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HAE > SEC Filings for HAE > Form 10-Q on 30-Jan-2014All Recent SEC Filings

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Form 10-Q for HAEMONETICS CORP


30-Jan-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with both our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and our annual consolidated financial statements, notes thereto and the MD&A contained in our fiscal year 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 20, 2013. The following discussion may contain forward-looking statements and should be read in conjunction with the "Cautionary Statement Regarding Forward-Looking Information."

Our Business

Haemonetics is a global healthcare company dedicated to providing innovative blood management solutions to our customers. Our comprehensive portfolio of integrated devices, information management, and consulting services offers blood management solutions for each facet of the blood supply chain, helping improve clinical outcomes and reduce costs for blood and plasma collectors, hospitals, and patients around the world. Our products and services help prevent a transfusion to a patient who does not need one and provide the right blood product, at the right time, in the right dose to the patient who does.

Blood and its components (plasma, platelets, and red cells) have many vital and frequently life-saving clinical applications. Plasma is used for patients with major blood loss and is manufactured into pharmaceuticals to treat a variety of illnesses and hereditary disorders such as hemophilia. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets treat cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.

Recent developments

Value Creation and Capture Initiatives
On April 29, 2013, we committed to a plan to pursue identified Value Creation and Capture ("VCC") opportunities. These opportunities include investment in product line extensions and next generation products, enhancement of commercial capabilities and a transformation of our manufacturing network. The transformation of our manufacturing network will take place over the next three fiscal years and includes changes to the current manufacturing footprint and supply chain structure (the "Network Plan"). To implement the Network Plan, we will (i) cease manufacturing activities at our Braintree, Massachusetts and Ascoli-Piceno, Italy locations, (ii) create a technology center of excellence for product development close to our current Corporate Headquarters, (iii) expand our current facility in Tijuana, Mexico, (iv) engage Sanmina Corporation, a contract manufacturer to produce certain medical equipment, and (v) build a new manufacturing facility in Penang, Malaysia closer to our customer base in that region. See liquidity and capital resources discussion of this MD&A for further discussion of the costs of these activities.

Changes in Blood Management

Blood management is an approach to optimizing the care of patients that may need a transfusion that includes a wide range of practices and protocols which influence the need for, and use of, blood products in hospitals. As previously disclosed, adoption of blood management practices by hospitals, particularly in the United States, is gaining momentum. Blood management efforts can reduce the demand for red cells, which in turn can reduce the demand for our red cell and whole blood collection products. We believe the decline in U.S. blood center collections will be approximately 8% to 10% annually for our present fiscal year 2014 and next year fiscal 2015.

Blood management practices have also increased the utilization of tranexamic acid. Tranexamic acid is used to treat and prevent post-operative bleeding in orthopedic surgeries, particularly hip and knee replacements. The use of this low cost, generic drug has expanded rapidly in an environment of greater blood management focus. We have been monitoring this trend and believe tranexamic acid is used in at least 30% of total hip and knee replacements in the United States and that broader adoption is likely. This expanded adoption of tranexamic acid is contributing to the aforementioned reduced demand for red cells and is reducing the demand for orthopedic cell salvage.

Products

Our medical device systems provide both automated and manual collection and processing of donated blood, assess likelihood for blood loss, salvage and process blood from surgery patients, and dispense and track blood inventory in the hospital. These


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systems include devices and single-use; proprietary disposable sets ("disposables") some of which only operate with our specialized devices. Specifically, our plasma and blood center systems allow users to collect and process only the blood component(s) they target - plasma, platelets, or red blood cells - increasing donor and patient safety as well as collection efficiencies. Our blood diagnostics system assesses hemostasis (a patient's clotting ability) to aid clinicians in assessing the cause of bleeding, resulting in overall reductions in blood product usage. Our surgical blood salvage systems allow surgeons to collect the blood lost by a patient in surgery, cleanse the blood, and make it available for transfusion back to the patient. Our blood tracking systems automate the distribution of blood products in the hospital. Our manual blood collection and filtration systems enable the manual collection of all blood components while detecting bacteria, thus reducing the risks of infection through transfusion.

We place devices with some of our customers which remain our property. The customer has the right to use these for a period of time as long as certain conditions are met, which, among other things, generally include one or more of the following:

Purchase and consumption of a minimum level of disposables products;

Payment of monthly rental fees; and

An asset utilization performance metric, such as performing a minimum level of procedures per month per device.

Our disposables revenue stream includes the sales of manual collection and filtration systems, device disposables and fees for the use of our equipment, which accounted for approximately 86.6% and 84.7% of our total revenues for the nine months ended December 28, 2013 and December 29, 2012, respectively.

