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: October 2, 2021
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.) | ||||||||||
| (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 Each 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 November 5, 2021: 51,105,232
HAEMONETICS CORPORATION
INDEX
| PAGE | |||||
2
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 | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Gains on divestitures and sale of assets | ( | ( | ( | ||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest and other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||||||||
| Provision 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.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
| October 2, 2021 | April 3, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, less allowance of $2,701 at October 2, 2021 and $2,226 at April 3, 2021 | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets, less accumulated amortization of $348,336 at October 2, 2021 and $320,640 at April 3, 2021 | |||||||||||
| 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 — 51,060,192 shares at October 2, 2021 and 50,868,820 shares at April 3, 2021 | |||||||||||
| 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.
4
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, April 3, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | ( | — | — | ||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting standards | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, July 3, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, October 2, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||
| Balance, March 28, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | ( | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 27, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, September 26, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
| Six Months Ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| 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 | |||||||||||
| Amortization of fair value inventory step-up | |||||||||||
| Impairment of assets | |||||||||||
| Share-based compensation expense | |||||||||||
| Amortization of deferred finance costs | |||||||||||
| (Benefit) provision for losses on inventory | |||||||||||
| Gains on divestitures and sale of assets | ( | ( | |||||||||
| Deferred tax benefit | ( | ||||||||||
| Contingent consideration expense | |||||||||||
| Other non-cash operating activities | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Change in accounts receivable | ( | ||||||||||
| Change in inventories | ( | ( | |||||||||
| Change in prepaid income taxes | ( | ||||||||||
| 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 | ( | ( | |||||||||
| Acquisition | ( | ( | |||||||||
| Proceeds from divestitures | |||||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Net increase in short-term loans | |||||||||||
| Repayment of term loan borrowings | ( | ( | |||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Other | ( | ||||||||||
| 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: | |||||||||||
| Non-Cash Investing and Financing Activities: | |||||||||||
| Transfers from inventory to fixed assets for placement of Haemonetics equipment | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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 October 2, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 2, 2022 or any other interim period. The Company has assessed its ability to continue as a going concern. As of October 2, 2021, 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 April 3, 2021.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2019-12, Income Taxes (Topic 740). The new guidance improves consistent application of and simplifies the accounting for income taxes by removing certain exceptions to the general principals in Topic 740. The Company adopted ASC Update No. 2019-12 effective April 4, 2021. The adoption did not have a material impact on the financial position or results of operations.
In August 2020, the FASB issued ASC ASU Update No. 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). The amendments simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company early adopted ASC Update No. 2020-06 effective April 4, 2021 using the modified retrospective method, which resulted in a decrease of $61.2 million to additional paid-in capital, a decrease to non-current deferred tax liabilities of $20.0 million, and an increase of $80.3 million to non-current convertible notes, net, on the Condensed Consolidated Balance Sheets. Additionally, retained earnings was adjusted to remove amortization expense recognized in prior periods related to the debt discount and the convertible notes no longer have a debt discount that will be amortized, net of taxes. The impact to retained earnings on the Condensed Consolidated Balance Sheets as of April 4, 2021 is an increase of $1.0 million.
In July 2021, the FASB issued ASC Update No. 2021-05. Leases (Topic 842). The new guidance requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria of ASC 842 and the lessor would have otherwise recognized a day-one loss. The Company prospectively adopted ASC Update No. 2021-05 effective in the second quarter of fiscal year 2022. The adoption did not have a material impact on the financial position or 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.
7
In July 2019, the Board of Directors of the Company approved the 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. During the first quarter of fiscal 2022, the Company revised the program to improve product and service quality, reduce cost principally in its manufacturing and supply chain operations and ensure sustainability while helping to offset impacts from a previously announced customer loss, rising inflationary pressures and effects of the COVID-19 pandemic. The Company now expects to incur aggregate charges between $95 million and $105 million by the end of fiscal 2025. The majority of charges will result in cash outlays, including severance and other employee costs, and will be incurred as the specific actions required to execute these initiatives are identified and approved. During the three and six months ended October 2, 2021, the Company incurred $4.6 million and $14.5 million, respectively, of restructuring and restructuring related costs under this program. During the three and six months ended September 26, 2020, the Company incurred $4.4 million and $8.0 million, respectively, of restructuring and restructuring related costs under this program. Total cumulative charges under this program are $41.5 million.
