UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended: September 28, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 001-14041
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
02184-9114 | ||
(Address of principal executive offices) | (Zip Code) | |
(781 ) 848-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Exchange on Which Registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||
Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No x
The number of shares of $0.01 par value common stock outstanding as of October 30, 2019: 50,682,643
HAEMONETICS CORPORATION
INDEX
PAGE | |
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ITEM 1. FINANCIAL STATEMENTS
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited in thousands, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Net revenues | $ | $ | $ | $ | |||||||||||
Cost of goods sold | |||||||||||||||
Gross profit | |||||||||||||||
Operating expenses: | |||||||||||||||
Research and development | |||||||||||||||
Selling, general and administrative | |||||||||||||||
Impairment of assets | |||||||||||||||
Total operating expenses | |||||||||||||||
Operating income | |||||||||||||||
Interest and other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Income before provision (benefit) for income taxes | |||||||||||||||
Provision (benefit) for income taxes | ( | ) | |||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Net income per share - basic | $ | $ | $ | $ | |||||||||||
Net income per share - diluted | $ | $ | $ | $ | |||||||||||
Weighted average shares outstanding | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
September 28, 2019 | March 30, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, less allowance of $4,108 at September 28, 2019 and $3,937 at March 30, 2019 | |||||||
Inventories, net | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property, plant and equipment, net | |||||||
Intangible assets, less accumulated amortization of $279,154 at September 28, 2019 and $263,479 at March 30, 2019 | |||||||
Goodwill | |||||||
Deferred tax asset | |||||||
Other long-term assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Notes payable and current maturities of long-term debt | $ | $ | |||||
Accounts payable | |||||||
Accrued payroll and related costs | |||||||
Other liabilities | |||||||
Total current liabilities | |||||||
Long-term debt, net of current maturities | |||||||
Deferred tax liability | |||||||
Other long-term liabilities | |||||||
Total stockholders’ equity | |||||||
Common stock, $0.01 par value; Authorized — 150,000,000 shares; Issued and outstanding — 50,607,751 shares at September 28, 2019 and 51,019,918 shares at March 30, 2019 | |||||||
Additional paid-in capital | |||||||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Par Value | |||||||||||||||||||||
Balance, March 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Employee stock purchase plan | — | — | ||||||||||||||||||||
Exercise of stock options | — | — | ||||||||||||||||||||
Shares repurchased | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||
Issuance of restricted stock, net of cancellations | ( | ) | — | — | ||||||||||||||||||
Share-based compensation expense | — | — | — | — | ||||||||||||||||||
Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Balance, June 29, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Exercise of stock options | — | — | ||||||||||||||||||||
Shares repurchased | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||
Issuance of restricted stock, net of cancellations | (1 | ) | — | — | ||||||||||||||||||
Share-based compensation expense | — | — | — | — | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Balance, September 29, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Par Value | |||||||||||||||||||||
Balance, March 31, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Employee stock purchase plan | — | — | ||||||||||||||||||||
Exercise of stock options | — | — | ||||||||||||||||||||
Shares repurchased | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||
Issuance of restricted stock, net of cancellations | — | — | — | — | ||||||||||||||||||
Share-based compensation expense | — | — | — | — | ||||||||||||||||||
Cumulative effect of change in accounting principles | — | — | — | — | ||||||||||||||||||
Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Balance, June 30, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Exercise of stock options | — | — | ||||||||||||||||||||
Shares repurchased | ( | ) | ( | ) | ( | ) | — | |||||||||||||||
Issuance of restricted stock, net of cancellations | — | — | — | |||||||||||||||||||
Share-based compensation expense | — | — | — | — | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Balance, September 29, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Six Months Ended | |||||||
September 28, 2019 | September 29, 2018 | ||||||
Cash Flows from Operating Activities: | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Non-cash items: | |||||||
Depreciation and amortization | |||||||
Impairment of assets | |||||||
Share-based compensation expense | |||||||
Deferred tax benefit | ( | ) | |||||
Provision for losses on accounts receivable and inventory | ( | ) | |||||
Gain on sale of assets | ( | ) | |||||
Other non-cash operating activities | |||||||
Change in operating assets and liabilities: | |||||||
Change in accounts receivable | ( | ) | |||||
Change in inventories | ( | ) | ( | ) | |||
Change in other assets and other liabilities | ( | ) | |||||
Change in accounts payable and accrued expenses | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
Cash Flows from Investing Activities: | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Proceeds from divestiture | |||||||
