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: September 27, 2003 Commission File Number: 1-10730 ------------------ ------- HAEMONETICS CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2882273 - --------------------------------- ----------------------------------- (State or other jurisdiction I.R.S. Employer Identification No.) of incorporation or organization) 400 Wood Road, Braintree, MA 02184 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (781) 848-7100 Indicate by check mark whether the registrant (1.) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) (2.) has been subject to the filing requirements for at least the past 90 days. Yes X No ---- ---- Indicate 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 September 27, 2003: 24,213,005
HAEMONETICS CORPORATION INDEX PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Unaudited Consolidated Statements of Income - Three and Six Months Ended September 27, 2003 and September 28, 2002 2 Unaudited Consolidated Balance Sheets - September 27, 2003 and March 29, 2003 3 Unaudited Consolidated Statement of Stockholders' Equity - Six Months Ended September 27, 2003 4 Unaudited Consolidated Statements of Cash Flows - Six Months Ended September 27, 2003 and September 28, 2002 5 Notes to Unaudited Consolidated Financial Statements 6-15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-29 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 29 ITEM 4. Controls and Procedures 30 PART II. OTHER INFORMATION 31 ITEM 6. Exhibits and Reports on Form 8-K 31 Signatures
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited - in thousands, except share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ----------------------------- September 27, September 28, September 27, September 28, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- <s> <c> <c> <c> <c> Net revenues $87,488 $87,025 $175,771 $168,960 Cost of goods sold 46,108 48,135 94,805 91,423 ------- ------- -------- -------- Gross profit 41,380 38,890 80,966 77,537 Operating expenses: Research and development. 4,622 5,110 9,619 10,049 ------- ------- -------- -------- Selling, general and administrative 27,852 23,954 54,255 47,970 Total operating expenses 32,474 29,064 63,874 58,019 ------- ------- -------- -------- Operating income 8,906 9,826 17,092 19,518 Interest expense (767) (870) (1,553) (1,747) Interest income 186 345 469 786 Other income, net 261 525 364 1,088 ------- ------- -------- -------- Income before provision for income taxes 8,586 9,826 16,372 19,645 Provision for income taxes 3,091 3,046 5,894 6,090 ------- ------- -------- -------- Net income... $ 5,495 $ 6,780 $ 10,478 $ 13,555 ======= ======= ======== ======== Basic earnings per common share $ 0.23 $ 0.28 $ 0.43 $ 0.54 Diluted earnings per common share $ 0.23 $ 0.27 $ 0.43 $ 0.53 Weighted average shares outstanding Basic 24,120 24,642 24,092 24,980 Diluted 24,327 25,163 24,276 25,642 </TABLE> 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) <TABLE> <CAPTION> September 27, 2003 March 29, 2003 ------------------ -------------- (unaudited) <s> <c> <c> ASSETS Current assets: Cash and cash equivalents $ 66,771 $ 49,885 Accounts receivable, less allowance of $1,536 at September 27, 2003 and $1,449 at March 29, 2003 84,162 77,913 Inventories 58,726 65,805 Current investment in sales-type leases, net 2,229 2,681 Deferred tax asset 18,247 17,307 Prepaid expenses and other current assets 11,434 9,664 -------- -------- Total current assets 241,569 223,255 Total property, plant and equipment 258,690 244,499 Less: accumulated depreciation 177,345 160,512 -------- -------- Net property, plant and equipment 81,345 83,987 Other assets: Investment in sales-type leases, net (long-term) 2,552 2,968 Other intangibles, less amortization of $4,664 at September 27, 2003 and $3,753 at March 29, 2003 25,619 26,339 Goodwill, net 16,639 16,010 Deferred tax asset, net 3,022 2,954 Other long-term assets 3,641 3,695 -------- -------- Total other assets 51,473 51,966 -------- -------- Total assets $374,387 $359,208 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt $ 38,388 $ 39,005 Accounts payable 13,682 13,677 Accrued payroll and related costs 13,993 11,930 Accrued income taxes 7,035 12,093 Other accrued liabilities 25,842 23,670 -------- -------- Total current liabilities 98,940 100,375 Long-term debt, net of current maturities 31,389 31,612 Other long-term liabilities 4,210 3,984 Stockholders' equity: Common stock, $0.01 par value; Authorized - 80,000,000 shares; Issued - 31,808,940 shares at September 27, 2003 and 31,664,849 shares at March 29, 2003 318 317 Additional paid-in capital 111,232 108,770 Retained earnings 303,449 292,971 Accumulated other comprehensive loss (10,472) (13,486) -------- -------- Stockholders' equity before treasury stock 404,527 388,572 Less: Treasury stock at cost - 7,595,935 shares at September 27, 2003 and 7,626,096 shares at March 29, 2003 164,679 165,335 -------- -------- Total stockholders' equity 239,848 223,237 -------- -------- Total liabilities and stockholders' equity $374,387 $359,208 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
3 HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited, in thousands) <TABLE> <CAPTION> Accumulated Common Stock Additional Other Total -------------- Paid-in Treasury Retained Comprehensive Stockholders' Comprehensive Shares $'s Capital Stock Earnings Loss Equity Income ------ --- ---------- -------- -------- ------------- ------------- -------------- <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, March 29, 2003 31,665 $317 $108,770 ($165,335) $292,971 ($13,486) $223,237 Employee stock purchase plan --- --- (202) 656 --- --- 454 Exercise of stock options and related tax benefit 144 1 2,664 --- --- --- 2,665 Purchase of treasury stock --- --- --- --- --- --- --- Net income --- --- --- --- 10,478 --- 10,478 $10,478 Foreign currency translation adjustment --- --- --- --- --- 4,528 4,528 4,528 Unrealized loss on derivatives --- --- --- --- --- (1,514) (1,514) (1,514) -------- Comprehensive income --- --- --- --- --- --- --- $13,492 -------------------------------------------------------------------------------- -------- Balance, September 27, 2003 31,809 $318 $111,232 ($164,679) $303,449 ($10,472) $239,848 ================================================================================ </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited- in thousands) <TABLE> <CAPTION> Six Months Ended -------------------------------- September 27, September 28, 2003 2002 ------------- ------------- <s> <c> <c> Cash Flows from Operating Activities: Net income $10,478 $ 13,555 Adjustments to reconcile net income to net cash provided by operating activities: Non cash items: Depreciation and amortization 15,603 14,253 Deferred tax benefit (86) (330) Tax benefit related to the exercise of stock options 290 470 Unrealized gain from hedging activities (48) (794) Change in operating assets and liabilities: Increase in accounts receivable - net (2,472) (10,213) Decrease (increase) in inventories 3,624 (8,888) Decrease in sales-type leases (current) 535 368 (Increase) decrease in prepaid income taxes (1,186) 402 (Increase) decrease in other assets and other long-term liabilities (180) 169 Increase (decrease) in accounts payable and accrued payroll 1,485 (724) (Decrease) increase in accrued taxes (5,259) 4,125 Decrease