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HAE > SEC Filings for HAE > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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Form 10-Q for HAEMONETICS CORP


31-Jul-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 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 22, 2014. 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 initiatives ("VCC"). 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 three years and includes changes to the current manufacturing footprint and supply chain structure (the "Network Plan"). To implement the Network Plan, we are (i) discontinuing manufacturing activities at our Braintree, Massachusetts, Ascoli-Piceno, Italy and Bothwell, Scotland facilities, (ii) creating a technology center of excellence for product development, (iii) expanding our current facility in Tijuana, Mexico, (iv) engaging Sanmina Corporation as a contract manufacturer to produce certain medical equipment, and (v) building a new manufacturing facility in Malaysia closer to our customers in Asia. See liquidity and capital resources discussion of this MD&A for further discussion of the costs of these activities.

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 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.


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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 87.4% and 87.0% of our total revenues for the three months ended June 28, 2014 and June 29, 2013, respectively.

Financial Summary
                                                    Three Months Ended
                                          June 28,       June 29,      % Increase/
(In thousands, except per share data)       2014           2013        (Decrease)
Net revenues                            $ 224,488      $ 219,543           2.3  %
Gross profit                            $ 106,278      $ 111,412          (4.6 )%
% of net revenues                            47.3  %        50.7  %
Operating expenses                      $ 107,944      $ 118,020          (8.5 )%
Operating loss                          $  (1,666 )    $  (6,608 )       (74.8 )%
% of net revenues                            (0.7 )%        (3.0 )%
Interest and other expense, net         $  (2,543 )    $  (2,641 )        (3.7 )%
Loss before benefit from income taxes   $  (4,209 )    $  (9,249 )       (54.5 )%
Income tax benefit                      $    (560 )    $  (1,375 )       (59.3 )%
% of pre-tax income                          13.3  %        14.9  %
Net loss                                $  (3,649 )    $  (7,874 )       (53.7 )%
% of net revenues                            (1.6 )%        (3.6 )%
Earnings per share-diluted              $   (0.07 )    $   (0.15 )       (53.3 )%

Net revenues increased 2.3% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effects of foreign exchange, net revenues increased 2.3% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Revenue increased due to plasma, TEG and emerging markets growth. These increases were largely offset by declines in the whole blood product line for the three months ended June 28, 2014.

Operating loss declined 74.8% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effects of foreign exchange, operating loss declined 103.6% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Operating loss decreased for the three months ended June 28, 2014 due primarily to the reduction of restructuring and transformation expenses that totaled $23.0 million in the current period, compared to $33.5 million in the prior period. This improvement was partially offset by lower gross profits.

Net loss declined 53.7% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effects of foreign exchange, net loss decreased 74.0% for the three months ended June 28, 2014, respectively, as compared to the same period of fiscal 2014. The change in net loss is attributable to the reduction in the operating loss described above.

RESULTS OF OPERATIONS

International Operations and the Impact of Foreign Exchange
                           Three Months Ended
                  June 28,     June 29,     % Increase/
(In thousands)      2014         2013       (Decrease)
United States    $ 120,749    $ 122,145        (1.1 )%
International      103,739       97,398         6.5  %
Net revenues     $ 224,488    $ 219,543         2.3  %

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 46.2% of total net revenues for the three months ended June 28, 2014. International sales are generally conducted in local currencies, primarily the Japanese Yen, the Euro and the 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.


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We have placed foreign currency hedges to minimize the risk of currency fluctuations. Relative weakness in the Japanese Yen to the US Dollar has negatively impacted revenue and operating income. We expect this trend to continue in fiscal 2015.

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
                      June 28,     June 29,     % Increase/
(In thousands)          2014         2013       (Decrease)
Disposables          $ 196,193    $ 191,048         2.7  %
Software solutions      17,738       16,746         5.9  %
Equipment & other       10,557       11,749       (10.1 )%
Net revenues         $ 224,488    $ 219,543         2.3  %

Disposable Revenues by Product Type

                                      Three Months Ended
                             June 28,     June 29,     % Increase/
(In thousands)                 2014         2013       (Decrease)
Plasma disposables          $  79,227    $  65,336        21.3  %
Blood center disposables
Platelet                       38,170       34,446        10.8  %
Red cell                       10,246       10,009         2.4  %
Whole blood                    37,950       51,254       (26.0 )%
                               86,366       95,709        (9.8 )%
Hospital disposables
Surgical                       15,621       16,089        (2.9 )%
OrthoPAT                        5,381        6,320       (14.9 )%
Diagnostics                     9,598        7,594        26.4  %
                               30,600       30,003         2.0  %
Total disposables revenue   $ 196,193    $ 191,048         2.7  %

Disposables Revenue

Disposables revenue increased 2.7% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, disposables revenue increased 2.8% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. The increase was driven primarily by growth in plasma, TEG and emerging markets disposable revenues, offset by significantly reduced whole blood disposable revenue.