Proceeds from sale of property, plant and equipment | |||||||
Net cash provided by (used in) investing activities | ( | ) | |||||
Cash Flows from Financing Activities: | |||||||
Net increase in short-term loans | |||||||
Term loan borrowings | |||||||
Repayment of term loan borrowings | ( | ) | ( | ) | |||
Other | |||||||
Proceeds from employee stock purchase plan | |||||||
Proceeds from exercise of stock options | |||||||
Share repurchases | ( | ) | ( | ) | |||
Net cash (used in) provided by financing activities | ( | ) | |||||
Effect of exchange rates on cash and cash equivalents | ( | ) | ( | ) | |||
Net Change in Cash and Cash Equivalents | ( | ) | |||||
Cash and Cash Equivalents at Beginning of Period | |||||||
Cash and Cash Equivalents at End of Period | $ | $ | |||||
Supplemental Disclosures of Cash Flow Information: | |||||||
Interest paid | $ | $ | |||||
Income taxes paid | $ | $ | |||||
Transfers from inventory to fixed assets for placement of Haemonetics equipment | $ | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Haemonetics Corporation ("Haemonetics" or the "Company") presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated. Operating results for the six months ended September 28, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 28, 2020 or any other interim period. The Company has assessed its ability to continue as a going concern. As of September 28, 2019, the Company has concluded that substantial doubt about its ability to continue as a going concern does not exist. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the fiscal year ended March 30, 2019.
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized or unrecognized subsequent events as of and for the six months ended September 28, 2019.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update No. 2016-02, Leases (Topic 842). ASC Update No. 2016-02 is intended to increase the transparency and comparability among organizations by recognizing lease asset and lease liabilities on the balance sheet, including those previously classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. In July 2018, the FASB issued an update to the leasing guidance to allow an additional transition option which would allow companies to adopt the standard as of the beginning of the year of adoption as opposed to the earliest comparative period presented. The Company adopted the new standard on March 31, 2019.
Upon transition, the Company applied the package of practical expedients permitted under ASC Update No. 2016-02 transition guidance to its entire lease portfolio at March 31, 2019. As a result, the Company is not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the classification of any expired or existing leases, and (iii) initial direct costs for any existing leases. The Company also elected to account for each lease component and the associated non-lease components as a single lease component and also elected not to recognize a lease liability or right-of-use asset for any lease that, at commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.
As a result of adopting ASC Update No. 2016-02, the Company recognized additional right-of-use assets of $22.9 million and corresponding liabilities of $22.7 million for its existing lease portfolio on the condensed consolidated balance sheets, with no material impact to the condensed consolidated statements of operations or condensed consolidated statements of cash flows. Additionally, the Company implemented a new lease administration and lease accounting system and has updated controls and procedures for maintaining and accounting for its lease portfolio under the new standard.
In March 2017, the FASB issued ASC Update No. 2017-07, Compensation - Retirement Benefits (Topic 715). The guidance revises the presentation of net periodic pension cost and net periodic post-retirement benefit cost. The Company adopted ASC Update No. 2017-07 during the first quarter of fiscal 2020. The adoption of ASC Update No. 2017-07 did not have a material impact on the Company's condensed consolidated financial statements.
In June 2018, the FASB issued ASC Update No. 2018-07, Compensation - Stock Compensation (Topic 718). The new guidance aligns the accounting for non-employee share-based payments with the existing employee share-based transactions guidance.
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The Company adopted ASC Update No. 2018-07 during the first quarter of fiscal 2020. The adoption of ASC Update No. 2018-07 did not have a material impact on the Company's financial position and results of operations.
3. RESTRUCTURING
On an ongoing basis, the Company reviews the global economy, the healthcare industry, and the markets in which it competes to identify opportunities for efficiencies, enhance commercial capabilities, align its resources and offer its customers better solutions. In order to realize these opportunities, the Company undertakes restructuring-type activities to transform its business.
In July 2019, the Board of Directors of the Company approved a new Operational Excellence Program (the "2020 Program") and delegated authority to the Company's management to determine the detail of the initiatives that will comprise the program. The 2020 Program is designed to improve operational performance and reduce cost principally in our manufacturing and supply chain operations. The Company estimates that it will incur aggregate charges between $60 million and $70 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2023. During both the three and six months ended September 28, 2019, the Company incurred $2.9 million of restructuring and turnaround costs under this program. Total cumulative charges under this program are $2.9 million.
