compliance program and various other safeguards to discourage impermissible practices, we have distributors in 90 countries, several of which are considered high risk for corruption. As a result, our global operations carry some risk of unauthorized impermissible activity on the part of one of our distributors, employees, agents or consultants. Any alleged or actual violation could subject us to government scrutiny, severe criminal or civil fines, or sanctions on our ability to export product outside the U.S., which could adversely affect our reputation and financial condition.
Export of U.S. technology or goods manufactured in the United States to some jurisdictions requires special U.S. export authorization or local market controls that may be influenced by factors, including political dynamics, outside our control.
Finally, any other significant changes in the competitive, legal, regulatory, reimbursement or economic environments of the jurisdictions in which we conduct our international business could have a material impact on our business.
The implementation of healthcare reform in the United States may adversely affect us.
The Patient Protection and Affordable Health Care Act was enacted into law in the U.S. in March 2010. In addition to a medical device tax, effective as of January 2013, the effects of which are considered in our financial disclosures, there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood. We are unable to predict what healthcare programs and regulations will be ultimately implemented at either the federal or state level, but any changes that may decrease reimbursement for our products, reduce medical procedure volumes or increase cost containment measures could adversely impact our business.
An interruption in our ability to manufacture our products or an inability to obtain key components or raw materials may adversely affect our business.
Certain key products are manufactured at single locations, with limited alternate facilities. If an event occurs that results in damage to one or more of our facilities, we may be unable to manufacture the relevant products at previous levels or at all. In addition, for reasons of quality assurance or cost effectiveness, we purchase certain finished goods, components and raw materials from sole suppliers, notably JMS Co. Ltd., Kawasumi Laboratories and Sanmina Corporation. Due to the stringent regulations and requirements of the FDA and other similar non-U.S. regulatory agencies regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. A reduction or interruption in manufacturing, or an inability to secure alternative sources of raw materials or components, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we are unable to meet our debt obligations or experience a disruption in our cash flows, it could have an adverse effect on our financial condition, results of operations or cost of borrowing.
We incurred $475.0 million in debt to acquire the whole blood business. The obligations to pay interest and repay the borrowed amounts may restrict our ability to adjust to adverse economic conditions, our ability to fund working capital, capital expenditures, acquisition or other general corporate requirements. The interest rate on the loan is variable and subject to change based on market forces. Fluctuations in interest rates could adversely affect our profitability and cash flows.
In addition, as a global corporation we have significant cash reserves held in foreign countries. These balances may not be immediately available to repay our debt.
Our credit facilities contain financial covenants that require us to maintain specified financial ratios and make interest and principal payments. If we are unable to satisfy these covenants, we may be required to obtain waivers from our lenders and no assurance can be made that our lenders would grant such waivers on favorable terms, or at all, and we could be required to repay any borrowed amounts on short notice.
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As a medical device manufacturer we are subject to a number of laws and regulations. Non-compliance with those laws or regulations could adversely affect our financial condition and results of operations.
The manufacture, distribution and marketing of our products are subject to regulation by the FDA and other non-United States regulatory bodies. We must obtain specific regulatory clearance prior to selling any new product or service, a process which is costly and time consuming. If we are unable to obtain the necessary regulatory clearance we will be unable to introduce new enhanced product. Our operations are also subject to continuous review and monitoring by the FDA and other regulatory authorities. Failure to substantially comply with applicable regulations could subject our products to recall or seizure by government authorities, or an order to suspend manufacturing activities. As well, if our products were determined to have design or manufacturing flaws, this could result in their recall or seizure. Either of these situations could also result in the imposition of fines.
Many of our competitors have significantly greater financial means and resources, which may allow them to more rapidly develop new technologies and more quickly address changes in customer requirements.
Our ability to remain competitive depends on a combination of factors. Certain factors are within our control such as reputation, regulatory approvals, patents, unpatented proprietary know-how in several technological areas, product quality, safety, cost effectiveness and continued rigorous documentation of clinical performance. Other factors are outside of our control such as regulatory standards, medical standards, reimbursement policies and practices, and the practice of medicine.
Loss of a significant customer could adversely affect our business.
In fiscal 2014, although no one customer represented more than 10% of our revenues, our ten largest customers accounted for approximately 46% of our revenue. If any of our largest customers materially reduce their purchases from us or terminate their relationship with us for any reason, we could experience an adverse effect on our results of operations or financial condition.
We may not realize the expected benefits from our Manufacturing Network Optimization Program; our long-term plans will result in higher short-term expenses and require more cash expenditures.
In May 2013, we announced a multi-year Manufacturing Network Optimization Program which is intended to reduce our manufacturing costs by changing our current manufacturing footprint and supply chain strategy. We expect the program will reduce manufacturing costs and improve supply chain efficiency when complete. However, there are no assurances these cost savings or supply chain efficiencies will be achieved, and implementation of the program could introduce risks such as management distraction, business disruption, and attrition beyond our planned reduction in workforce and reduced employee productivity which may reduce our revenue or increase our costs. In addition, the activities involve the movement of several product lines to new manufacturing locations. During these transitions, we may experience delays in the construction of our new facility in Malaysia or expanded facility in Mexico, challenges in transferring production to the new locations, additional costs, or unacceptable quality. These may lead to additional working capital, warranty or inventory costs. Finally, implementing the program will result in charges and expenses that impact our operating results and increase our level of capital expenditures.
Failure to integrate acquired businesses into our operations successfully could adversely affect our business.
The integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. These efforts result in additional expenses and involve significant amounts of management's time. Factors that affect the success of acquisitions include the strength of the acquired company's underlying technology and ability to execute, our ability to retain employees, and our ability to achieve synergies, such as increasing sales and achieving cost savings. Our failure to manage successfully and coordinate the growth of the combined acquired companies could have an adverse impact on our business and our future growth.
Current or worsening economic conditions may adversely affect our business and financial condition.
A portion of our trade accounts receivable outside the United States include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries’ national economies. Although, we have not incurred significant losses on government receivables to date, we continually evaluate all government receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries’ healthcare systems deteriorate such that their ability to make payments is uncertain, allowances may be required in future periods.
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As a global corporation, we are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations.
International revenues and expenses account for a substantial portion of our operations and we intend to continue expanding our presence in international markets. In fiscal 2014, our international revenues accounted for 46.6% of our total revenues. The exposure to fluctuations in currency exchange rates takes different forms. Reported revenues for sales, as well as manufacturing and operational costs denominated in foreign currencies by our international businesses, fluctuate due to exchange rate movement when translated into U.S. dollars for financial reporting purposes. Fluctuations in exchange rates could adversely affect our profitability in U.S. dollars of products and services sold by us into international markets, where payment for our products and services and related manufacturing and operational costs is made in local currencies.
We are subject to the risks associated with communicable diseases. A significant outbreak of a disease could reduce the demand for our products and affect our ability to provide our customers with products and services.
An eligible donor’s willingness to donate is affected by concerns about their personal health and safety. Concerns about communicable diseases (such as pandemic flu, SARS, or HIV) could reduce the number of donors, and accordingly reduce the demand for our products for a period of time. A significant outbreak of a disease could also affect our employees’ ability to work, which could limit our ability to produce product and service our customers.
There is a risk that the Company’s intellectual property may be subject to misappropriation in some countries.
Certain countries, particularly China, do not enforce compliance with laws that protect intellectual property (“IP”) rights with the same degree of vigor as is available under the U.S. and European systems of justice. Further, certain of the Company’s IP rights are not registered in China, or if they were, have since expired. This may permit others to produce copies of products in China that are not covered by currently valid patent registrations. There is also a risk that such products may be exported from China to other countries.
In order to aggressively protect our intellectual property throughout the world, we have a program of patent disclosures and filings in markets where we conduct significant business. While we believe this program is reasonable and adequate, the risk of loss is inherent in litigation as different legal systems offer different levels of protection to intellectual property, and it is still possible that even patented technologies may not be protected absolutely from infringement.
Pending and future intellectual property litigation could be costly and disruptive to us.
We operate in an industry that is susceptible to significant intellectual property litigation. We are currently pursuing intellectual property infringement claims described in more detail under Item 3. Legal Proceedings and Note 10- Commitments and Contingencies to our fiscal 2014 consolidated financial statements included in Item 8 of this Annual Report. Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict. Patent litigation may result in adverse outcomes and could significantly divert the attention of our technical and management personnel.
We sell our products in certain emerging economies.
There are risks with doing business in emerging economies, such as Brazil, Russia, India and China. These economies tend to have less mature product regulatory systems, and more volatile financial markets. In addition, the government controlled health care system's ability to invest in our products and systems may abruptly shift due to changing government priorities or funding capacity. Our ability to sell products in these economies is dependent upon our ability to hire qualified employees or agents to represent our products locally, and our ability to obtain and maintain the necessary regulatory approvals in a less mature regulatory environment. If we are unable to retain qualified representatives or maintain the necessary regulatory approvals, we will not be able to continue to sell products in these markets. We are exposed to a higher degree of financial risk, if we extend credit to customers in these economies.
In many of the international markets in which we do business, including certain parts of Europe, South America, the Middle East, Russia and Asia, our employees, agents or distributors offer to sell our products in response to public tenders issued by various governmental agencies.
There is additional risk in selling our products through agents or distributors, particularly in public tenders. If they misrepresent our products, do not provide appropriate service and delivery, or commit a violation of local or U.S. law, our reputation could be harmed, and we could be subject to fines, sanctions or both.
We have a complex international supply chain which includes key sole source suppliers.
We have a complex international supply chain which involves integrating key suppliers and our manufacturing capacity into a global movement of components and finished goods.
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We have certain key suppliers, JMS Co. Ltd., Kawasumi Laboratories and Sanmina Corporation, who have their own complex supply chains. JMS and Kawasumi make certain finished goods and important sub components in locations throughout Asia. We have engaged Sanmina to be the sole manufacturer of certain equipment as part of our manufacturing network optimization activities.
Any disruption to one or more of our suppliers’ production or delivery of sufficient volumes of subcomponents conforming to our specifications could disrupt or delay our ability to deliver finished products to our customers. For example, we purchase components in Asia for use in manufacturing in the United States, Puerto Rico, Mexico and Scotland. We also regularly ship finished goods from the United States, Puerto Rico, Mexico and Scotland to Europe and Asia.
Plastics are the principal component of our disposables, which are the main source of our revenues. Any change in the price, composition or availability of the plastics we purchase could adversely affect our business.
We have three risks with this key raw material: price, composition and availability.
Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials. Increases in the costs of other commodities may affect our procurement costs to a lesser degree.
The composition of the plastic we purchase is also important. Today, we purchase plastics which contain DEHP. Should plastics with DEHP become unavailable due to regulatory changes, we may be required to obtain new FDA or foreign approvals for a number of products.
While we have not experienced shortages in the past, any interruption in the supply for certain plastics could have a material impact on our business by limiting our ability to manufacture and sell the products which represent a significant portion of our revenues.
The technologies that support our products are the subject of active patent prosecution.
There is a risk that one or more of our products may be determined to infringe a patent held by another party. If this were to occur we may be subject to an injunction or to payment of royalties, or both, which may adversely affect our ability to market the affected product(s). In addition, competitors may patent technological advances which may give them a competitive advantage or create barriers to entry.
Our products are made with materials which are subject to regulation by governmental agencies.
Environmental regulations may prohibit the use of certain compounds in products we market and sell in regulated markets. If we are unable to substitute suitable materials into our processes, our manufacturing operations may be disrupted. In addition, we may be obligated to disclose the origin of certain materials used in our products, including but not limited to, metals mined from locations which have been the site of human rights violations.
