10-Q 1 haem1.txt BODY OF 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the quarter ended: July 1, 2000 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 25,087,007 shares of Common Stock, $ .01 par value, as of --------------------------------------------------------- July 1, 2000 HAEMONETICS CORPORATION INDEX PAGE ---- PART I. Financial Information Consolidated Statements of Operations - 2 Three Months Ended July 1, 2000 and July 3, 1999 Consolidated Balance Sheets - July 1, 2000 3 and April 1, 2000 Consolidated Statements of Stockholders' Equity - 4 Three Months Ended July 1, 2000 Consolidated Statements of Cash Flows - 5 Three Months Ended July 1, 2000 and July 3, 1999 Notes to Consolidated Financial Statements 6-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Quantitative and Qualitative Disclosures about Market Risk 16-17 PART II. Other Information 18 Signatures 19 HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - in thousands, except share data)
Three Months Ended ------------------ July 1, July 3, 2000 1999 ------------------ Net revenues $69,693 $69,122 Cost of goods sold 36,276 36,305 ------------------ Gross profit 33,417 32,817 Operating expenses: Research and development 4,134 3,623 Selling, general and administrative 20,956 20,744 ------------------ Total operating expenses 25,090 24,367 ------------------ Operating income 8,327 8,450 Interest expense (1,021) (1,015) Interest income 1,182 1,117 Other income, net 767 232 ------------------ Income from continuing operations before provision for income taxes 9,255 8,784 Provision for income taxes 2,591 2,811 ------------------ Net Income $ 6,664 $ 5,973 ================== Basic income(loss) per common share $ 0.264 $ 0.223 Income(loss) per common share assuming dilution $ 0.259 $ 0.223 Weighted average shares outstanding Basic 25,248 26,729 Diluted 25,731 26,830
The accompanying notes are an integral part of these consolidated financial statements. HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited - in thousands, except share data)
July 1, April 1, ASSETS 2000 2000 -------------------- Current assets: Cash and short term investments $ 52,195 $ 61,328 Accounts receivable, less allowance of $993 at July 1, 2000 and $1,149 at April 1, 2000 58,814 59,140 Inventories 57,615 59,817 Current investment in sales-type leases, net 7,456 8,036 Deferred tax asset 19,794 16,360 Other prepaid and current assets 4,607 5,237 -------------------- Total current assets 200,481 209,918 -------------------- Property, plant and equipment 189,158 185,432 Less accumulated depreciation 108,853 103,824 -------------------- Net property, plant and equipment 80,305 81,608 Other assets: Investment in sales-type leases, net (long term) 8,454 10,775 Distribution rights, net 11,129 11,356 Goodwill, less accumulated amortization of $706 at July 1, 200 and $662 at April 1, 2000 1,788 1,832 Deferred tax asset 14,806 14,806 Other assets, net 20,948 18,815 -------------------- Total other assets 57,125 57,584 -------------------- Total assets $337,911 $349,110 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt $ 24,823 $ 32,896 Accounts payable 8,323 17,224 Accrued payroll and related costs 7,968 8,456 Accrued income taxes 16,710 15,700 Other accrued liabilities 13,727 14,199 -------------------- Total current liabilities 71,551 88,475 -------------------- Deferred income taxes 14,165 10,722 Long-term debt, net of current maturities 41,184 41,306 Other long-term liabilities 2,153 2,164 Stockholders' equity: Common stock, $.01 par value; Authorized - 80,000,000 shares; Issued 30,038,869 shares at July 1, 2000; 30,004,811 shares at April 1, 2000 300 300 Additional paid-in capital 74,557 73,662 Retained earnings 237,366 230,732 Cumulative translation adjustments (13,701) (13,078) -------------------- Stockholders' equity before treasury stock 298,522 291,616 Less: treasury stock 4,951,862 shares at cost at July 1, 2000 and 4,728,762 shares at cost at April 1, 2000 89,664 85,173 -------------------- Total stockholders' equity 208,858 206,443 -------------------- Total liabilities and stockholders' equity $337,911 $349,110 ==================== Supplemental disclosure of balance sheet information: Net debt $ 13,812 $ 12,874
The accompanying notes are an integral part of these consolidated financial statements. HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited in thousands)
