Haemonetics Corp (HAE) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Haemonetics conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation.

Please note during the course of this call, Haemonetics may make statements that could be characterized as forward looking, and actual results may materially differ from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the Company's press release and 10-K. Mr. Brad Nutter, Haemonetics' President and CEO will moderate this call. Here is Mr. Netter.

Thank you, operator. Good morning, and thank you for joining our call. Today I'm joined by Ron Ryan, our CFO, Lisa Lopez, General Counsel and VP of IR, and Julie Fallon, Manager of Investor Relations.

Our comments today will expand on this morning's press release. We'll cover three things. First, our review of the market trends and developments we see in our global donor business. Included in this part of my discussion will be comments on the sale of Alpha Therapeutics. Second, Ron Ryan will review our Q2 and year-to-date operating results. And third, I'll talk about our accomplishments during the last 90 days and our priorities going forward.

This is a year of transition as we reposition our business. We began the year by setting guidance that we felt was realistic given our current products and marketplace. This guidance may have been different from what you might have expected, but again, we believe it was realistic. Within that context, I'm comfortable with our quarterly and year-to-date results. They continue to meet our internal plans. Now at the beginning of the year, we set our following goals -- high-single digit revenue growth, gross profit margin in the mid- to high 40's, modestly improving operating margin, and net EPS in the $1.13 range. That guidance is good. And we've performed to that guidance. When we set our guidance, we knew that Baxter had announced its intention to purchase Alpha's plasma collection business; and our planning took into consideration several possible outcomes to that transaction. Now that the facts and the timing of that acquisition are settled, we are evaluating which of our planning scenarios is best suited to the present circumstance. If our evaluation indicates a need to update our guidance, then we will do so promptly.

So let me begin by focusing on the donor division and the market trends we see developing. On our Q3 call, I will focus on the patient division and the developing market trends for that business.

So I will start with my perspective on the dynamics of the worldwide plasma market. There have been a number of questions from investments regarding this complex marketplace. And the entire market for plasma can basically be divided into three parts, each represented by a stage of plasma processing, that begins at the donor and ends at the patient. First is plasma collection. And as you know, this is the only part where Haemonetics competes. We manufacture equipment and disposables to help our customers collect plasma from paid donors. We share this market about equally with one global competitor. The second stage of the process is fractionation, or if you will, separating the plasma into its different proteins. And then this brings me to the third and final stage of the process, selling an end product which is a therapeutic drug. Some of the drugs derived from fractionated plasma are IVIG, albumen, and Factor VIII.

Today, the plasma market is affected by tremendous industry consolidation. This, as well as pricing for our plasma-derived drugs, has raised speculation as to the overall health of this industry. To be sure, dynamics concerning consolidation and pricing for finished product continue to play out in the market. Consolidation can affect us. Pricing for finished product, however, does not affect us. By the way, because this is such a rapidly changing and complex market, we will provide what we call a plasma market primer in the industry news section of our website. We hope this is helpful and informative.

I will talk about Alpha Therapeutics and its impact on Haemonetics in a moment. But here's some data to help you better understand Haemonetics' role in the marketplace. Over the last ten years, the worldwide market for systems to collect plasma has nearly doubled, from 125 million to 230 million, averaging over 6 percent annual growth. Today, there are approximately 18 million liters of plasma collected annually versus only 10 million liters collected ten years ago. The market for plasma has grown steadily. And the new plasma drive drugs like IVIG continue to drive the need for fractionated plasma. We see that trend continuing. Now at the present, there is an excess of collection capacity in the worldwide market. And the collection market, the part where Haemonetics competes, is not growing. This nears (ph) past swings in collection capacity and is not a new trend. However, industry reports indicate that IVIG inventories are reducing. So we expect the supply versus demand for source plasma to level out. So to summarize, the past ten years in the market have had swings. But the long-term trends continue to show 6 percent average annual growth.

Now, if we drill into the details of the last five years for Haemonetics, we grew a plasma disposable visit business from 85 million to 114 million, demonstrating an average annual growth rate of 8 percent. So while our quarterly performance has certainly fluctuated, our long-term performance has exceeded market growth rates. So folks, now let's turn and look to our current financial performance during a period when the market has not been growing.

