FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended: October 2, 2004 Commission File Number: 1-10730
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2882273
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 Wood Road, Braintree, MA 02184
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 848-7100
Indicate by check mark whether the registrant (1.) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) (2.) has been subject to the
filing requirements for at least the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes |X| No |_|
The number of shares of $.01 par value common stock
outstanding as of October 2, 2004:
25,409,008
HAEMONETICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statements of Income - Three and
Six Months Ended October 2, 2004 and September 27, 2003 2
Unaudited Consolidated Balance Sheets - October 2, 2004 and
April 3, 2004 3
Unaudited Consolidated Statement of Stockholders' Equity -
Six Months Ended October 2, 2004 4
Unaudited Consolidated Statements of Cash Flows -Six Months Ended
October 2, 2004 and September 27, 2003 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 34
ITEM 4. Controls and Procedures 35
PART II. OTHER INFORMATION
ITEM 6. Exhibits 36
Signatures
ITEM 1. Financial Statements
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except share data)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ---------- -------------
Net revenues ........................................... $ 90,923 $ 87,488 $ 185,525 $ 175,771
Cost of goods sold ..................................... 45,374 45,880 92,876 94,328
--------- --------- --------- ---------
Gross profit ........................................... 45,549 41,608 92,649 81,443
Operating expenses:
Research and development ............................. 4,253 4,622 8,307 9,619
Selling, general and administrative .................. 27,385 27,852 55,469 54,255
--------- --------- --------- ---------
Total operating expenses ........................... 31,638 32,474 63,776 63,874
--------- --------- --------- ---------
Operating income ....................................... 13,911 9,134 28,873 17,569
Interest expense ....................................... (636) (767) (1,297) (1,553)
Interest income ........................................ 502 186 865 469
Other (expense) income, net ............................ (69) 33 (301) (113)
--------- --------- --------- ---------
Income before provision for income taxes ............... 13,708 8,586 28,140 16,372
Provision for income taxes ............................. 4,834 3,091 9,446 5,894
--------- --------- --------- ---------
Net income ............................................. $ 8,874 $ 5,495 $ 18,694 $ 10,478
========= ========= ========= =========
Basic earnings per common share ........................ $ 0.35 $ 0.23 $ 0.74 $ 0.43
Diluted earnings per common share ...................... $ 0.34 $ 0.23 $ 0.73 $ 0.43
Weighted average shares outstanding
Basic ........................................ 25,258 24,120 25,207 24,092
Diluted ...................................... 25,784 24,327 25,681 24,276
The accompanying notes are an integral part of these
consolidated financial statements.
2
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
October 2, 2004 April 3, 2004
--------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 143,829 $ 118,117
Accounts receivable, less allowance of $1,731 as of October 2, 2004
and $2,261 as of April 3, 2004 83,347 82,640
Inventories 50,712 52,235
Deferred tax asset, net 16,841 21,856
Prepaid expenses and other current assets 9,526 6,601
--------- ---------
Total current assets 304,255 281,449
Property, plant and equipment:
Total property, plant and equipment 272,623 269,121
Less: accumulated depreciation 200,399 191,091
--------- ---------
Net property, plant and equipment 72,224 78,030
Other assets:
Other intangibles, less amortization of $6,530 as of October 2, 2004
and $5,569 as of April 3, 2004 27,918 24,784
Goodwill, net 17,804 17,242
Other long-term assets 5,334 5,889
--------- ---------
Total other assets 51,056 47,915
--------- ---------
Total assets $ 427,535 $ 407,394
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 28,298 $ 32,818
Accounts payable 15,105 14,249
Accrued payroll and related costs 13,280 14,547
Accrued income taxes 7,799 7,967
Other accrued liabilities 22,147 26,262
--------- ---------
Total current liabilities 86,629 95,843
Deferred tax liability, net 1,376 1,682
Long-term debt, net of current maturities 25,199 25,442
Other long-term liabilities 4,665 4,678
Stockholders' equity:
Common stock, $0.01 par value; Authorized - 80,000,000 shares;
Issued - 32,957,146 shares at October 2, 2004 and 32,647,910 shares at April 3, 2004 330 326
Additional paid-in capital 134,915 127,744
Retained earnings 340,985 322,291
Accumulated other comprehensive loss (2,924) (6,535)
--------- ---------
Stockholders' equity before treasury stock 473,306 443,826
Less: Treasury stock at cost - 7,548,138 shares at October 2, 2004
and 7,568,289 shares at April 3, 2004 163,640 164,077
--------- ---------
Total stockholders' equity 309,666 279,749
--------- ---------
Total liabilities and stockholders' equity $ 427,535 $ 407,394
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited - in thousands)
Accumulated
Common Stock Additional Other
----------------- Paid-in Treasury Retained Comprehensive
Shares $ Capital Stock Earnings Loss
-----------------------------------------------------------------------------------
Balance, April 3, 2004 32,648 $326 $127,744 ($164,077) $322,291 ($6,535)
=================================================================================
Employee stock purchase plan -- -- (42) 437 -- --
Exercise of stock options
and related tax benefit 309 4 7,213 -- -- --
Net income -- -- -- -- 18,694 --
Foreign currency translation adjustment -- -- -- -- -- (1,103)
Unrealized gain on derivatives -- -- -- -- -- 4,714
Comprehensive income -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, October 2, 2004 32,957 $330 $134,915 ($163,640) $340,985 ($2,924)
=================================================================================
Total
Stockholders' Comprehensive
Equity Income
------------- -------------
Balance, April 3, 2004 $279,749
Employee stock purchase plan 395
Exercise of stock options
and related tax benefit 7,217
Net income 18,694 $18,694
Foreign currency translation adjustment (1,103) (1,103)
Unrealized gain on derivatives 4,714 4,714
-------
Comprehensive income -- $22,305
-------- =======
Balance, October 2, 2004 $309,666
========
The accompanying notes are an integral part of these
consolidated financial statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Six Months Ended
----------------
October 2, September 27,
2004 2003
---------- -------------
Cash Flows from Operating Activities:
Net income $ 18,694 $ 10,478
Adjustments to reconcile net income to net cash provided by operating activities:
Non cash items:
Depreciation and amortization 14,328 15,603
Deferred tax expense (benefit) 1,920 (86)
Gain on sales of plant, property and equipment (2,905) (979)
Tax benefit related to exercise of stock options 421 290
Unrealized loss (gain) from hedging activities 521 (48)
Change in operating assets and liabilities:
Increase in accounts receivable, net (1,993) (2,165)
(Increase) decrease in inventories (2,768) 3,624
Increase in prepaid income taxes (1,315) (1,186)
(Increase) decrease in other assets and other long-term liabilities (1,033) 765
Increase (decrease) in accounts payable and accrued expenses 1,514 (3,982)
--------- ---------
Net cash provided by operating activities 27,384 22,314
Cash Flows from Investing Activities:
Capital expenditures on property, plant and equipment (7,177) (6,809)
Proceeds from sale of property, plant and equipment 5,505 2,554
Acquisition of patents (4,019) --
Acquisition of software development company and milestone payments -- (1,020)
--------- ---------
Net cash used in investing activities (5,691) (5,275)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage (224) (205)
Net decrease in short-term revolving
credit agreements (2,975) (3,105)
Employee stock purchase plan 395 454
Exercise of stock options 6,796 2,374
--------- ---------
Net cash provided by (used in) financing activities 3,992 (482)
Effect of Exchange Rates on Cash and Cash Equivalents 27 329
--------- ---------
Net Increase in Cash and Cash Equivalents 25,712 16,886
Cash and Cash Equivalents at Beginning of Year 118,117 49,885
--------- ---------
Cash and Cash Equivalents at End of Period $ 143,829 $ 66,771
========= =========
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements
of Haemonetics equipment $ 3,482 $ 4,266
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,179 $ 1,414
========= =========
Income taxes paid $ 8,848 $ 12,330
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
our management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated. Operating results for the
six-month period ended October 2, 2004 are not necessarily indicative of the
results that may be expected for the full fiscal year ending April 2, 2005. For
further information, refer to the audited consolidated financial statements and
footnotes included in our annual report on Form 10-K for the fiscal year ended
April 3, 2004.