We are entrusted with sensitive personal information relating to surgical patients, blood donors, employees and other persons in the course of operating our business and serving our customers.
Government agencies require that we implement measures to ensure the integrity and security of such personal data and, in the event of a breach of protocol, we inform affected individuals. If our systems are not properly designed or implemented, or should suffer a breach of security or an intrusion (e.g., “hacking”) by unauthorized persons, the Company’s reputation could be harmed, and it could incur costs and liabilities to affected persons and enforcement agencies.
We operate in an industry susceptible to significant product liability claims.
Our products are relied upon by medical personnel in connection with the treatment of patients and the collection of blood from donors. In the event that patients or donors sustain injury or death in connection with their condition or treatment, we, along with others, may be sued, and whether or not we are ultimately determined to be liable, we may incur significant legal expenses. These claims may be brought by individuals seeking relief on their own behalf or purporting to represent a class. In addition, product liability claims may be asserted against us in the future based on events we are not aware of at the present time.
In addition, such litigation could damage our reputation and, therefore, impair our ability to market our products and obtain professional or product liability insurance. This causes the premiums for such insurances to increase. As such, we carry product liability coverage. While we believe that current coverage is sufficient, there is no assurance that such coverage will be adequate to cover incurred liabilities. Moreover, we may be unable to obtain acceptable product and professional liability coverage.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters facility, which the Company owns, is located on 14 acres in Braintree, Massachusetts. This facility is located in a light industrial park and was constructed in the 1970s. The building is approximately 180,000 square feet, of which 70,000 square feet are devoted to manufacturing and quality control operations, 35,000 square feet to warehousing, 72,000 square feet for administrative and research, development and engineering activities.
The Company leases an 81,929 square foot facility in Leetsdale, Pennsylvania. This facility is used for warehousing, distribution and manufacturing operations supporting our plasma business. Annual lease expense is $383,970 for this facility.
The Company leases 99,931 square feet in Draper, Utah. This facility is used for the manufacturing and distribution of plasma disposable products. Annual lease expense is $503,652. During fiscal 2014, the Company entered an agreement to purchase this facility for $6.6 million which is payable during the first quarter of fiscal 2015.
The Company owns a facility in Union, South Carolina. This facility is used to manufacture sterile solutions that support our blood center and plasma businesses. The facility is approximately 69,300 square feet.
The Company leases a facility in Niles, Illinois, which performs research and manufacturing for the Company. This facility is 16,478 square feet of office and manufacturing space. Annual lease expense is $293,003.
The Company owns a facility in Bothwell, Scotland used to manufacture disposable components for European and Asian customers. This facility is approximately 40,200 square feet. We are currently consulting with employee representatives regarding ceasing operations and closure of this facility.
The Company leases 26,264 square feet of office space in Signy, Switzerland. This facility is used for sales, marketing, finance and other administrative services, as well as supply chain and procurement management activities related to our manufacturing operations. Annual lease expense for this space is approximately $950,000.
The Company leases a facility in Fajardo, Puerto Rico that is approximately 114,860 square feet under an agreement with Pall Corporation executed in connection with the Company's acquisition of Pall's transfusion medicine business on August 1, 2012. This facility is used for production of blood filters. We recorded a $2.1 million capital lease under purchase accounting for this property for which we are recording approximately $0.2 million of depreciation expense annually.
The Company owns a facility in Ascoli, Italy, used for the production of whole blood collection kits. This facility is 87,188 square feet. During fiscal 2014, the Company announced it has discontinued manufacturing activities at this location as part of its VCC initiatives.
The Company leases 126,569 square feet of space in Tijuana, Mexico used for the production of blood collection sets used for collection, handling and storage of whole blood. Annual lease expense is approximately $325,000.
The Company owns a facility in Tijuana, Mexico which will be used for the production of whole blood collection sets and disposables. This facility is approximately 182,380 square feet.
The Company owns two facilities in Covina, California that occupy 70,781 square feet, dedicated to manufacturing, R&D and engineering functions. The facilities also include general administration space. The Company also leases 40,400 square feet of space for warehousing and logistic operations. Annual lease expense is approximately $264,450. These facilities are used for the production of whole blood collection kits.
The Company leases land in Penang, Malaysia where we are building a new manufacturing facility closer to our customers in Asia. Annual lease expense is approximately $100,000.
The Company leases 166,400 square feet in Nashville, TN. This facility is used for warehousing and distribution. Annual lease expense is approximately $415,000 for this facility. This lease was executed in fiscal 2014 and effective during the first quarter of fiscal 2015.
The Company also leases administration, sales, marketing, service, and distribution facilities in locations around the world.
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ITEM 3. LEGAL PROCEEDINGS
We are presently engaged in various legal actions, and although our ultimate liability cannot be determined at the present time, we believe that any such liability will not materially affect our consolidated financial position or our results of operations.
Fenwal (Fresenius) Patent Infringement
For the past seven years, we have pursued patent infringement lawsuits against Fenwal Inc. seeking an injunction and damages from their infringement of a Haemonetics patent, through the sale of the ALYX brand automated red cell collection system, a competitor of our automated red cell collection systems.
Most recently, we have pursued a patent infringement action in Germany against Fenwal, and its European and German subsidiary. On September 20, 2010, we filed a patent infringement action in Germany. In response, Fenwal filed an action to invalidate the Haemonetics patent which is the subject of this infringement action on December 1, 2010. In January 2014, we received a final ruling which narrowed the scope of our patent. This ruling will prevent us from further claims of infringement and effectively ends our claims against Fenwal.
Italian Employment Litigation
We have recently received notices from employees of the facility in Ascoli-Piceno, Italy where we are discontinuing operations of claimed violations of employment related contracts. Seventy-two employees served actions in February 2014 claiming their working conditions should have been established by the national collective bargaining agreement for the chemical and pharmaceutical industries rather than the one actually used. They claim applying the alternative bargaining agreement would have resulted in slightly higher minimum salaries according to their job functions. Also in February, sixty-eight employees served actions claiming that certain solidarity agreements are void. Solidarity agreements are arrangements between the company, employees and the government to continue full pay and benefits for employees who would otherwise be terminated in times of low demand. As of March 29, 2014, the total amount of damages claimed by the plaintiffs in these matters is approximately $3.5 million, however it is not possible at this point in the proceedings to accurately evaluate the likelihood or amount of any potential losses. As such, no amounts have been accrued. We may receive other, similar claims, in the future.
ITEM 4. MINE SAFETY DISCLOSURES
None
ITEM 4A. EXECUTIVE OFFICERS
Executive Officers of the Registrant
The information concerning our Executive Officers is as follows. Executive officers are elected by and serve at the discretion of our Board of Directors. There are no family relationships between any director or executive officer and any other director or executive officer of Haemonetics Corporation.
PETER ALLEN (age 55), President, Global Plasma joined Haemonetics in 2003 as President of the Donor Division. In March 2008, Mr. Allen was appointed Chief Marketing Officer. In October 2011, he was promoted to President of Global Plasma. Prior to joining Haemonetics, Mr. Allen was Vice President of The Aethena Group, a private equity firm providing services to the global healthcare industry. From 1998 to 2001, he held various positions including Vice President of Sales and the Oncology Business at Syncor International, a provider of radiopharmaceutical and comprehensive medical imaging services. Previously, Mr. Allen held executive level positions in sales, marketing, and operations in DataMedic, Inc., Enterprise Systems, Inc./HBOC, and Robertson Lowstuter, Inc. Mr. Allen has also worked in sales and marketing at American Hospital Supply Corporation and Baxter International, Inc.
BRIAN BURNS (age 50) Executive Vice President, Global Quality Assurance and Regulatory Affairs joined Haemonetics in January 2014. Mr. Burns most recently held the position of Senior Vice President, North America QA, RA for Fresenius Medical Corporation, Dialysis Division, where he was also the Corporate Management Representative. Brian was previously with Boston Scientific as Executive Vice President, Global QA, RA and Safety. During his tenure, he held leadership positions at the Senior Vice President and Vice President levels with accountability and expertise in global quality, CAPA, Complaints, Clinical, and Regulatory functions.
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BRIAN CONCANNON (age 56) , President and Chief Executive Officer joined Haemonetics in 2003 as President of the Patient Division. He was promoted to President of Global Markets in 2006 and then to Chief Operating Officer in 2007. In April 2009, he was promoted to President and Chief Executive Officer, and elected to the Haemonetics Board of Directors. Immediately prior to joining Haemonetics, Mr. Concannon was President of the Northeast Region at Cardinal Health Medical Products and Services where he was employed since 1998. From 1985 to 1998, he was employed by American Hospital Supply Corporation, Baxter Healthcare Corporation, and Allegiance Healthcare in a series of sales and operations management positions of increasing responsibility.
SUSAN HANLON (age 46), Vice President Finance and Chief Accounting Officer joined our Company in 2002 as Vice President and Corporate Controller. In 2004, she was promoted to Vice President Planning and Control, and in 2008, Ms. Hanlon was promoted to Vice President Finance. She presently has responsibility for Controllership, Financial Planning, Tax, and Treasury. Prior to joining Haemonetics, Ms. Hanlon was a partner with Arthur Andersen LLP in Boston.
DAVID HELSEL (age 50) Executive Vice President, Global Manufacturing joined Haemonetics as Vice President of Global Manufacturing in March 2012, and is responsible for worldwide oversight of the Company’s manufacturing and supply chain organizations. Mr. Helsel was previously with Covidien, Ltd. for 16 years, where he most recently was Vice President of Operations for the Surgical Solutions global business unit. During his tenure with Covidien, his previous roles included Vice President of Operations for the Medical Supplies segment and Global Director of Operational Excellence – Manufacturing. Mr. Helsel holds a Bachelor of Science degree in Mechanical Engineering from LeTourneau University.
SANDRA JESSE (age 61) Chief Legal Officer joined Haemonetics as Vice President, Chief Legal Officer in September 2011, and is responsible for the company’s world-wide Legal, Compliance and Corporate Audit and Controls groups. Ms. Jesse was previously the Executive Vice President and Chief Legal Officer of Blue Cross Blue Shield of Massachusetts, a Partner in the Boston law firm of Choate, Hall and Stewart, and Press Secretary for United States Congressman, Lee Hamilton. She has served on a number of Boards of Directors, including the New England Legal Foundation, Longy School of Music, Boston Harbor Island Alliance and the Landmark School. Ms. Jesse is a former President of the Boston Bar Foundation.
CHRISTOPHER LINDOP (age 56) Executive Vice President, Business Development and Chief Financial Officer joined Haemonetics in January of 2007 as Chief Financial Officer. In 2007, Mr. Lindop assumed responsibility for business development. Prior to joining Haemonetics, he was Chief Financial Officer at Inverness Medical Innovations, a rapidly growing global developer of advanced consumer and professional diagnostic products from 2003 to 2006. Prior to this, Mr. Lindop was a Partner in the Boston offices of Ernst & Young LLP and Arthur Andersen LLP.
KATHLEEN MCDANIEL (age 50) Executive Vice President, Global Human Resources joined Haemonetics in March 2013 as EVP, Global Human Resources. Ms. McDaniel most recently served as worldwide VP of Human Resources for DePuy Synthes, a Johnson & Johnson Company. Prior to Depuy, Ms. McDaniel was an Executive Vice President at Fleet Credit Card Services. She has over 25 years of broad global HR leadership experience having held executive, senior human resources generalist and compensation positions at leading computer and financial services companies.