During fiscal 2018, the Company launched a Complexity Reduction Initiative (the "2018 Program"), a company-wide restructuring program designed to improve operational performance and reduce cost, freeing up resources to invest in accelerated growth. During the three and six months ended September 28, 2019, the Company incurred $0.9 million and $2.9 million, respectively, of restructuring and turnaround costs under this program. During the three and six months ended September 29, 2018, the Company incurred $1.9 million and $5.3 million, respectively, of restructuring and turnaround costs under this program. Total cumulative charges under this program are $55.2 million.
The following table summarizes the activity for restructuring reserves for the six months ended September 28, 2019, substantially all of which relates to employee severance and other employee costs:
(In thousands) | 2020 Program | 2018 Program and Prior Programs | ||||||
Balance at March 30, 2019 | $ | $ | ||||||
Costs incurred, net of reversals | ||||||||
Payments | ( | ) | ( | ) | ||||
Balance at September 28, 2019 | $ | $ | ||||||
As of September 28, 2019, the Company had a restructuring liability of $4.2 million, of which $3.7 million is payable within the next twelve months.
The following presents the restructuring costs by line item within our accompanying condensed consolidated statements of income:
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Cost of goods sold | $ | $ | $ | $ | |||||||||||
Research and development | |||||||||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | |||||||||||
$ | $ | ( | ) | $ | $ | ( | ) | ||||||||
In addition to the restructuring costs included in the table above, the Company also incurred costs that do not constitute restructuring under ASC 420, Exit and Disposal Cost Obligations, which the Company refers to as turnaround costs. These costs, substantially all of which have been included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of income, consist primarily of expenditures directly related to the restructuring actions and include program management costs associated with the implementation of outsourcing initiatives and recent accounting standards.
8
The tables below present restructuring and turnaround costs by the Company's three reportable segments as well as the Company's other corporate restructuring and turnaround costs:
Restructuring costs | Three Months Ended | Six Months Ended | |||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Plasma | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Blood Center | |||||||||||||||
Hospital | ( | ) | ( | ) | |||||||||||
Corporate | ( | ) | |||||||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Turnaround costs | Three Months Ended | Six Months Ended | |||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Plasma | $ | $ | $ | $ | |||||||||||
Blood Center | |||||||||||||||
Hospital | ( | ) | ( | ) | |||||||||||
Corporate | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Total restructuring and turnaround costs | $ | $ | $ | $ | |||||||||||
4. DIVESTITURE
On May 21, 2019, the Company transferred to CSL Plasma Inc. (“CSL”) substantially all of its tangible assets held relating to the manufacture of anti-coagulant and saline (together, “Liquids”) at its Union, South Carolina facility (“Union”), which consist primarily of property, plant and equipment and inventory, and CSL assumed certain related liabilities (the “Asset Transfer”) pursuant to the terms of a settlement, release and asset transfer agreement between the parties dated May 13, 2019. The Asset Transfer excludes all other assets related to Union, including accounts receivable, customer contracts and the Company's U.S. Food and Drug Administration (“FDA”) product approvals for manufacturing Liquids.
At closing, Haemonetics received $9.8 million of proceeds for the Asset Transfer and was concurrently released from its obligations to supply Liquids under a 2014 supply agreement with CSL. In connection with the Asset Transfer, CSL and Haemonetics also entered into related transition services, supply and manufacturing services and quality agreements that, among other things, permit CSL to manufacture Liquids under the Company's FDA product approvals, exclusively for Haemonetics and CSL, until CSL obtains independent product approvals from the FDA to manufacture the Liquids.
In connection with the Company's and CSL's entry into the May 13, 2019 agreement for the Asset Transfer, the Company recognized a pre-tax impairment charge of $48.7 million in the first quarter of fiscal 2020, primarily related to the carrying balances of the property, plant and equipment exceeding the consideration received under the terms of the Agreement. The charge will not result in any future cash expenditures.
5. INCOME TAXES
The Company conducts business globally and reports its results of operations in a number of foreign jurisdictions in addition to the United States. The Company's reported tax rate is impacted by the jurisdictional mix of earnings in any given period as the foreign jurisdictions in which it operates have tax rates that differ from the U.S. statutory tax rate.