Certain amounts in the prior year financial statements have been reclassified to
conform to the fiscal year 2005 presentation.
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal
year 2005 includes 52 weeks with all four quarters including 13 weeks. Fiscal
year 2004 included 53 weeks with the first three quarters of the fiscal year
including 13 weeks and the fourth quarter of fiscal 2004 including 14 weeks.
2. EARNINGS PER SHARE ("EPS")
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations, as required by SFAS
No. 128, "Earnings Per Share." Basic EPS is computed by dividing net income by
weighted average shares outstanding. Diluted EPS includes the effect of
potential dilutive common shares.
For the three months ended
October 2, 2004 September 27, 2003
----------------------------------------
(in thousands, except per share amounts)
----------------------------------------
Basic EPS
Net income $ 8,874 $ 5,495
Weighted average shares 25,258 24,120
----------------------------------
Basic earnings per share $ 0.35 $ 0.23
----------------------------------
Diluted EPS
Net income $ 8,874 $ 5,495
Basic weighted average shares 25,258 24,120
Effect of stock options 526 207
----------------------------------
Diluted weighted average shares 25,784 24,327
----------------------------------
Diluted earnings per share $ 0.34 $ 0.23
----------------------------------
6
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
------------------------------------------
For the six months ended
October 2, 2004 September 27, 2003
------------------------------------------
(in thousands, except per share amounts)
------------------------------------------
Basic EPS
Net income $18,694 $10,478
Weighted average shares 25,207 24,092
---------------------------------
Basic earnings per share $ 0.74 $ 0.43
---------------------------------
Diluted EPS
Net income $18,694 $10,478
Basic weighted average shares 25,207 24,092
Effect of stock options 474 184
---------------------------------
Diluted weighted average shares 25,681 24,276
---------------------------------
Diluted earnings per share $ 0.73 $ 0.43
---------------------------------
3. STOCK-BASED COMPENSATION
We adopted the disclosure only provisions for employee stock-based compensation
under Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," and continue to
account for employee stock-based compensation using the intrinsic value method
under Accounting Principles Board Opinion No. 25 ("APB No. 25").
At the date of grant, the exercise price of our employee stock options equals
the market price of the underlying stock. Therefore, under the intrinsic value
method no accounting recognition is given to options granted to employees and
directors until the options are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity. The compensation cost
for options granted to consultants is recorded at fair value in accordance with
Emerging Issues Task Force "EITF" issue 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Had compensation costs under our stock-based compensation plans been determined
based on the fair value model of Statement of Financial Accounting Standards
(SFAS) 123 "Accounting for Stock-Based Compensation," as amended by SFAS 148,
the effect on our earnings per share would have been as follows:
7
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the three months ended
October 2, 2004 September 27, 2003
------------------------------------------
(in thousands, except per share amounts)
Net income (as reported): $ 8,874 $ 5,495
Deduct: Total stock-based
compensation expense
determined under the fair
value method for all
awards, net of tax (1,225) (1,200)
------------------------
Pro Forma Net Income: $ 7,649 $ 4,295
========================
Earnings per share:
Basic
As reported $ 0.35 $ 0.23
Pro forma $ 0.30 $ 0.18
Diluted
As Reported $ 0.34 $ 0.23
Pro forma $ 0.30 $ 0.18
For the six months ended
October 2, 2004 September 27, 2003
----------------------------------------
(in thousands, except per share amounts)
Net income (as reported): $ 18,694 $ 10,478
Deduct: Total stock-based
compensation expense determined
under the fair value method
for all awards, net of tax (2,643) (2,680)
--------------------------
Pro Forma Net Income: $ 16,051 $ 7,798
==========================
Earnings per share:
Basic
As reported $ 0.74 $ 0.43
Pro forma $ 0.64 $ 0.32
Diluted
As Reported $ 0.73 $ 0.43
Pro forma $ 0.63 $ 0.32
8
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
4. ACCOUNTING FOR SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in costs of goods sold with the
exception of $1.2 million for both the three month periods ended October 2, 2004
and September 27, 2003, respectively, and $2.5 million for both the six month
periods ended October 2, 2004 and September 27, 2003 which is included in
selling, general and administrative expenses.
5. FOREIGN CURRENCY
We enter into forward exchange contracts to hedge the anticipated cash flows
from forecasted foreign currency denominated revenues, principally Japanese Yen
and Euro. The purpose of our hedging strategy is to lock in foreign exchange
rates for twelve months to minimize, for this period of time, the unforeseen
impact on our results of operations of fluctuations in foreign exchange rates.
We also enter into forward contracts that settle within 35 days to hedge certain
inter-company receivables denominated in foreign currencies. These derivative
financial instruments are not used for trading purposes. The cash flows related
to the gains and losses on these foreign currency hedges are classified in the
consolidated statements of cash flows as part of cash flows from operating
activities.
6. PRODUCT WARRANTIES
We provide a warranty on parts and labor for one year after the sale and
installation of each device. We also warrant our disposable products through
their use or expiration. We estimate our potential warranty expense based on our
historical warranty experience, and we periodically assess the adequacy of our
warranty accrual and make adjustments as necessary.
For the three months ended
October 2, 2004 September 27, 2003
-------------------------------------
(in thousands)
Warranty accrual as of the
beginning of the period $ 751 $ 722
Warranty Provision 412 373
Warranty Spending (412) (443)
--------------------------
Warranty accrual as of the
end of the period $ 751 $ 652
==========================
9
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the six months ended
October 2, 2004 September 27, 2003
-------------------------------------
(in thousands)
Warranty accrual as of the
beginning of the period $ 677 $ 1,056
Warranty Provision 1,029 802
Warranty Spending (955) (1,206)
--------------------------
Warranty accrual as of the
end of the period $ 751 $ 652
==========================
7. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-owner changes
in stockholders' equity. For us, all other non-owner changes are primarily
foreign currency translation, the change in our net minimum pension liability
and the changes in fair value of the effective portion of our outstanding cash
flow hedge contracts.
A summary of the components of other comprehensive income is as follows:
For the three months ended
October 2, 2004 September 27, 2003
-------------------------------------
(in thousands)
-------------------------------------
Net income $ 8,874 $ 5,495
--------------------------
Other comprehensive income:
Foreign currency translation 159 721
Unrealized gain (loss) on cash
flow hedges, net of tax 364 (2,172)
Reclassifications into earnings of
cash flow hedge losses, net of tax 1,269 940
--------------------------
Total comprehensive income $ 10,666 $ 4,984
--------------------------
10
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the six months ended
October 2, 2004 September 27, 2003
-------------------------------------
-------------------------------------
(in thousands)
-------------------------------------
Net income $ 18,694 $ 10,478
--------------------------
Other comprehensive income:
Foreign currency translation (1,103) 4,528
Unrealized gain (loss) on cash
flow hedges, net of tax 2,364 (4,336)
Reclassifications into earnings of
cash flow hedge losses, net of tax 2,350 2,822
--------------------------
Total comprehensive income $ 22,305 $ 13,492
--------------------------
8. INVENTORIES
Inventories are stated at the lower of cost or market and include the cost of
material, labor and manufacturing overhead. Cost is determined on the first-in,
first-out method.