Common Stock Additional Cumulative Total ------------ Paid-in Treasury Retained Translation Stockholders' Comprehensive Shares $'s Capital Stock Earnings Adjustment Equity Income ---------------------------------------------------------------------------------------------- Balance, April 1, 2000 30,005 $300 $73,662 $(85,173) $230,732 $(13,078) $206,443 ========================================================================================== Employee stock purchase plan --- --- --- 238 (30) --- 208 Exercise of stock options and related tax benefit 34 0 895 --- --- --- 895 Purchase of treasury stock --- --- --- (4,729) --- --- (4,729) Net income --- --- --- --- 6,664 --- 6,664 $6,664 Foreign currency translation adjustment --- --- --- --- --- (623) (623) (623) ------------------------------------------------------------------------------------------ Comprehensive income --- --- --- --- --- --- --- $6,041 ------------------------------------------------------------------------------------====== Balance, July 1, 2000 30,039 $300 $74,557 $(89,664) $237,366 $(13,701) $208,858 ===========================================================================
HAEMONETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited- in thousands)
Three Months Ended -------------------- July 1, July 3, 2000 1999 -------------------- Cash Flows from Operating Activities: Net income $ 6,664 $ 5,973 Adjustments to reconcile net income to net cash provided by operating activities: Non cash items: Depreciation and amortization 6,027 7,359 Deferred tax benefit 9 1 Other 787 234 Change in operating assets and liabilities: Decrease in accounts receivable - net 169 3,216 Decrease in inventories 2,116 1,234 Decrease in sales-type leases (current) 580 637 (Increase) decrease in prepaid income taxes (225) 1,208 (Increase) decrease in other assets (1,352) 938 Decrease in accounts payable, accrued expenses and other current liabilities (8,884) (9,461) -------------------- Net cash provided by operating activities, continuing operations 5,891 11,339 -------------------- Net cash used in operating activities, discontinued operations 0 (4,281) -------------------- Net cash provided by operating activities 5,891 7,058 Cash Flows from Investing Activities: Capital expenditures on property, plant and equipment, net of retirements and disposals (4,636) (6,942) Net decrease in sales-type leases (long-term) 1,534 562 -------------------- Net cash used in investing activities, continuing operations (3,102) (6,380) Net cash provided by investing activities, discontinued operations 0 3,562 -------------------- Net cash used in investing activities (3,102) (2,818) Cash Flows from Financing Activities: Payments on long-term real estate mortgage 0 (62) Net increase (decrease) in short-term revolving credit agreements (8,136) 2,444 Net decrease in long-term credit agreements (126) (20) Employee stock purchase plan 208 185 Exercise of stock options and related tax benefit 895 82 Purchase of treasury stock (4,729) (9,546) -------------------- Net cash used in financing activities (11,888) (6,917) Effect of exchange rates on cash and cash equivalents (34) (345) -------------------- Net decrease in cash and cash equivalents (9,133) (3,022) Cash and cash equivalents at beginning of period 61,328 56,319 -------------------- Cash and cash equivalents at end of period $52,195 $53,297 ==================== Supplemental disclosures of cash flow information: Net decrease in cash and cash equivalents, discontinued operations $ 0 $ (719) Net decrease in cash and cash equivalents, continuing operations $(9,133) $(2,303) Increase in net debt $ 871 $ 5,384 Interest paid $ 1,670 $ 1,674 Income taxes paid $ 1,084 $ 3,835 ====================
HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. The Company believes that the quarterly information presented includes all adjustments (consisting only of normal, recurring adjustments) that the Company considers necessary for a fair presentation in accordance with generally accepted accounting principles. The accompanying consolidated financial statements and notes should be read in conjunction with the Company's audited annual financial statements. 2. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to the last day of March. Both fiscal year 2001 and 2000 include 52 weeks with the first quarter of each fiscal year including 13 weeks. 3. COMPREHENSIVE INCOME In the first quarter of fiscal year 1999, the Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) NO. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components. Comprehensive income is the total of net income and all other non-owner changes in stockholders' equity, which for the Company, is foreign currency translation. At July 1, 2000 and April 1, 2000, the cumulative foreign currency translation adjustment totaled ($13.7) million and ($13.1) million, respectively. 