For the three and six months ended September 28, 2019, the Company reported an income tax provision of $7.6 million and a benefit of $1.6 million, respectively, representing an effective tax rate of 16.9 % and (6.0 )%, respectively. The effective tax rate for the three and six months ended September 28, 2019 is lower than the U.S. statutory tax rate primarily due to a discrete tax benefit recognized from excess stock compensation deductions of $4.4 million and $9.3 million, respectively. The effective tax rates were also impacted by the jurisdictional mix of earnings and the impact of the divestiture of the Union liquid solutions
9
operation in the first quarter of fiscal 2020. Refer to Note 4, Divestiture for additional details related to the divestiture of the Union liquid solutions operation.
6. EARNINGS PER SHARE (“EPS”)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands, except per share amounts) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Basic EPS | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Weighted average shares | |||||||||||||||
Basic income per share | $ | $ | $ | $ | |||||||||||
Diluted EPS | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Basic weighted average shares | |||||||||||||||
Net effect of common stock equivalents | |||||||||||||||
Diluted weighted average shares | |||||||||||||||
Diluted income per share | $ | $ | $ | $ | |||||||||||
Basic earnings per share is calculated using the Company's weighted-average outstanding common stock. Diluted earnings per share is calculated using its weighted-average outstanding common stock including the dilutive effect of stock awards as determined under the treasury stock method. For the three and six months ended September 28, 2019, weighted average shares outstanding, assuming dilution, excludes the impact of 12,421 shares and 0.2 million anti-dilutive shares, respectively. For the three and six months ended September 29, 2018, weighted average shares outstanding, assuming dilution, excludes the impact of 0.2 million and 0.1 million anti-dilutive shares, respectively.
Share Repurchase Program
In May 2019, the Company's Board of Directors authorized the repurchase of up to $500 million of Haemonetics common shares over the next two years.
In July 2019, the Company completed a $75.0 million repurchase of its common stock pursuant to an accelerated share repurchase agreement ("ASR") entered into with Citibank N.A. ("Citibank") in June 2019. The total number of shares repurchased under the ASR was 0.6 million at an average price per share upon final settlement of $116.33 .
In September 2019, the Company entered into an ASR with Morgan Stanley & Co. LLC ("Morgan Stanley") to repurchase $50.0 million of the Company’s common stock. Pursuant to the terms of the ASR, in September 2019, the Company paid Morgan Stanley $50.0 million in cash and received an initial delivery of 0.3 million shares of the Company's common stock based on a closing market price on the New York Stock Exchange on September 10, 2019 of $120.73 . This initial delivery of shares represented approximately 80 % of the notional amount of the ASR. On October 8, 2019, the ASR was completed and an additional 0.1 million shares were delivered upon settlement. The total number of shares repurchased under the ASR was 0.4 million at an average price per share upon final settlement of $124.37 .
As of September 28, 2019, the total remaining authorization for repurchases of the Company's common stock under the share repurchase program was $375 million.
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7. REVENUE
The Company's revenue recognition policy is to recognize revenues from product sales, software and services in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; this occurs with the transfer of control of the Company’s goods or services.
The Company considers revenue to be earned when all of the following criteria are met: it has a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the consideration it expects to receive for transferring goods or providing services, is determinable and it has transferred control of the promised items to the customer. A promise in a contract to transfer a distinct good or service to the customer is identified as a performance obligation. A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of the Company’s contracts have multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the estimated standalone selling prices of the good or service in the contract. For goods or services for which observable standalone selling prices are not available, the Company uses an expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
As of September 28, 2019, the Company had $22.5 million of its transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more. The Company expects to recognize approximately 56 % of this amount as revenue within the next twelve months and the remaining balance thereafter.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheets. The difference in timing between billing and revenue recognition primarily occurs in software licensing arrangements, resulting in contract assets and contract liabilities.
As of September 28, 2019 and March 30, 2019, the Company had contract assets of $6.9 million and $5.6 million, respectively. The change is primarily due to the delay in billings compared to the revenue recognized. Contract assets are classified as other current assets and other long-term assets on the condensed consolidated balance sheets.
As of September 28, 2019 and March 30, 2019, the Company had contract liabilities of $19.8 million and $20.3 million, respectively. During the three and six months ended September 28, 2019, the Company recognized $5.0 million and $13.4 million, respectively, of revenue that was included in the above March 30, 2019 contract liability balance. Contract liabilities are classified as other current liabilities and other long-term liabilities on the condensed consolidated balance sheets.