Inventories consist of the following:
October 2, 2004 April 3, 2004
---------------------------------
(in thousands)
Raw materials $ 15,041 $ 11,630
Work-in-process 6,691 5,340
Finished goods 28,980 35,265
--------------------------
$ 50,712 $ 52,235
==========================
9. ACQUIRED INTANGIBLE ASSETS
Patents
During the current quarter, we purchased $4.0 million in patents for several
products aimed at blood conservation and surgical blood salvage. The useful life
assigned to the patents acquired was 10 years.
11
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
As of October 2, 2004
Weighted
Average
Gross Carrying Accumulated Useful Life
Amount Amortization (in years)
------------------------------------------
(in thousands)
Amortized Intangibles
Patents $10,389 $ 1,882 13
Other technology 11,757 2,078 15
Customer contracts and related
relationships 11,809 2,570 15
------- -------
Subtotal 33,955 6,530 14
Indefinite Life Intangibles
Trade name 493 --
------- -------
Total Intangibles $34,448 $ 6,530 Indefinite
======= =======
12
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
As of April 3, 2004
Weighted
Average
Gross Carrying Accumulated Useful Life
Amount Amortization (in years)
-------------------------------------------
(in thousands)
Amortized Intangibles
Patents $ 6,371 $ 1,594 14
Other technology 11,754 1,810 15
Customer contracts and related
relationships 11,738 2,165 15
------- -------
29,863 5,569 15
Subtotal
Indefinite Life Intangibles
Trade name 490 -- Indefinite
------- -------
Total Intangibles $30,353 $ 5,569
======= =======
The only other changes to the net carrying value of our intangible assets from
April 3, 2004 to October 2, 2004 was amortization expense and the effect of rate
changes in the translation of the intangibles contained in the financial
statement of our Canadian subsidiary.
Aggregate amortization expense for amortized other intangible assets was $0.5
million for both the three months ended October 2, 2004 and September 27, 2003.
Additionally, expected future amortization expenses on intangible assets
approximates $2.0 million for fiscal 2005, $2.9 million for fiscal years 2006
and 2007 and $2.8 million for fiscal years 2008 through 2010.
10. GOODWILL
The change in the carrying amount of our goodwill during the six months ended
October 2, 2004 is as follows (in thousands):
Carrying amount as of April 3, 2004 $ 17,242
Fifth Dimension earn-out payment 1,020 (a)
Effect of change in rates used for translation (458)
--------
Carrying amount as of October 2, 2004 $ 17,804
========
13
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
(a) The acquisition of Fifth Dimension, which occurred on January 1, 2002,
involved the potential for earn-out payments of up to $4.1 million based
on Fifth Dimension reaching certain performance milestones prior to fiscal
2008. The payment accrued this quarter was the second milestone payment.
The first milestone payment, also in the amount of $1.0 million, was
earned as of the end of the fiscal year 2003 and paid during the first
quarter of fiscal 2004.
11. INCOME TAXES
For the six months ended October 2, 2004, the income tax provision, as a
percentage of pretax income, was 36% before the $0.6 million first quarter
reversal of previously established tax reserves related to a local Japanese tax
matter and a second quarter $0.1 million release of reserve in the U.S. As a
consequence of these reserve adjustments, the effective tax rate was reduced to
33.6%. For the six months ended September 27, 2003, the tax rate was 36%.
12. COMMITMENTS AND CONTINGENCIES
We are presently engaged in various legal actions, and although ultimate
liability cannot be determined at the present time, we believe, based on
consultation with counsel, that any such liability will not materially affect
our consolidated financial position or our results of operations.
13. DEFINED BENEFIT PENSION PLANS
Two of our subsidiaries have defined benefit pension plans covering
substantially all full time employees at those subsidiaries. Net periodic
benefit costs for the plans in the aggregate include the following components:
For the three months ended
October 2, 2004 September 27, 2003
-----------------------------------
(in thousands):
Service Cost $ 141 $ 118
Interest cost on benefit obligation 38 31
Expected return on plan assets (14) (47)
Recognized net actuarial (gain) loss -- 42
Settlements 6 5
Amortization of unrecognized prior
service cost, unrecognized gain
and unrecognized
initial obligation 8 10
------- -------
Net periodic benefit cost $ 179 $ 159
======= =======
14
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
For the six months ended
October 2, 2004 September 27, 2003
-----------------------------------
(in thousands):
Service Cost $ 302 $ 239
Interest cost on benefit obligation 87 62
Expected return on plan assets (29) (94)
Recognized net actuarial (gain) loss -- 84
Settlements 14 11
Amortization of unrecognized prior
service cost, unrecognized gain
and unrecognized
initial obligation 16 18
------------------------
Net periodic benefit cost $ 390 $ 320
========================
14. SEGMENT INFORMATION
Segment Definition Criteria
We manage our business on the basis of one operating segment: the design,
manufacture and marketing of automated blood processing systems. Our chief
operating decision-maker uses consolidated results to make operating and
strategic decisions. Manufacturing processes, as well as the regulatory
environment in which we operate, are largely the same for all product lines.
Product and Service Segmentation
We have two families of products: (1) those that serve the donor and (2) those
that serve the patient. Under the donor product of families we have included
blood bank, red cell and plasma collection products. The patient products are
the surgical collection products.
Donor
The blood bank products include machines, single use disposables and intravenous
solutions that perform "apheresis," (the separation of whole blood into its
components and subsequent collection of certain components, including platelets
and plasma), as well as the washing of red blood cells for certain procedures.
The main devices used for this blood component processing are the MCS(R)+ 9000
system and the ACP(R) 215 automated cell processing system. In addition, the
blood bank product line includes intravenous solutions used in non-apheresis
applications.
Red cell products include machines, single use disposables and intravenous
solutions that perform apheresis for the collection of red blood cells. The
device used for the collection of red blood cells is the MCS(R)+ 8150 systems.
15
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Plasma collection products are machines, single use disposables and intravenous
solutions that perform apheresis for the collection of plasma. The devices used
in automated plasma collection are the PCS(R)2 plasma collection system and the
Superlite(TM).
Patient
Surgical products include machines and single use disposables that perform
surgical blood salvage in transplant, orthopedic and cardiovascular surgical
applications. Surgical blood salvage is a procedure whereby shed blood is
collected, cleansed and made available to be transfused back to the patient. The
devices used in the surgical area are the OrthoPAT(R) and the Cell Saver(R)
autologous blood recovery systems.
Other
Other revenue includes revenue generated from equipment repairs performed under
preventative maintenance contracts or emergency service billings and
miscellaneous sales, including revenue from our software division, Fifth
Dimension.
Revenues from External Customers:
(in thousands) Three months ended
October 2, 2004 September 27, 2003
--------------- ------------------
Donor:
Blood Bank $ 34,539 $ 27,869
Red Cell 6,745 5,166
Plasma 24,128 31,599
-------- --------
65,412 64,634
Patient:
Surgical 21,442 17,950
Other 4,069 4,904
-------- --------
Total revenues from external customers $ 90,923 $ 87,488
======== ========
(in thousands) Six months ended
October 2, 2004 September 27, 2003
--------------- ------------------
Donor:
Blood Bank $ 66,543 $ 55,460
Red Cell 16,707 9,845
Plasma 50,070 61,840
-------- --------
133,320 127,145
Patient:
Surgical 43,696 38,320
Other 8,509 10,306
-------- --------
Total revenues from external customers $185,525 $175,771
======== ========
16
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
15. REORGANIZATION
On August 12, 2003, during the second quarter of fiscal 2004, we announced a
reorganization of our business in order to meet the needs of our two categories
of customers: "Donor" and "Patient". As a result of the reorganization, we
reduced our worldwide workforce of 1,500 employees by approximately 4%. No
facilities were closed. The reductions resulted in a charge during the second
quarter of fiscal 2004, included in selling, general and administrative
expenses, for severance and related costs of $2.6 million. All payments were
made during fiscal 2004.