4. NEW PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which the Company will be required to adopt by the end of the fourth quarter of fiscal year 2001. SAB 101 provides additional guidance on the accounting for revenue recognition including both broad conceptual discussions, as well as certain industry-specific guidance. The Company is in the process of accumulating the information necessary to quantify the potential impact, if any, of this new guidance. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The SFAS No. 133 requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, or in the case of a hedge of a forecasted probable transaction, a derivative's gains and losses are included in other comprehensive income until the transaction is consummated. Additionally, a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. A company may implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance (that is fiscal quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied retroactively. The impacts of adopting SFAS No. 133 on the Company's financial statements or the timing of adoption of SFAS No. 133 have not been determined. However, it is expected that the derivative financial instruments acquired in connection with the Company's hedging program will continue to qualify for hedge accounting. 5. FOREIGN CURRENCY Foreign currency transactions and financial statements are translated into U.S. dollars following the provisions of SFAS No. 52, "Foreign Currency Translation." Accordingly, assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at period end. Net revenues and costs and expenses are translated at average rates in effect during the period. The effects of exchange rate changes on the Company's assets and liabilities are included in the cumulative translation adjustment account. Included in other income (expense) in the consolidated statement of operations in fiscal year 2001 and fiscal year 2000 are ($153,000) and $2,000 respectively, in foreign currency transaction gains (losses). The Company enters into forward exchange contracts to hedge certain firm sales commitments by customers that are denominated in foreign currencies. The purpose of the Company's foreign hedging activities is to minimize, for a period of time, the unforeseen impact on the Company's results of operations of fluctuations in foreign exchange rates. The Company also enters into forward contracts that settle within 35 days to hedge certain inter-company receivables denominated in foreign currencies. Actual gains and losses on all forward contracts are recorded in operations, offsetting the gains and losses on the underlying transactions being hedged. These derivative financial instruments are not used for trading purposes. The cash flows related to the gains and losses on these foreign currency hedges are classified in the consolidated statements of cash flows as part of cash flows from operating activities. At July 1, 2000 and July 3, 1999, the Company had forward exchange contracts, all maturing in less than twelve months, to exchange foreign currencies (major European currencies and Japanese yen) primarily for U.S. dollars totaling $135,057,000 and $145,270,000, respectively. Of the respective balances, $28,504,000 and $49,752,000 represented contracts related to inter-company receivables that settled within 35 days. The balance of the contracts relate to firm sales commitments. Gross unrealized gains and losses from hedging firm sales commitments, based upon current forward rates, were a $1,902,000 gain and a $327,000 loss at July 1, 2000 and a $3,909,000 gain and a $4,121,000 loss at July 3, 1999. Deferred gains and losses are recognized in earnings when the transactions being hedged are recognized. Management anticipates that these deferred amounts at July 1, 2000 will be offset by the foreign exchange effect on sales of products to international customers in future periods. The Company is exposed to credit loss in the event of nonperformance by counter-parties on these foreign exchange contracts. The Company does not anticipate nonperformance by any of these parties. 6. INVENTORIES Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined on the first-in, first-out method. Inventories consist of the following:
July 1, April 1, 2000 2000 ----------------------- (in thousands) Raw materials $13,559 $14,081 Work-in-process 6,019 7,199 Finished goods 38,037 38,537 ---------------------- $57,615 $59,817 ======================
7. NET INCOME PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations, as required by Statement of Financial Accounting Standards, "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 other common stock equivalents.