DR. JONATHAN WHITE (age 54) Chief Science and Technology Officer joined Haemonetics in 2008 as Vice President of Research and Development. Dr. White joined Haemonetics from Pfizer where he held a number of roles including Chief Information Officer. He previously worked at McKinsey and Company in New York. Dr. White is a Fellow of the Royal College of Surgery in England.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol HAE. The following table sets forth for the periods indicated the high and low sales prices of such common stock, which represent actual transactions as reported by the New York Stock Exchange. On November 30, 2012 the Company completed a two-for-one split of its common stock in the form of a stock dividend. Unless otherwise indicated, all common stock shares and per share information referenced below have been retroactively adjusted to reflect the stock split. The exercise price of each outstanding option has also been proportionately and retroactively adjusted for all periods presented. Par value per share and authorized shares were however not affected by the stock split.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Fiscal year ended March 29, 2014: | |||||||||||||||
Market price of Common Stock: | |||||||||||||||
High | $ | 42.87 | $ | 45.90 | $ | 44.20 | $ | 43.60 | |||||||
Low | $ | 37.71 | $ | 39.32 | $ | 38.26 | $ | 31.80 | |||||||
Fiscal year ended March 30, 2013: | |||||||||||||||
Market price of Common Stock: | |||||||||||||||
High | $ | 37.06 | $ | 40.70 | $ | 41.38 | $ | 44.44 | |||||||
Low | $ | 33.44 | $ | 34.32 | $ | 38.92 | $ | 40.78 | |||||||
There were approximately 254 holders of record of the Company’s common stock as of March 29, 2014. The Company has never paid cash dividends on shares of its common stock and does not expect to pay cash dividends in the foreseeable future.
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The following graph compares the cumulative 5-year total return provided to shareholders on Haemonetics Corporation’s common stock relative to the cumulative total returns of the S&P 500 index and the S&P Health Care Equipment index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on 3/28/2009 and its relative performance is tracked through 3/29/2014.
___________________________________
* | $100 invested on 3/28/2009 in stock or index, including reinvestment of dividends. Fiscal year ended March 30. | |
3/09 | 3/10 | 3/11 | 3/12 | 3/13 | 3/14 | |||||||||||||
Haemonetics Corporation | 100.00 | 103.78 | 118.99 | 126.51 | 151.27 | 118.34 | ||||||||||||
S&P 500 | 100.00 | 146.57 | 166.17 | 176.53 | 196.67 | 234.67 | ||||||||||||
S&P Health Care Equipment | 100.00 | 139.58 | 141.61 | 147.06 | 164.75 | 209.57 | ||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Unregistered Sales of Equity Securities and Use of Proceeds
There was no repurchase of shares during fiscal 2014. On April 28, 2014 the Board of Directors approved the repurchase of up to $100.0 million worth of the Company's shares.
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ITEM 6. SELECTED FINANCIAL DATA
Haemonetics Corporation Five-Year Review
(In thousands, except per share and employee data) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Summary of Operations | |||||||||||||||||||
Net revenues | $ | 938,509 | $ | 891,990 | $ | 727,844 | $ | 676,694 | $ | 645,430 | |||||||||
Cost of goods sold | 470,144 | 463,859 | 358,604 | 321,485 | 307,949 | ||||||||||||||
Gross profit | 468,365 | 428,131 | 369,240 | 355,209 | 337,481 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and development | 54,200 | 44,394 | 36,801 | 32,656 | 26,376 | ||||||||||||||
Selling, general and administrative | 365,127 | 323,053 | 243,681 | 212,005 | 212,138 | ||||||||||||||
Asset write-down | 1,711 | 4,247 | — | — | 15,686 | ||||||||||||||
Total operating expenses | 421,038 | 371,694 | 280,482 | 244,661 | 254,200 | ||||||||||||||
Operating income | 47,327 | 56,437 | 88,758 | 110,548 | 83,281 | ||||||||||||||
Other (expense) income, net | (10,926 | ) | (6,540 | ) | 740 | (467 | ) | (2,010 | ) | ||||||||||
Income before provision for income taxes | 36,401 | 49,897 | 89,498 | 110,081 | 81,271 | ||||||||||||||
Provision for income taxes | 1,253 | 11,097 | 22,612 | 30,101 | 22,901 | ||||||||||||||
Net income | $ | 35,148 | $ | 38,800 | $ | 66,886 | $ | 79,980 | $ | 58,370 | |||||||||
Income per share: | |||||||||||||||||||
Basic | $ | 0.68 | $ | 0.76 | $ | 1.32 | $ | 1.59 | $ | 1.15 | |||||||||
Diluted | $ | 0.67 | $ | 0.74 | $ | 1.30 | $ | 1.56 | $ | 1.12 | |||||||||
Weighted average number of shares | 51,611 | 51,349 | 50,727 | 50,154 | 50,902 | ||||||||||||||
Common stock equivalents | 766 | 910 | 863 | 1,038 | 1,224 | ||||||||||||||
Weighted average number of common and common equivalent shares | 52,377 | 52,259 | 51,590 | 51,192 | 52,126 | ||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Financial and Statistical Data: | |||||||||||||||||||
Working capital | $ | 406,048 | $ | 416,866 | $ | 396,385 | $ | 340,160 | $ | 250,888 | |||||||||
Current ratio | 2.9 | 3.3 | 4.0 | 4.1 | 2.9 | ||||||||||||||
Property, plant and equipment, net | $ | 271,437 | $ | 256,953 | $ | 161,657 | $ | 155,528 | $ | 154,313 | |||||||||
Capital expenditures | $ | 73,648 | $ | 62,188 | $ | 53,198 | $ | 46,669 | $ | 56,304 | |||||||||
Depreciation and amortization | $ | 81,740 | $ | 65,481 | $ | 49,966 | $ | 48,145 | $ | 43,236 | |||||||||
Total assets | $ | 1,514,178 | $ | 1,461,917 | $ | 911,135 | $ | 833,264 | $ | 760,928 | |||||||||
Total debt | $ | 437,687 | $ | 480,094 | $ | 3,771 | $ | 4,879 | $ | 20,520 | |||||||||
Stockholders’ equity | $ | 837,888 | $ | 769,182 | $ | 732,631 | $ | 686,136 | $ | 593,124 | |||||||||
Debt as a % of stockholders’ equity | 52.2 | % | 62.4 | % | 0.5 | % | 0.7 | % | 3.5 | % | |||||||||
Employees | 3,782 | 3,563 | 2,337 | 2,201 | 2,327 | ||||||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
Haemonetics is a global healthcare company dedicated to providing innovative blood management solutions to our customers. Our comprehensive portfolio of integrated devices, information management, and consulting services offers blood management solutions for each facet of the blood supply chain, helping improve clinical outcomes and reduce costs for blood and plasma collectors, hospitals, and patients around the world. Our products and services help prevent a transfusion to a patient who does not need one and provide the right blood product, at the right time, in the right dose to the patient who does.
Blood and its components (plasma, platelets, and red cells) have many vital and frequently life-saving clinical applications. Plasma is used for patients with major blood loss and is manufactured into pharmaceuticals to treat a variety of illnesses and hereditary disorders such as hemophilia. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets treat cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.
Recent developments
Value Creation and Capture Initiatives
On April 29, 2013, we committed to a plan to pursue identified Value Creation and ("VCC") opportunities. These opportunities include investment in product line extensions and next generation products, enhancement of commercial capabilities and a transformation of our manufacturing network. The transformation of our manufacturing network will take place over the next three fiscal years and includes changes to the current manufacturing footprint and supply chain structure (the "Network Plan"). To implement the Network Plan, we are (i) discontinuing manufacturing activities at our Braintree, Massachusetts and Ascoli-Piceno, Italy facilities, (ii) creating a technology center of excellence for product development, (iii) expanding our current facility in Tijuana, Mexico, (iv) engaging Sanmina Corporation as a contract manufacturer to produce certain medical equipment, and (v) building a new manufacturing facility in Malaysia closer to our customers in Asia. We updated our plans on April 28, 2014 by announcing a consultation with employee representatives regarding ceasing operations and closure of our manufacturing facility in Bothwell, Scotland. See liquidity and capital resources discussion of this MD&A for further discussion of the costs of these activities.
Entry Into Whole Blood Market
In fiscal 2013, we entered the market for manual whole blood collections with the acquisition of Pall Corporation’s blood collection, filtration and processing product lines. In fiscal 2014, we acquired the business assets of Hemerus Medical, LLC, a company that develops innovative technologies for the collection of whole blood and processing and storage of blood components, including SOLX storage solutions. We paid $24.1 million for the Hemerus assets and may pay an additional $3.0 million contingent upon receipt of an FDA approval of the SOLX solution for 24 hour storage of whole blood prior to processing. Additionally, up to $14.0 million may be paid dependent on future sales levels of SOLX-based products. We refer to these recently acquired businesses as the whole blood business. These acquisitions provide access to the manual collection and whole blood markets and provide scope for introduction of automated solutions into those markets.
Market Trends
Plasma Market
Changes in demand for plasma-derived pharmaceuticals, particularly immunoglobulin (“IG”), are the key driver of plasma collection volumes in the bio-pharmaceutical market. Various factors related to the supply of plasma and the production of plasma-derived pharmaceuticals also affect collection volume, including the following:
• | Several blood collectors supply additional plasma to fractionators, and thus collection volumes can rise overall but not directly impact our bio-pharmaceutical business. |
• | Bio-pharmaceutical companies are seeking more efficient production processes, helping companies meet growing demand for pharmaceuticals without requiring an equivalent increase in plasma supply. |
• | Reimbursement guidelines affect the demand for end product pharmaceuticals, although off-label use of pharmaceuticals is growing, in particular for Alzheimer's treatment. |
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• | Newly approved indications for, and the growing understanding and thus diagnosis of auto-immune diseases treated with plasma derived therapies increase the demand for plasma, as do longer lifespans and a growing aging patient population. |
• | Geographical expansion of biopharmaceuticals also increases demand for plasma. |
Demand for plasma in fiscal 2014 was particularly strong in North America where approximately two-thirds of commercial plasma is collected. Global markets for plasmapheresis have been relatively flat, with U.S. produced plasma meeting an increasing percentage of plasma volume demand worldwide.
Blood Center Market
In the blood center market, we sell products used in the collection of platelets, red cells and whole blood. Whole blood is collected from the donor and then transported to a laboratory where it is separated into its components: red cells, platelets and/or plasma.
Despite modest increases in the demand for platelets in Europe and Japan, improved collection efficiencies that increase the yield of platelets per collection and more efficient use of collected platelets have resulted in a flat market for automated collections and related disposables in these countries. With changes in healthcare and social security systems in emerging markets, a larger number of people get access to state of the art medical treatments, which drives the demand for platelet transfusions and represent a faster growing market.
Blood management is an approach to optimizing the care of patients that may need a transfusion that includes a wide range of practices and protocols which influence the need for, and use of, blood products in hospitals. Adoption of blood management practices by hospitals, particularly in the United States, continues to gain momentum. Blood management efforts reduce the demand for red cells, which in turn can reduce the demand for our red cell and whole blood collection products. We believe the decline in U.S. blood center collections will be approximately 10% during our next fiscal year.
As discussed above and further within the revenue section below, demand for red cells has declined in mature markets due to better blood management and the development of less invasive, lower blood loss medical procedures. However, highly populated emerging market countries are increasing their demand for blood as they are advancing their health care coverage, and as greater numbers of people gain access to more advanced medical treatment, demand for blood components, including red cells increases directly.