Plasma

Plasma disposables revenue increased 21.3% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, plasma revenue increased 21.1% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Plasma revenue increased due to higher volumes in the United States associated with end market growth for plasma-derived biopharmaceuticals as well as the result of a transition to a direct sales model in Australia and New Zealand during the second quarter of fiscal 2014, which negatively impacted plasma revenue in the first quarter of fiscal 2014.

Blood Center

Blood center consists of disposables used to collect platelets, red cells and whole blood.


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Platelet
We continue to see significant differences in demand for our platelet products in various markets depending on access to health care and adoption of certain efficient collection techniques. In emerging markets, increased access to health care continues to increase the demand for platelet transfusions, while increases in the demand for platelet transfusions in developed markets is modest. Improved collection efficiencies which increase the yield of platelets per collection and more efficient use of collected platelets reduce the number of collections required to meet market demand. Where we see adoption of these techniques we experience reduced demand for our products. Not all markets have adopted these collection efficiencies at the same level.

Platelet disposables revenue increased 10.8% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, platelet disposable revenue increased 13.0% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014, due primarily to increased revenues in emerging markets due to strong demand and lower prior period sales as distributors adjusted inventory levels during the first quarter of fiscal 2014.

Red Cell and Whole Blood
Sales to U.S. blood centers represent over 70% of our total red cell and whole blood disposable revenue. The demand for these disposable products in the U.S. declined in fiscal 2014 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 collections will be approximately 10% in fiscal 2015, and accordingly will continue to negatively impact red cell and whole blood revenue. Additionally, in response to this trend, certain large U.S. blood center collector groups pursued single source vendors for whole blood collection products which required significant reductions in average selling prices in order to retain or increase our share of their business. We expect these U.S. blood collector groups to pursue similar arrangements that will likely affect our red cell revenues in the future.

As a result of the above, during fiscal 2014 we entered into a multi-year agreement to supply the HemeXcel Purchasing Alliance, LLC with certain whole blood collection components on an exclusive basis during the calendar years 2014-2016. The agreement includes a reduction in average selling prices which will continue to negatively impact our financial results in fiscal 2015. During March 2014, the American Red Cross selected another supplier to provide certain whole blood products. We anticipate this will reduce annualized revenues approximately $25.0 million with the principal effect beginning in the second quarter of fiscal 2015.

Red cell disposables revenue increased 2.4% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, red cell disposables revenue increased 2.0% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014 due to increased revenues in North America associated with favorable order timing.

Whole blood revenue decreased 26.0% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, whole blood revenue decreased 26.5% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Revenue for the three months ended June 28, 2014 decreased primarily due to lower revenue in the U.S. associated with a decline in demand, lower market share including the loss of the European tender and pricing reductions. Order timing in distribution markets outside the U.S. also contributed to the decline in whole blood revenue.

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 2.9% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, surgical disposables revenue decreased 2.4% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Surgical disposables grew in emerging markets but declined in mature markets due to a combination of market conditions and competitive pressures.

Revenues from our OrthoPAT disposables decreased 14.9% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased 15.0% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014, 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.


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Diagnostics product revenue consists principally of the consumable reagents used with the TEG analyzer. Revenues from our diagnostics products increased 26.4% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, diagnostics product revenues increased 23.1% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. The revenue increase is due to continued adoption of our TEG analyzer, principally in the US and China.

Software Solutions Revenue

Our software solutions revenues include sales of our information technology software platforms and consulting services. Software revenues increased 5.9% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, software revenues increased 4.4% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Software revenue increased due to strong BloodTrack sales in the US and Europe during the three months ended June 28, 2014.

Equipment & Other Revenue

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 10.1% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, equipment and other revenues decreased 9.2% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. The decline in revenue for the three months ended June 28, 2014 is due primarily to the impact of order timing in global markets. This decline was partially offset by growing service revenues in Australia and New Zealand due to the transition to a direct sales model.

Gross Profit
                               Three Months Ended
                     June 28,      June 29,      % Increase/
(In thousands)         2014          2013        (Decrease)
Gross profit        $ 106,278     $ 111,412         (4.6 )%
% of net revenues        47.3 %        50.7 %

Gross profit decreased 4.6% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. Without the effect of foreign exchange, gross profit decreased 3.0% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. The gross profit margin decreased by 340 basis points for the three months ended June 28, 2014, as compared to the same three month period of fiscal 2014. The decrease in gross profit margin during the three months ended June 28, 2014 was primarily due to volume and price reductions associated with changes in the whole blood market described above. These decreases were partially offset by cost savings from our VCC initiatives implemented during fiscal 2014.

Operating Expenses
                                                 Three Months Ended
                                       June 28,      June 29,      % Increase/
(In thousands)                           2014          2013        (Decrease)
Research and development              $  15,382     $  11,209         37.2  %
% of net revenues                           6.9 %         5.1 %
Selling, general and administrative   $  92,562     $ 106,811        (13.3 )%
% of net revenues                          41.2 %        48.7 %
Total operating expenses              $ 107,944     $ 118,020         (8.5 )%
% of net revenues                          48.1 %        53.8 %


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Research and Development

Research and development expenses increased 37.2% for the three months ended June 28, 2014, as compared to the same period of fiscal 2014. The increase is primarily associated with planned increases in new product development investments.