During the first half of the year, our plasma disposable growth increased 3 percent from approximately 59 million to 60 million. We projected early in this fiscal year that we believe that plasma revenue would not grow in fiscal '04. However, through the first half of year, we have grown. Since we know the market is not growing, we are effectively taking share. This performance demonstrates that we have offset the loss of some business as a result of prior industry consolidations. For example, we have offset the loss of $9 million in business from Seratech, as it was purchased by a competitor in 2001. At the same time, we continue to grow over prior year.

A final comment regarding Alpha Therapeutics' sale of its collection centers. Folks, 2.5 years ago, when we negotiated exclusive purchase and supply contracts with Alpha, the Haemonetics team recognized the possibility of Alpha exiting some or all of the plasma market. Alpha was open about looking for new strategic options. Given the unknown of Alpha's future, we negotiated contracts with minimum purchase requirements and other terms that protected Haemonetics' interests. For the last four months, Haemonetics has had ongoing contacts with Alpha, Baxter and others regarding the pending sale of Alpha. That transaction is now complete. So we are in discussions with Baxter, who had assumed these contracts, as to how they will be honoring the contractual obligations. As our discussions are finalized, we will share this information with investors. Today it would be inappropriate or possibly misleading to speculate on the outcome.

So to summarize, these are the key lessons about the plasma market. First, it can be volatile on an annual basis. But, and this is the important point, over the long-term, it continues to grow at a very steady rate, as the market for end product continues to increase. Second, despite having lost some business due to industry consolidation trends in the past, we've made up that volume. In fact, we have prospered in non-growth markets. Third, industry consolidation has shown that collection capacity has recently been reduced by 15 percent. While there may be additional consolidation in the broad market in the future, however, our market intelligence tells us that this change will have the long-term effect of stabilizing the collection industry. Eventually this will prompt another cycle of increases in collection capacity in the future. This is consistent with the fluctuations we have witnessed for more than a decade. Most importantly, we are confident that this market continues to grow. Notwithstanding temporary contractions in one part of the plasma supply chain, we will win our share of that growth and maintain 50 percent market share as we've done over the past 15 years. Therefore, as this market continues to change, I'm very confident in our ability to change and strengthen our business. Our results this year exceed our expectations.

The second market I would like to talk about briefly is the blood bank market. We shared in Q1 that we plan no growth in this product line for the year. But this quarter, we've exceeded our expectations with 7 percent growth over Q2 '03. The blood bank market is a mature market, and includes platlet collection. There has been no growth in worldwide platelet collection procedures over the past few years, as increased collection efficiencies offset increased demand for platelets. Yet even in this market, we have shown growth.

So let's shift to the third and final part of the donor market, and that is, the emerging red cell market. In the United States, for example, only 3 percent of the market has been converted to automated technology for the collection of red blood cells. Our primary competition in this market is whole blood collections, in which a pint or unit of blood is mainly drawn from a donor. To remind you, Haemonetics created the markets for automated plasma and platelet collection; and today, we are creating a market for automated red cell collection. And that development is ongoing. Driving customer demand for red cell technology are blood shortages, higher collection costs, quality compliance, and a need for improved blood center manufacturing efficiencies. We have three tactics to grow this business. First, gain new customers. Second, grow business at existing customers. And third, convert collections to filtration. Ron Ryan will give you specifics on our success this quarter against these tactics. But let me summarize that we performed well this quarter. And I'm confident in our ability to continue to execute.

That being said, I recognize the need to focus on growing existing customers more quickly and to complete the conversion of customers to filter technology. I hope this brief review of trends in the donor markets has been helpful. In our next call, I will focus on trends in our patient markets.

Finally, before I turn the call over to Ron, let me share with you some comments on the Company's performance in general. It is important to point out that we were able to grow our business even as markets change, adopt technology, or face economic pressures. An additional thing that is a challenge to control is our mix and revenues. Our forecast considers trends as trends as sales estimates. So this year, we projected a certain mix of disposable revenues, with red cell and surgical being stronger than other product lines. As the year unfolds, we see some shifts in this mix for disposable revenues. Ron will comment on this specifically. But know that we are comfortable with our total disposable and service growth of 6 percent versus prior year.

Now I will turn this over to Ron to share financial and operational specifics. Ron.

Thanks, Brad and good morning, everyone. Let me begin by echoing Brad's comments that we are pleased with our results in the context of what we set out to do this year. In most cases, we met or beat our internal operating and financial plan for the quarter. As importantly, our performance tracks to the annual guidance we set at the beginning of this fiscal year. Today, I'm going to share our second quarter financial results and given an operational update.