Hospital Market
In the hospital market, we sell cardiovascular surgical blood salvage systems, orthopedic surgical blood salvage systems, and a blood diagnostics instrument.
Our Cell Saver brand surgical blood salvage system was designed as a solution for rapid, high volume blood loss procedures, such as cardiovascular surgeries. Since the 2012 introduction of the Cell Saver Elite, we have seen growth from emerging markets due to increased access to healthcare and we have also had growth in mature markets.
Our OrthoPAT technology is used to salvage red cells in high blood loss orthopedic procedures, including hip and knee replacement surgeries. The OrthoPAT is designed to collect, separate and wash a patient’s shed blood both during and after surgery. While cell salvage is not yet a standard of care for U.S. orthopedic procedures, we position this device as an effective alternative to stored red cells (both autologous predonated and allogeneic) and non-washed autotransfusion systems. Particularly in the United States, hip and knee replacement surgeries are frequently elective surgeries and as a result are subject to changes in economic conditions. Blood management practices have also increased the utilization of tranexamic acid. Tranexamic acid is used to treat and prevent post-operative bleeding in orthopedic surgeries, particularly hip and knee replacements. The use of this low cost, generic drug has expanded rapidly in an environment of greater blood management focus. We have been monitoring this trend and believe tranexamic acid is used in at least 30% of total hip and knee replacements in the United States and that broader adoption is likely. This expanded adoption of tranexamic acid is contributing to the aforementioned reduced demand for red cells and is reducing the demand for orthopedic cell salvage.
Our TEG Thrombelastograph Hemostasis Analyzer is a diagnostic tool which provides a comprehensive assessment of a patient’s overall hemostasis. The benefit is that this information enables caregivers to decide the best blood-related clinical treatment for the individual patient in order to minimize blood loss and reduce incidence of "reoperations". The test is expanding beyond cardiac surgery into trauma, as well as helping manage surgical timing of patients on anti-platelet medications. TEG product line sales further strengthened in fiscal 2014. This product’s growth is dependent on hospitals adopting this technology in their blood management programs.
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Software Market
Our software solutions portfolio addresses many of the critical data collection and data management needs within the plasma, blood center, and hospital markets and is also a key component of our blood management solutions today. In fiscal 2014, the pressures to improve efficiencies, reduce cost, and improve patient outcomes continued to be key drivers in all three markets.
Demand for our plasma software solution declined in fiscal 2014 as a sub-segment of this market has or intends to migrate towards homegrown proprietary software solutions in an effort to gain unique competitive advantages.
In the blood center market for software, we currently participate most actively in the United States, where expansion to new or emerging technology platforms such as our El Dorado Software Solution Suite has been slow due to industry consolidation and the relatively high cost and management focus required to migrate to new information technology platforms. This trend has limited revenue growth but the high switching costs noted and recurring maintenance revenue streams from existing products has provided relative revenue stability in this segment.
We currently participate in the hospital markets for software primarily in the United States and Europe. In the United States we have experienced growth in our installed base for our blood banking solution, SafeTraceTX, due to demand for reliable, proven safety systems within blood banks. However, growth in the United States continues to be constrained due to hospital IT organization focus on the electronic medical records mandates. Revenues from BloodTrack, a blood inventory and transfusion management system, have increased in the United States and Europe recently as hospitals seek means to improve efficiencies and meet compliance guidelines for tracking and dispositioning blood components to patients.
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Financial Summary
(In thousands, except per share data) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Net revenues | $ | 938,509 | $ | 891,990 | $ | 727,844 | 5.2 | % | 22.6 | % | |||||||
Gross profit | $ | 468,365 | $ | 428,131 | $ | 369,240 | 9.4 | % | 15.9 | % | |||||||
% of net revenues | 49.9 | % | 48.0 | % | 50.7 | % | |||||||||||
Operating expenses | $ | 421,038 | $ | 371,694 | $ | 280,482 | 13.3 | % | 32.5 | % | |||||||
Operating income | $ | 47,327 | $ | 56,437 | $ | 88,758 | (16.1 | )% | (36.4 | )% | |||||||
% of net revenues | 5.0 | % | 6.3 | % | 12.2 | % | |||||||||||
Other (expense) income, net | $ | (10,926 | ) | $ | (6,540 | ) | $ | 740 | 67.1 | % | — | % | |||||
Income before taxes | $ | 36,401 | $ | 49,897 | $ | 89,498 | (27.0 | )% | (44.2 | )% | |||||||
Provision for income tax | $ | 1,253 | $ | 11,097 | $ | 22,612 | (88.7 | )% | (50.9 | )% | |||||||
% of pre-tax income | 3.4 | % | 22.2 | % | 25.3 | % | |||||||||||
Net income | $ | 35,148 | $ | 38,800 | $ | 66,886 | (9.4 | )% | (42.0 | )% | |||||||
% of net revenues | 3.7 | % | 4.3 | % | 9.2 | % | |||||||||||
Earnings per share-diluted | $ | 0.67 | $ | 0.74 | $ | 1.30 | (9.5 | )% | (43.1 | )% | |||||||
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal 2014, 2013 and 2012 each included 52 weeks with each quarter having 13 weeks.
Net revenue for fiscal 2014 increased 5.2% compared to fiscal 2013. Without the effects of foreign exchange, net revenue increased 6.9% compared to fiscal 2013. Revenue increased due to a full year of sales from the whole blood business acquired August 1, 2012 as compared to eight months of sales in the prior year, as well as growth in our plasma and diagnostics disposable products. These increases were partially offset by declines across other product lines for the fiscal year ended March 29, 2014.
Net revenue for fiscal 2013 increased 22.6% compared to fiscal 2012. Without the effects of foreign exchange, net revenue increased 22.2% over fiscal 2012. The increase includes revenue from the acquired whole blood business of $138.4 million for the fiscal year ended March 30, 2013. The remaining increase for the fiscal year ended March 30, 2013 is primarily due to revenue growth from our plasma, surgical and diagnostics products. Fiscal 2012 revenue benefited from purchases by the Japan Red Cross (“JRC”) in March 2012 to avoid future supply disruptions in anticipation of an internal business system conversion, negatively impacting fiscal year ended March 30, 2013.
During fiscal 2014, operating income decreased 16.1% compared to fiscal 2013. Without the effects of foreign currency, operating income decreased 4.1% compared to fiscal 2013. Operating income decreased as gross profit growth was more than offset by higher restructuring and transformation expenses and other operating expense growth associated with the whole blood acquisition. Restructuring and transformation expenses were $84.8 million for the fiscal year ended March 29, 2014, as compared to $72.5 million for the comparative prior year period. Restructuring and transformation expenses in fiscal 2014 are primarily associated with VCC initiatives, and in fiscal 2013 were primarily associated with the acquisition and integration of the whole blood business.
During fiscal 2013, operating income decreased 36.4% compared to fiscal 2012. Without the effects of foreign currency, operating income decreased 43.7% over fiscal 2012 as increased gross profit due to revenue growth was more than offset by higher costs of goods sold due to acquisition-related step-up in the value of acquired inventory. Also contributing to the decrease in operating income was a $7.0 million inventory reserve for a quality matter involving a component of our whole blood disposable inventory which occurred in the third quarter of fiscal 2013 and higher operating expenses including significant acquisition and integration costs totaling $37.3 million.
Net income decreased 9.4% during fiscal 2014. Without the effects of foreign exchange, net income decreased 3.4% for fiscal 2014. The decrease in net income was attributable to the decrease in operating income described above and additional interest expense associated with a full year of term loan borrowing following the whole blood acquisition. These were partially offset by a reduction in tax expense due to lower income before taxes and a lower income tax rate.
Net income decreased 42.0% during fiscal 2013. Without the effects of foreign exchange, net income decreased 49.9% for fiscal 2013. The decrease in net income was attributable to the decline in operating income described above and additional interest expense.
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RESULTS OF OPERATIONS
Net Revenues by Geography
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
United States | $ | 500,719 | $ | 454,874 | $ | 352,160 | 10.1 | % | 29.2 | % | |||||||
International | 437,790 | 437,116 | 375,684 | 0.2 | % | 16.4 | % | ||||||||||
Net revenues | $ | 938,509 | $ | 891,990 | $ | 727,844 | 5.2 | % | 22.6 | % | |||||||
International Operations and the Impact of Foreign Exchange
Our principal operations are in the U.S., Europe, Japan and other parts of Asia. Our products are marketed in approximately 100 countries around the world through a combination of our direct sales force and independent distributors and agents.
The percentage of revenue generated in our principle operating regions is summarized below:
March 29, 2014 | March 30, 2013 | March 31, 2012 | ||||||
United States | 53.4 | % | 51.0 | % | 48.4 | % | ||
Japan | 11.6 | % | 13.5 | % | 17.1 | % | ||
Europe | 24.0 | % | 25.2 | % | 25.2 | % | ||
Other | 11.0 | % | 10.3 | % | 9.3 | % | ||
Total | 100.0 | % | 100.0 | % | 100.0 | % | ||
International sales are generally conducted in local currencies, primarily the Japanese Yen, the Euro, the Chinese Renminbi and the Australian Dollar. Our results of operations are impacted by changes in foreign exchange rates, particularly in the value of the Yen, the Euro and Australian Dollar relative to the U.S. Dollar.
We have placed foreign currency hedges to minimize the risk of currency fluctuations. For fiscal 2014 as compared to fiscal 2013, the effects of foreign exchange resulted in a 1.7% decrease in sales. The primary reason is the relative weakness in the Japanese Yen to the US Dollar. We expect this relative weakness to continue to negatively impact operating income into fiscal 2015. For fiscal 2013 as compared to fiscal 2012, the effects of foreign exchange accounted for a 0.4% increase in sales.
Please see section entitled “Foreign Exchange” in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.
Net Revenues by Product Type
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Disposables | $ | 806,834 | $ | 757,765 | $ | 594,933 | 6.5 | % | 27.4 | % | |||||||
Software solutions | 70,441 | 69,952 | 70,557 | 0.7 | % | (0.9 | )% | ||||||||||
Equipment & other | 61,234 | 64,273 | 62,354 | (4.7 | )% | 3.1 | % | ||||||||||
Net revenues | $ | 938,509 | $ | 891,990 | $ | 727,844 | 5.2 | % | 22.6 | % | |||||||
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Disposables Revenues by Product Type
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Plasma disposables | $ | 291,895 | $ | 268,900 | $ | 258,061 | 8.6 | % | 4.2 | % | |||||||
Blood center disposables | |||||||||||||||||
Platelet | 156,643 | 169,602 | 167,946 | (7.6 | )% | 1.0 | % | ||||||||||
Red cell | 42,378 | 49,733 | 48,034 | (14.8 | )% | 3.5 | % | ||||||||||
Whole blood | 190,698 | 138,436 | — | 37.8 | % | — | % | ||||||||||
389,719 | 357,771 | 215,980 | 8.9 | % | 65.7 | % | |||||||||||
Hospital disposables | |||||||||||||||||
Surgical | 66,876 | 73,508 | 66,619 | (9.0 | )% | 10.3 | % | ||||||||||
OrthoPAT | 25,042 | 30,230 | 31,186 | (17.2 | )% | (3.1 | )% | ||||||||||
Diagnostics | 33,302 | 27,356 | 23,087 | 21.7 | % | 18.5 | % | ||||||||||
125,220 | 131,094 | 120,892 | (4.5 | )% | 8.4 | % | |||||||||||
Total disposables revenue | $ | 806,834 | $ | 757,765 | $ | 594,933 | 6.5 | % | 27.4 | % | |||||||
Disposables Revenue
Disposables include the Plasma, Blood Center, and Hospital product lines. Disposables revenue increased 6.5% during fiscal 2014 and 27.4% during fiscal 2013. Without the effects of foreign exchange, disposables revenue increased 8.3% and 26.8% for fiscal 2014 and 2013, respectively. This increase was primarily due to a full year of sales from the whole blood business acquired August 1, 2012 as compared to eight months of sales in the prior year, as well as growth in our plasma and diagnostics disposable products.