For the three months ended ---------------------------- July 1, 2000 July 3, 1999 ---------------------------- Basic EPS --------- Net Income(loss) $ 6,664 $ 5,973 Weighted Average Shares 25,248 26,729 ----------------------- Basic income(loss) per share $ .264 $ .223 ----------------------- Diluted EPS ----------- Net Income(loss) $ 6,664 $ 5,973 Basic Weighted Average shares 25,248 26,729 Effect of Stock options 483 101 ----------------------- Diluted Weighted Average shares 25,731 26,830 ----------------------- Diluted income(loss) per share $ .259 $ .223 -----------------------
8. SEGMENT INFORMATION Segment Definition Criteria The Company manages its business on the basis of one operating segment: the design, manufacture and marketing of automated blood processing systems. Haemonetics chief operating decision-maker uses consolidated results to make operating and strategic decisions. Manufacturing processes, as well as the regulatory environment in which the company operates, are largely the same for all product lines. Product and Service Segmentation The Company's principal product offerings include blood bank, surgical and plasma products. The blood bank products comprise machines and single use disposables that perform "apheresis," the separation of whole blood into its components and subsequent collection of certain components. The device used for blood component therapy is the MCS(R)+, mobile collection system. Surgical products comprise machines and single use disposables that perform intraoperative autologous transfusion ("IAT") or surgical blood salvage as it is more commonly known. Surgical blood salvage is a procedure whereby shed blood is cleansed and then returned back to a patient. The devices used to perform this are a full line of Cell Saver(R) autologous blood recovery systems. Plasma collection products are machines and disposables that, like blood bank, perform apheresis for the separation of whole blood components and subsequent collection of plasma. The device used in automated plasma collection is the PCS(R)2. Three months ended (in thousands)
July 1, 2000 Blood Bank Surgical Plasma Other Total ------------ ---------- -------- ------ ----- ----- Revenues from external customers 29,457 15,972 20,217 4,047 69,693 July 3, 1999 ------------ Revenues from external customers 29,051 15,851 21,684 2,536 69,122
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS The table outlines the components of the consolidated statements of income for continuing operations as a percentage of net revenues:
Percentage of Net Revenues Percentage Inc(Dec) Three Months Ended Three Months Ended ---------------------------- ------------------- July 1, 2000 July 1, 1999 2000/1999 ----------------------------------------------------------------------------------------------- Net revenues 100.0% 100.0% 1.0% Cost of goods sold 52.1 52.5 (0.1) ---------------------------------------- Gross Profit 47.9 47.5 1.8 Operating Expenses: Research and development 5.9 5.3 14.1 Selling, general and administrative 30.1 30.0 1.0 ---------------------------------------- Total operating expenses 36.0 35.3 3.0 Operating income 11.9 12.2 (1.0) Interest expense (1.4) (1.5) 1.0 Interest income 1.7 1.6 5.8 Other income, net 1.1 0.3 230.6 ---------------------------------------- Income from continuing operations before provision for income taxes 13.3 12.6 5.4 Provision for income taxes 3.7 4.0 (7.8) ---------------------------------------- Earnings from continuing operations 9.6% 8.6% 11.6% ========================================
Three Months Ended July 1, 2000 Compared to Three Months Ended July 3, 1999 Net Revenue Summary ------------------- ( in thousands) -------------------
Percent Increase / (Decrease) ----------------------------- Actual dollars At constant By geography: 2000 1999 as reported currency --------------------------------------------------- United States $22,148 $22,522 (1.7)% (1.7)% International 47,545 46,600 2.0 0.3 ----------------------------------------------- Net revenues 69,693 $69,122 0.8% (0.4)% Percent Increase / (Decrease) ----------------------------- Actual dollars At constant By product type: 2000 1999 as reported currency --------------------------------------------------- Disposables $62,636 $62,115 0.8% (0.7)% Misc & service 4,048 2,540 59.4 63.7 Equipment 3,009 4,467 (32.6) (31.3) ----------------------------------------------- Net revenues $69,693 $69,122 0.8% (0.4)% Percent Increase / (Decrease) ----------------------------- Disposables Actual dollars At constant By product line: 2000 1999 as reported currency --------------------------------------------------- Surgical $14,849 $14,564 2.0% 2.7% Blood bank** 27,683 27,046 2.4 (0.4) Plasma 20,104 20,505 (2.0) (3.7) ----------------------------------------------- Disposable revenues $62,636 $62,115 0.8 (0.7) ** Includes red cell disposables