8. INVENTORIES
Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined using the first-in, first-out method.
(In thousands) | September 28, 2019 | March 30, 2019 | ||||||
Raw materials | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Total inventories | $ | $ | ||||||
9. PROPERTY, PLANT AND EQUIPMENT
In December 2018, the Company entered into a lease for office space in Boston, MA that will serve as the new corporate headquarters and replace the existing location in Braintree, MA. During the second quarter of fiscal 2020, the Company sold $7.8 million of real estate and other assets associated with the Braintree corporate headquarters and entered into a lease with the buyer that allows the Company to leaseback the facility on a rent-free basis through December 31, 2019 pending the completion of its relocation to Boston, MA, which is expected to occur in the third quarter of fiscal 2020. As a result of this transaction, the Company received net cash proceeds of $15.0 million and non-cash consideration of $0.9 million related to a free rent period ending in December 2019. The transaction resulted in a net gain of $8.1 million.
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10. GOODWILL AND INTANGIBLE ASSETS
Subsequent to the annual goodwill impairment test performed in the fourth quarter of fiscal 2019, the Company revised the composition of its reportable segments to align with its three global business units, Plasma, Blood Center and Hospital. Refer to Note 15, Segment and Enterprise-Wide Information, for additional information regarding the change in the Company's reportable segments.
A reporting unit is defined as an operating segment or one level below an operating segment, referred to as a component. The Company aggregates components within an operating segment that have similar economic characteristics. Consistent with its reportable segments, reporting units for purposes of assessing goodwill impairment have also been reorganized based on business unit and include: Plasma, Blood Center and Hospital.
To determine the amount of goodwill within each of the new reporting units, the Company reallocated, on a relative fair value basis, $84.0 million of goodwill previously allocated to the former Europe, APAC and Japan reporting units to the new global reporting units. In addition, the $126.8 million of goodwill previously allocated to the former North America reporting units was reallocated to each new respective global reporting unit.
The following represents our goodwill balance by new global reportable segment. The prior period information has been restated to conform to the current presentation:
(In thousands) | Plasma | Blood Center | Hospital | Total | |||||||||||
Carrying amount as of March 30, 2019 | $ | $ | $ | $ | |||||||||||
Currency translation | |||||||||||||||
Carrying amount as of September 28, 2019 | $ | $ | $ | $ | |||||||||||
11. LEASES
Lessee Activity
The Company has operating leases for office space, land, warehouse and manufacturing space, R&D laboratories, vehicles and certain equipment. Finance leases are not significant. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet and expense for these leases is recognized on a straight-line basis over the lease term. For leases executed in fiscal 2020 and later, the Company accounts for the lease components and the non-lease components as a single lease component. The Company's leases have remaining lease terms of 1 year to approximately 30 years, some of which may include options to extend the leases for up to 10 years and some include options to terminate early. These options have been included in the determination of the lease liability when it is reasonably certain that the option will be exercised. The Company does not have any leases that include residual value guarantees.
The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of an arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. For operating leases that commenced prior to the Company's adoption of ASC 842, the Company measured the lease liabilities and right-of-use assets using the incremental borrowing rate as of March 31, 2019. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
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The following table presents supplemental balance sheet information related to the Company's operating leases:
(In thousands) | September 28, 2019 | |||
Assets | ||||
Operating lease right-of-use assets in Other long-term assets | $ | |||
Liabilities | ||||
Operating lease liabilities in Other current liabilities | $ | |||
Operating lease liabilities in Other long-term liabilities | $ | |||
The following table presents the weighted average remaining lease term and discount rate information related to our operating leases:
September 28, 2019 | |||
Weighted average remaining lease term | |||
Weighted average discount rate | % | ||
During the three and six months ended September 28, 2019 the Company's operating lease cost was $2.1 million and $4.6 million, respectively.
The following table presents supplemental cash flow information related to our operating leases:
(In thousands) | Three Months Ended September 28, 2019 | Six Months Ended September 28, 2019 | ||||||
Cash paid for amounts included in the measurement of operating lease liabilities | ||||||||
Operating cash flows used for operating leases | $ | $ | ||||||
The following table presents the maturities of our operating lease liabilities as of September 28, 2019:
Fiscal Year (In thousands) | Operating Leases | |||
2020 (excluding the first half of 2020) | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total future minimum operating lease payments | ||||
Less: imputed interest | ( | ) | ||
Present value of operating lease liabilities | $ | |||
As of September 28, 2019, the Company has an additional lease for office space of $98.6 million and has a lease term, including renewal options, of up to 22 years. The Company will take control of the facility upon lease commencement during third quarter of fiscal 2020.