Plasma
Plasma disposables revenue increased 8.6% during fiscal 2014. Without the effects of foreign exchange, plasma disposables revenue increased 10.3% during fiscal 2014 compared to fiscal 2013. Plasma revenue increased due to higher volumes in the United States and the transition to a direct sales model in Australia and New Zealand. With the completion of multi-year extensions to our agreements with certain bio-pharmaceutical customers, approximately 80% of our current bio-pharmaceutical revenues are under agreement through the first quarter of fiscal 2019.
Plasma disposables revenue increased 4.2% during fiscal 2013. Without the effects of foreign exchange, plasma disposables revenue increased 4.5% during fiscal 2013. Plasma revenue primarily increased due to higher revenue from commercial fractionation customers in the United States, with increased collections more than offsetting price reductions in contract renewals completed in fiscal 2012.
Blood Center
Blood Center consists of disposables used to collect platelets, red cells and whole blood.
Sales to U.S. blood centers represent over 70% of our total red cell and whole blood disposable revenue. The demand for these disposable products in the U.S. has recently declined due to a rapid reduction in demand for blood products associated with actions taken by hospitals to improve blood management techniques and protocols. The decline in U.S. blood center collections was approximately 10% in fiscal 2014, and we expect a similar reduction in collections in fiscal 2015. Additionally, in response to this trend, our U.S. blood center customers are taking actions to improve efficiencies and reduce operating costs, including consolidation amongst blood centers, formation of purchasing affiliations, and focusing on direct supplier costs via vendor consolidation and other means. In fiscal 2014, large U.S. blood collector groups pursued single source vendors for whole blood collection products which required significant reductions in average selling prices in order to retain or increase our share of their business. We expect these U.S. blood collector groups to pursue similar arrangements that will likely affect our red cell revenues in the future.
As mentioned above, our U.S. blood center customers are taking actions to improve efficiencies and reduce operating costs, including formation of purchasing affiliations. As a result, we entered into a multi-year agreement to supply the HemeXcel Purchasing Alliance LLC with certain whole blood collection components on an exclusive basis during the calendar years 2014-2016. The agreement includes a reduction in average selling prices and we anticipate that it will negatively impact our financial results in fiscal 2015. During March 2014, the American Red Cross selected another supplier to provide certain whole
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blood products. While this did not impact fiscal 2014 revenues, we anticipate this will reduce annualized revenues approximately $25 million beginning in the first quarter of fiscal 2015.
Platelet disposables revenue decreased 7.6% during fiscal 2014. Without the effects of foreign exchange, platelet disposable revenue decreased 3.8% during fiscal 2014, due primarily to lower revenues in Canada and lower revenues in emerging markets associated with order timing and reductions of distributor inventory levels.
Platelet disposables revenue increased 1.0% during fiscal 2013. Without the effects of foreign exchange, platelet disposable revenue increased 1.0% during fiscal 2013 resulting from continued growth in emerging markets which more than offset declines in mature markets, notably Japan. Revenue growth in Japan was lower due to increased prior year sales resulting from quality issues experienced with a competitor's device in the prior year, and the negative impact of the JRC's purchases in March 2012 to avoid future supply disruptions in anticipation of an internal system conversion.
Red cell disposables revenue decreased 14.8% during fiscal 2014. Without the effects of foreign exchange, red cell disposables revenue decreased 14.3% during fiscal 2014 due to the market factors discussed above.
Red cell disposables revenue increased 3.5% during fiscal 2013. Without the effects of foreign exchange, red cell disposables revenue increased 3.8% during fiscal 2013, due primarily to favorable order timing in North America in the fourth quarter of fiscal 2013.
Whole blood revenue increased 37.8% during fiscal 2014. Without the effect of foreign exchange, whole blood revenue increased 37.4% during fiscal 2104. Revenue for fiscal 2014 increased due to a full period of sales from the whole blood business acquired August 1, 2012 as compared to 8 months of sales in the prior year period. The increase was partially offset by the negative impact of the U.S. collection market, a European tender loss and a decline in contract manufacturing revenue.
Hospital
Hospital consists of Surgical, OrthoPAT, and Diagnostics products. The hospital product line includes the following brand platforms: the Cell Saver brand, the TEG brand and the OrthoPAT brand.
Surgical disposables revenue consists principally of the Cell Saver products. Revenue from our surgical disposables decreased 9.0% during fiscal 2014. Without the effect of foreign exchange, surgical disposables revenue decreased 5.4% during fiscal 2014. Surgical revenue decreased due to the return to the market of a competitor with aggressive pricing whose operations were limited by a natural disaster in the prior year, and by a reduction in demand for surgical procedures. This decrease was partially offset by growth in emerging markets, primarily China.
Revenue from our surgical disposables increased 10.3% during fiscal 2013. Without the effect of foreign exchange, surgical disposables revenue increased 8.4% for fiscal 2013, with revenue growth realized across all markets we serve. We achieved growth from market acceptance of Cell Saver Elite in the U.S., Europe and Japan, while emerging market growth was realized through increased commercial presence in emerging markets such as China. Surgical revenue also benefited from market share gains due to limited product availability from our primary competitor due to a now resolved supply chain disruption following a natural disaster in Europe.
Revenue from our OrthoPAT disposables decreased 17.2% during fiscal 2014. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased 14.7% as better blood management has reduced orthopedic blood loss and demand for OrthoPAT disposables. Recent trends in blood management particularly the adoption of tranexamic acid to treat and prevent orthopedic post-operative blood loss have continued to reduce hospital use of OrthoPAT disposables.
Revenue from our OrthoPAT disposables decreased 3.1% during fiscal 2013. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased 3.8%, primarily due to lower sales in the United States as device utilization by smaller hospitals has declined following the voluntary recall of the OrthoPAT device in fiscal 2012.
Diagnostics product revenue consists of the TEG products. Revenues from TEG customer increased 21.7% during fiscal 2014. Without the effect of foreign exchange, diagnostic product revenue increased 20.0%. The revenue increase is due to continued adoption of our TEG analyzer, principally in the United States and China.
Revenue from our diagnostics products increased 18.5% during fiscal 2013. Without the effect of foreign exchange, diagnostic product revenue increased 17.0%. The revenue increase is due to continued adoption of our TEG analyzer, principally in the United States and China.
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Other Revenues
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Software solutions | $ | 70,441 | $ | 69,952 | $ | 70,557 | 0.7 | % | (0.9 | )% | |||||||
Equipment and other | 61,234 | 64,273 | 62,354 | (4.7 | )% | 3.1 | % | ||||||||||
Net other revenues | $ | 131,675 | $ | 134,225 | $ | 132,911 | (1.9 | )% | 1.0 | % | |||||||
Software Solutions
Our software solutions revenue includes sales of our information technology software platforms and consulting services.
Software solutions revenue increased 0.7% during fiscal 2014. Without the effects of foreign exchange, software solutions revenue increased 0.1% during fiscal 2014. During fiscal 2014, growth in hospital software revenue was offset by lower hosting fees associated with a large bio-pharmaceutical customer.
Software solutions revenue decreased 0.9% during fiscal 2013. Without the effects of foreign exchange, software solutions revenue increased 0.2% during fiscal 2013. Installed base growth in hospital-based solutions, SafeTraceTX and BloodTrack, which was offset by declines in plasma software revenue.
Equipment & Other
Our equipment and other revenues include revenue from equipment sales, repairs performed under preventive maintenance contracts or emergency service visits, spare part sales, and various service and training programs. These revenues are primarily composed of equipment sales, which tend to vary from period to period more than our disposable product line due to the timing of order patterns, particularly in our distribution markets.
Equipment and other revenue decreased 4.7% during fiscal 2014. Without the effects of currency exchange, equipment and other revenue decreased 2.0%. The decrease in revenue during fiscal 2014 is due primarily to benefits in the prior year from a competitor whose operations were limited by a natural disaster and the successful launch of the Cell Saver Elite, partially offset by higher services revenue associated with a transition to a direct sales model in Australia and New Zealand.
Equipment and other revenue increased 3.1% during fiscal 2013. Without the effect of currency exchange, equipment and other revenue increased 3.2%. The increase is due primarily to higher TEG equipment sales in China and higher surgical equipment sales across multiple markets.
Gross Profit
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Gross profit | $ | 468,365 | $ | 428,131 | $ | 369,240 | 9.4 | % | 15.9 | % | |||||||
% of net revenues | 49.9 | % | 48.0 | % | 50.7 | % | |||||||||||
Our gross profit increased 9.4% during fiscal 2014. Without the effects of foreign exchange, gross profit increased 12.0% during fiscal 2014. Our gross profit margin percentage increased by 190 basis points for fiscal 2014 as compared to fiscal 2013. The increase in gross profit margin for the fiscal year ended March 29, 2014 is primarily driven by lower whole blood related inventory charges. During fiscal 2013, we recorded inventory reserves associated with the removal of certain whole blood collection sets from inventory based on a quality matter detected during the year. We also recorded significant inventory step-up charges related to acquired whole blood inventory. Improvements to reported gross margin excluding the inventory adjustments noted also included improvements in manufacturing efficiencies. These increases were partially offset by the impact of foreign currency.
Our gross profit amount increased 15.9% during fiscal 2013. Without the effects of foreign exchange, gross profit increased 13.8%. Our gross profit margin percentage decreased by 270 basis points for fiscal 2013 as compared to fiscal 2012. The decrease in gross profit margin during 2013 includes $11.9 million of costs of goods sold related to the increase in fair value of acquisition-related whole blood inventory acquired from Pall as well as an approximately $7.0 million inventory reserve recorded related to a quality matter. This reserve is related to the removal of affected whole blood collection sets from inventory for destruction or rework based on a quality matter detected during the third quarter of fiscal 2013. Additionally, the decrease in gross profit margin included the combined impact of whole blood disposable sales, as whole blood gross margins are lower than gross margins for our complete product line. These decreases were partially offset by reduced equipment depreciation expense
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as a result of a change in estimated useful lives implemented during the year ended March 30, 2013. The effect of this change in estimate was a reduction of depreciation expense in fiscal 2013 by $4.5 million, an increase in income net of tax of $3.3 million and an increase in basic and diluted earnings per share of $0.09.