Three months ended July 1, 2000 compared to three months ended July 3, 1999 Net Revenues Net revenues in 2000 increased 0.8% to $69.7 million from $69.1 million in 1999. With currency rates held constant, net revenues decreased 0.4% from 1999 to 2000. Disposable sales increased 0.8% from 1999 to 2000 at actual rates. With currency rates held constant, disposable sales decreased 0.7%. The 0.7% decrease was largely a result of lower sales in the U.S. commercial plasma business due to the continued shortage of available donors. Constant currency sales of disposable products, excluding service and other miscellaneous revenue, accounted for approximately 90% of constant currency net revenues for both 2000 and 1999. Service generated from equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous revenues accounted for approximately 6.0% and 4.0% of the Company's net revenues, at constant currency, for 2000 and 1999, respectively. Equipment revenues decreased approximately $1.5 million from the $4.5 million in 1999. With currency rates held constant, equipment revenues decreased 31.3% from 1999 to 2000. The equipment decrease was attributable primarily to a 1999 international sale of plasma equipment that was non-recurring in 2000. International sales as reported accounted for approximately 68% and 67% of net revenues for 2000 and 1999, respectively. Gross profit Gross profit of $33.4 million in 2000 increased $0.6 million from $32.8 million 1999 and increased 0.4% as a percent of sales from 1999 to 2000. At constant currency rates, gross profit, as a percent of sales and in dollars remained relatively unchanged from 1999 to 2000. Expenses The Company expended $4.1 million (5.9 % of net revenues) on research and development in 2000 and $3.6 million (5.3% of net revenues) in 1999. At constant currency rates, research and development as a percent of sales increased slightly by 0.7%, or $0.5 million in dollars from 1999 to 2000. Selling, general and administrative expenses increased to $21.0 million in 2000 from $20.7 million in 1999. At constant currency rates, selling, general and administrative expenses increased $0.2 million and increased 0.4% as a percent of sales from 1999 to 2000. Operating Income Operating income as a percentage of net revenues decreased 0.3 percentage points to 11.9% in 2000 from 12.2% in 1999. At constant currency rates, operating income, as a percent of sales, decreased 1.1% from 1999 or $0.8 million. The $0.8 million decrease in operating income resulted mainly from increases in R&D spending. Foreign Exchange Greater than two-thirds of the Company's revenues are generated outside the U.S. in foreign currencies. As such, the Company uses a combination of business and financial tools comprised of various natural hedges, (offsetting exposures from local production costs and operating expenses), and forward contracts to hedge its balance sheet and P&L exposures. The Company computes a composite rate index for purposes of measuring, comparatively, the change in foreign currency hedge spot rates from the hedge spot rates of the corresponding period in the prior year. The relative value of currencies in the index corresponds to the value of sales in those currencies. The composite was set at 1.00 based upon the weighted rates at March 31, 1997. For fiscal year 2000 and 2001, the indexed hedge rates were 3.9% less favorable and 9.1% more favorable than the respective prior years. For the first quarter of fiscal 2001 and 2002, the indexed hedge spot rates appreciated 5.4% and a 5.2% over the corresponding quarter of the preceding years. The final impact of currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.
Composite Index Favorable / (Unfavorable) Hedge Spot Rates Change vs Prior Year --------------------------------------------- FY1999 Q1 0.98 (9.4%) Q2 1.06 (13.4%) Q3 1.03 (5.9%) Q4 1.05 (7.4%) 1999 Total 1.03 (9.1%) FY2000 Q1 1.10 (10.8%) Q2 1.09 (2.8%) Q3 1.04 (0.6%) Q4 1.07 (1.0%) 2000 Total 1.07 (3.9%) FY2001 Q1 1.04 5.4% Q2 1.00 8.2% Q3 0.92 12.9% Q4 0.97 10.3% 2001 Total 0.98 9.1% FY2002 Q1 0.99 5.2% Q2 0.97 3.3%
Other Income and Expense Interest expense and interest income remained relatively unchanged from 1999 to 2000. Other income net increased $0.5, of which $0.3 was due to increases in income earned on points on forward contracts. Taxes The provision for income taxes, as a percentage of pretax income, was 32.0% in the first quarter of fiscal year 1999 and 28.0% in the first quarter of fiscal year 2001. The Company expects the provision rate to remain at 28% for the full 12 months of fiscal year 2001. Contributing to the decrease in the tax rates was an increase in export benefits from the Company's Foreign Sales Corporation, benefits associated with the repatriation of funds as well as the geographic mix of income. LIQUIDITY AND CAPITAL RESOURCES The Company has satisfied its cash requirements principally from internally generated cash flow and borrowings. The Company's need for funds is derived primarily from capital expenditures, acquisitions, new business development and working capital. During the three months ended July 1, 2000, the Company decreased its cash balances, before the effect of exchange rates, by $9.1 million from operating, investing and financing activities which represents an increase in cash utilization of $6.4 million from the $2.7 million utilized in the Company's operating, investing and financing activities during the three months ended July 3, 1999. The increase cash utilization was largely funded by an increase of $4.9 million in net cash from the Company's financing activities. Operating Activities: The Company generated $5.9 million