in accrued expenses (26) (336) ------- -------- Net cash provided by operating activities 22,758 12,057 ------- -------- Cash Flows from Investing Activities: Purchases of available-for-sale investments -- (11,670) Gross proceeds from sale of available-for-sale investments -- 44,306 Capital expenditures on property, plant and equipment, net of retirements and disposals (5,234) (3,172) Performance milestone payment to acquired software development company (1,020) 0 Net decrease in sales-type leases (long-term) 535 22 ------- -------- Net cash (used in) provided by investing activities (5,719) 29,486 ------- -------- Cash Flows from Financing Activities: Payments on long-term real estate mortgage (205) (189) Net (decrease) increase in short-term revolving credit agreements (3,105) 4,628 Employee stock purchase plan purchases 454 361 Exercise of stock options 2,374 3,027 Purchase of treasury stock -- (41,033) ------- -------- Net cash used in financing activities (482) (33,206) Effect of exchange rates on cash and cash equivalents 329 365 ------- -------- Net increase in cash and cash equivalents 16,886 8,702 Cash and cash equivalents at beginning of period 49,885 34,913 ------- -------- Cash and cash equivalents at end of period $66,771 $ 43,615 ======= ======== Non-cash investing and financing activities: Transfers from inventory to fixed assets for placements of Haemonetics equipment $ 4,266 $ 6,843 Reclassifications fron long-term credit agreements to short-term credit agreements $ 0 $ 2,579 Supplemental disclosures of cash flow information: Interest paid $ 1,414 $ 1,620 Income taxes paid $12,330 $ 1,270 </TABLE>
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 September 27, 2003 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 3, 2004. 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 March 29, 2003. Certain amounts in the prior year financial statements have been reclassified to conform to the fiscal year 2004 presentation. Our fiscal year ends on the Saturday closest to the last day of March. Fiscal year 2004 includes 53 weeks with the first three quarters of the fiscal year including 13 weeks and the fourth quarter of fiscal 2004 including 14 weeks. Fiscal year 2003 included 52 weeks with all four quarters including 13 weeks. 2. EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations, as required by SFAS No. 128, "Earnings Per Share." Basic EPS is computed by dividing reported earnings available to stockholders by weighted average shares outstanding. Diluted EPS includes the effect of potential dilutive common shares. <TABLE> <CAPTION> For the three months ended September 27, 2003 September 28, 2002 ---------------------------------------- (in thousands, except per share ---------------------------------------- <s> <c> <c> Basic EPS Net income $ 5,495 $ 6,780 Weighted average shares 24,120 24,642 ----------------------------- Basic earnings per share $ 0.23 $ 0.28 ----------------------------- Diluted EPS Net income $ 5,495 $ 6,780 Basic weighted average shares 24,120 24,642 Effect of stock options 207 521 ----------------------------- Diluted weighted average shares 24,327 25,163 ----------------------------- Diluted earnings per share $ 0.23 $ 0.27 ----------------------------- </TABLE>
6 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued <TABLE> <CAPTION> For the six months ended September 27, 2003 September 28, 2002 ---------------------------------------- (in thousands, except per share amounts) ---------------------------------------- <s> <c> <c> Basic EPS Net income $10,478 $13,555 Weighted average shares 24,092 24,980 ----------------------------- Basic earnings per share $ 0.43 $ 0.54 ----------------------------- Diluted EPS Net income $10,478 $13,555 Basic weighted average shares 24,092 24,980 Effect of stock options 184 662 ----------------------------- Diluted weighted average shares 24,276 25,642 ----------------------------- Diluted earnings per share $ 0.43 $ 0.53 ----------------------------- </TABLE> 3. STOCK-BASED COMPENSATION Effective in the fourth quarter of fiscal 2003, 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 will 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
7 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued Compensation," the effect on our earnings per share would have been as follows: <TABLE> <CAPTION> For the three months ended September 27, September 28, 2003 2002 ----------------------------- (in thousands, except per share amounts) <s> <c> <c> Net income (as reported): $ 5,495 $ 6,780 Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax $(1,200) $(1,850) ----------------------- Pro Forma Net Income: $ 4,295 $ 4,930 ======= ======= Earnings per share: Basic As Reported $ 0.23 $ 0.28 Pro forma $ 0.18 $ 0.20 Diluted As Reported $ 0.23 $ 0.27 Pro forma $ 0.18 $ 0.20 </TABLE> <TABLE> <CAPTION> For the six months ended September 27, September 28, 2003 2002 ----------------------------- (in thousands, except per share amounts) <s> <c> <c> Net income (as reported): $10,478 $13,555 Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax $(2,680) $(3,951) ------- ------- Pro Forma Net Income: $ 7,798 $ 9,604 ======= ======= Earnings per share: Basic As Reported $ 0.43 $ 0.54 Pro forma $ 0.32 $ 0.38 Diluted As Reported $ 0.43 $ 0.53
8 Pro forma $ 0.32 $ 0.38 </TABLE> 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 and $1.3 million for the three months ended September 27, 2003 and September 28, 2002, respectively and $2.5 million and $2.6 million for the six months ended September 27, 2003 and September 28, 2002, respectively. We include these costs 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. <TABLE> <CAPTION> For the three months ended September 27, September 28, 2003 2002 ----------------------------- (in thousands) <s> <c> <c> Warranty accrual as of the beginning of the period $ 722 $ 800 Provision related to preexisting warranties -- 375 Warranty Provision 156 648 Warranty Spending (226) (398) ------ ------ Warranty accrual as of the end of the period $ 652 $1,425 ====== ====== </TABLE>
9 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued <TABLE> <CAPTION> For the six months ended September 27, September 28, 2003 2002 ----------------------------- (in thousands) <s> <c> <c> Warranty accrual as of the beginning of the period $1,056 $ 800 Provision related to preexisting warranties -- 375 Warranty Provision 314 831 Warranty Spending (718) (581) ------ ------ Warranty accrual as of the end of the period $ 652 $1,425 ====== ====== </TABLE> 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 and the changes in fair value associated with our outstanding cash flow hedge contracts. <TABLE> <CAPTION> Three Months Ended (In thousands) September 27, September 28, 2003 2002 ----------------------------- <s> <c> <c> Net income $ 5,495 $ 6,780 Other comprehensive income: Foreign currency translation 721 (622) Unrealized (losses) gains on cash flow hedges, net of tax (2,172) 1,131 Reclassifications into earnings of cash flow hedge losses, net of tax 940 761 ------- ------- Comprehensive income $ 4,984 $ 8,050 ======= ======= </TABLE>