Operating Expenses
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||||
Research and development | $ | 54,200 | $ | 44,394 | $ | 36,801 | 22.1 | % | 20.6 | % | |||||||
% of net revenues | 5.8 | % | 5.0 | % | 5.1 | % | |||||||||||
Selling, general and administrative | $ | 365,127 | $ | 323,053 | $ | 243,681 | 13.0 | % | 32.6 | % | |||||||
% of net revenues | 38.9 | % | 36.2 | % | 33.5 | % | |||||||||||
Asset write-downs | $ | 1,711 | $ | 4,247 | $ | — | (59.7 | )% | — | ||||||||
% of net revenues | 0.2 | % | 0.5 | % | — | % | |||||||||||
Total operating expenses | $ | 421,038 | $ | 371,694 | $ | 280,482 | 13.3 | % | 32.5 | % | |||||||
% of net revenues | 44.9 | % | 41.7 | % | 38.5 | % | |||||||||||
Research and Development
Research and development increased 22.1% during fiscal 2014. This increase includes a $3.6 million in-process research and development charge related to the acquisition of certain technology and manufacturing rights to be used in a next generation device, which was recorded during the second quarter of 2014. Excluding the impact of the in-process research and development charge, research and development was 5.4% of net revenues. Other increases are primarily due to additional staff and program spending related to the whole blood acquisitions, new research initiatives and development programs.
Research and development increased 20.6% during fiscal 2013. This increase is primarily due to additional staff and program spending related to the whole blood acquisition and related product initiatives, as well as a general increase in development programs to support long-term product plans and increase our competitiveness.
Selling, General and Administrative
During fiscal 2014, selling, general and administrative expenses increased 13.0%. Without the effects of foreign exchange, selling, general and administrative expenses increased 15.0% during fiscal 2014. The increase during fiscal 2014 is primarily related to a $21.1 million increase in restructuring and transformation costs due to VCC initiatives. We also incurred incremental costs of approximately $21.0 million associated with operating the whole blood business for the entire year as compared to eight months in the prior year, of which approximately $7.0 million relates to the amortization of acquired intangible assets.
During fiscal 2013, selling, general and administrative expenses increased 32.6%. Without the effects of foreign exchange, selling, general and administrative expenses increased 30.6% during fiscal 2013. This increase includes acquisition and integration expenses associated with the whole blood acquisition of $37.3 million compared to approximately $3.0 million of whole blood transaction costs incurred in fiscal 2012. We also incurred approximately $35.2 million of expenses associated with operating the whole blood business following the August 1, 2012 acquisition, of which approximately $10.5 million relates to the amortization of acquired intangible assets. The remainder of the growth is related to investments in the global sales organization, particularly emerging markets, and information technology infrastructure to support increased revenue levels. We also incurred higher incentive compensation in fiscal 2013 as financial performance versus established financial targets improved as compared to fiscal 2012.
Asset Write-Down
We recorded an asset write-down of $1.7 million in the fourth quarter of fiscal 2014 associated with exit activities related to our VCC and integration initiatives.
We recorded an asset write-down of $4.2 million in the fourth quarter of fiscal 2013 associated with exit activities related to technologies originally acquired from Arryx, Inc.
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Other income (expense), net
Other expense, net, increased during fiscal 2014 as compared to the same periods of fiscal 2013 primarily due to $4.4 million of incremental interest expense from the term loan established in connection with the whole blood acquisition. The effective interest rate on the term loan outstanding as of March 29, 2014 is approximately 1.89%.
Taxes
March 29, 2014 | March 30, 2013 | March 31, 2012 | % Increase/(Decrease) 14 vs. 13 | % Increase/(Decrease) 13 vs. 12 | ||||||||||
Reported income tax rate | 3.4 | % | 22.2 | % | 25.3 | % | (18.8 | )% | (3.1 | )% | ||||
Reported Tax Rate
We conduct business globally and as a result report our results of operations in a number of foreign jurisdictions and the United States. Our reported tax rate is lower than the U.S. statutory tax rate in all periods due primarily to our jurisdictional mix of earnings as the income earned in our foreign subsidiaries is taxed at a lower tax rate.
The reported tax rate for the year ended March 29, 2014 was 3.4%. Our tax rate is lower than our tax rates of 22.2% and 25.3% for the years ended March 30, 2013 and March 21, 2012, respectively. The decrease in our tax rate is primarily due to changes in our jurisdictional mix of earnings, a bad debt deduction claimed on an intercompany loan and the release of certain previously established tax reserves in connection with the closure of certain tax statutes of limitations.
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Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
(In thousands) | March 29, 2014 | March 30, 2013 | |||||
Cash & cash equivalents | $ | 192,469 | $ | 179,120 | |||
Working capital | $ | 406,048 | $ | 416,866 | |||
Current ratio | 2.9 | 3.3 | |||||
Net debt position (1) | $ | (245,218 | ) | $ | (300,974 | ) | |
Days sales outstanding (DSO) | 62 | 62 | |||||
Disposables finished goods inventory turnover | 4.2 | 4.0 | |||||
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(1) | Net debt position is the sum of cash and cash equivalents less total debt. |
Our capital resources consist of cash and cash equivalents, our ability to generate cash flow from operations and available borrowings under our credit facility and lines of credit. As discussed earlier in Management’s Discussion and Analysis, during fiscal 2014 our business was negatively impacted by changes in blood management practices and actions taken by U.S. blood center customers in response to related reductions in demand for blood products. We expect these trends to continue to negatively impact revenue and cash flow from operations in fiscal 2015, including the loss of revenues from the American Red Cross whole blood contract.
During fiscal 2014 we initiated the VCC program that includes a significant transformation of our manufacturing network designed to reduce product costs and increase the efficiency of our supply chain. The program has and will require cash expenditures for plant exit and closure costs including separation benefits, new plant construction and temporary increases in inventory levels as manufacturing is transitioned to new facilities. We paid $72.9 million in cash related to restructuring, transformation costs and capital expenditures associated with the VCC initiatives during fiscal 2014. We estimate we will pay an additional $100.0 million in cash in fiscal 2015 related to our VCC initiatives, including our manufacturing network optimization and commercial excellence and productivity activities.
As of March 29, 2014, we had approximately $192.5 million in cash and cash equivalents. We currently have a credit facility with certain lenders which provides for a $475.0 million term loan and a $50.0 million revolving loan. The credit facility has a term of five years and matures on August 1, 2017. As of March 29, 2014, $437.9 million of the term loan was outstanding, and all $50.0 million of the revolving credit facility was undrawn. We also have lines of credit to fund our global operations and there are no outstanding borrowings as of March 29, 2014. The credit facility contains covenants requiring us to maintain certain financial ratios. Any failure to comply with the financial and or other operating covenants of the credit facility would prevent us from being able to borrow under the revolving credit facility and would constitute a default, which could result in, among other things, the amounts outstanding including all accrued interest and unpaid fees, becoming immediately due and payable. As of March 29, 2014, we were in compliance with the covenants.
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and option exercises. Although cash flow from operations will be negatively impacted by the trends noted above, we believe these sources are sufficient to fund our cash requirements over at least the next twelve months, as expected which are primarily payments associated with VCC initiatives described above, share repurchases, capital expenditures, cash payments under the loan agreement, investments and other acquisitions. These are described in more detail in Contractual Obligations below.
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Cash Flow Overview:
(In thousands) | March 29, 2014 | March 30, 2013 | March 31, 2012 | Increase/(Decrease) 14 vs. 13 | Increase/(Decrease) 13 vs. 12 | ||||||||||||||
Net cash provided by (used in): | |||||||||||||||||||
Operating activities | $ | 139,524 | $ | 85,074 | $ | 115,318 | $ | 54,450 | $ | (30,244 | ) | ||||||||
Investing activities | (105,830 | ) | (596,395 | ) | (52,196 | ) | 490,565 | (544,199 | ) | ||||||||||
Financing activities | (20,700 | ) | 461,853 | (30,470 | ) | (482,553 | ) | 492,323 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents(1) | 355 | (273 | ) | (498 | ) | 628 | 225 | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | $ | 13,349 | $ | (49,741 | ) | $ | 32,154 | $ | 63,090 | $ | (81,895 | ) | |||||||
(1) | The balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In accordance with GAAP, we have eliminated the effect of foreign currency throughout our cash flow statement, except for its effect on our cash and cash equivalents. |
In fiscal 2014, the Company did not repurchase shares of its common stock.
In fiscal 2013, the Company repurchased approximately 1.2 million shares of its common stock for an aggregate purchase price of $50.0 million. This completed a $50.0 million share repurchase program that was announced in April 2012.
In fiscal 2012, the Company repurchased approximately 1.8 million shares of its common stock for an aggregate purchase price of $50.0 million. This completed a $50.0 million share repurchase program that was announced in May 2011.
Operating Activities:
Net cash provided by operating activities was $139.5 million during fiscal 2014, an increase of $54.5 million as compared to fiscal 2013 primarily due to higher cash receipts associated with strong collections which more than offset increased expenditures for inventory. Additionally, initial investments in accounts receivable were required in fiscal 2013 as existing accounts receivable were not acquired in the whole blood acquisition, negatively impacting net cash provided by operating activities in the prior year.
Net cash provided by operating activities was $85.1 million during fiscal 2013, a decrease of $30.2 million as compared to fiscal 2012 primarily due to higher payments of acquisition and integration related costs and working capital investments related to sales from the whole blood business, as accounts receivable were not included in the acquired assets.
Investing Activities:
Net cash used in investing activities was $105.8 million during fiscal 2014, a decrease of $490.6 million as compared to fiscal 2013 primarily due to the $535.2 million paid for the whole blood acquisition, of which $475.0 million was funded by term loan borrowings discussed above. Investing activities also included $23.1 million paid for the acquisition of Hemerus Medical, LLC, and $73.6 million of capital expenditures including $18.0 million related to our manufacturing network transformation activities.
Net cash used in investing activities was $596.4 million during fiscal 2013, an increase of $544.2 million as compared to fiscal 2012 due to the use of $535.2 million to acquire the whole blood business, of which $475.0 million was funded by term loan borrowings discussed above. The increase in net cash used in investing activities also included higher capital expenditures primarily related to the expansion of our installed equipment base with customers, particularly for plasma and hospital equipment.
Financing Activities:
Net cash used in financing activities was $20.7 million during fiscal 2014, a decrease of $482.6 million as compared to fiscal 2013 primarily due to the $475.0 million term loan borrowed in fiscal 2013 to finance the whole blood acquisition. Financing
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activities included $22.8 million of proceeds from the exercise of share-based compensation, offset by $37.1 million of debt repayments related to term loan repayments and an additional $5.5 million of short term debt repayments in foreign jurisdictions.
Net cash provided by financing activities was $461.9 million during the fiscal 2013, an increase of $492.3 million as compared to the fiscal 2012, due primarily to a $475.0 million term loan used to finance the whole blood acquisition, $15.1 million of incremental proceeds from the exercise of share-based compensation and $5.6 million of short term borrowings from the fluctuation of working capital in Japan. These were offset by $5.5 million of debt issuance costs paid related to the term loan closing. Net cash used to fund share repurchases under common stock repurchase programs was $50.0 million during fiscal 2013 and 2012.
Contractual Obligations
A summary of our contractual and commercial commitments as of March 29, 2014, is as follows:
Payments Due by Period | |||||||||||||||||||
(In thousands) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||
Debt | $ | 437,687 | $ | 45,630 | $ | 249,947 | $ | 142,110 | $ | — | |||||||||
Operating leases | 22,928 | 6,991 | 8,498 | 7,439 | — | ||||||||||||||
Purchase commitments* | 110,678 | 95,678 | 15,000 | — | — | ||||||||||||||
Expected retirement plan benefit payments | 17,345 | 2,023 | 3,804 | 3,223 | 8,295 | ||||||||||||||
Employee related commitments | 22,069 | 16,710 | 5,359 | — | — | ||||||||||||||
Total contractual obligations | $ | 610,707 | $ | 167,032 | $ | 282,608 | $ | 152,772 | $ | 8,295 | |||||||||
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* | Includes amounts we are committed to spend on purchase orders entered in the normal course of business for capital equipment and for the purpose of manufacturing our products including contract manufacturers, specifically JMS Co. Ltd., and Kawasumi Laboratories, for the manufacture of certain disposable products. The majority of our operating expense spending does not require any advance commitment. | |
The above table does not reflect our long-term liabilities associated with unrecognized tax benefits of $5.6 million recorded in accordance with ASC Topic 740, Income Taxes. We cannot reasonably make a reliable estimate of the period in which we expect to settle these long-term liabilities due to factors outside of our control, such as tax examinations.