16. SUBSEQUENT EVENT
On October 29, 2004 we invested $5 million, an 18.7% investment, in the
preferred stock of a private company engaged in the development and marketing of
technology for processing blood components. We also entered into an exclusive
license agreement with the same company for the potential use of their
technology in processing blood components. Future milestone payments could be
made contingent upon the demonstration of a successful proof of concept and if
certain development deliverables are completed. The potential milestone payments
total $12.4 million. If these milestones are met, we would be obligated to make
minimum royalty payments for commercial sales of products that incorporate this
technology.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Business
We design, manufacture and market automated systems for the collection,
processing and surgical salvage of donor and patient blood, including the
single-use disposables used with our systems and related data management
software. Our systems allow users to collect and process only the blood
component(s) they target, red blood cells, platelets or plasma, increasing donor
and patient safety as well as collection efficiencies. Our systems consist of
proprietary disposable sets that operate on our specialized equipment. Our data
management systems are used by blood collectors to improve the safety and
efficiency of blood collection logistics by eliminating previously manual
functions at commercial plasma and not-for-profit blood banks. We organize our
business into two global product families: donor and patient to better serve our
customers and better position us for continued growth.
As a general practice we place our equipment at customers' sites, with
contractual requirements that customers purchase a certain number of disposables
in a predetermined time frame and, in some cases, pay a fee for the use of our
equipment. This disposable revenue stream (including sales of disposables and
fees for the use of our equipment) accounted for approximately 92.7% and 90.8%
of our total revenues for the second quarters of fiscal 2005 and fiscal 2004,
respectively.
Financial Summary
For the quarter ended
%
Increase/
October 2, September 27, (Decrease)
(in thousands, except per share data) 2004 2003 Q205 vs. Q204
-----------------------------------------
Net revenues $ 90,923 $ 87,488 3.9%
Gross Profit 45,549 41,608 9.5
% of net revenues 50.1% 47.6%
Operating income 13,911 9,134 52.3
% of net revenues 15.3% 10.4%
Provision for income tax 4,834 3,091 56.4
---------- ----------
% of net revenues 5.3% 3.5%
---------- ----------
Net income 8,874 5,495 61.5
% of net revenues 9.8% 6.3%
Earnings per share-diluted $ 0.34 $ 0.23 47.8%
Net revenues for the second quarter of fiscal 2005 increased 3.9% over the same
period in fiscal 2004. The favorable effects of foreign exchange contributed
3.2% to the increase. The remaining 0.7%
18
increase resulted from increases in disposable revenue across our blood bank,
surgical, and red cell product lines partially offset by volume decreases in our
plasma product revenue, equipment revenue and miscellaneous and service revenue.
Gross profit increased 9.5% versus Q2 fiscal 2004. The favorable effects of
foreign exchange accounted for a 5.6% increase in gross profit. The remaining
3.9% increase was due to the change in the mix of products being sold, price
improvements and increased sales volumes. Operating income increased 52.3% over
Q2 fiscal 2004. The favorable effects of foreign exchange accounted for a 15.3%
increase in operating income. The remaining 37.0% was due to gross profit
improvements and a decrease in operating expenses as a percentage of total
revenues. Net income increased 61.5% as compared to Q2 last year. This increase
was due to our higher operating income.
RESULTS OF OPERATIONS
Q2 FISCAL 2005 AS COMPARED TO Q2 FISCAL 2004
Net Revenues
By geography
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
United States $30,399 $32,317 $(1,918) (5.9%)
International 60,524 55,171 5,353 9.7
------------------------------------------------------
Net revenues $90,923 $87,488 $ 3,435 3.9%
======================================================
International Operations and the Impact of Foreign Exchange
Our principal operations are in the U.S., Europe, Japan and other parts of Asia.
Our products are marketed in more than 50 countries around the world via a
direct sales force as well as independent distributors.
Approximately 67% and 63% of our revenues during the second quarters of fiscal
year 2005 and 2004, respectively, were generated outside the U.S. Revenues in
Japan accounted for approximately 28% and 27% of total revenues for Q2 fiscal
2005 and 2004, respectively. Revenues in Europe accounted for approximately 28%
of our total revenues for both Q2 of fiscal 2005 and fiscal 2004. International
sales are primarily conducted in local currencies, specifically the Japanese Yen
and the Euro. Accordingly, our results of operations are significantly affected
by changes in the value of the Yen and the Euro relative to the U.S. dollar. The
favorable effects of foreign exchange resulted in a 3.2% increase in sales.
Please see section entitled "Foreign Exchange" in this management's discussion
for a more complete discussion of how foreign currency affects our business, as
well as our strategy to manage this exposure.
19
By product type
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Disposables $84,274 $79,472 $ 4,802 6.0%
Misc. & service 4,069 4,904 (835) (17.0%)
Equipment 2,580 3,112 (532) (17.1%)
------------------------------------------------------
Net revenues $90,923 $87,488 $ 3,435 3.9%
======================================================
Disposables revenue by product line
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Donor:
Plasma $24,238 $30,720 $(6,482) (21.1%)
Blood Bank 33,338 26,731 6,607 24.7
Red Cell 6,653 5,082 1,571 30.9
------------------------------------------------------
Subtotal $64,229 $62,533 $ 1,696 2.7%
Patient:
Surgical 20,045 16,939 3,106 18.3%
------------------------------------------------------
Total disposables revenue $84,274 $79,472 $ 4,802 6.0%
======================================================
DONOR PRODUCTS
Donor products include the Plasma, Blood Bank and Red Cell product lines.
Disposable revenue for donor products increased 2.7% compared to the second
quarter of fiscal year 2004. Without the favorable impact of foreign exchange,
disposable revenue for donor products was flat from the same period in the prior
year. Red cell and blood bank product revenue increases were almost entirely
offset by a decline in plasma product revenue, as more specifically detailed
below.
Plasma
Disposable revenue in the plasma product line decreased 21.1%. Without the 2.8%
favorable effect of foreign exchange, the decrease in plasma disposable revenues
was 23.9%. The worldwide commercial plasma collection market is experiencing
lower plasma collections both as a result of significant consolidation among
plasma collectors and fractionators and as a result of an oversupply of source
plasma. Of the 23.9% decline, 15.8% is attributable to volume decreases in the
U.S. To-date, the most significant factor affecting the U.S. plasma business has
been the loss of our U.S. customer, Alpha Therapeutic Corporation ("Alpha")
(whose plasma collection operations were purchased and closed by our only plasma
competitor in October 2003, the third quarter of fiscal 2004). The remaining
8.1% decrease in plasma revenues is a result of plasma collection declines in
Asia, Europe and Japan.
20
Blood Bank
Blood Bank disposable revenues increased 24.7%. The favorable effects of foreign
exchange resulted in a 3.8% increase in blood bank disposable revenues as the
majority of our blood bank business is comprised of platelet disposable sales
and a majority of these sales occur in Europe and Japan. The remaining 20.9%
increase in blood bank disposable revenue was spread almost equally between
Japan, the U.S. and Asia. In Japan, the increase in Blood Bank disposable
revenue was due to several factors including: (i) platelet market share gains in
Japan achieved in the fourth quarter of fiscal year 2004, which we have
sustained during the first half of fiscal year 2005 and, (ii) a product mix
shift from non-filtered sets to higher-priced filtered platelet sets as compared
to the second quarter of fiscal 2004. In the U.S. the increase in Blood Bank
disposable revenue was due to increases in intravenous solution sales. In Asia,
the increase in Blood Bank disposable revenue was as a result of comparison to
low platelet collections in the second quarter of fiscal 2004 when there were
fewer Asian blood collections because of the impact to the region of the SARS
virus.