10 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued <TABLE> <CAPTION> Six Months Ended (In thousands) September 27, September 28, 2003 2002 ----------------------------- <s> <c> <c> Net income $10,478 $13,555 Other comprehensive income: Foreign currency translation 4,528 4,787 Unrealized loss on cash flow hedges, net of tax (4,336) (4,928) Reclassifications into earnings of cash flow hedge losses, net of tax 2,822 333 ------- ------- Comprehensive income $13,492 $13,747 ======= ======= </TABLE> 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: <TABLE> <CAPTION> September 27, 2003 March 29, 2003 ------------------------------------ (in thousands) <s> <c> <c> Raw materials $13,574 $17,037 Work-in-process 4,700 $4,597 Finished goods 40,452 $44,171 --------------------------- $58,726 $65,805 =========================== </TABLE>
11 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued 9. ACQUIRED INTANGIBLE ASSETS As of September 27, 2003 - ------------------------ <TABLE> <CAPTION> Weighted Gross Carrying Accumulated Average Amount Amortization Useful Life (in thousands) (in thousands) (in years) -------------- -------------- ----------- <s> <c> <c> <c> Amortized Intangibles --------------------- Patents $ 6,371 $ 1,357 14 Other technology 11,752 1,542 15 Customer contracts and related relationships 11,674 1,765 15 ------- ------- Subtotal Indefinite Life Intangibles $29,797 $ 4,664 15 --------------------------- Trade name 486 -- Indefinite ------- ------- Total Intangibles $30,283 $ 4,664 ======= ======= </TABLE> As of March 29, 2003 - -------------------- <TABLE> <CAPTION> Weighted Gross Carrying Accumulated Average Amount Amortization Useful Life (in thousands) (in thousands) (in years) -------------- -------------- ----------- <s> <c> <c> <c> Amortized Intangibles --------------------- Patents $ 6,371 $ 1,119 14 Other technology 11,746 1,274 15 Customer contracts and related relationships 11,498 1,360 15 ------- ------- Subtotal Indefinite Life Intangibles --------------------------- $29,615 $ 3,753 15 Trade name 477 -- Indefinite ------- ------- Total Intangibles $30,092 $ 3,753 ======= ======= </TABLE>
12 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued The only change to the net carrying value of our intangible assets from March 29, 2003 to September 27, 2003 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 for both the six months ended September 27, 2003 and September 28, 2002 was $0.9 million. Additionally, expected future amortization expenses on other intangible assets for each of the succeeding five fiscal years approximate $1.7 million. 10. GOODWILL The change in the carrying amount of our goodwill during the six months ended September 27, 2003 is as follows (in thousands): <TABLE> <s> <c> Carrying amount as of March 29, 2003 $16,010 Effect of change in rates used for translation 629 ------- Carrying amount as of September 27, 2003 $16,639 ======= </TABLE> 11. 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. 12. 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 Our principal product offerings include blood bank, red cell, surgical and plasma collection products. The blood bank products include machines, single use disposables and solutions that perform "apheresis," (the automated 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. In addition, the blood bank product line includes solutions used in non-apheresis applications.
13 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued The main devices used for these blood component processes are the MCS(R)+ 9000 mobile collection system and the ACP(R) 215 automated cell processing system. Red cell products include machines and single use disposables and solutions that perform apheresis for the collection of red blood cells. Devices used for the collection of red blood cells are the MCS(R)+ 8150 and the MCS(R)+ 9000 mobile collection systems. Surgical products include machines and single use disposables that perform surgical blood salvage in 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? and the Cell Saver(R) autologous blood recovery systems. Plasma collection products are machines, disposables and 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). Other includes revenue generated from equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous sales, including revenue from our software division, Fifth Dimension. Fifth Dimension provides information management products and services to plasma collectors and fractionators. <TABLE> <CAPTION> Three months ended (in thousands) September 27, 2003 ------------------ Blood Bank Red Cells Surgical Plasma Other Total ---------- --------- -------- ------ ----- ----- <s> <c> <c> <c> <c> <c> <c> Revenues from external customers $27,869 5,166 17,950 31,599 4,904 $87,488 September 28, 2002 ------------------ Revenues from external customers $29,203 3,737 17,963 31,563 4,559 $87,025 <CAPTION> Six months ended (in thousands) September 27, 2003 ------------------ Blood Bank Red Cells Surgical Plasma Other Total ---------- --------- -------- ------ ----- ----- <s> <c> <c> <c> <c> <c> <c> Revenues from external customers $55,460 9,845 38,320 61,840 10,306 $175,771 September 28, 2002 ------------------ Revenues from external customers $55,696 7,380 36,297 61,000 8,587 $168,960 </TABLE>
14 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued 13. REORGANIZATION On August 12, 2003, 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, included in selling, general and administrative expenses, for severance and related costs of $2.6 million in the second quarter. A summary of activity follows (in thousands): <TABLE> <s> <c> Balance as of March 29, 2003 $ -- Total charges 2,566 Severance and related costs paid (2,075) ------- Balance as of September 27, 2003 $ 491 </TABLE> We expect all payments to be made by the end of fiscal 2004. In connection with the reorganization, we are performing a review of all significant strategic initiatives and development projects. As a result of this certain projects and technologies may no longer be pursued, which could result in the impairment of certain long term assets. We expect the review to be complete by the end of our fourth quarter. 14. SUBSEQUENT EVENT On October 20, 2003, Baxter Healthcare Corporation (Baxter) announced the completion of its acquisition of certain assets of Alpha Therapeutics (Alpha), a significant customer of our Plasma business. As part of the acquisition, Baxter acquired 41 plasma collection centers, all of which utilized Haemonetics technology. Baxter has announced its intent to close 38 centers and sell the remaining 3 centers. We have supply contracts with Alpha that include both exclusivity provisions and minimum purchase requirements. The exclusivity provisions lapse over time beginning in January 2005 and ending in January 2009. The minimum purchase requirements lapse over time beginning in January 2006 and ending in January 2009. All of the contracts between us and Alpha were assumed by Baxter as part of the acquisition. At the current time, we do not know the impact of Baxter's acquisition of Alpha's plasma operations on our business. Our sales to Alpha were $8.2 million and $9.6 million for the first six months of fiscal 2004 and fiscal 2003, respectively. We also have certain fixed assets dedicated to supporting the Alpha business as well as customer contract and related relationship intangible assets associated with the Alpha business. We are currently evaluating the likely future use and recoverability of these assets as part of our business planning and ongoing discussions with Baxter.