The following table summarizes the activity for restructuring reserves related to the 2020 Program and prior programs for the six months ended October 2, 2021, substantially all of which relates to employee severance and other employee costs:
| (In thousands) | 2020 Program | Prior Programs | Total | |||||||||||||||||
| Balance at April 3, 2021 | $ | $ | $ | |||||||||||||||||
| Costs incurred, net of reversals | ||||||||||||||||||||
| Payments | ( | ( | ( | |||||||||||||||||
| Balance at October 2, 2021 | $ | $ | $ | |||||||||||||||||
The following presents the restructuring costs by line item within our accompanying unaudited Condensed Consolidated Statements of Income and Comprehensive Income:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| Cost of goods sold | $ | $ | ( | $ | $ | ||||||||||||||||||
| Research and development | ( | ||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| $ | $ | ( | $ | $ | |||||||||||||||||||
As of October 2, 2021, the Company had a restructuring liability of $3.7 million, of which $3.2 million is payable within the next twelve months.
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, and which the Company instead refers to as restructuring related costs. These costs 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 restructuring related costs by reportable segment:
| Restructuring costs | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| (In thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| Plasma | $ | $ | ( | $ | $ | ||||||||||||||||||
| Blood Center | |||||||||||||||||||||||
| Hospital | ( | ( | ( | ( | |||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||
| Restructuring related costs | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| (In thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| Plasma | $ | $ | $ | $ | |||||||||||||||||||
| Blood Center | |||||||||||||||||||||||
| Hospital | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Total restructuring and restructuring related costs | $ | $ | $ | $ | |||||||||||||||||||
4. ACQUISITIONS
On January 17, 2021, the Company entered into an Agreement and Plan of Merger with Cardiva Medical, Inc. (“Cardiva”), an industry-leading manufacturer of vascular closure systems based in Santa Clara, California. In connection with this acquisition, which closed on March 1, 2021, the Company acquired 100 % of the issued and outstanding shares of capital stock of Cardiva for total consideration of $489.8 million, which consisted of upfront payments in the aggregate of $465.5 million ($418.2 million net of cash acquired) and the fair value of contingent consideration of $24.3 million. The contingent consideration, which could total a maximum of $35.0 million, is payable over the next two years based on sales growth. The Company financed the acquisition through a combination of cash, borrowings under its revolving credit facility and an additional $150.0 million term loan under the existing credit facility.
Cardiva’s portfolio includes two catheter-based vascular access site closure devices. The VASCADE® vascular closure system is designed for “small-bore” femoral arterial and venous closure, generally used in interventional cardiology and peripheral vascular procedures. The VASCADE MVP® vascular closure system is designed for “mid-bore” multi-access femoral venous closure, generally used in electrophysiology procedures, and is the only U.S. Food and Drug Administration (“FDA”) approved closure device for use following cardiac ablation procedures requiring two or more access sites within the same vessel. The addition of the VASCADE portfolio to the Hospital business unit includes products with demonstrated benefits and enhances penetration into the large and growing interventional cardiology and electrophysiology markets.
Purchase Price Allocation
The Company accounted for the acquisition as a business combination, and in accordance with FASB ASC Topic 805, Business Combinations (Topic 805), recorded the assets acquired and liabilities assumed at their fair values as of the acquisition date. The fair value of assets acquired and liabilities assumed have been recognized based on management’s estimates and assumptions using the information regarding facts and circumstances that existed at the closing date. The assessment of fair value is preliminary and is based on information that was available at the time the consolidated financial statements were prepared. The most significant open items included the valuation of certain intangible assets and the accounting for income taxes as the Company is finalizing additional information to complete its assessment of these matters. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of the Company’s purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed, which could be material. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period as required by Topic 805. As of October 2, 2021, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the projection of the underlying cash flows used to determine the fair value of the identified tangible, intangible and financial assets and liabilities.