Lessor Activity
Assets on the Company's balance sheet classified as Haemonetics equipment primarily consists of medical devices installed at customer sites but owned by Haemonetics. These devices are leased to customers under contractual arrangements that typically include an operating or sales-type lease as well as the purchase and consumption of a certain level of disposable products. Sales-type leases are not significant. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where devices are provided under operating lease arrangements, a substantial majority of the entire lease revenue is variable and subject to subsequent non-lease component (disposable products) sales. The allocation of
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revenue between the lease and non-lease components is based on stand-alone selling prices. Operating lease revenue represents less than 3 percent of the Company's total net sales.
12. NOTES PAYABLE AND LONG-TERM DEBT
On June 15, 2018, the Company entered into a credit agreement with certain lenders which provided for a $350.0 million term loan (the "Term Loan") and a $350.0 million revolving loan (the "Revolving Credit Facility" and together with the Term Loan, the "Credit Facilities"). The Credit Facilities expire on June 15, 2023. Interest on the Credit Facilities is established using LIBOR plus 1.13 % - 1.75 %, depending on the Company's leverage ratio. Under the Credit Facilities, the Company is required to maintain certain leverage and interest coverage ratios specified in the credit agreement as well as other customary non-financial affirmative and negative covenants. At September 28, 2019, $332.5 million was outstanding under the Term Loan with an effective interest rate of 3.4 % and $40.0 million was outstanding on the Revolving Credit Facility. The Company also has $25.7 million of uncommitted operating lines of credit to fund its global operations under which there were no outstanding borrowings as of September 28, 2019.
The Company has required scheduled principal payments of $8.8 million during fiscal 2020, $21.9 million during fiscal 2021, $17.5 million during fiscal 2022, $214.4 million during fiscal 2023 and $70.0 million thereafter.
The Company was in compliance with the leverage and interest coverage ratios specified in the Credit Facilities as well as all other bank covenants as of September 28, 2019.
13. DERIVATIVES AND FAIR VALUE MEASUREMENTS
The Company manufactures, markets and sells its products globally. During the three and six months ended September 28, 2019, 35.9 % and 35.2 %, respectively, of the Company's sales were generated outside the U.S., generally in foreign currencies. The Company also incurs certain manufacturing, marketing and selling costs in international markets in local currency.
Accordingly, earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. Dollar, the Company's reporting currency. The Company has a program in place that is designed to mitigate the exposure to changes in foreign currency exchange rates. That program includes the use of derivative financial instruments to minimize, for a period of time, the impact on its financial results from changes in foreign exchange rates. The Company utilizes foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, Australian Dollar, Canadian Dollar and the Mexican Peso. This does not eliminate the impact of the volatility of foreign exchange rates. However, because the Company generally enters into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation.
Designated Foreign Currency Hedge Contracts
All of the Company's designated foreign currency hedge contracts as of September 28, 2019 and March 30, 2019 were cash flow hedges under ASC 815, Derivatives and Hedging ("ASC 815"). The Company records the effective portion of any change in the fair value of designated foreign currency hedge contracts in other comprehensive income until the related third-party transaction occurs. Once the related third-party transaction occurs, the Company reclassifies the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. The Company had designated foreign currency hedge contracts outstanding in the contract amount of $42.0 million as of September 28, 2019 and $81.5 million as of March 30, 2019. At September 28, 2019, a gain of $1.5 million, net of tax, will be reclassified to earnings within the next twelve months. Substantially all currency cash flow hedges outstanding as of September 28, 2019 mature within twelve months.
Non-Designated Foreign Currency Contracts
The Company manages its exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. It uses foreign currency forward contracts as a part of its strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These foreign currency forward contracts are entered into for periods consistent with currency transaction exposures, generally one month. They are not designated as cash flow or fair value hedges under ASC 815. These forward contracts are marked-to-market with changes in fair value recorded to earnings. The Company had non-designated foreign currency hedge contracts under ASC 815 outstanding in the contract amount of $81.5 million as of September 28, 2019 and $37.4 million as of March 30, 2019.