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2003 (FISCAL 2004) COMPARED TO THREE - ----------------------------------------------------------------------------- MONTHS ENDED SEPTEMBER 28, 2002 (FISCAL 2003) - --------------------------------------------- The table outlines the components of the consolidated statements of operations as a percentage of net revenues: Percentage of Net Revenues For the three months ended -------------------------- <TABLE> <CAPTION> Percentage September 27, September 28, Increase/ 2003 2002 (Decrease) - ----------------------------------------------------------------------------------------- <s> <c> <c> <c> Net revenues 100.0% 100.0% 0.5% Cost of goods sold 52.7 55.3 (4.2) - ----------------------------------------------------------------------------------------- Gross profit 47.3 44.7 6.4 - ----------------------------------------------------------------------------------------- Operating expenses: Research and development 5.3 5.9 (9.5) Selling, general and administrative 31.8 27.5 16.3 - ----------------------------------------------------------------------------------------- Total operating expenses 37.1 33.4 11.7 - ----------------------------------------------------------------------------------------- Operating income 10.2 11.3 (9.4) Interest expense (0.9) (1.0) (11.8) Interest income 0.2 0.4 (46.1) Other income, net 0.3 0.6 (50.3) - ----------------------------------------------------------------------------------------- Income from operations before provision for income taxes 9.8 11.3 (12.6) Provision for income taxes 3.5 3.5 1.5 - ----------------------------------------------------------------------------------------- Net income 6.3% 7.8% (19.0)% ========================================================================================= </TABLE> Net Revenue Summary - ------------------- <TABLE> <CAPTION> % September 27, September 28, Increase/ By location 2003 2002 (Decrease) - ----------- -------------------------------------------- <s> <c> <c> <c> United States $32,317 $33,632 (3.9%) International 55,171 53,393 3.3 ----------------------------------------- Net revenues $87,488 $87,025 0.5%
16 <CAPTION> % September 27, September 28, Increase/ By product type 2003 2002 (Decrease) - --------------- -------------------------------------------- <s> <c> <c> <c> Disposables $79,472 $75,093 5.8% Misc. & service 4,904 4,559 7.6 Equipment 3,112 7,373 (57.8) ----------------------------------------- Net revenues $87,488 $87,025 0.5% <CAPTION> Disposable revenue by % product line September 27, September 28, Increase/ - --------------------- 2003 2002 (Decrease) -------------------------------------------- <s> <c> <c> <c> Surgical $16,939 $16,625 1.9% Blood bank 26,731 24,917 7.3 Red Cell 5,082 3,461 46.8 Plasma 30,720 30,090 2.1 ----------------------------------------- Total disposables revenue $79,472 $75,093 5.8% </TABLE> Net Revenues Net revenues for the three months ended September 27, 2003, increased $0.5 million to $87.5 million from $87.0 million for the three months ended September 28, 2002. The increase in net revenue resulted from volume increases in disposable sales as well as positive effects from foreign currency, offset, almost entirely, by decreases in equipment revenue. See the section below entitled "Foreign Exchange" for a complete discussion of how foreign exchange impacts our business. International sales accounted for 63.1% of net sales for the second quarter of fiscal 2004 as compared to 61.4% in the second quarter of fiscal 2003. Disposable Sales - ---------------- Disposable sales increased 5.8% or $4.4 million. By product line, disposable sales increased in worldwide Surgical (up 1.9%), worldwide Blood bank (up 7.3%), worldwide Red Cell (up 46.8%), and worldwide Plasma (up 2.1%). * Surgical- Worldwide Surgical disposable sales include our traditional cell salvage business (which targets procedures in which there is a large volume of blood lost) and our OrthoPAT(R) business for lower blood loss orthopedic procedures. Without the favorable effect of foreign currency, worldwide surgical disposable sales were down slightly. The decrease was a result of a volume decrease in the U.S. cell salvage market, partially offset by a volume increase in our OrthoPAT(R) sales. OrthoPAT(R) sales have increased as U.S. and European orthopedic surgeons continue to adopt cell salvage as an effective alternative to patient pre-donation and blood
17 transfusions in hip and knee replacements as well as other orthopedic surgeries. The U.S. cell salvage market has experienced a decline in the number of open-heart procedures performed which is contributing to the decline in our cell salvage business. As advances are made in the medical field and technology improves, the preference of surgeons may shift to minimally invasive surgical procedures enabled by coronary stents and angioplasty, reducing the number of open heart surgeries. Blood bank- Approximately one-half of the increase in worldwide Blood bank disposable sales was due to the favorable effect of foreign currency. The remainder of the increase was primarily a result of platelet volume increases in Europe and Japan. The volume increase in Europe represented two-thirds of the increase and was a result of market share gains due to product enhancements as well as our reputation for quality. Red Cell - Worldwide Red Cell sales grew primarily due to volume increases in the U.S. U.S. blood collectors are adopting automated red cell collection to increase the supply of red cells, reduce collection costs and improve quality. Automated collections also overcome the impact of red cell shortages by increasing the number of units of blood collected from a declining number of eligible donors. The growth in the U.S. of higher priced filtered sets (which include a filter to remove white blood cells from the collected blood) also contributed to the sales increase. Plasma - Worldwide plasma disposable sales were up slightly. Overall, an excess supply of plasma and plasma derived products and industry consolidation is negatively impacting the plasma disposable collection market. Increases in worldwide Plasma sales from the favorable effects of currency, the expansion of our Plasma product line with solutions and containers and volume increases in Europe were partially offset by disposable volume decreases in Japan and the U.S. The growth in Europe is due to additional collection centers opened in the second half of fiscal year 2003. The decrease in disposable volumes in Japan was due to a decline in plasma collections over the previous year as the Japanese Red Cross decreased collection targets. The decrease in disposable volumes in the U.S. is due primarily to the impact of industry consolidation. Update on previously announced consolidation plans. - On October 20, 2003, Baxter Healthcare Corporation (Baxter) announced the completion of its acquisition of certain assets of Alpha Therapeutics (Alpha), a significant customer of our Plasma business. As part of the acquisition, Baxter acquired 41 plasma collection centers, all of which utilized Haemonetics technology. Baxter has announced its intent to close 38 centers and sell the remaining 3 centers. We have supply contracts with Alpha that include both exclusivity provisions and minimum purchase requirements. The exclusivity provisions lapse over time beginning in January 2005 and ending in January 2009. The minimum purchase requirements lapse over time beginning in January 2006 and ending in January 2009. All of the contracts between us and Alpha were assumed by Baxter as part of the acquisition. At the current time, we do not know the impact of Baxter's acquisition of Alpha's plasma operations on our business. Our sales to Alpha were $8.2 million and $9.6 million for the first six months of fiscal 2004 and fiscal 2003, respectively. We also have certain fixed assets dedicated to supporting the Alpha business as well as customer contract and related relationship intangible assets associated with the Alpha business. We are currently evaluating the likely future use and recoverability of these assets as part of our business planning and ongoing discussions with Baxter.