At the closing of the whole blood acquisition, we paid a total of $535.2 million in cash consideration following resolution of post-closing adjustments for working capital and historical earnings levels. We anticipate paying an additional $15.0 million upon replication and delivery of certain manufacturing assets of Pall's filter media business to Haemonetics by 2016.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. A portion of our trade accounts receivable outside the United States, however, include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
Although we have not incurred significant losses on government receivables to date, we continually evaluate all government receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries' healthcare systems deteriorate such that their ability to make payments is uncertain, allowances may be required in future periods.
Contingent Commitments
In 2014, we acquired the business assets of Hemerus Medical, LLC, a company that develops innovative technologies for the collection of whole blood and processing and storage of blood components, including SOLX storage solutions. We paid $24.1 million for the Hemerus assets and may pay an additional $3.0 million contingent upon receipt of an FDA approval of the SOLX solution for 24 hour storage of whole blood prior to processing. Additionally, up to $14.0 million may be paid dependent on future sales levels of SOLX-based products.
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Legal Precedings
We are presently engaged in various legal actions, and although our ultimate liability cannot be determined at the present time, we believe that any such liability will not materially affect our consolidated financial position or our results of operations.
Fenwal (Fresenius) Patent Infringement
For the past seven years, we have pursued patent infringement lawsuits against Fenwal Inc. seeking an injunction and damages from their infringement of a Haemonetics patent, through the sale of the ALYX brand automated red cell collection system, a competitor of our automated red cell collection systems.
Most recently, we have pursued a patent infringement action in Germany against Fenwal, and its European and German subsidiary. On September 20, 2010, we filed a patent infringement action in Germany. In response, Fenwal filed an action to invalidate the Haemonetics patent which is the subject of this infringement action on December 1, 2010. In January 2014, we received a final ruling which narrowed the scope of our patent. This ruling will prevent us from further claims of infringement and effectively ends our claims against Fenwal.
Italian Employment Litigation
We have recently received notices from employees of the facility in Ascoli-Piceno, Italy where we are discontinuing operations of claimed violations of employment related contracts. Seventy-two employees served actions in February 2014 claiming their working conditions should have been established by the national collective bargaining agreement for the chemical and pharmaceutical industries rather than the one actually used. They claim applying the alternative bargaining agreement would have resulted in slightly higher minimum salaries according to their job functions. Also in February, sixty-eight employees served actions claiming that certain solidarity agreements are void. Solidarity agreements are arrangements between the company, employees and the government to continue full pay and benefits for employees who would otherwise be terminated in times of low demand. As of March 29, 2014, the total amount of damages claimed by the plaintiffs in these matters is approximately $3.5 million, however it is not possible at this point in the proceedings to accurately evaluate the likelihood or amount of any potential losses. As such, no amounts have been accrued. We may receive other, similar claims, in the future.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity, and by adjusting the selling prices of products. We continue to monitor inflation pressures generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Foreign Exchange
During fiscal 2014, approximately 46.6% of our sales were generated outside the U.S., generally in foreign currencies, yet our reporting currency is the U.S. Dollar. Our primary foreign currency exposures relate to sales denominated in the Euro, the Japanese Yen and the Australian Dollar. We also have foreign currency exposure related to manufacturing and other operational costs denominated in the Swiss Franc, the British Pound, the Canadian Dollar, and the Mexican Peso. The Euro, Yen and Australian Dollar sales exposure is partially mitigated by costs and expenses for foreign operations and sourcing products denominated in these foreign currencies. Since our foreign currency denominated Euro, Yen and Australian Dollar sales exceed the foreign currency denominated costs, whenever the U.S. Dollar strengthens relative to these currencies, there is an adverse effect on our results of operations and, conversely, whenever the U.S. Dollar weakens relative to these currencies, there is a positive effect on our results of operations. For the Swiss Franc, the British Pound, the Canadian Dollar and the Mexican Peso, our primary cash flows relate to product costs or costs and expenses of local operations. Whenever the U.S. Dollar strengthens relative to these currencies, there is a positive effect on our results of operations. Conversely, whenever the U.S. Dollar weakens relative to these currencies, there is an adverse effect on our results of operations.
We have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. That program includes the use of derivative financial instruments to minimize for a period of time, the unforeseen impact on our financial results from changes in foreign exchange rates. We utilize forward foreign currency contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, the British Pound, the Canadian Dollar, the Mexican Peso and the Australian Dollar. This does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, to the extent hedged, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation.
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These contracts are designated as cash flow hedges and are intended to lock in the expected cash flows of forecasted foreign currency denominated sales and costs at the available spot rate. Actual spot rate gains and losses on these contracts are recorded in sales and costs, at the same time the underlying transactions being hedged are recorded. 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.
Presented below are the spot rates for our Euro, Japanese Yen, Australian Dollar, Canadian Dollar, British Pound, Swiss Franc and Mexican Peso cash flow hedges that settled during fiscal 2014 and 2013 or are presently outstanding. These hedges cover our long foreign currency positions that result from our sales designated in the Euro, the Japanese Yen and the Australian Dollar. These hedges also include our short positions associated with costs incurred in Canadian Dollars, British Pounds, Swiss Francs and Mexican Pesos. The table also shows how the strengthening or weakening of the spot rates associated with those hedge contracts versus the spot rates in the contracts that settled in the prior comparable period affects our results favorably or unfavorably. The table assumes a consistent notional amount for hedge contracts in each period presented.
First Quarter | Favorable / (Unfavorable) | Second Quarter | Favorable / (Unfavorable) | Third Quarter | Favorable / (Unfavorable) | Fourth Quarter | Favorable / (Unfavorable) | |||||||||||||||||
Sales Hedges | ||||||||||||||||||||||||
Euro - Hedge Spot Rate (US$ per Euro) | ||||||||||||||||||||||||
FY12 | 1.24 | (9 | )% | 1.30 | (8 | )% | 1.36 | (5 | )% | 1.37 | 1 | % | ||||||||||||
FY13 | 1.43 | 15 | % | 1.42 | 9 | % | 1.36 | — | % | 1.32 | (4 | )% | ||||||||||||
FY14 | 1.27 | (11 | )% | 1.25 | (12 | )% | 1.29 | (5 | )% | 1.33 | 1 | % | ||||||||||||
FY15 | 1.33 | 5 | % | 1.35 | 8 | % | 1.35 | 5 | % | 1.37 | 3 | % | ||||||||||||
Japanese Yen - Hedge Spot Rate (JPY per US$) | ||||||||||||||||||||||||
FY12 | 88.99 | 9 | % | 85.65 | 10 | % | 81.73 | 8 | % | 82.45 | 8 | % | ||||||||||||
FY13 | 79.40 | 11 | % | 76.65 | 11 | % | 77.58 | 5 | % | 78.69 | 5 | % | ||||||||||||
FY14 | 79.85 | (1 | )% | 79.68 | (4 | )% | 84.32 | (9 | )% | 93.92 | (19 | )% | ||||||||||||
FY15 | 97.16 | (22 | )% | 98.18 | (23 | )% | 101.09 | (20 | )% | 102.44 | (9 | )% | ||||||||||||
Australian Dollar - Hedge Spot Rate (AUD per US$) | ||||||||||||||||||||||||
FY 14 | — | — | 0.92 | — | 0.91 | — | 0.92 | — | ||||||||||||||||
FY 15 | 0.90 | — | 0.94 | (3 | )% | 0.94 | (3 | )% | 0.90 | 2 | % | |||||||||||||
Operating Hedges | ||||||||||||||||||||||||
Canadian Dollar - Hedge Spot Rate (CAD per US$) | ||||||||||||||||||||||||
FY12 | 1.05 | (5 | )% | 1.03 | (6 | )% | 1.00 | (7 | )% | 0.99 | (4 | )% | ||||||||||||
FY13 | 0.98 | (7 | )% | 0.99 | (4 | )% | 1.01 | 1 | % | 1.00 | 1 | % | ||||||||||||
FY14 | 1.01 | 3 | % | 1.00 | 1 | % | 1.00 | (1 | )% | 1.01 | 1 | % | ||||||||||||
FY15 | — | — | — | — | — | — | — | — | ||||||||||||||||
British Pound - Hedge Spot Rate (US$ per GBP) | ||||||||||||||||||||||||
FY12 | 1.50 | (2 | )% | 1.54 | 7 | % | 1.57 | 4 | % | 1.58 | 1 | % | ||||||||||||
FY13 | 1.62 | (8 | )% | 1.63 | (6 | )% | 1.60 | (2 | )% | 1.57 | 1 | % | ||||||||||||
FY14 | 1.59 | 2 | % | 1.55 | 5 | % | 1.52 | 5 | % | 1.54 | 2 | % | ||||||||||||
FY15 | 1.56 | 2 | % | 1.57 | (1 | )% | 1.62 | (7 | )% | 1.65 | (7 | )% | ||||||||||||
Swiss Franc - Hedge Spot Rate (CHF per US$) | ||||||||||||||||||||||||
FY12 | 1.05 | — | 1.01 | (4 | )% | 0.96 | (8 | )% | 0.92 | (12 | )% | |||||||||||||
FY13 | 0.82 | (22 | )% | 0.85 | (16 | )% | 0.92 | (4 | )% | 0.92 | — | % | ||||||||||||
FY14 | 0.96 | 17 | % | 0.95 | 12 | % | 0.92 | — | % | 0.93 | 1 | % | ||||||||||||
FY15 | 0.94 | (2 | )% | 0.92 | (3 | )% | 0.91 | (1 | )% | 0.89 | (4 | )% | ||||||||||||
Mexican Peso - Hedge Spot Rate (MXN per US$) | ||||||||||||||||||||||||
FY14 | 12.34 | — | 12.35 | — | 12.22 | — | 12.20 | — | ||||||||||||||||
FY15 | 12.40 | 1 | % | 13.06 | 6 | % | 13.09 | 7 | % | 13.08 | 7 | % | ||||||||||||
_______________________________________
We generally place our cash flow hedge contracts on a rolling twelve month basis. | ||
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Recent Accounting Pronouncements
New pronouncements issued but not effective until after March 29, 2014 are not expected to have a material impact on financial position, results of operation or liquidity.
Guidance to be Implemented
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 limits the requirement to report discontinued operations to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments also require expanded disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significant component of an entity that does not qualify for discontinued operations reporting. The amendments in this ASU are effective prospectively for reporting periods beginning on or after December 15, 2014, with early adoption permitted. The impact on our Financial Statements of adopting ASU 2014-08 is being assessed by management.
Standards Implemented
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02,Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in a single note; any significant amount reclassified out of accumulated other comprehensive income in its entirety in the period, and the income statement line item affected by the reclassification. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance during the three months ended June 29, 2013
In July 2013 FASB issued ASU 2013-10 Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU 2013-10 amends ASC 815 to include the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We have evaluated the amendments and concluded that these do not impact our financial statements as we have not entered into transactions with Fed Funds Effective Swap Rate.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 of our consolidated financial statements. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates.