Revenue was on plan at $87 million for the quarter, level with Q2 '03, and on plan year-to-date at $176 million, up 4 percent over last year's first half. To put this on a comparable basis, however, we need to review last year's second quarter, where we saw equipment revenues at $7 million, 4 million more than this quarter. It is important to remember that the ups and downs of our equipment sales were often opportunistic and not consistent. This is the razor part of our business. Like Gillette, we make a more consistent revenue and income stream from our razor blade business. That is significant to remember, because disposables and service sectors are the engines that drive our overall business. They represent almost 90 percent of our revenue, and are the best indicator of how our business is doing. This is the revenue number to focus on. So let me share with you these results.

Disposables and service revenue was $84 million for the quarter, up 6 percent over Q2 '03, and $168 million year-to-date, up 7 percent over last year's first half. Let me first address results in our donor division, which is made up of the blood bank, plasma and red cell product lines as well as services. In plasma, we beat plan this quarter, with revenues of $31 million, up 2 percent over Q2 '03. Year-to-date plasma revenues are $60 million, up 3 percent over FY '03. We had projected that we would experience sales comparable with last year given market trends. Just as Brad described, the plasma market continues to be somewhat volatile, and currently, the worldwide supply of plasma exceeds demand. So we attribute our year-to-date increase in plasma collections to taking share. In blood bank, we also beat plans for the quarter, with revenues of $27 million, up 7 percent over Q2 '03. Year-to-date, blood bank revenues are $53 million, up 8 percent over FY '03. While the majority of sales for this product line come from platelike collection disposables, we continue to add new products to the line. In fact, in the quarter. we announced the FDA clearance of a red cell washing protocol for our ACP 215 system.

And to red cells, we were right on track this quarter with revenues of $5 million, up 47 percent over Q2 '03. Year-to-date red cell revenues are $10 million, up 38 percent over FY '03. In the U.S., we grew red cell collections 71 percent from the same period last year. We continue to forecast red cell sales growth of 40 to 50 percent for the year.

Brad identified three growth tactics in the red cell business. First, adding new customers. Second. growing collections at existing customers. And third, converting customers to filtration. This quarter, we beat our plan for adding new customers by adding three. Two regions of the American Red Cross, Southeast Michigan and Badger-Hawkeye, Wisconsin, and the University of Chicago Hospital blood bank. We're also successful at growing existing customers. For example, the Carolinas region of the Red Cross increased automated collections by 27 percent from August to September. The same region, which incidentally is the largess Red Cross region in the U.S., was almost 400,000 annual blood collections, expanded use of our red cell technology during the quarter by adding it to mobile drives in three of five mobile service centers.

Our experience with United Blood Services, the nation's second-largest blood collector, is another example of growing existing customers. By the end of this quarter, approximately 26 percent of red cell products collected at UBS were using Haemonetics systems, compared to 15 percent at the same time one year ago. In total, UBS performs about 8,000 red cell procedures monthly with Haemonetics' technology. As you know, we reported in the past on the success of UBS's Las Vegas site, which converted one center to all automation two years ago. Today, four UBS sites have been converted to total automation.

Converting to filtration, or white red blood cell reduction, is the third tactic to achieve red cell growth. Customers have continued to embrace filtration, and conversion to filter disposables kits advanced from 24 percent of red blood cells kits sold in the U.S. during Q1 of this year to 31 percent of kits sold in Q2. Filtration disposables benefit blood collectors by supporting good manufacturing practices, reducing manual processing steps, and increasing profitability, because two units of blood are white cell reduced with just one blood filter.

Now I'm going to talk about the services business, which is becoming a more important part of our product mix. We have grouped services under Donor Division for purposes of this call, because most of that business supports donor division customers. Services revenue for the quarter was $5 million, up 8 percent over Q2 '03. Year-to-date revenues are $10 million, up 20 percent over FY '03. Our Fifth Dimension business is an important contributor to service revenue growth. Fifth Dimension continues to win important customers. As announced last week, Fifth Dimension's LOGIC Software was chosen by Aventis Bio-Services to manage its plasma transport operations. Aventis processes approximately 3 million liters of plasma annually. Fifth Dimension's LOGIC System is also the software now used by the American Red Cross to manage the logistics of its plasma operations.