Financial Summary
                                      Three Months Ended                                    Nine Months Ended
(In thousands,
except per share        December 28,      December 29,      % Increase/     December 28,      December 29,       % Increase/
data)                       2013              2012          (Decrease)          2013              2012           (Decrease)
Net revenues           $    242,120      $     247,395           (2.1 )%   $     697,418     $     642,048            8.6  %
Gross profit           $    121,629      $     113,115            7.5  %   $     352,924     $     304,990           15.7  %
% of net revenues              50.2  %            45.7 %                            50.6 %            47.5 %
Operating expenses     $    103,769      $      97,368            6.6  %   $     318,243     $     266,261           19.5  %
Operating income       $     17,860      $      15,747           13.4  %   $      34,681     $      38,729          (10.5 )%
% of net revenues               7.4  %             6.4 %                             5.0 %             6.0 %
Interest and other
expense, net           $     (2,852 )    $      (2,542 )         12.2  %   $      (8,035 )   $      (3,518 )        128.4  %
Income before taxes    $     15,008      $      13,205           13.7  %   $      26,646     $      35,211          (24.3 )%
Income tax
(benefit)/expense      $     (1,282 )    $       3,301         (138.8 )%   $       1,682     $       8,972          (81.3 )%
% of pre-tax income            (8.5 )%            25.0 %                             6.3 %            25.5 %
Net income             $     16,290      $       9,904           64.5  %   $      24,964     $      26,239           (4.9 )%
% of net revenues               6.7  %             4.0 %                             3.6 %             4.1 %
Earnings per
share-diluted          $       0.31      $        0.19           63.2  %   $        0.48     $        0.50           (4.0 )%

Net revenues decreased 2.1% and increased 8.6% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, net revenues decreased 0.3% and increased 10.4% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Revenue increased due to a full period of sales from the whole blood business acquired August 1, 2012 as compared to five months of sales in the prior year, as well as growth in our plasma and diagnostics disposable products. These increases were partially offset by declines across other product lines for the three and nine months ended December 28, 2013.
Operating income increased 13.4% and decreased 10.5% for the three and nine months ended December 28, 2013, respectively as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, operating income increased 33.1% and 2.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Operating income increased for the three months ended December 28, 2013 due primarily to improved gross margin performance.
Operating income decreased for the nine months ended December 28, 2013 as increases in gross profit were more than offset by higher restructuring and transformation expenses and other operating expense growth associated with the whole blood acquisition. Restructuring and transformation expenses were $17.5 million and $69.9 million for the three and nine months ended December 28, 2013, as compared to $25.1 million and $55.2 million for the comparative prior year periods.


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Restructuring and transformation expenses in fiscal 2014 are primarily associated with VCC initiatives, and in fiscal 2013 were primarily associated with the acquisition and integration of the whole blood business.

Net income increased 64.5% and decreased 4.9% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, net income increased 71.6% and decreased 1.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. The net income changes are attributable to the changes described in operating income above, and the recognition of a tax benefit in the three months ended December 28, 2013.

RESULTS OF OPERATIONS
International Operations and the Impact of Foreign Exchange
                                        Three Months Ended                                      Nine Months Ended
                         December 28,       December 29,       % Increase/       December 28,       December 29,      % Increase/
(In thousands)               2013               2012           (Decrease)            2013               2012           (Decrease)
United States          $      126,752     $      125,362            1.1  %     $      374,559     $      324,755           15.3 %
International                 115,368            122,033           (5.5 )%            322,859            317,293            1.8 %
Net revenues           $      242,120     $      247,395           (2.1 )%     $      697,418     $      642,048            8.6 %

Our principal operations are in the U.S., Europe, Japan and other parts of Asia. Our products are marketed in approximately 100 countries around the world through a combination of our direct sales force, independent distributors and agents.
Our revenues generated outside the U.S. approximated 46.3% of total net revenues for the nine months ended December 28, 2013. International sales are generally conducted in local currencies, primarily the Japanese Yen, the Euro and Australian Dollar. Our revenues are impacted by changes in the value of the Yen, the Euro and the Australian Dollar relative to the U.S. Dollar.
Changes in foreign exchange rates contributed to a reduction in operating income of approximately 20% and 12% for the three and nine months ended December 28, 2013, respectively. The primary reason is the relative weakness in the Japanese Yen to the US Dollar. We expect this relative weakness to continue to negatively impact operating income for the balance of fiscal 2014 and into fiscal 2015, as we have placed foreign currency hedges for those periods. Please see section entitled "Foreign Exchange" in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.
Net Revenues by Product Type