Red Cell
Red Cell disposable revenue increased 30.9%. The favorable effects of foreign
exchange resulted in a 1.9% increase in red cell disposable revenues. The
remaining 29.0% increase is due to the continuing adoption of our automated
collection technology in the United States where we continue to see blood
shortages. In fiscal 2005, blood collectors continue to increase the use of our
technology to increase the supply of red cells from eligible donors, to reduce
collection costs, and to improve operating quality and efficiency. Increased
U.S. sales of our higher priced filtered sets, which include a filter to remove
white blood cells from the collected blood, also contributed to the revenue
increase.
PATIENT PRODUCTS
Surgical
The surgical product line has two major brand platforms: the Cell Saver brand
and the OrthoPAT brand. Disposable revenue for the surgical product line, in
total, increased 18.3%. The favorable effects of foreign exchange accounted for
a 3.5% increase with the remaining 14.8% increase largely attributable to
increases in OrthoPAT disposable revenues.
Cell Saver disposables revenue increased 9.0% for the quarter. The favorable
effects of foreign exchange resulted in a 3.7% increase in cell saver disposable
revenues. The remaining 5.3% increase for the quarter is due to an increase in
volume in our European and U.S. markets. In Europe, the Cell Saver system is
used in both high and low blood loss surgeries, including the orthopedic market.
OrthoPAT disposable revenues increased 70.6%. Orthopedic surgeons continue to
adopt surgical blood salvage as an effective alternative to using blood from
patient pre-donation or from donated blood in hip and knee replacements and
other orthopedic surgeries. The favorable effects of foreign exchange accounted
for 3.0% of the increase in OrthoPAT disposable revenues.
21
Other Revenues
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Miscellaneous & Service $ 4,069 $ 4,904 $ (835) (17.0%)
Equipment 2,580 3,112 (532) (17.1%)
------------------------------------------------------
Total other revenues $ 6,649 $ 8,016 $(1,367) (17.1%)
======================================================
Our miscellaneous and service revenue includes revenue from repairs performed
under preventive maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, Fifth
Dimension.
Miscellaneous and service revenue decreased 17.0%. Without the favorable effects
of foreign currency, the decrease would have been 20.2%. A 14.2% decrease in
miscellaneous and service revenue was due to reduced software revenue from Fifth
Dimension. Fifth Dimension currently sells its products primarily to plasma
customers who have been negatively impacted by the recent volatility and
consolidation in the worldwide commercial plasma collection market.
Revenue from equipment sales decreased 17.1%. Without the favorable effects of
foreign currency, the decrease would have been 21.2%. Equipment sales are
variable and as such fluctuate from period to period.
Gross profit
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Gross Profit $ 45,549 $ 41,608 $3,941 9.5%
% of net sales 50.1% 47.6%
Gross profit increased 9.5% versus Q2 fiscal 2004. The favorable effects of
foreign exchange accounted for a 5.6% increase in gross profit. The remaining
3.9% increase was due to the change in the mix of products being sold, price
improvements and increased sales volumes
Operating Expenses
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Research and development $ 4,253 $ 4,622 $ (369) (8.0%)
Selling, general and
administrative $27,385 $27,852 $ (467) (1.7)%
------------------------------------------------------
Total operating expenses $31,638 $32,474 $ (836) (2.6%)
------------------------------------------------------
22
Research and Development
Research and Development expenses were down slightly from spending in the second
quarter of the prior year due to our restructuring in the second quarter of
fiscal year 2004 which lowered our head count. We anticipate an increase in R&D
spending in the third and fourth quarter of this fiscal year to support the R&D
projects currently in our pipeline, including the CardioPAT(TM) system, a
surgical product, as well as enhancements to the MCS multi component platelet
collection platform.
Selling, general and administrative
For the second quarter of fiscal 2005 selling, general and administrative
expenses decreased 1.7%. Without the 2.9% unfavorable effect of foreign
exchange, the decrease in selling, general and administrative expenses was 4.6%.
The 4.6% or $1.3 million decrease was a result of $2.6 million in severance
costs charged to selling, general and administrative expenses during the second
quarter of fiscal 2004 as part of our reorganization (see note 15) partially
offset by current quarter increases in personnel-related expenses in marketing
to support our higher level of sales.
Operating income
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Operating Income $ 13,911 $ 9,134 $4,777 52.3%
% of net sales 15.3% 10.4%
Operating income for the quarter increased 52.3% over the prior year. An
increase of 15.3% was due to foreign exchange. The remaining 37.0% increase was
a result of the effect of gross profit improvements and lower operating
expenses.
Other expense, net
(in thousands)
October 2, September 27, $ %
2004 2003 Change Change
---------------------------------------------------
Interest expense $(636) $(767) 131 17.1%
Interest income 502 186 316 169.9%
Other (expense) income, net (69) 33 (102) (309.1%)
---------------------------------------------------
Total other expense, net $(203) $(548) $ 345 (63.0%)
===================================================
Several factors contributed to the decrease in total other expense, net: (1) a
decrease in interest expense as we had lower average debt outstanding as
compared to fiscal 2004, (2) an increase in interest income due to higher cash
balances during the year, (3) offset by an increase in other expense, net as a
result of
23
increases in other miscellaneous expenses (such as royalty expense) partially
offset by increases in other miscellaneous incomes (such as hedge points) over
the second quarter of fiscal year 2004.
Income taxes
The income tax provision, as a percentage of pretax income, was 35.3%
incorporating a 36.0% natural tax rate reduced by a $0.1 million reserve release
in the U.S. The income tax provision, as a percentage of pretax income, was 36%
for the second quarter of fiscal 2004. We expect our natural tax rate to
approximate 36.0% for the remainder of fiscal 2005, although future reserve
adjustments may increase or decrease the reported effective tax rate.
Financial Summary
For the six months ended
%
Increase/
October 2, September 27, (Decrease)
(in thousands, except per share data) 2004 2003 05 vs. 04
----------------------------------------
Net revenues $ 185,525 $175,771 5.5%
Gross Profit 92,649 81,443 13.8
% of net revenues 49.9% 46.3%
Operating income 28,873 17,569 64.3
% of net revenues 15.6% 10.0%
Provision for income tax 9,446 5,894 60.3
--------- --------
% of net revenues 5.1% 3.4%
--------- --------
Net income 18,694 10,478 78.4
% of net revenues 10.1% 6.0%
Earnings per share-diluted $ 0.73 $ 0.43 69.8%
Net revenues for the first six months of fiscal 2005 increased 5.5% over the
same period in fiscal 2004. The favorable effects of foreign exchange
contributed 4.7% to the increase. The remaining 0.8% increase resulted from
increases in disposable revenue across our blood bank, surgical, and red cell
product lines, and increases in equipment revenue. These increases were almost
entirely offset by volume decreases in our plasma product line and in
miscellaneous and service revenue.
Gross profit increased 13.8% versus the first six months of fiscal 2004. The
favorable effects of foreign exchange accounted for an 8.7% increase in gross
profit. The remaining 5.1% increase was due to the change in the mix of products
being sold, price improvements and increased sales volumes. Operating
24
income increased 64.3% over the first six months of fiscal 2004 due to gross
profit improvements and a decrease in operating expenses. Net income increased
78.4% as compared to the first six months of last year. This increase was due to
two factors: (i) higher operating margin, and (ii) a reduction in our year to
date tax rate to 33.6% due to the release of income tax reserves of $0.6 million
in Japan during the first quarter of fiscal 2005 and $0.1 million in the U.S.
during the second quarter of fiscal 2005.