So let me wrap up my Donor Division comments by confirming that we're ahead of our expectations in the plasma and blood bank product lines, and meeting U.S. expectations in the red cell product line. These products represent 75 percent of our total business.

Now, let me turn to our Patient Division, which encompasses the surgical product line. Revenues were $17 million, up 2 percent over Q2 '03. Fiscal year-to-date revenue is $35 million, up 4 percent over FY '03. This is lower than we had projected. Last quarter, we reported that we added new Cell Saver customers. This quarter, we again added new customers. However, market data has indicated that the total number of open heart surgeries in which the Cell Saver is used is declining. This is why we are gaining customers, but not realizing increased revenues. In summary, due to a reduction in the number of open heart surgeries, we now forecast fiscal year growth in the high-single digits, down modestly from our previous forecast of double-digits.

We are encouraged by OrthoPAT growth at the customer level, as reported this morning by Zimmer of over 50 percent. To remind everyone, the OrthoPAT is used in orthopedic surgeries, mostly hips and knee transplants. So a decline in open heart procedures will not affect growth of this product.

Now that we've talked about the donor and patient division, I want to shift focus and share some highlights from our P&L and balance sheet. Three factors affected the P&L this quarter. As you recall, in the second quarter, we reorganized into new donor and patient divisions, eliminating 4 percent of our worldwide workforce and incurring $2.6 million in severance costs. This severance expense and a tax rate that increased to 36 percent from 31 percent impacted several areas of the P&L. Keep these items in mind as I recap our P&L as reported. Gross profit was $41 million in Q2 '04, up 6 percent over Q2 '03, and $81 million year-to-date, up 4 percent over FY '03. Gross margin was 47 percent in Q2 '04, up 260 basis points over Q2 '03, and was 46 percent fiscal year-to-date, up 20 basis points over FY '03. Operating expenses were $32 million in Q2 '04, up 12 percent over Q2 '03, and were $64 million year-to-date, up 10 percent over FY '03. Operating income was $9 million in Q2 '04, down $1 million from Q2 '03, and was $17 million year-to-date, down 12 percent from FY '03. Operating margin was 10 percent in Q2 '04, down from 11 percent in Q2 '03, and was 10 percent year-to-date, down from 12 percent in FY '03. Earnings per share were 23 cents in Q2 '04 compared to 27 cents in Q2 '03, and were 43 cents year-to-date compared to 53 cents in fiscal '03.

Again, included in the above are the $2.6 million or approximately 7 cents a share in reorganization costs. Without the reorganization costs, our gross profit in the quarter would've grown modestly. Operating expenses would've been incomparable, and earnings per share in the second quarter would've been 29 cents per share compared to 27 cents in Q2 '03. So as you can see by these results, we are running our business efficiently.

Now I will move to another area of operational improvement. For the past several years, we've been reporting steadily meaningful contributions from our program for customer-oriented redesign for excellence, or CORE. I'm happy to report that we saw improvement again this quarter, generating $1.4 million of operating cost reduction. Our goal this year is 3 to $4 million of additional savings, which is comparable to last year. I'm extremely pleased to report the ongoing strength in our balance sheet. We reduced inventory by $5 million, and ran capital expenditures at less than the cost of depreciation. We now have a cash reserve of $67 million, and net debt of $3 million, down from $20 million in the first quarter. Accounts receivable days sales outstanding were 82 days, comparable to Q1 '04'.

We had two particularly noteworthy items. We produced $21 million of operating cash flow and achieved disposables finished goods inventory turns of 5.7. So there is some additional insight into our financial and operating results. Please note that we have again posted on our website a detailed breakout of the effects of currency on our P&L.

Now I will turn the discussion back to Brad for summary comments.

Thanks, Ron. At this point I will comment very briefly on our quarterly accomplishments and our priorities for Q3. As indicated during our last call, our Q2 priority was the reorganization of our business. I previewed that at the end of the quarter, we would identify a new structure, its financial impact, and the leadership to grow our business. We accomplished all these things within thirty days of the Q1 conference call. The reorganization was difficult. However, it went well, and the positive financial impact for fiscal year '05 will be $4 million. We reduced layers of management to become a leaner, flatter organization. We recruited executives to run our new divisions, and we moved 34 high potential employees into new stretch assignments. A Q2 objective was to complete our new leadership team. Remember in Q1, both Ron Matricaria and I assumed our new assignments. In 2Q, we added Brian Concannon and Pete Allen as Presidents of the patient and donor divisions, respectively. And finally in Q2, we announced that Larry Best, Boston Scientific's very successful CFO, has joined the Haemonetics board. I'm excited about the new leadership team that is chartering the course of Haemonetics' feature.