in cash from operating activities of continuing operations in 2000 as compared to $11.3 million generated during 1999. The $5.4 million decrease in operating cash flow generated from continuing operations from 1999 to 2000 was a result of a $3.0 million change in accounts receivable and a $3.7 million increase in prepaid income taxes and other assets offset by increases in cash generated by an $0.8 million decrease in inventory and a $0.5 million change in accounts payable, accrued expenses and other current liabilities. The Company measures its performance using an operating cash flow metric defined as net income adjusted for depreciation, amortization and other non-cash items; capital expenditures for property, plant and equipment together with the investment in Haemonetics equipment at customer sites, including sales-type leases; and the change in operating working capital, including change in accounts receivable, inventory, accounts payable and accrued expenses, excluding tax accounts and the effects of currency translation. During the three months ended July 1, 2000, The company generated $10.0 million of operating cash during both the three months ended July 1, 2000 and the three months ended July 3, 1999. The $10.0 million of operating cash generated for the three months ended July 1, 2000 resulted from $7.8 million of net income adjusted for non-cash items and $3.0 million from the reduction of the Company's net investment in property plant and equipment and sales-type leases offset by $0.8 million in higher working capital investment. Investing Activities The Company utilized $3.1 million in cash for investing activities from continuing operations in 2000, a decrease of $3.3 million from 1999. In 2000, the Company incurred $4.6 million in capital expenditures net of retirements and disposals, a decrease of $2.3 in capital expenditures from the $6.9 million incurred for capital expenditures in 1999. Additionally, the Company generated $1.0 million more cash in 2000 as compared to 1999 by reducing its investment in long-term sales-type leases. Financing Activities: During the three months ended July 1, 2000, the Company's net debt increased $0.9 million, a $4.5 million decrease in the change in net debt as compared to the three months ended July 1, 1999. This $4.5 million decrease in the change in net debt stems from the Company's repurchase of fewer shares of common stock in 2000 for its treasury with a cost savings of $4.8 million and $0.8 million received in additional funds from the exercise of stock options in 2000 as compared to 1999. These increase sources of cash, reducing the change in net debt, were offset by the Company's 2000 operating and investing activities which provided $1.5 million less cash as compared to 1999. At July 1, 2000, the Company had working capital of $128.9 million. This reflects an increase of $7.5 million in working capital for the three months ended July 1, 2000. The Company believes its sources of cash are adequate to meet its projected needs. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which the Company will be required to adopt in the third or fourth quarter of fiscal year 2001. SAB 101 provides additional guidance on the accounting for revenue recognition including both broad conceptual discussions, as well as certain industry-specific guidance. The Company is in the process of accumulating the information necessary to quantify the potential impact, if any, of this new guidance. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The SFAS No. 133 requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, or in the case of a hedge of a forecasted probable transaction, a derivative's gains and losses are included in other comprehensive income until the transaction is consummated. Additionally, a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. A company may implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance (that is fiscal quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied retroactively. The impacts of adopting SFAS No. 133 on the Company's financial statements or the timing of adoption of SFAS No. 133 have not been determined. However, it is expected that the derivative financial instruments acquired in connection with the Company's hedging program will continue to qualify for hedge accounting. Cautionary Statement Regarding Forward-Looking Information Statements contained in this report, as well as oral statements made by the Company that are prefaced with the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "designed" and similar expressions, are intended to identify forward looking statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or unanticipated. Such risks and uncertainties include technological advances in the medical field and the Company's ability to successfully implement products that incorporate such advances, product demand and market acceptance of the Company's products, regulatory uncertainties, the effect of economic conditions, the impact of competitive products and pricing, foreign currency exchange rates, changes in customers' ordering patterns, the effect of uncertainties in markets outside the U.S. (including Europe and Asia) in which the Company operates, and the implications of Year 2000 