RESULTS OF OPERATIONS
FISCAL 2005 AS COMPARED TO FISCAL 2004
Net Revenues
By geography
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
United States $ 63,310 $ 63,869 $ (559) (0.9)%
International 122,215 111,902 10,313 9.2
------------------------------------------------------
Net revenues $185,525 $175,771 $ 9,754 5.5%
======================================================
International Operations and the Impact of Foreign Exchange
Our principal operations are in the U.S., Europe, Japan and other parts of Asia.
Our products are marketed in more than 50 countries around the world via a
direct sales force as well as independent distributors.
Approximately 65.9% and 63.7% of our revenues during the first six months of
fiscal year 2005 and 2004, respectively, were generated outside the U.S.
Revenues in Japan accounted for approximately 28.1% and 26.5% of total revenues
for the first six months of fiscal 2005 and 2004, respectively. Revenues in
Europe accounted for approximately 29.2% and 28.5% of our total revenues for the
first six months of fiscal 2005 and fiscal 2004, respectively. International
sales are primarily conducted in local currencies, specifically the Japanese Yen
and the Euro. Accordingly, our results of operations are significantly affected
by changes in the value of the Yen and the Euro relative to the U.S. dollar. The
favorable effects of foreign exchange resulted in a 4.7% increase in sales.
Please see section entitled "Foreign Exchange" in this management's discussion
for a more complete discussion of how foreign currency affects our business, as
well as our strategy to manage this exposure.
25
By product type
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Disposables $167,763 $157,867 $ 9,896 6.3%
Misc. & service 8,509 10,306 (1,797) (17.4)
Equipment 9,253 7,598 1,655 21.8
------------------------------------------------------
Net revenues $185,525 $175,771 $ 9,754 5.5%
======================================================
Disposables revenue by product line
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Donor:
Plasma $ 49,724 $ 60,309 $(10,585) (17.6%)
Blood Bank 64,107 52,680 11,427 21.7
Red Cell 13,114 9,646 3,468 36.0
------------------------------------------------------
Subtotal $126,945 $122,635 $ 4,310 3.5%
Patient:
Surgical 40,818 35,232 5,586 15.9%
------------------------------------------------------
Total disposables revenue $167,763 $157,867 $ 9,896 6.3%
======================================================
DONOR PRODUCTS
Donor products include the Plasma, Blood Bank and Red Cell product lines.
Disposable revenue for all donor products increased 3.5% compared to the first
six months of fiscal year 2004. The favorable effects of foreign exchange
increased donor disposable revenue 4.8%. Without this favorable impact of
foreign exchange, disposable revenue declined 1.3% from the same period in the
prior year. Red cell and blood bank product revenues increases were more than
offset by a decline in plasma product revenue, as more specifically detailed
below.
Plasma
Disposable revenue in the plasma product line decreased 17.6%. Without the 4.0%
favorable effect of foreign exchange, the decrease in plasma disposable revenues
was 20.5%. The worldwide commercial plasma collection market is experiencing
lower plasma collections both as a result of significant consolidation among
plasma collectors and fractionators and as a result of an oversupply of source
plasma. Of the 20.5% decline, 14.9% is attributable to volume decreases in the
U.S. To date, the most significant factor affecting the U.S. plasma business has
been the loss of our U.S. customer, Alpha Therapeutic Corporation ("Alpha")
(whose plasma collection operations were purchased and closed by our only plasma
competitor in October 2003, the third quarter of fiscal 2004). The remaining
5.6% decrease in plasma revenue is a result of plasma collection declines in
Europe, Asia and Japan.
26
Blood bank
Blood bank disposable revenues increased 21.7%. The favorable effects of foreign
exchange resulted in a 6.2% increase in blood bank disposable revenues as the
majority of our blood bank business is comprised of platelet disposable sales
and the majority of these sales occur in Europe and Japan. A 7.3% increase in
blood bank disposable revenue was a result of the following two factors in
Japan: (i) platelet market share gains in Japan achieved in the fourth quarter
of fiscal year 2004, which we sustained during fiscal year 2005 and (ii) a
product mix shift from non-filtered sets to higher-priced filtered platelet
sets, as compared to the second quarter of fiscal 2004. The remaining 8.2%
increase in blood bank disposable revenue was equally spread between Asia and
the U.S. In Asia, the increase in Blood Bank disposable revenue was as a result
of comparison to low platelet collections in the second quarter of fiscal 2004
when there were fewer Asian blood collections because of the impact to the
region of the SARS virus. In the U.S. the increase in Blood Bank disposable
revenue was due to increases in intravenous solution sales.
Red Cell
Red Cell disposable revenue increased 36.0%. The favorable effects of foreign
exchange resulted in a 2.6_% increase in red cell disposable revenues. The
remaining 33.4% increase is due to the continuing adoption of our technology in
the United States where we continue to see blood shortages. In fiscal 2005 blood
collectors continue to increase the use of our technology to increase the supply
of red cells from eligible donors, to reduce collection costs, and to improve
operating quality and efficiency. Increased U.S. sales of our higher priced
filtered sets, which include a filter to remove white blood cells from the
collected blood, also contributed to the revenue increase.
PATIENT PRODUCTS
Surgical
The surgical product line has two major brand platforms: the Cell Saver brand
and the OrthoPAT brand. Disposable revenue for the surgical product line
increased 15.9%. The favorable effects of foreign exchange accounted for a 5.0%
increase with the remaining 10.9% increase largely attributable to increases in
OrthoPAT disposable revenues.
Cell Saver disposables revenue increased 6.5% during fiscal 2005. Without the
5.4% favorable effect of foreign exchange, Cell Saver disposable revenues
increased 1.1%. The 1.1% increase is due primarily to an increase in volume in
our European markets. In Europe, the Cell Saver system is used in both high and
low blood loss surgeries, including the orthopedic market.
OrthoPAT disposable revenues increased 70.9%. Orthopedic surgeons continue to
adopt surgical blood salvage as an effective alternative to using blood from
patient pre-donation or from donated blood in hip and knee replacements and
other orthopedic surgeries. The favorable effects of foreign exchange accounted
for a 3.8% of the increase in OrthoPAT disposable revenues.
27
Other Revenues
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Miscellaneous & Service $ 8,509 $10,306 $(1,797) (17.4%)
Equipment 9,253 7,598 1,655 21.8%
------------------------------------------------------
Total other revenues $17,762 $17,904 $ (142) (0.8%)
======================================================
Our miscellaneous and service revenue includes revenue from repairs performed
under preventive maintenance contracts or emergency service visits, spare part
sales, various training programs and revenue from our software division, Fifth
Dimension.
Miscellaneous and service revenue decreased 17.4%. Without the favorable effects
of foreign currency, the decrease would have been 21.4%. A 14.0% decrease in
miscellaneous and service revenue was due to reduced software revenue from Fifth
Dimension. Fifth Dimension currently sells its products primarily to plasma
customers who have been negatively impacted by the recent volatility and
consolidation in the worldwide commercial plasma collection market.
Revenue from equipment sales increased 21.8%. The favorable effects of foreign
exchange accounted for a 3.1% increase. The remaining increase of 18.7% was due
primarily to a large sale to a red cell customer during the first quarter of
fiscal 2005. Equipment sales are variable and as such fluctuate from period to
period.
Gross profit
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Gross Profit $92,649 $81,443 $11,206 13.8%
% of net sales 49.9% 46.3%
Gross profit increased 13.8% versus the first six months of fiscal 2004. The
favorable effects of foreign exchange accounted for an 8.7% increase in gross
profit. The remaining 5.1% increase was due to the change in the mix of products
being sold, price improvements and increased sales volumes.