So we made good progress on our Q2 priorities. Now let's move to our Q3 objectives. One of the most import Q3 priorities is a core competency review. The goal in this review is to determine what competencies Haemonetics can leverage to support future growth. With the reorganization behind us, Bob Ebbeling, our Vice President of Operations and his team are escalating their efforts on the core competency review. This is a Q3 priority, and I will report on our progress during our next call. A key priority for Brian Concannon and Pete Allen is to review products in our R&D pipeline. Since 1996, we have introduced few major new device platforms, and this is not acceptable. This is one of the reasons why we are challenged for growth. Therefore, I've asked Brian and Pete to review all R&D projects, and focus on implementing a game plan to bring a few key products to market as rapidly as possible versus working on a number of different projects with the hope that we might get them to market all within a few years. As we finalize the game plans, we will communicate our findings and tactics as we move forward.

Additionally, Brian and Pete have begun rationalizing our product line, with emphasis on return on investment. As we develop our FY '05 plan, we will use strict ROI discipline to evaluate spending proposals. This is a timely exercise.

Folks, that is a brief recap of our accomplishments and our priorities. So let me sum up. First, clearly, our marketplace is changing and challenging. However, we continue to outpace the growth of our markets in key areas, and have delivered overall growth of disposable sales exceeding the growth of the plasma and blood bank markets -- as emerging markets red cells and OrthPAT have continued to grow, at our guidance of 50 percent, I'm concerned about our traditional Cell Saver business, and have charged the group with determining the underlining growth inhibitors, and we are studying a plan to strengthen our sales. I will report back to you on this in Q3.

Our reorganization is complete, well done, and new leadership has been added to the Corporation. Priorities have been well set. The financial impact on this reorganizational will pay off as we move forward. Finally, this organization understands the need to change, have been willing to change, and continues to focus on delivering on our committed guidance. At the same time, we are preparing ways to leverage our business so we can develop new growth opportunities in the future.

Thank you. And operator, we will now take your questions.

(OPERATOR INSTRUCTIONS). Your first question is coming from James Sidoti of Sidoti & Co. Please state your question.

Good morning, Brad. On the red cell business, do you have any figures for what the percentage of red cell collected by the Red Cross is, using the automated equipment?

I want to jump in there, Brad. This is Lisa. We know that the Red Cross is now collecting or using our automated technology at about a third of their regions, that is 11 regions, of their total of 35; that represents a little bit more than one-third of their total collections. They increased that percentage by two during this past quarter. Although they've said that they have a penetration target to use automated technology, red cell technology, to collect five percent of their collections within the first year of implementation. We do, however, have some figures that some of their regions that have been going on for much longer have significantly increased beyond five percent. I think it's the St. Paul region, is up to about 18 percent of collections by this point in time.

Do you expect that they could eventually approach the 26 percent where UBS is?

You know, that's really entirely up to the Red Cross. We are ready, able, willing and have training plans that meet their needs, and we expect that the Red Cross collections will continue to grow.

Lisa, I might just jump in and say that we are pleased to see that we have had great penetration with some customers. And I think the key opportunity for us is focusing our energies to implement penetration with customers to meet what their time frames are. But it's nice to know that we're seeing some customers with full automation of red cells.

Right. And the other quick question I had was the OrthoPAT sales. I listened to the call this morning with Zimmer. And like you said, they report their sales going up 50 percent. Have we seen that in your numbers for this quarter?

Yes.

Thank you. Steve Hamill of U.S. Bancorp Piper Jaffray. Please state your question.

Great. Thank you, and good morning, Brad, and you to everybody else. A couple of questions on the plasma business. In terms of the planning that you talked about this year when you went through your guidance determinations, you said that you've contemplated a variety of scenarios with regard to what might happen to Alpha. Is it safe to assume that this announcement by Baxter would represent kind of the worst-case scenario that you considered when you gave us that guidance?

I would think so. That is correct, Steve.

At this point, can you quantify that you have kind of given us a sense already in the past what the revenue exposure is. But can you quantify what the potential profit exposure would be related to sales to Alpha?