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Interest Rate Swaps
On June 15, 2018, the Company entered into Credit Facilities which provided for a $350.0 million Term Loan and a $350.0 million Revolving Credit Facility. Under the terms of the Credit Facilities, interest is established using LIBOR plus 1.13 % - 1.75 %. As a result, the Company's earnings and cash flows are exposed to interest rate risk from changes to LIBOR. Part of the Company's interest rate risk management strategy includes the use of interest rate swaps to mitigate its exposure to changes in variable interest rates. The Company's objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations.
In August 2018, the Company entered into two interest rate swap agreements (the "Swaps") to pay an average fixed rate of 2.80 % on a total notional value of $241.9 million of debt. As a result of the Swaps, 70 % of the Term Loan previously exposed to interest rate risk from changes in LIBOR is now fixed at a rate of 4.05 %. The Swaps mature on June 15, 2023. The Company designated the Swaps as cash flow hedges of variable interest rate risk associated with $332.5 million of indebtedness. For the six months ended September 28, 2019, a loss of $5.4 million, net of tax, was recorded in accumulated other comprehensive loss to recognize the effective portion of the fair value of the Swaps that qualify as cash flow hedges.
Fair Value of Derivative Instruments
The following table presents the effect of the Company's derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC 815 in its condensed consolidated statements of income and comprehensive income for the six months ended September 28, 2019:
(In thousands) | Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Loss | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings | Location in Condensed Consolidated Statements of Income and Comprehensive Income | Amount of Gain Excluded from Effectiveness Testing | Location in Condensed Consolidated Statements of Income and Comprehensive Income | |||||||||||
Designated foreign currency hedge contracts, net of tax | $ | $ | Net revenues, COGS and SG&A | $ | Interest and other expense, net | |||||||||||
Non-designated foreign currency hedge contracts | $ | Interest and other expense, net | ||||||||||||||
Designated interest rate swaps, net of tax | $ | ( | ) | $ | ( | ) | Interest and other expense, net | $ | ||||||||
The Company did not have fair value hedges or net investment hedges outstanding as of September 28, 2019 or March 30, 2019. As of September 28, 2019, no deferred tax assets were recognized for designated foreign currency hedges.
ASC 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. The Company determines the fair value of its derivative instruments using the framework prescribed by ASC 820, Fair Value Measurements and Disclosures, by considering the estimated amount it would receive or pay to sell or transfer these instruments at the reporting date and by taking into account current interest rates, currency exchange rates, current interest rate curves, interest rate volatilities, the creditworthiness of the counterparty for assets, and its creditworthiness for liabilities. In certain instances, the Company may utilize financial models to measure fair value. Generally, it uses inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of September 28, 2019, the Company has classified its derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC 815, as discussed below, because these observable inputs are available for substantially the full term of its derivative instruments.
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The following tables present the fair value of the Company's derivative instruments as they appear in its condensed consolidated balance sheets as of September 28, 2019 and March 30, 2019:
(In thousands) | Location in Condensed Consolidated Balance Sheets | As of | As of | |||||||
September 28, 2019 | March 30, 2019 | |||||||||
Derivative Assets: | ||||||||||
Designated foreign currency hedge contracts | Other current assets | $ | $ | |||||||
Non-designated foreign currency hedge contracts | Other current assets | |||||||||
$ | $ | |||||||||
Derivative Liabilities: | ||||||||||
Designated foreign currency hedge contracts | Other current liabilities | $ | $ | |||||||
Non-designated foreign currency hedge contracts | Other current liabilities | |||||||||
Designated interest rate swaps | Other current liabilities | |||||||||
$ | $ | |||||||||
Other Fair Value Measurements
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes the following three-level hierarchy used for measuring fair value:
• | Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. |
• | Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
• | Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
The Company's money market funds carried at fair value are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
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Fair Value Measured on a Recurring Basis
Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of September 28, 2019 and March 30, 2019.
As of September 28, 2019 | ||||||||||||
(In thousands) | Level 1 | Level 2 | Total | |||||||||
Assets | ||||||||||||
Money market funds | $ | $ | $ | |||||||||
Designated foreign currency hedge contracts | ||||||||||||
Non-designated foreign currency hedge contracts | ||||||||||||
$ | $ | $ | ||||||||||
Liabilities | ||||||||||||
Designated foreign currency hedge contracts | $ | $ | $ | |||||||||
Non-designated foreign currency hedge contracts | ||||||||||||
Designated interest rate swaps | ||||||||||||