Selling, General and Administrative

During the three months ended June 28, 2014, selling, general and administrative expenses decreased 13.3%, as compared to the same period of fiscal 2014. The decrease for the three months ended June 28, 2014 was due primarily to lower restructuring and transformation costs primarily due to the timing of manufacturing network optimization activities as well as the completion of the whole blood integration activities during fiscal 2014. Restructuring and transformation costs recorded in selling, general and administrative were $16.8 million during the three months ended June 28, 2014 and $30.3 million in the prior period.

Interest and Other Expense, Net

Interest and other expense, net, remained flat for the three months ended June
28, 2014, as compared to the same period of fiscal 2014. Interest expense from
our term loan borrowings constitutes the majority of expense reported in both
periods. The effective interest rate on total debt outstanding for the three
months ended June 28, 2014 and the three months ended June 29, 2013 was
approximately 2.0%.

Income Taxes
                             Three Months Ended
                            June 28,     June 29,
                              2014         2013
Reported income tax rate      13.3 %        14.9 %

We conduct business globally, and as a result, report our results of operations in a number of foreign jurisdictions in addition to the United States. Our reported tax rate is lower than the federal statutory rate in all periods as the income tax rates in the foreign jurisdictions are generally lower.

The reported tax rate for the three months ended June 28, 2014 as well as the comparable period in the prior year was approximately 15%. Our reported tax rates are lower than the federal statutory tax rate in both periods due to lower foreign tax rates. In addition, during the current period we recorded a pre-tax loss in Scotland associated with restructuring costs, and we did not record a corresponding tax benefit due to uncertainty around our ability to realize a tax benefit in Scotland. Similarly in the prior period, we recorded pre-tax losses in Italy associated with restructuring costs, and we did not record a corresponding tax benefit due to uncertainty around our ability to realize a tax benefit in Italy.

Liquidity and Capital Resources

The following table contains certain key performance indicators we believe
depict our liquidity and cash flow position:
                                                 June 28,      March 29,
(Dollars in thousands)                             2014           2014
Cash & cash equivalents                        $  139,943     $  192,469
Working capital                                $  403,437     $  406,048
Current ratio                                         3.4            2.9
Net debt (1)                                   $ (290,998 )   $ (245,218 )
Days sales outstanding (DSO)                           63             62
Disposable finished goods inventory turnover          4.0            4.2

(1) Net debt position is the sum of cash and cash equivalents less total debt.

Our capital resources consist of cash and cash equivalents, our ability to generate cash flow from operations and available borrowings under our credit facility and lines of credit. As discussed in Management's Discussion and Analysis, during fiscal 2014 our business was negatively impacted by changes in blood management practices and actions taken by U.S. blood center customers in response to related reductions in demand for blood products. We expect these trends and the loss of revenues from


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the American Red Cross whole blood contract to continue to negatively impact revenue and cash flow from operations in fiscal 2015.

During fiscal 2014 we commenced the VCC initiatives that includes a significant transformation of our manufacturing network designed to reduce product costs and increase the efficiency of our supply chain. The program requires cash expenditures for plant exit and closure costs including separation benefits, new plant construction and temporary increases in inventory levels as manufacturing is transitioned to new facilities. We paid $72.9 million in cash related to restructuring, transformation costs and capital expenditures associated with the VCC initiatives during fiscal 2014. We estimate we will pay $100.0 million in cash in fiscal 2015 related to our VCC initiatives.

During the three months ended June 28, 2014, we announced a share repurchase plan of up to $100 million worth of shares in the open market. The repurchase program adheres to all debt covenants and is subject to market conditions. As of June 28, 2014, we had repurchased approximately 834,000 shares at a total cost of $26.5 million under this plan.

Debt

In connection with the acquisition of the whole blood business, we entered into a credit agreement ("Credit Agreement") with certain lenders (together, "Lenders") which provided for a $475.0 million Term Loan and a $50.0 million revolving loan (the "Revolving Credit Facility"), and together with the Term Loan, (the "Credit Facilities"). The Credit Facilities have a term of five years and mature on August 1, 2017. Interest is based on the Adjusted LIBOR plus a range of 1.125% to 1.500% depending on achievement of leverage ratios and customary credit terms which include financial and negative covenants. As of June 28, 2014, all $50.0 million of the Revolving Credit Facility was available and we were in compliance with the financial covenants including Consolidated Total Leverage Ratio and Consolidated Interest Coverage Ratio.

On June 30, 2014, we modified our existing Credit Facilities by extending the maturity date by approximately two years, extending the principal repayments of the Term Loan, and modifying certain restrictive covenants to allow greater . . .

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