Not really. At this point, I've asked Ron Ryan and Lisa to coordinate our discussions with the Baxter folks. And those are ongoing. So it would be kind of premature for us at this point to speculate as to where those discussions will go. But they are ongoing. So as we have that information, we can certainly make it available to all of you guys.

Thank you. Your next question is coming from Kerry Nelson of Blum Capital Partners. Please state your question.

Good morning, Brad and everyone. Could you help us understand some of the currency outlooks? So if you took today's rates, (multiple speakers) given what you've already hedged, can you just comment on the impact for next year?

Sure. Ron, do you have some detail there for us?

Sure. First of all, I would say that the rates locked in for this year, FY '04, about 5 percent stronger than last year, and these are the exchange rates that we expect to impact the second half of year. The rates locked in during Q1 and Q2 of this year, for next year, are about 10 percent stronger than this year's rates. So we'll start to see those occurring in FY '05. We have not completed our planning yet for FY '05, and we will be issuing comprehensive guidance including foreign exchange in the Q4 call.

Thank you. Your next question is from Ellen Sharer (ph), a private investor. Please state your question.

Good morning. You had mentioned that you've reduced layers of management. However, it still appears that you are a very top-heavy organizations, with about 40 Vice Presidents plus. Can you explain a little but why you're continuing to grow your upper management yet decreasing your workforce?

When we went to our reorganization, the purpose of that was basically to change our customer to -- our culture, rather, -- to make sure that we're right-sized, right-managed and right structure, so we could grow going forward. We built ourselves into two businesses, a patient business, and a donor business. If you look at all of our product lines, they either touch a patient or touch a donor. So we thought that those two structures were the right kind of structures going forward. We recruited two people that I've known over the last twenty years who have tremendous background to run both of those businesses. As we went through the restructuring, we have given each of those individuals, Brian Concannon and Pete Allen, the flexibility to relook at their structure within those two businesses. As we look at our structure today, we are comfortable with it. I know Brian and Pete are very comfortable as they've visited with their teams. They are pleased with the talent within the organization. But as we go forward, we'll always look at our structure and our ability to better serve our customer as we go forward in the future. So that's the genesis of why we structured and why we went into two businesses. So the right kind of number of employees and how we structure our business in the future is always something that we will always have the discipline to review.

Ellen Sharer Okay. Thank you.

Thank, you. Your next question is coming from Stan Manney of Brawny Investment. Please state your question.

Good morning, gentlemen. I have two areas to discuss. One is, the move you've made to downsize seems to be a small step. Your SG&A still seems as someone else pointed out, on the high side. And the overall cost structure of the business seems to be on the high side. I've written letters and asked why we don't consider moving our plants to lower-cost locations for cost and taxes, and not gotten an answer. When I compare this organization to your competitor, I still find that the SG&A is on the high side and the gross margin is on the low side. So with all the words we've gotten, it seems we are getting words. And I'd like to know when the next step. The second part is, I think we ought to consider giving our stockholders some of the cash we've accumulated so it's used more properly. Can you speak to both these areas?

Sure I can, Stan. Thanks. Let me first talk about our manufacturing. This business has a structure that we've been comfortable with in the past. However, I've asked Bob Ebbeling and his staff to look at all alternatives in terms of reducing structural costs. And we've done a pretty good job of reducing structural costs over the last five years exceeding $25 million. In terms of plant locations, that is something that we are continuing to look at, and will continue to look at in the future. Ron Ryan might have some comments on operating expenses. Ron.

I'd like to just comment on operating expense because it was the major factor in our profit margin comparisons for the quarter. In fact, our operating expenses were up 12 percent or over $3 million compared to last year's quarter. This increase in operating expense, and particularly SG&A, as you mentioned, was impacted by three factors. First of all, we had the $2.6 million severance costs incurred in the quarter. Second, other expenses were held to actually a couple of hundred thousand dollars below last year, rather, in local currency. And third, we had about $1 million of operating expense increase in foreign exchange. I'd also say that aside from the severance charge, operating expense was $2 million below our internal plan.

I'd also reiterate that we are working hard to reduce our rate of spending in order to get more leverage out of the business. And certainly, we're not at all satisfied with our operating margins at this point. And expect a combination of continued expense discipline, continued reduction in cost of goods as a result of our core program, which I mentioned we're targeting 3 to $4 million in cuts in cost of goods, and then finally, operating leverage to benefit our operating margins.