                                       Three Months Ended                                     Nine Months Ended
                        December 28,       December 29,      % Increase/       December 28,       December 29,      % Increase/
(In thousands)              2013               2012           (Decrease)           2013               2012           (Decrease)
Disposables           $      209,120     $      212,638          (1.7 )%     $      603,887     $      543,925          11.0  %
Software solutions            17,603             16,008          10.0  %             51,469             51,354           0.2  %
Equipment & other             15,397             18,749         (17.9 )%             42,062             46,769         (10.1 )%
Net revenues          $      242,120     $      247,395          (2.1 )%     $      697,418     $      642,048           8.6  %


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Disposable Revenues by Product Type
                                       Three Months Ended                                     Nine Months Ended
                        December 28,       December 29,      % Increase/       December 28,       December 29,      % Increase/
(In thousands)              2013               2012           (Decrease)           2013               2012           (Decrease)
Plasma disposables    $       76,698     $       68,102          12.6  %     $      217,768     $      200,657           8.5  %
Blood center
disposables
Platelet                      43,447             45,139          (3.7 )%            117,778            125,579          (6.2 )%
Red cell                       9,869             11,752         (16.0 )%             30,098             35,738         (15.8 )%
Whole blood                   47,342             54,894         (13.8 )%            145,879             83,514          74.7  %
                             100,658            111,785         (10.0 )%            293,755            244,831          20.0  %
Hospital
disposables
Surgical                      16,807             18,900         (11.1 )%             49,247             55,965         (12.0 )%
OrthoPAT                       6,392              7,090          (9.8 )%             18,973             22,276         (14.8 )%
Diagnostics                    8,565              6,761          26.7  %             24,144             20,196          19.5  %
                              31,764             32,751          (3.0 )%             92,364             98,437          (6.2 )%
Total disposables
revenue               $      209,120     $      212,638          (1.7 )%     $      603,887     $      543,925          11.0  %

Disposables
Disposables revenue decreased 1.7% and increased 11.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, disposables revenue was essentially unchanged and increased 13.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, driven primarily by revenue from the whole blood acquisition and growth in plasma and diagnostics.
Plasma
Plasma disposables revenue increased 12.6% and 8.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, plasma revenue increased 14.4% and 10.5% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. Plasma revenue increased due to higher volumes in the United States and the transition to a direct sales model in Australia and New Zealand. We recently completed multi-year extensions to our agreements with certain commercial plasma customers. Approximately 80% of our current commercial plasma revenues are under agreement through the third quarter of fiscal 2019 with these contract extensions. Blood Center
Blood center consists of disposables used to collect platelets, red cells and whole blood.
Platelet disposables revenue decreased 3.7% and 6.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, platelet disposable revenue decreased 0.1% and 2.4% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due primarily to lower revenues in Canada and lower revenues in emerging markets associated with order timing and reductions of distributor inventory levels over the first half of fiscal 2014. In the most recent quarter platelet revenue in distribution markets returned to growth.

Sales to U.S. blood centers represent over 70% of our total red cell and whole blood disposable revenue. The demand for these disposable products in the U.S. has recently declined due to a rapid decline in demand for blood products associated with actions taken by hospitals to improve blood management techniques and protocols. We believe the decline in U.S. blood center


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collections will be approximately 8% to 10% per year for fiscal 2014 and fiscal 2015, and accordingly will continue to negatively impact red cell and whole blood revenue during these periods.

Additionally, in response to this trend, our U.S. blood center customers are taking actions to improve efficiencies and reduce operating costs, including consolidation amongst blood centers, formation of purchasing affiliations, and focusing on direct supplier costs via vendor consolidation and other means. Large U.S. blood collector groups are currently pursuing single source contracts for whole blood collection products which will require reductions in average selling prices in order to retain or increase U.S. market share. In the three months ended December 28, 2013, we entered into a multi-year agreement to supply the HemeXcel Purchasing Alliance LLC with certain whole blood collection components on an exclusive basis during the calendar years 2014-2016. The agreement is not expected to have a material impact on fiscal 2014 revenue or earnings, but will negatively impact fiscal 2015 gross margins based on reductions in average selling prices as anticipated. Another major U.S. whole blood tender remains in process and is expected to be awarded early in calendar 2014. Price reductions will be required to be awarded this tender. If we are not awarded this tender, it will result in a reduction in whole blood revenue in fiscal 2015.