18 Miscellaneous and Service Sales - ------------------------------- Miscellaneous and service sales include revenues generated from equipment repairs performed under preventive maintenance contracts or emergency service billings and revenue from our software division, Fifth Dimension. Miscellaneous and service sales increased 7.6% or $0.3 million year over year. The most significant contributor to the increase was the favorable effect of foreign currency. Equipment Sales - --------------- The $4.3 million decrease in equipment revenue from $7.3 million in fiscal 2003 is primarily attributable to a decrease in volume in the sales of our ACP (R) 215 automated cell processing system in the U.S. and our platelet collection device in Japan. Prior year sales of our ACP 215 (R) system were positively impacted during its initial rollout to the U.S. military. Equipment revenue from our platelet collection device in Japan was high in the prior year because of a sale to the Japanese Red Cross ("JRC") of equipment used previously by the JRC under a use plan arrangement due to a change in Japanese regulatory requirements. Most of our equipment sales occur in markets outside the U.S. In the U.S., we generally place equipment with a customer in exchange for an agreement to purchase disposables or to require payment of a rental fee. Due to the variable nature of equipment sales, we give no assurance as to whether or not our current level of equipment sales will continue in the future. Gross profit Gross profit of $41.4 million for the second quarter of fiscal 2004 increased $2.5 million from $38.9 million for the second quarter of fiscal 2003. Foreign currency, cost reductions generated by our Customer Oriented Redesign for Excellence ("CORE") program and a prior year provision for quality enhancements to the Company's OrthoPAT(R) surgical blood salvage system were the most significant reasons for the increase. For the second quarter of fiscal 2004, the CORE program generated a $1.4 million improvement in our gross profit by automating and redesigning the way certain products are made and by negotiating reduced raw material prices from suppliers. Expenses * Research and Development ------------------------ We spent $4.6 million on research and development in the second quarter of fiscal 2004 (5.3% as a percentage of sales) and $5.1 million in the second quarter of fiscal 2003 (5.9% as a percentage of sales). The decrease in research and development expense is related primarily to lower headcount which lead to reduced salary and bonus expenses in the U.S. in fiscal 2004 as compared to fiscal 2003.
19 * Selling, general and administrative ----------------------------------- Selling, general and administrative expenses increased $3.9 million in the second quarter of fiscal 2004 from $24.0 million in the second quarter of fiscal 2003. The majority of the increase was due to the $2.6 million in severance costs related to the recent reorganization which reduced our worldwide workforce by approximately 4.0 percent (see note 13). Most of the remainder of the increase was related to foreign currency. Operating Income Operating income for the second quarter of fiscal 2004 decreased $0.9 million from the second quarter of fiscal 2003 and decreased to 10.2% of sales in the second quarter of fiscal 2004 from 11.3% in the second quarter of fiscal 2003. The $0.9 million decrease in operating income is primarily a result of the increased selling, general and administrative expenses due to our recent reorganization, partially offset by net favorable effects of foreign currency. Other income (expense), net Interest expense for the second quarter of fiscal 2004 was down slightly compared to the second quarter of fiscal 2003 due to lower average borrowings in fiscal 2004 compared to fiscal 2003. All of our long-term debt is at fixed rates so changing rates do not have a significant impact on our interest expense. Interest income decreased $0.2 million from 2003 to 2004, due primarily to lower investment yields. Other income, net decreased $0.3 million from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 due to a decrease in income earned from points on forward contracts in the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003. Points on forward contracts are amounts, either expensed or earned, based on the interest rate differential between two foreign currencies in a forward hedge contract. Income Taxes The income tax provision, as a percentage of pretax income, was 36.0% for the second quarter of fiscal 2004. This increase from 31.0% for the second quarter of fiscal year 2003 is attributable to prior year tax efficient cash repatriations and higher export credits. We expect our tax rate to be 36% for the remainder of fiscal year 2004.