Operating Expenses
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Research and development $ 8,307 $ 9,619 $(1,312) (13.6%)
Selling, general and
administrative 55,469 54,255 1,214 2.2%
------------------------------------------------------
Total operating expenses 63,776 $63,874 $ (98) (0.2)%
------------------------------------------------------
28
Research and Development
Research and Development expenses were down from spending in the first half of
the prior year due to our restructuring in the second quarter of fiscal year
2004 which lowered our head count. We anticipate an increase in R&D spending
later in the third and fourth quarter of this fiscal year to support the R&D
projects currently in our pipeline, including the CardioPAT(TM) system, a
surgical product, as well as enhancements to the MCS multi component platelet
collection platform.
Selling, general and administrative
For the first half of fiscal 2005 selling, general and administrative expenses
increased 2.2%. Without the 3.2% unfavorable effect of foreign exchange,
selling, general and administrative expenses decreased 1.0%. The 1.0% decrease
was a result of $2.6 million in severance costs charged to selling, general and
administrative expenses during the second quarter of fiscal 2004 as part of our
reorganization (see note 15) partially offset by increases in personnel-related
expenses in marketing to support our higher level of sales.
Operating income
(in thousands)
$ %
October 2, September 27, Increase/ Increase/
2004 2003 (Decrease) (Decrease)
------------------------------------------------------
Operating Income $28,873 $17,569 $11,304 64.3%
% of net sales 15.6% 10.0%
Operating income for the first half of fiscal 2005 increased 64.3% over the
prior year. An increase of 28.5% was due to foreign exchange. The remaining
35.8% increase was a result of the effect of gross profit improvements.
Other expense, net
(in thousands)
October 2, September 27, $ %
2004 2003 Change Change
------------------------------------------------------
Interest expense $(1,297) $(1,553) $ 256 16.5%
Interest income
865 469 396 84.4
Other (expense), net (301) (113) (188) (166.4)
------------------------------------------------------
Total other expense, net $ (733) $(1,197) $ 464 38.8%
------------------------------------------------------
Several factors contributed to the decrease in total other expense, net: (1) a
decrease in interest expense as we had lower average debt outstanding as
compared to fiscal 2004, (2) an increase in interest income
29
due to higher cash balances during the year, (3) offset by an increase in other
expense, net as a result of increases in other miscellaneous expenses (such as
royalty expense).
Income taxes
For the first six months of fiscal 2005, the income tax provision, as a
percentage of pretax income, was 33.6% incorporating a 36.0% natural tax rate
reduced by reserve releases for $0.6 million in Japan during the first quarter
of fiscal 2005, and $0.1 million in the U.S. during the second quarter of fiscal
2005. For the first six months of fiscal 2004, the natural tax rate was 36%. We
expect our natural tax rate to approximate 36.0% for the remainder of fiscal
2005, although future reserve adjustments may increase or decrease the reported
effective tax rate.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe
depict our liquidity and cash flow position:
October 2, April 3,
2004 2004
----------------------
(dollars in thousands)
Cash & cash equivalents $143,829 $118,117
Working capital $217,626 $185,606
Current ratio 3.5 2.9
Net cash (debt) position (1) $ 90,332 $ 59,857
Days sales outstanding (DSO) 78 76
Disposables finished goods inventory turnover 6.6 5.7
(1) Net cash position is the sum of cash and cash equivalents less total debt.
Our primary sources of capital include cash and cash equivalents, internally
generated cash flows and bank borrowings. We believe these sources to be
sufficient to fund our requirements, which are primarily capital expenditures
(including systems to improve our product life cycle management), acquisitions,
new business and product development and working capital for at least the next
twelve months.
Cash Flow Overview:
For the six months ended
October 2, September 27,
2004 2003 Change
--------------------------------------
(In thousands)
Net cash provided by (used in):
Operating activities $ 27,384 $ 22,314 $ 5,070
Investing activities (5,691) (5,275) (416)
Financing activities 3,992 (482) 4,474
Effect of exchange rate
changes on cash (1) 27 329 (302)
--------------------------------------
Net increase in cash and
cash equivalents $ 25,712 $ 16,886 $ 8,826
--------------------------------------
30
(1) The balance sheet is affected by spot exchange rates used to translate local
currency amounts into U.S. dollars. In comparing spot exchange rates during the
six months ended fiscal 2005 versus the six months ended fiscal 2004, the
European currencies and the Japanese Yen have weakened against the U.S. dollar.
In accordance with GAAP, only the effect of foreign currency on cash is included
on our cash flow statement.
FISCAL 2005 AS COMPARED TO FISCAL 2004
Operating Activities:
Net cash provided by operating activities was $27.4 million for the first six
months of fiscal 2005, an increase of $5.0 million from the same period in the
prior year, due primarily to:
o $7.7 million more cash provided by net income adjusted for non-cash
items,
o $6.4 million more cash used by inventory during fiscal 2005 as
inventory balances decreased during the first half of fiscal 2004,
o $5.5 million less cash used by accounts payable and accrued expenses
due primarily to lower tax payments in fiscal 2005.
o $1.8 million more cash used in other assets and other long-term
liabilities due to fiscal 2005 increases in stock option receivables
and insurance prepayments. The increase in stock option receivables
is a result of the higher stock option activity in fiscal 2005 as
compared to fiscal 2004. Insurance prepayments are higher in fiscal
2005 as compared to fiscal 2004 due both to rate increases and
timing of payments.
Investing Activities:
Net cash from investing activities decreased $0.4 million as a result of the
$4.0 million spent to acquire patents in the current quarter offset by 1) an
increase in proceeds from the sale of property, plant and equipment due
primarily to a significant sale of our equipment to a red cell customer at the
end of the first quarter of fiscal 2005 and 2) milestone payments made in fiscal
2004 related to Fifth Dimension.
During the first six months of fiscal 2005, we had capital expenditures of $7.2
million, an increase of $0.4 million over the first six months of fiscal 2004.
Financing Activities:
Net cash provided by financing activities increased $4.5 million primarily due
to an increase in proceeds from stock option exercises during the first six
months of fiscal 2005.
Inflation
We do not believe that inflation has had a significant impact on our results of
operations for the periods presented. Historically, we believe we have been able
to minimize the effects of inflation by improving
31
our manufacturing and purchasing efficiencies, by increasing employee
productivity and by adjusting the selling prices of new products.
Foreign Exchange
Approximately 66% of our sales are generated outside the U.S. in local
currencies, yet our reporting currency is the U.S. dollar. Our primary foreign
currency exposures in relation to the U.S. dollar are the Japanese Yen and the
Euro. Foreign exchange risk arises because we engage in business in foreign
countries in local currency. Exposure is partially mitigated by producing and
sourcing product in local currency and expenses incurred by local sales offices.
However, whenever the U.S. dollar strengthens relative to the other major
currencies, there is an adverse affect on our results of operations and
alternatively, whenever the U.S. dollar weakens relative to the other major
currencies there is a positive effect on our results of operations.
It is our policy to minimize for a period of time, the unforeseen impact on our
financial results of fluctuations in foreign exchange rates by using derivative
financial instruments known as forward contracts to hedge the anticipated cash
flows from forecasted foreign currency denominated sales. Hedging through the
use of forward contracts does not eliminate the volatility of foreign exchange
rates, but because we generally enter into forward contracts one year out, rates
are fixed for a one-year period, thereby facilitating financial planning and
resource allocation. We enter into forward contracts that mature one month prior
to the anticipated timing of the forecasted foreign currency denominated sales.