Red cell disposables revenue decreased 16.0% and 15.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, red cell disposables revenue decreased 15.7% and 15.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due to a combination of competitive challenges and reductions in blood collections in the U.S. as discussed above. Additionally, favorable order timing in the three months ended March 30, 2013 had a negative impact on sales in the first three months of fiscal 2014.

Whole blood revenue decreased 13.8% and increased 74.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, whole blood revenue decreased 13.5% and increased 73.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Revenue for the three months ended December 28, 2013 decreased due to the reductions in the U.S. collection market noted above and the impact of a previously announced loss of a European tender. Revenue for the nine months ended December 28, 2013 increased due to a full period of sales from the whole blood business acquired August 1, 2012 as compared to five months of sales in the prior year period, partially offset by the negative impact of the U.S. collection market and European tender loss noted.
Hospital
Hospital consists of Surgical, OrthoPAT, and Diagnostics products. Surgical disposables revenue consists principally of the Cell Saver and CardioPAT products. Revenues from our surgical disposables decreased 11.1% and 12.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, surgical disposables revenue decreased 7.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due to the return to the market of a competitor with aggressive pricing whose operations were limited by a natural disaster in the prior year, and by a reduction in demand for surgical procedures.
Revenues from our OrthoPAT disposables decreased 9.8% and 14.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased 7.6% and 11.9% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, as better blood management has reduced orthopedic blood loss and demand for OrthoPAT disposables. Recent trends in blood management particularly the adoption of tranexamic acid to treat and prevent orthopedic post-operative blood loss have lessened hospital use of OrthoPAT disposables.
Diagnostics product revenue consists principally of the consumable reagents used with the TEG analyzer. Revenues from our diagnostics products increased 26.7% and 19.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, diagnostics product revenues increased 24.3% and 18.3% for the three and nine months ended December 28, 2013, respectively, as compared to the same period of fiscal 2013. The revenue increase is due to continued adoption of our TEG analyzer, principally in the U.S. and China. Software Solutions
Our software solutions revenues include sales of our information technology software platforms and consulting services. Software revenues increased 10.0% and 0.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, software revenues increased 9.2% and decreased 0.3% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Software revenue was essentially flat in the nine months ended December 28, 2013, as increases in hospital software revenue were offset by lower hosting fees associated with a large commercial plasma customer.


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Equipment & Other
Our equipment and other revenues include revenue from equipment sales, repairs performed under preventive maintenance contracts or emergency service visits, spare part sales, and various services and training programs. These revenues are primarily composed of equipment sales, which tend to vary from period to period more than our disposable business due to the timing of order patterns, particularly in our distribution markets. Equipment and other revenues decreased 17.9% and 10.1% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, equipment and other revenues decreased 13.6% and 7.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same period of fiscal 2013. The decline in revenue for the nine months ended December 28, 2013 is due primarily to benefits in the prior year from a competitor whose operations were limited by a natural disaster and the successful launch of the Cell Saver Elite. The decline in revenue for the three months ended December 28, 2013 also included the impact of equipment order timing in Japan.

Gross Profit
                                     Three Months Ended                                   Nine Months Ended
                       December 28,      December 29,      % Increase/     December 28,      December 29,      % Increase/
(In thousands)             2013              2012          (Decrease)          2013              2012          (Decrease)
Gross profit          $     121,629     $     113,115           7.5 %     $     352,924     $     304,990          15.7 %
% of net revenues              50.2 %            45.7 %                            50.6 %            47.5 %

Gross profit increased 7.5% and 15.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, gross profit increased 10.4% and 18.2% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. The gross profit margin increased by 450 and 310 basis points for the three and nine months ended December 28, 2013 respectively as compared to the same three month periods of fiscal 2013. The increase in gross profit margin in both the three and nine months ended December 28, 2013 is primarily driven by lower whole blood related inventory charges. In the prior fiscal year we recorded inventory reserves associated with the removal of certain whole blood collection sets from inventory based on a quality matter detected in the third quarter of fiscal 2013. We also recorded significant inventory step-up charges in the prior year related to acquired whole blood inventory. Improvements to reported gross margin excluding the inventory adjustments noted also included the positive impact of customer mix within whole blood and plasma disposable sales during the three months ended December 28, 2013 and improvements in manufacturing efficiencies for the nine months ended December 28, 2013.
The aforementioned reductions in average selling prices in the North America whole blood market will negatively impact fiscal 2015 gross margins.

Operating Expenses
                                      Three Months Ended                                   Nine Months Ended
                        December 28,      December 29,     % Increase/      December 28,      December 29,      % Increase/
(In thousands)              2013              2012          (Decrease)          2013              2012           (Decrease)
. . .
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