The accounting policies identified as critical are as follows:
Revenue Recognition
We recognize revenue from product sales, software and services in accordance with ASC Topic 605, Revenue Recognition and ASC Topic 985-605, Software. These standards require that revenue is recognized when persuasive evidence of an arrangement exists, product delivery, including customer acceptance, has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. When more than one element such as equipment, disposables and services are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a stand-alone basis. The selling price of the undelivered elements is determined by the price charged when the element is sold separately, which constitutes vendor specific objective evidence as defined under ASC Topic 985-605, or in cases when the item is not sold separately, by third-party evidence of selling price or by management's best estimate of selling price. For our software arrangements accounted for under the provisions of ASC 985-605, Software, we establish fair value of undelivered elements based upon vendor specific objective evidence.
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We generally do not allow our customers to return products. We offer sales rebates and discounts to certain customers. We treat sales rebates and discounts as a reduction of revenue and classify the corresponding liability as current. We estimate rebates for products where there is sufficient historical information available to predict the volume of expected future rebates. If we are unable to estimate the expected rebates reasonably, we record a liability for the maximum potential rebate or discount that could be earned.
We generally recognize revenue from the sale of perpetual licenses on a percentage-of-completion basis which requires us to make reasonable estimates of the extent of progress toward completion of the contract. These arrangements most often include providing customized implementation services to our customer. We also provide other services, including in some instances hosting, technical support, and maintenance, for the payment of periodic, monthly, or quarterly fees. We recognize these fees and charges as earned, typically as these services are provided during the contract period.
Goodwill and Other Intangible Assets
Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. We amortize our other intangible assets over their estimated useful lives.
Goodwill is not amortized. Instead goodwill is reviewed for impairment at least annually in accordance with ASC Topic 350, Intangibles - Goodwill and Other, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter for each of our reporting units. We first perform a qualitative test and if necessary, perform a quantitative test.
Prior to fiscal 2014 we determined we operated a single operating segment, blood management solutions, based on our chief operating decision maker ("CODM") primarily using consolidated results to make operating and strategic decisions. Our reporting units for purposes of assessing goodwill impairment prior to fiscal 2014 were medical devices and software. During fiscal 2014 our CODM utilized financial results by operating units organized primarily on geography due to changes in the composition in the executive staff reporting to the CODM. Based on these changes we determined the five operating units noted above represent operating segments as defined under ASC 280 - Segment Reporting. Following this change we determined our reporting units for purposes of assessing goodwill impairment by identifying our operating segments and assessing whether segment management regularly reviews the operating results of any components. Through this process, we concluded that our reporting units were the same as our operating segments, which are the following operating units organized based primarily on geography: North America Plasma, North America Blood Center and Hospital, Europe, Asia-Pacific and Japan. Goodwill was reallocated from the medical device and software reporting units to the new reporting units based on a relative fair value basis.
The quantitative test is based on a discounted cash flow analysis or other valuation techniques, such as the market approach, for each reporting unit. In fiscal 2014, we determined the fair value of our reporting units based on the market approach. Under the market approach, we estimate the fair value of our reporting units based on a combination of, a) market multiples of current year earnings before interest, taxes, depreciation and amortization (“EBITDA”) and b) net revenues for each individual reporting unit. For the market approach, we use judgment in identifying the relevant comparable-company market multiples, such as recent divestitures/acquisitions, facts and circumstances surrounding the market and growth rates. Management assesses the relevance and reliability of the multiples by considering factors unique to its reporting units, including recent operating results, business plans, economic projections, anticipated future cash flows, and other data. EBITDA and revenue multiples can also be significantly impacted by future growth opportunities for the reporting unit as well as for the company itself, general market and geographic sentiment, and pending or recently completed merger transactions.
The fair values of our reporting units in fiscal 2012 and 2013 were determined using an income approach. Under the income approach, the fair value of a reporting unit is based on the present value of future cash flows using appropriate discount rates, growth rates, operating margins and future market conditions amongst others. We changed our valuation approach to assessing goodwill impairment in fiscal 2014 in connection with the change in reporting units. ASC 350, Intangibles - Goodwill and Other defines the fair value of a reporting unit as the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. We utilized the market approach as we determined relevant comparable information was available, and accordingly such method was an appropriate alternative to the income method based on cost-benefit considerations.
These tests showed no evidence of impairment to our goodwill for fiscal 2014, 2013 or 2012 and demonstrated that the fair value of each reporting unit exceeded the reporting unit’s carrying value in each period. During March 2014, circumstances
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arose that indicated a potential impairment. We performed an interim impairment test with the new information and noted that the fair value of our reporting units still exceeded their carrying values.
We review intangible assets subject to amortization at least annually or more frequently if certain conditions arise to determine if any adverse conditions exist that would indicate that the carrying value of an asset or asset group may not be recoverable, or that a change in the remaining useful life is required. Conditions indicating that an impairment exists include but are not limited to a change in the competitive landscape, internal decisions to pursue new or different technology strategies, a loss of a significant customer or a significant change in the marketplace including prices paid for our products or the size of the market for our products. During March 2014, circumstances arose that indicated a potential impairment of certain intangible assets subject to amortization. We performed the recoverability test described below for the relevant asset group and determined expected undiscounted cash flows exceeded the carrying value of the asset group.
If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), we will write the carrying value down to the fair value in the period identified.
We generally calculate fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures and remaining useful lives of the asset (asset group).
If we determine the estimate of an intangible asset's remaining useful life should be reduced based on our expected use of the asset, the remaining carrying amount of the asset is amortized prospectively over the revised estimated useful life.
Inventory Provisions
We base our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. Additionally, uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to excess, expired and obsolete inventory.
Income Taxes
The income tax provision is calculated for all jurisdictions in which we operate. The income tax provision process involves calculating current taxes due and assessing temporary differences arising from items which are taxable or deductible in different periods for tax and accounting purposes and are recorded as deferred tax assets and liabilities. Deferred tax assets are evaluated for realizability and a valuation allowance is maintained for the portion of our deferred tax assets that are not more-likely-than-not realizable
We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts. We record a liability for the portion of unrecognized tax benefits claimed which we have determined are not more-likely-than-not realizable. These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
Valuation of Acquisitions
We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their estimated fair values at the dates of acquisition, including acquired identifiable intangible assets, and purchased research and development. We base the estimated fair value of identifiable intangible assets on detailed valuations that use historical and forecasted information and market assumptions based upon the assumptions of a market participant. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
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In certain acquisitions, we have earn-out arrangements or contingent consideration to provide potential future payments to the seller for achieving certain agreed-upon financial targets. We record the contingent consideration at its fair value at the acquisition date. Generally, we have entered into arrangements with contingent consideration that require payments in cash. As such, we periodically revalue the contingent consideration obligations associated with certain acquisitions to their current fair value and record the change in the fair value as contingent consideration income or expense within selling, general and administrative. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates, and changes in assumed probability adjustments with respect to regulatory approval. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration income or expense we record in any given period.
Contingencies
We may become involved in various legal proceedings that arise in the ordinary course of business, including, without limitation, patent infringement, product liability and environmental matters. Accruals recorded for various contingencies including legal proceedings, self-insurance and other claims are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are reevaluated each accounting period, as additional information is available. When we are initially unable to develop a best estimate of loss, we record the minimum amount of loss, which could be zero. As information becomes known, additional loss provision is recorded when either a best estimate can be made or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third party insurers when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we make which are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. These statements are based on our current expectations and estimates as to prospective events and circumstances about which we can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of our actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: the effects of disruption from the manufacturing transformation making it more difficult to maintain relationships with employees and timely deliver high quality products, unexpected expenses incurred during our VCC initiatives, technological advances in the medical field and standards for transfusion medicine, our ability to successfully implement products that incorporate such advances and standards, demand for whole blood and blood components, product quality, market acceptance, regulatory uncertainties, the ability of our contract manufacturing vendors to timely supply high quality goods, the effect of economic and political conditions, the impact of competitive products and pricing, blood product reimbursement policies and practices, foreign currency exchange rates, changes in customers’ ordering patterns including single-source tenders, the effect of industry consolidation as seen in the plasma and blood center markets, the effect of communicable diseases and the effect of uncertainties in markets outside the U.S. (including Europe and Asia) in which we operate and such other risks described under Item 1A. Risk Factors included in this report. The foregoing list should not be construed as exhaustive.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s exposures relative to market risk are due to foreign exchange risk and interest rate risk.
Foreign Exchange Risk
See the section above entitled Foreign Exchange for a discussion of how foreign currency affects our business. It is our policy to minimize, for a period of time, the unforeseen impact on our financial results of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge anticipated cash flows from forecasted foreign currency denominated sales and costs. We do not use the financial instruments for speculative or trading activities. At March 29, 2014, we had the following significant foreign exchange contracts to hedge the anticipated foreign currency cash flows outstanding. The contracts have been organized into maturity groups and the related quarter that we expect the hedge contract to affect our earnings.
Hedged Currency | (BUY)/SELL Local Currency | Weighted Spot Contract Rate | Weighted Forward Contract Rate | Fair Value Gain/(Loss) | Maturity | Quarter Expected to Affect Earnings | |||||||||||
EUR | 7,679,000 | 1.339 | 1.340 | $ | (296,508 | ) | Mar 2014 - May 2014 | Q1 FY15 | |||||||||
EUR | 9,224,000 | 1.350 | 1.351 | $ | (254,173 | ) | Jun 2014 - Aug 2014 | Q2 FY15 | |||||||||
EUR | 9,710,000 | 1.350 | 1.351 | $ | (264,557 | ) | Sep 2014 - Nov 2014 | Q3 FY15 | |||||||||
EUR | 11,801,000 | 1.372 | 1.372 | $ | (76,434 | ) | Dec 2014 - Feb 2015 | Q4 FY15 | |||||||||
YEN | 1,051,671,000 | 97.31 per US$ | 97.10 per US$ | $ | 553,300 | Mar 2014 - May 2014 | Q1 FY15 | ||||||||||
YEN | 1,395,050,000 | 98.18 per US$ | 97.95 per US$ | $ | 594,600 | Jun 2014 - Aug 2014 | Q2 FY15 | ||||||||||
YEN | 1,417,157,000 | 101.09 per US$ | 100.84 per US$ | $ | 187,286 | Sep 2014 - Nov 2014 | Q3 FY15 | ||||||||||
YEN | 1,335,478,000 | 102.44 per US$ | 102.19 per US$ | $ | (1,868 | ) | Dec 2014 - Feb 2015 | Q4 FY15 | |||||||||
GBP | (652,000 | ) | 1.548 | 1.545 | $ | 70,760 | Feb 2014 - Apr 2014 | Q1 FY15 | |||||||||
GBP | (2,015,000 | ) | 1.567 | 1.564 | $ | 178,010 | May 2014 - Jul 2014 | Q2 FY15 | |||||||||
GBP | (1,822,000 | ) | 1.622 | 1.618 | $ | 61,643 | Aug 2014 - Oct 2014 | Q3 FY15 | |||||||||
GBP | (989,000 | ) | 1.651 | 1.646 | $ | 4,712 | Nov 2014 - Jan 2015 | Q4 FY15 | |||||||||
GBP | (331,000 | ) | 1.668 | 1.663 | $ | (3,915 | ) | Feb 2015 - Apr 2015 | Q1 FY16 | ||||||||
CHF | (5,587,000 | ) | 0.94 per US$ | 0.94 per US$ | $ | 347,153 | Apr 2014 - Jun 2014 | ||||||||||