20 FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003 (FISCAL 2004) COMPARED TO - --------------------------------------------------------------------- SIX MONTHS ENDED SEPTEMBER 28, 2002 (FISCAL 2003) - ------------------------------------------------- The table outlines the components of the consolidated statements of operations as a percentage of net revenues: Percentage of Net Revenues For the six months ended ------------------------ <TABLE> <CAPTION> Percentage September 27, September 28, Increase/ 2003 2002 (Decrease) - ------------------------------------------------------------------------------------------ <s> <c> <c> <c> Net revenues 100.0% 100.0% 4.0% Cost of goods sold 53.9 54.1 3.7 - ------------------------------------------------------------------------------------------ Gross profit 46.1 45.9 4.4 - ------------------------------------------------------------------------------------------ Operating expenses: Research and development 5.5 5.9 (4.3) Selling, general and administrative 30.9 28.4 13.1 - ------------------------------------------------------------------------------------------ Total operating expenses 36.3 34.3 10.1 - ------------------------------------------------------------------------------------------ Operating income 9.7 11.6 (12.4) Interest expense (0.9) (1.0) (11.1) Interest income 0.3 0.4 (40.3) Other income, net 0.2 0.6 (66.5) - ------------------------------------------------------------------------------------------ Income from operations before provision for income taxes 9.3 11.6 (16.7) Provision for income taxes 3.3 3.6 (3.2) - ------------------------------------------------------------------------------------------ Net income 6.0% 8.0% (22.7) ========================================================================================== </TABLE> Net Revenue Summary - ------------------- <TABLE> <CAPTION> % September 27, September 28, Increase/ By location 2003 2002 (Decrease) - ----------- -------------------------------------------- <s> <c> <c> <c> United States $ 63,869 $ 64,562 (1.1)% International 111,902 104,398 7.2 ----------------------------------------- Net revenues $175,771 $168,960 4.0% <CAPTION> % September 27, September 28, Increase/ By product type 2003 2002 (Decrease) - --------------- -------------------------------------------- <s> <c> <c> <c> Disposables $157,867 $148,581 6.2% Misc. & service 10,306 8,587 20.0 Equipment 7,598 11,792 (35.6) ----------------------------------------- Net revenues $175,771 $168,960 4.0%
21 <CAPTION> % Disposable revenue by September 27, September 28, Increase/ product line 2003 2002 (Decrease) - --------------------- -------------------------------------------- <s> <c> <c> <c> Surgical $ 35,232 $ 33,888 4.0% Blood bank 52,680 48,956 7.6 Red Cell 9,646 6,989 38.0 Plasma 60,309 58,748 2.7 ----------------------------------------- Total disposables revenue $157,867 $148,581 6.2% </TABLE> Net Revenues Net revenues for the six months ended September 27, 2003, increased $6.8 million to $175.8 million from $169.0 million for the six months ended September 28, 2002. The sales change was a result of (i) volume increases from both disposable and miscellaneous and service sales, which include sales from our software company, Fifth Dimension, (ii) positive effects from foreign currency, and (iii) volume decreases in equipment revenue. See the section below entitled "Foreign Exchange" for a complete discussion of how foreign exchange impacts our business. International sales accounted for 63.7% of net sales for the first six months of fiscal 2004 as compared to 61.8% for the first six months of fiscal 2003. Disposable Sales - ---------------- Disposable sales increased 6.2% or $9.3 million. By product line, disposable sales increased in worldwide Surgical (up 4.0%), worldwide Blood bank (up 7.6%), worldwide Red Cell (up 38.0%), and worldwide Plasma (up 2.7%). * Surgical- Worldwide Surgical disposable sales include our traditional cell salvage business (which targets procedures in which there is a large volume of blood lost) and our OrthoPAT(R) business for lower blood loss orthopedic procedures. Without the favorable effect of foreign currency, worldwide surgical disposable sales were down slightly. The decrease was a result of a volume decrease in the U.S. cell salvage market, partially offset by a volume increase in our OrthoPAT(R) sales. OrthoPAT(R) sales increased as U.S. and European orthopedic surgeons continue to adopt cell salvage as an effective alternative to patient pre-donation and blood transfusions in hip and knee replacements as well as other orthopedic surgeries. The U.S. surgical cell salvage market has experienced a decline in the number of open-heart procedures performed which is contributing to the decline in our cell salvage business. As advances are made in the medical field and technology improves, the preference of surgeons may shift to minimally invasive surgical procedures enabled by coronary stents and angioplasty, reducing the number of open heart surgeries. * Blood bank-The increase in worldwide Blood bank disposable sales was primarily a result of platelet volume increases in Europe and Japan. We achieved market share gains due to product enhancements as well as our reputation for quality. Approximately one-third of the increase was due to the favorable effect of foreign currency.
22 * Red Cell - Worldwide Red Cell sales grew primarily due to volume increases in the U.S. U.S. blood collectors are adopting automated red cell collection to increase the supply of red cells, reduce collection costs and improve quality. Automated collections also overcome the impact of red cell shortages by increasing the number of units of blood collected from a declining number of eligible donors. The growth in the U.S. of higher priced filtered sets (which include a filter to remove white blood cells from the collected blood) also contributed to the sales increase. * Plasma - Worldwide plasma disposable sales were up slightly. Overall, an excess supply of plasma and plasma derived products and industry consolidation is negatively impacting the plasma disposable collection market. Increases in worldwide Plasma sales from the favorable effects of currency, the expansion of our Plasma product line with solutions and containers and volume increases in Europe were partially offset by disposable volume decreases in Japan and the U.S. The growth in Europe is due to additional collection centers opened in the second half of fiscal year 2003. The decrease in disposable volumes in Japan was due to a decline in plasma collections over the previous year as the Japanese Red Cross decreased collection targets. The decrease in disposable volumes in the U.S. is due primarily to the impact of industry consolidation. Update on previously announced consolidation plans. - On October 20, 2003, Baxter Healthcare Corporation (Baxter) announced the completion of its acquisition of certain assets of Alpha Therapeutics (Alpha), a significant customer of our Plasma business. As part of the acquisition, Baxter acquired 41 plasma collection centers, all of which utilized Haemonetics technology. Baxter has announced its intent to close 38 centers and sell the remaining 3 centers. We have supply contracts with Alpha that include both exclusivity provisions and minimum purchase requirements. The exclusivity provisions lapse over time beginning in January 2005 and ending in January 2009. The minimum purchase requirements lapse over time beginning in January 2006 and ending in January 2009. All of the contracts between us and Alpha were assumed by Baxter as part of the acquisition. At the current time, we do not know the impact of Baxter's acquisition of Alpha's plasma operations on our business. Our sales to Alpha were $8.2 million and $9.6 million for the first six months of fiscal 2004 and fiscal 2003, respectively. We also have certain fixed assets dedicated to supporting the Alpha business as well as customer contract and related relationship intangible assets associated with the Alpha business. We are currently evaluating the likely future use and recoverability of these assets as part of our business planning and ongoing discussions with Baxter. Miscellaneous and Service Sales - ------------------------------- Miscellaneous and service sales include revenues generated from equipment repairs performed under preventive maintenance contracts or emergency service billings and revenue from our software division, Fifth Dimension. Miscellaneous and service sales increased 20.0% or $1.7 million year over year. Growth in both service and software revenues contributed almost equally to this change.