including but not limited to the cost and expense of updating software and hardware and any potential system interruptions. The foregoing list should not be construed as exhaustive. EURO CURRENCY Effective January 1, 1999, 11 of the 15 countries in the European Union (Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg, Portugal and Spain) adopted a single currency known as the Euro. For the three years following January 1, 1999, these countries will be allowed to transact business in both the Euro and in their own currencies at fixed exchange rates. Beginning on July 1, 2002, the Euro will become the only currency for these 11 countries. Operations in Europe The introduction of the Euro may have a significant impact on the Company's operations. The Company has 10 subsidiaries located throughout Europe, that generate one-third of its sales. State of Readiness The Company has formed a Euro Steering Committee (the "Committee") to address all issues related to the Euro. This Committee is now preparing a detailed action plan which will cover all areas of concern including information systems, finance, tax, treasury, legal, marketing and human resources. As a part of the detailed action plan, a comprehensive questionnaire was distributed to all of the Company's European subsidiaries to gain a better understanding of the impact of the Euro currency in each location. Currently, the responses to the questionnaires are being analyzed and specific action plans are being developed for each subsidiary. Date of conversion The target date for conversion of the Company's local and corporate information systems to the Euro is April 1, 2001, which is the first day of the Company's fiscal year 2002. Business activities Although the introduction of the Euro will likely result in greater transparency of pricing throughout Europe, it is anticipated that these changes will have little impact on Haemonetics. The Company's products are heavily regulated by organizations specific to each country and as a result, transactions between countries are infrequent. Information systems The Company is continuing to gain a more complete view of the impact of the Euro conversion on its information systems. The Company realizes it will create technical challenges to adapt information technology and other systems to accommodate Euro-denominated transactions. The Committee is in the process of identifying all systems and determining their state of Euro readiness. The cost of adapting these systems is not yet known, but the Company does not believe it to be significant. All local transactional systems will be tested by September 2000 reviewed shortly thereafter. Accounting, Finance & Treasury At the point the Company adopts the Euro, it expects to experience the benefits of simplified hedging, banking and financial transaction systems. The Corporate local currency bank accounts have been consolidated to a single Euro account. Each subsidiary will maintain bank accounts, which are capable of processing transactions in both the local currency and the Euro. The transactions between the local currency accounts and Euro accounts throughout Europe do not result in any additional expense for the company. Tax It is expected that some of the European countries will allow costs related to the introduction of the Euro to be fully deductible. Additionally, it is anticipated that most countries will allow tax relief by means of a one-time depreciation or amortization charge related to assets utilized in the Euro conversion. Legal The EU has adopted regulations precluding a party from using the Euro conversion as the reason for breaching or changing its contractual obligations, unless the other parties to the contract are in agreement. The Company is now in the process of identifying any contracts between the Company and parties outside the USA, which fall under these regulations. At this point, the Company is not aware of substantial risk related to such contracts. The conversion to Euro on April 2, 2001 will result in the conversion of the share capital of the 6 subsidiaries within the European Monetary Union (EMU). The amount of the converted share capital must be modified in order to eliminate uneven amounts and decimals resulting from the conversion. The Committee has identified the new amounts of the share capital per the requested minimum capital requirements issued by the EU. The Committee is currently in the process of coordinating all activities related to these changes such as meetings of the subsidiary board of directors, shareholder meetings, changes in by-laws and defining the appropriate accounting transactions. The Company anticipates that all required changes will be completed during the second and third quarters of fiscal year 2001. The Company does not anticipate material exposure resulting from the share capital conversion. Human Resources The Committee has decided not to rewrite the existing employee contracts in subsidiaries located in the EMU, but rather, to give a letter to each employee which will form an integrated part of the existing employee contract. This letter will indicate the salary amount in Euro, as well as provide general information about the Euro. The effective date of this letter will be April 2, 2001. A Euro contact person responsible for organizing regular employee updates and for communicating the company-wide progress of the Euro implementation has been identified at each European subsidiary. Costs Although the total cost of the Euro conversion has not yet been quantified, the Company does not believe that the total cost will be significant or have a material impact on its business, results of operations, financial position or cash flows. 