These contracts are designated as cash flow hedges intended to lock in the
expected cash flows of forecasted foreign currency denominated sales at the
available spot rate. Actual spot rate gains and losses on these contracts are
recorded in sales, at the same time the underlying transactions being hedged are
recorded.
We compute a composite rate index for purposes of measuring, comparatively, the
change in foreign currency hedge spot rates from the hedge spot rates of the
corresponding period in the prior year. The relative value of currencies in the
index is weighted by sales in those currencies. The composite was set at 1.00
based upon the weighted rates at March 31, 1997. The composite rate is presented
in the period corresponding to the maturity of the underlying forward contracts.
The favorable or (unfavorable) changes are in comparison to the same period of
the prior year. A favorable change is presented when we will obtain relatively
more U.S. dollars for each of the underlying foreign currencies than we did in
the prior period. An unfavorable change is presented when we obtain relatively
fewer U.S. dollars for each of the underlying foreign currencies than we did in
the prior period. These indexed hedge rates impact sales, and as a result also
gross profit, operating income and net income, in our financial statements. The
final impact of currency fluctuations on the results of operations is dependent
on the local currency amounts hedged and the actual local currency results.
Composite Index Favorable / (Unfavorable)
Hedge Spot Rates Change versus Prior Year
------------------------------------------------
FY2001 Q1 1.04 5.4%
Q2 1.00 8.2%
Q3 0.92 12.9%
Q4 0.97 10.2%
------------------------------------------------
2001 Total 0.98 9.1%
32
FY2002 Q1 0.99 5.2%
Q2 0.97 3.3%
Q3 1.01 (8.6%)
Q4 1.05 (7.5%)
------------------------------------------------
2002 Total 1.00 (2.0%)
FY2003 Q1 1.09 (8.9%)
Q2 1.08 (10.3%)
Q3 1.10 (8.1%)
Q4 1.17 (11.0%)
------------------------------------------------
2003 Total 1.11 (9.5%)
FY2004 Q1 1.13 (3.6%)
Q2 1.05 3.6%
Q3 1.06 3.2%
Q4 1.01 15.9%
------------------------------------------------
2004 Total 1.06 4.9%
FY2005 Q1 0.97 15.7%
Q2 0.99 5.1%
Q3 0.92 15.5%
Q4 0.89 14.1%
------------------------------------------------
2005 Total 0.94 12.7%
FY2006 Q1 0.92 5.2%
Q2 0.91 9.1%
Q3 0.89* 3.5%
* NOTE: Represents hedges for October FY06.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we make which
are prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed," and similar expressions, are
intended to identify forward looking statements regarding events, conditions,
and financial trends that may affect our future plans of operations, business
strategy, results of operations, and financial position. These statements are
based on our current expectations and estimates as to prospective events and
circumstances about which we can give no firm assurance. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of our
actual future financial condition or results. These forward-looking statements,
like any forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include technological advances in the medical field
and our standards for transfusion medicine and our ability to successfully
implement products that incorporate
33
such advances and standards, product demand and market acceptance of our
products, regulatory uncertainties, the effect of economic and political
conditions, the impact of competitive products and pricing, foreign currency
exchange rates, changes in customers' ordering patterns, the effect of industry
consolidation as seen in the Plasma market, the effect of communicable diseases
and the effect of uncertainties in markets outside the U.S. (including Europe
and Asia) in which we operate. The foregoing list should not be construed as
exhaustive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign exchange risk
and interest rate risk.
FOREIGN EXCHANGE RISK
See the section entitled Foreign Exchange for a discussion of how foreign
currency affects our business. It is our policy to minimize for a period of
time, the unforeseen impact on our financial results of fluctuations in foreign
exchange rates by using derivative financial instruments known as forward
contracts to hedge anticipated cash flows from forecasted foreign currency
denominated sales. We do not use the financial instruments for speculative or
trading activities. At October 2, 2004, we had the following significant foreign
exchange contracts to hedge the anticipated cash flows from forecasted foreign
currency denominated sales outstanding:
Hedged (BUY) / SELL Weighted Spot Weighted Forward
Currency Local Currency Contract Rate Contract Rate Fair Value Maturity
Euro 5,500,000 $1.183 $1.171 ($333,768) Oct-Nov 2004
Euro 8,250,000 $1.254 $1.244 $98,133 Dec 2004-Feb 2005
Euro 7,600,000 $1.196 $1.192 ($295,852) Mar-May 2005
Euro 7,400,000 $1.227 $1.226 ($52,998) Jun-Aug 2005
Japanese Yen 1,325,000,000 109.0 per US$ 107.7 per US$ $329,982 Oct-Nov 2004
Japanese Yen 1,725,000,000 106.9 per US$ 105.6 per US$ $659,349 Dec 2004-Feb 2005
Japanese Yen 1,650,000,000 110.4 per US$ 108.3 per US$ $159,783 Mar-May 2005
Japanese Yen 1,720,000,000 110.0 per US$ 107.7 per US$ $150,872 Jun-Aug 2005
---------
Total: $715,501
=========
We estimate the change in the fair value of all forward contracts assuming both
a 10% strengthening and weakening of the U.S. dollar relative to all other major
currencies. In the event of a 10% strengthening of the U.S. dollar, the change
in fair value of all forward contracts would result in a $10.5 million increase
in the fair value of the forward contracts; whereas a 10% weakening of the U.S.
dollar would result in a $11.8 million decrease in the fair value of the forward
contracts.
34
Interest Rate Risk
All of our long-term debt is at fixed rates. Accordingly, a change in interest
rates has an insignificant effect on our interest expense amounts. The fair
value of our long-term debt, however, does change in response to interest rate
movements due to its fixed rate nature. At October 2, 2004, the fair value of
our long-term debt was approximately $2.2 million higher than the value of the
debt reflected on our financial statements. This higher fair market is entirely
related to our $17.1 million, 7.05% fixed rate senior notes and our $8.1
million, 8.41% real estate mortgage.
At September 27, 2003, the fair value of our long-term debt was approximately
$3.6 million higher than the value of the debt reflected on our financial
statements. This higher fair market is entirely related to our $22.9 million,
7.05% fixed rate senior notes and our $8.5 million, 8.41% real estate mortgage.
Using scenario analysis, if interest rate on all long-term maturities changed by
10% from the rate levels that existed at October 2, 2004 the fair value of our
long-term debt would change by approximately $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, as of October 2, 2004, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer (the Company's principal executive officer and
principal financial officer, respectively) regarding the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within those entities.
There was no change in our internal control over financial reporting during the
six months ended October 2, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On July 27, 2004, the Company held its annual meeting of stockholders. At the
meeting, Yutaka Sakurada was elected as a Director for a term ending in 2005.
The voting results were as follows:
For Against Withheld
Yutaka Sakurada 23,145,266 -- 289,019
Ratification of Ernst & Young LLP
as Independent Public Accountants 23,100,005 327,223 7,057
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002, of Brad Nutter, President and Chief Executive Officer of the
Company
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley of 2002, of
Ronald J. Ryan, Vice President and Chief Financial Officer of the
Company
32.1 Certification Pursuant to 18 United States Code Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Brad Nutter, President and Chief Executive Officer of the Company
32.2 Certification Pursuant to 18 United States Code Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Ronald J. Ryan,
Vice President and Chief Financial Officer of the Company
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAEMONETICS CORPORATION
Date: November 10, 2004 By: s/ Brad Nutter
-----------------------------------------
Brad Nutter, President and Chief
Executive Officer
Date: November 10, 2004 By: s/ Ronald J. Ryan
-----------------------------------------
Ronald J. Ryan, Vice President and Chief
Financial Officer (Principal Financial
Officer)
37