23 Equipment Sales - --------------- The $4.2 million decrease in equipment revenue from $11.8 million in fiscal 2003 is primarily attributable to a decrease in volume in the sales of our Automated Cell Process ("ACP(R) 215") system in the U.S. and our platelet collection device in Japan. Prior year sales of our ACP(R) 215 system were positively impacted during its initial rollout to the U.S. military. Equipment revenue from our platelet collection device in Japan was high in the prior year because of a sale to the Japanese Red Cross ("JRC") of equipment used previously by the JRC under a use plan arrangement due to a change in Japanese regulatory requirements. Most of our equipment sales occur in markets outside the U.S. In the U.S. we generally place equipment with a customer in exchange for an agreement to purchase disposables or to require payment of a rental fee. Due to the variable nature of equipment sales, we give no assurance as to whether or not our current level of equipment sales will continue in the future. Gross profit Gross profit of $81.0 million for the first six months of fiscal 2004 increased $3.4 million from $77.5 million for the first six months of fiscal 2003. Foreign currency and the cost reductions generated by our Customer Oriented Redesign for Excellence ("CORE") program were the most significant reasons for the increase. Included in the year over year increase in gross profit was the effect of a first quarter fiscal 2004 provision of $0.9 million for excess and obsolete inventory and a second quarter fiscal 2003 provision for quality enhancement to the Company's OrthoPAT(R) surgical blood salvage system. These items were not significant factors in the year over year increase as they were largely offsetting. For the first six months of fiscal 2004, the CORE program generated a $2.4 million improvement in our gross profit by automating and redesigning the way certain products are made and by negotiating reduced raw material prices from suppliers. Expenses * Research and Development ------------------------- We spent $9.6 million on research and development in the first six months of fiscal 2004 (5.5% as a percentage of sales) and $10.0 million for the first six months of fiscal 2003 (5.9% as a percentage of sales). The small decrease in research and development expense is related primarily to lower headcount which reduced salary and bonus expenses in the U.S. in the first six months of fiscal 2004 as compared to the first six months of fiscal 2003. * Selling, general and administrative ----------------------------------- Selling, general and administrative expenses increased $6.3 million in fiscal 2004 from $48.0 million in fiscal 2003. A little more than one-half of the increase in spending is related to foreign exchange. The remainder of the increase is primarily due to the $2.6 million in severance costs recognized in the second quarter of fiscal 2004 related to our recent reorganization which reduced our worldwide workforce by 4.0 percent (see note 13).
24 Operating Income Operating income in fiscal 2004 decreased $2.4 million from $19.5 fiscal 2003 and decreased to 9.7% of sales in fiscal 2004 from 11.6% in fiscal 2003. The $2.4 million decrease in operating income is primarily a result of the increase in selling, general and administrative expenses due to our recent reorganization. Foreign currency had a limited impact on the decrease in operating income. Foreign Exchange Approximately 64% of our sales are generated outside the U.S., yet our reporting currency is the U.S. dollar. Foreign exchange risk arises because we engage in business in foreign countries in local currency, primarily the Euro and the Japanese Yen. 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 lock in for a period of time the impact on our financial results of fluctuations in foreign exchange rates. We do this by using derivative financial instruments known as forward contracts to hedge the anticipated cash flows from forecasted foreign currency denominated sales. We refer to these contracts as our plan hedges. Hedging through the use of forward contracts does not eliminate the volatility of foreign exchange rates. However, because we enter into forward contracts one year in advance, exchange rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. 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 recorded when we obtain relatively more U.S. dollars for each of the underlying foreign currencies than we did in the prior period. An unfavorable change is recorded 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 consequently, 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.
25 <TABLE> <CAPTION> Composite Index Favorable / (Unfavorable) Hedge Spot Rates Change versus Prior Year ---------------- ------------------------- <s> <c> <c> <c> FY2001 Q1 1.04 5.4% Q2 1.00 8.2% Q3 0.92 12.9% Q4 0.97 10.2% ---------------------------- 2001 Total 0.98 9.1% FY2002 Q1 0.99 5.2% Q2 0.97 3.3% Q3 1.01 (8.6%) Q4 1.05 (7.5%) ---------------------------- 2002 Total 1.00 (2.0%) 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 0.93* 14.8% ---------------------------- </TABLE> * NOTE: Represents hedges for Oct FY05. Other income (expense), net Interest expense for fiscal 2004 was slightly down compared to fiscal 2003 due to lower average borrowings in fiscal 2004 compared to fiscal 2003. All of our long-term debt is at fixed rates so changing rates do not have a significant impact on our interest expense. Interest income decreased $0.3 million from 2003 to 2004, due primarily to lower investment yields. Other income, net decreased $0.7 million from fiscal 2003 to fiscal 2004 due to a decrease in income earned from points on forward contracts in fiscal 2004 as compared to of fiscal 2003. Points on forward contracts are amounts, either expensed or earned, based on the interest rate differential between two foreign currencies in a forward hedge contract.