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 Over two-thirds of the Company's revenues are generated outside the U.S. yet the Company's reporting currency is the U.S. dollar. Foreign exchange risk arises because the Company engages in business in foreign countries in local currency. Exposure is partially mitigated by producing and sourcing product in local currency. Accordingly, whenever the US dollar strengthens relative to the other major currencies, there is an adverse affect on the Company's results of operations and alternatively, whenever the U.S. dollar weakness relative to the other major currencies, there is a positive effect on the Company's results of operations. It is the Company's policy to minimize for a period of time, the unforeseen impact on its results of operations of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge the majority of its firm sales commitments to customers that are denominated in foreign currencies. The Company also enters into forward contracts that settle within 35 days to hedge certain intercompany receivables denominated in foreign currencies. Actual gains and losses on all forward contracts are recorded in operations, offsetting the gains and losses on the underlying transactions being hedged. These derivative financial instruments are not used for trading purposes. The Company's primary foreign currency exposures in relation to the U.S. dollar are the Japanese Yen and the Euro equivalent of the French Franc, Deutsche Mark and Italian Lire. At July 1, 2000, the Company had the following significant foreign exchange contracts to hedge certain firm sales commitments denominated in foreign currency outstanding:
Hedged (BUY) / SELL Weighted Forward US$ @ Unrealized Currency Local Currency Contract Rate Current Fwd Gain / (Loss) Maturity ----------------------------------------------------------------------------------------------------- Euro Equivalent 7,200,000 $1.077 6,876,160 $ 881,000 Jul-Sep 2000 Euro Equivalent 7,500,000 $1.108 7,200,600 $ 1,106,900 Oct-Dec 2000 Euro Equivalent 8,100,000 $1.004 7,812,720 $ 315,910 Jan-Mar 2001 Euro Equivalent 7,500,000 $0.915 7,261,900 $ (401,525) Apr-Jun 2001 Japanese Yen 1,975,000,000 111.9 per US$ 18,727,430 $(1,078,814) Jul-Sep 2000 Japanese Yen 2,075,000,000 99.7 per US$ 20,027,233 $ 793,629 Oct-Dec 2000 Japanese Yen 1,900,000,000 100.8 per US$ 18,661,438 $ 189,996 Jan-Mar 2001 Japanese Yen 2,000,000,000 101.2 per US$ 19,985,383 $ (231,454) Apr-Jun 2001 ---------------------------------------------- Total: 106,552,863 $ 1,575,642 ==============================================
The Company estimated the change in the fair value of all forward contracts assuming both a 10% strengthening and weakening of the U.S. dollar relative to all other major currencies. In the event of a 10% strengthening of the U.S. dollar, the change in fair value of all forward contracts would create an additional $12.7 million unrealized gain; whereas a 10% weakening of the U.S. dollar would create an additional $14.8 million unrealized loss. Interest Rate Risk Approximately 97%, of the Company's long-term debt is at fixed rates. Accordingly, a change in interest rates has an insignificant effect on the Company's interest expense amounts. The fair value of the Company's long- term debt however would change in response to interest rates movements due to its fixed rate nature. At July 1, 2000, the fair value of the Company's long-term debt was approximately $0.6 million higher than the value of the debt reflected on the Company's financial statements. This higher fair market is primarily related to the $40 million, 7.05% fixed rate senior notes the Company holds. These notes represent approximately 97% of the Company's outstanding long-term borrowings at July 1, 2000. At July 3, 1999, the fair value of the Company's long-term debt was approximately $1.6 million higher than the value of the debt reflected on the Company's financial statements. Using scenario analysis, the Company changed the interest rate on all long-term maturities by 10% from the rate levels, which existed at July 1, 2000. The effect was a change in the fair value of the Company's long-term debt, of approximately $1.5 million. PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a). Exhibits The following exhibits will be filed as part of this form 10-Q: Exhibit 27 Financial Data Schedule (b). Reports on Form 8-K. none SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HAEMONETICS CORPORATION Date: August 4 , 2000 By: /s/ James L. Peterson --------------- ------------------------------------ James L. Peterson, President and Chief Executive Officer Date: August 4 , 2000 By: /s/ Ronald J. Ryan --------------- ------------------------------------ Ronald J. Ryan, Sr. Vice President and Chief Financial Officer, (Principal Accounting Officer)