You also asked about the possibility of a dividend going forward. We continue to believe that the strength of our balance sheet can be better utilized to grow the business going forward. And our senior management, and in particular, our Board, is certainly reviewing on a going forward, continuing basis options to use that cash.

Thank you. (OPERATOR INSTRUCTIONS). Your next question is from Joe Schwartz of Wellington Management. Please state your question.

Good morning. I'd like some more color on cash flow. You mentioned in the press release that cash flow from operations was $20 million. What was the number in the prior quarter and then also in the prior year?

Last quarter, the cash flow was about $3 million. Let me just quickly give you a rundown on the cash flow. In addition to net income, we talked about our depreciation and CapEx having a favorable performance; so depreciation was 8 million; CapEx was only 4.5 million. We took $5 million out of inventory and a total of $11 million our of working capital. And that brought us to the $21 million. This is substantially higher than last year, where in last year, we had operating cash flow of 24 to $25 million.

So, can you tell me what the metrics have been for DSOs and DIOH (ph) for the prior quarter and the prior year? Do you have those data?

I do have that data. I mentioned that our DSO for the company in Q2 was 82 days. A year ago, the DSO was 81 days. At year end, it was 83 days. And then June last quarter was 81 days. So our corporate DSO has been tightly bunched in that 81, 82 day territory.

Thank you. Your next question is a follow-up from Steve Hamill of U.S. Bancorp Piper Jaffray. Please state your question.

Yes, in terms of the restructuring benefit and how that has flowed through in the quarter, did we see the bulk of that benefit already in the second quarter? Or should we see a larger benefit in Q3?

This is Brad. We saw the big amount -- the 2.6 million that Ron talked about -- as a cost in Q2. We don't expect to see any in Q3, because there was a onetime, one quarter hit. So does that clarify it?

Actually, I was thinking more in terms of the cost savings. Did you recognize most of the cost savings already in Q2, offsetting part of that severance expense? Or will we not get the full benefit of cost savings until Q3?

Yes. The full benefit will start in Q3 because Q2 wasn't (ph) covered by the severance expense. So there was more severance expense than savings. But we are expecting that the impact of the reorganization to be basically neutral to the year because of the severance expense. And then on a run rate basis, we've delivered $4 million of expense reduction to the P&L.

Okay. And then in terms out your comments about plasma market collection capacity, I think you had said, Brad, that it was down 15 percent? I'm wondering, is that basically the Baxter announcement back in July that they are closing down 26 of their centers, plus the Alpha announcement? Or are there other plasma collection centers that have either reduced collections or have been closed down that are in your calculation?

That is exactly right, Steve.

Your description, that is, the 26 Baxter centers plus the 38 Alpha centers closing -- given the total number of U.S. centers, it represent about 15 percent of collection capacity.

You know, one additional thing, if you look at the number of centers between Haemonetics and Baxter pre-Alpha, they were pretty close. And now post-Baxter, Alpha acquisition, we have about 171 centers in the United States and they will have about 180 centers in the United States. So we have about the same number of centers after their acquisition of Alpha, Steve.

Thank you. Your next question is a follow-up from James Sidoti of Sidoti & Co. Please state your question.

Brad, if I look at the revenue breakdown, it looks like you had growth in disposables relatively flat in service. but equipment was down 4 million. Can you just remind us what happened four quarters ago on the equipment side?

Sure.

This is Ron. Jim, last year, we had solid equipment sales in the U.S., and particularly overseas, as our Japanese customer was acquiring equipment -- that $7 million that we did in last year's quarter was particularly high for us.

Was that the ACP 215 machines?

There were a variety of factors. That would have been the U.S. factor.

There were some sales to the military, Jim, and the aftermath of September 11th -- that blood freezing technology.

So going forward, would you expect equipment sales to be in line with last year's numbers?

We're not breaking down equipment sales other than to say Q2 last year was particularly high for us. And the 3 million that we experienced this quarter is a lot closer to our current run rate.

Okay.

There are no further questions at this time. I would like to turn the floor back to the speakers for any further or closing comments.

Thank you, Jackie. Clearly, our marketplaces are changing and challenging. And we continue to outpace the growth of our markets in key areas and have delivered overall growth of disposables sales exceeding the growth of the plasma and blood bank markets. For those of you who would like to listen to the call again, replay information will be available on the news section of our website. We thank all of you for your time, and we will look forward to sharing our results with you during the end of Q3. Thanks, so much.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day.