26 Income Taxes The income tax provision, as a percentage of pretax income, was 36.0% for the first six months of fiscal year 2004. This increase from 31.0% for the first six months of fiscal year 2003 is attributable to prior year tax efficient cash repatriations and higher export credits. We expect our tax rate to be at 36.0% for the remainder of fiscal year 2004. Liquidity and Capital Resources Our primary sources of liquidity include cash and short-term investments, internally generated cash flows, and borrowings. We believe these sources to be sufficient to fund our requirements, which are primarily capital expenditures, acquisitions, new business development, share repurchases and working capital. During the six-months ended September 27, 2003, we funded our activities primarily with $22.8 million of cash flow generated by operations. Working capital at September 27, 2003, was $142.6 million. This reflects an increase of $17.0 million in working capital from the same period in the prior year largely due to an increase in cash and cash equivalents and accounts receivable offset by a decrease in inventory. Cash Flow Overview: <TABLE> <CAPTION> For the six months ended September 27, 2003 September 28, 2002 Change - ------------------------------------------------------------------------------------------------ (In thousands) <s> <c> <c> <c> Net cash provided by (used in): Operating activities $22,758 $ 12,057 $ 10,701 Investing activities (5,719) 29,486 (35,205) Financing activities (482) (33,206) 32,714 Effect of exchange rate changes on cash 329 365 (36) ---------------------------------------------- Net increase in cash and cash equivalents $16,886 $ 8,702 $ 8,184 ---------------------------------------------- </TABLE> Operating Activities: Cash provided by operating activities was $22.7 million for the six months ended September 27, 2003, as compared to $12.1 million for the six months ended September 28, 2002. The $10.7 million increase was primarily related to lower working capital investments in accounts receivable and inventory in fiscal 2004 offset by additional tax payments in fiscal 2004. Cash spent on inventory decreased in
27 fiscal 2004 as compared to fiscal 2003 due to lower inventory balances in fiscal 2004. Increases in cash flows from accounts receivables in fiscal 2004 as compared to fiscal 2003 were due to the timing of customer payments and sales fluctuations. Investing Activities: We used $5.7 million for investing activities for the six months ended September 27, 2003, which represents a decrease of $35.2 million from the $29.5 million in cash provided for the six months ended September 28, 2002. The $35.2 million decrease in cash provided was a result of the liquidation of our available for sale investments which provided $32.6 million in fiscal 2003. Financing Activities: Our financing activities for the six months ended September 27, 2003 utilized $0.5 million in cash as compared to $33.2 million utilized in the same period of the prior year. This decrease in cash utilized was primarily due to the $41.0 million spent in fiscal 2003 to repurchase stock under our repurchase program whereas no cash has been expended to purchase stock in fiscal 2004. Also, in fiscal 2003, we borrowed approximately $4.6 million for working capital purposes in Japan while in the same period of fiscal 2004, we repaid outstanding borrowings by $3.1 million. 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 our manufacturing and purchasing efficiencies, by increasing employee productivity and by adjusting the selling prices of new products we introduce. 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 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, the impact of industry consolidation, foreign currency exchange rates, changes in customers' ordering patterns, the effect of industry consolidation as seen in the Plasma market, the effect of
28 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 September 27, 2003, we had the following significant foreign exchange contracts to hedge the anticipated cash flows from forecasted foreign currency denominated sales outstanding: <TABLE> <CAPTION> Hedged (BUY)/SELL Weighted Spot Weighted Forward Currency Local Currency Contract Rate Contract Rate Fair Value Maturity -------- -------------- ------------- ---------------- ---------- -------- <s> <c> <c> <c> <c> <c> Euro 9,400,000 $1.017 $1.004 $(1,314,530) Oct-Dec 2003 Euro 9,500,000 $1.100 $1.088 $ (505,273) Jan-Mar 2004 Euro 8,500,000 $1.144 $1.133 $ (55,368) Apr-Jun 2004 Euro 6,000,000 $1.133 $1.123 $ (85,140) Jul-Aug 2004 Japanese Yen 1,725,000,000 121.6 per US$ 119.8 per US$ $(1,044,064) Oct-Dec 2003 Japanese Yen 1,615,000,000 118.3 per US$ 116.7 per US$ $ (656,746) Jan-Mar 2004 Japanese Yen 1,815,000,000 118.2 per US$ 116.7 per US$ $ (771,404) Apr-Jun 2004 Japanese Yen 1,250,000,000 120.4 per US$ 118.7 per US$ $ (721,411) Jul-Aug 2004 ----------- Total: $(5,153,936) =========== </TABLE> 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 $12.4 million increase in the fair value of the forward contracts; whereas a 10% weakening of the U.S. dollar would result in a $13.8 million decrease in the fair value of the forward contracts. 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 rates movements due to its fixed rate nature. 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
29 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. At September 28, 2002, the fair value of our long-term debt was approximately $ 4.1 million higher than the value of the debt reflected on our financial statements. This higher fair value was primarily related to the $28.6 million, 7.05% fixed rate senior notes and the $9.0 million, 8.41% real estate mortgage. Using scenario analysis, if we changed the interest rate on all long- term maturities by 10% from the rate levels that existed at September 27, 2003 the fair value of our long-term debt would change by approximately $0.5 million. ITEM 4. CONTROLS AND PROCEDURES We conducted an evaluation, as of September 27, 2003, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our 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 quarter ended September 27, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
30 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On July 22, 2003, the Company held its annual meeting of stockholders. At the meeting, Ronald G. Gelbman, Brad Nutter and Ronald A. Matricaria were elected as Directors for terms ending in 2005. The voting results were as follows: Ronald G. Gelbman For 16,983,188 Withheld 2,655,293 Brad Nutter For 19,443,150 Withheld 195,331 Ronald A. Matricaria For 19,292,609 Withheld 345,872 The other members of the Board of Directors whose terms continued after the meeting were: Serving a Term Ending in 2004 -- Yutaka Sakurada, Donna C.E. Williamson, Harvey G. Klein, M.D. Serving a term ending in 2005: -- Benjamin L. Holmes Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits 10.1 Employment agreement between the Company and Peter Allen dated August 15, 2003. 10.2 Employment agreement between the Company and Brian Concannon dated August 25, 2003. 10.3 Employment agreement between the Company and Alicia Lopez, dated February 1, 1999.
31 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 (b) Reports on Form 8-K We filed a report on Form 8-K on July 24, 2003 furnishing a press release we issued on July 24, 2003 announcing fiscal 2004 first quarter results and our planned reorganization. We filed a report on Form 8-K on August 20, 2003 announcing the appointments of Peter M. Allen and Brian Concannon as Presidents of our newly created Donor and Patient Divisions, respectively. We filed a report on Form 8-K on August 25, 2003 announcing the appointment of Lawrence Best, Senior Vice President and Chief Financial Officer of Boston Scientific Corporation, to our Board of Directors.
32 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 11, 2003 By: /s/ Brad Nutter -------------------------------- Brad Nutter, President and Chief Executive Officer Date: November 11, 2003 By: /s/ Ronald J. Ryan -------------------------------- Ronald J. Ryan, Vice President and Chief Financial Officer (Principal Financial Officer)
33