9
| (In thousands) | March 1, 2021 | ||||
| Accounts receivable | $ | ||||
| Inventories | |||||
| Prepaid expenses and other current assets | |||||
| Property, plant and equipment | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Other long-term assets | |||||
| Total assets acquired | $ | ||||
| Accounts payable | |||||
| Accrued payroll and related costs | |||||
| Other liabilities | |||||
| Deferred tax liability | |||||
| Other long-term liabilities | |||||
| Total liabilities assumed | $ | ||||
| Net assets acquired | $ | ||||
The Company determined the identifiable intangible assets were completed technology, customer relationships, trademarks and in-process research and development (“IPR&D”). The fair values of intangible assets were based on valuation techniques with estimates and assumptions developed by the Company. Completed technology and IPR&D were valued using the excess earnings method. Customer relationships were valued using the distributor method. Trademarks were valued using the relief from royalty method. The cash flows used in the valuation of the intangible assets were based on estimates used to price the transaction. In developing the discount rates applied to the cash flow projections, the discount rates were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital and then adjusted to reflect the relative risk of the asset. As of October 2, 2021, the valuation of the intangible assets is preliminary as the Company is still finalizing information related to the assets’ cash flow projections.
The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. As a result of the acquisition of Cardiva, the Company recognized goodwill of $254.0 million, which is attributable to the revenue and cash flow projections associated with completed technologies and the development of future technology that does not exist in the current IPR&D pipeline. The goodwill is not deductible for tax purposes and relates entirely to the Hospital reportable segment.
Intangible assets acquired consist of the following:
| (In thousands) | Amount | Weighted-Average Amortization Period | Risk-Adjusted Discount Rates used in Purchase Price Allocation | ||||||||
| Completed technology | $ | % | |||||||||
| Customer relationships | % | ||||||||||
| Trademarks | % | ||||||||||
| IPR&D | Indefinite | % | |||||||||
| Total | $ | ||||||||||
The Company recorded a long-term deferred tax liability, net, of $27.1 million primarily related to definite-lived intangible assets which cannot be deducted for tax purposes, partially offset by deferred tax assets primarily related to net operating losses acquired.
10
Acquisition-Related Costs
The amount of acquisition-related costs incurred associated with the acquisition was $9.6 million for the fiscal year ending April 3, 2021. The Company incurred acquisition costs related legal and other professional fees in the amount of $6.6 million and an additional $3.0 million of debt financing costs and lender fees which were recognized in selling, general and administrative and as interest expense on the unaudited Condensed Consolidated Statements of Income and Comprehensive Income, respectively.
HAS Intellectual Property
In January 2021, the Company entered into an agreement to acquire certain intellectual property owned by HemoAssay Science and Technology (Suzhou) Co. Ltd., a China-incorporated company, and its affiliates (collectively, “HemoAssay”) underlying their HAS viscoelastic diagnostic devices, related assays and disposables. The Company previously entered into exclusive manufacturing and distribution agreements with HemoAssay pursuant to which it has exclusive rights to commercialize HemoAssay’s HAS devices in China. In connection with the transaction, the Company has agreed to pay up to $15.0 million to HemoAssay in contingent consideration based on certain developmental and manufacturing based milestones. During the six months ended October 2, 2021, the Company made $2.5 million of milestone payments which were recorded within intangible assets on the Condensed Consolidated Balance Sheets. These products augment the Company's portfolio of hemostasis analyzers within the Hospital business unit.
enicor GmbH
On April 1, 2020, the Company acquired all of the outstanding equity of enicor GmbH (“enicor”), the manufacturer of ClotPro®, a new generation whole blood coagulation testing system that is currently available in select European and Asia Pacific markets, for total consideration of $20.5 million, which consisted of upfront payments of $16.6 million and the fair value of contingent consideration of $3.9 million. The contingent consideration, which could total a maximum of $4.5 million, consists of payments related to the achievement of certain revenue and regulatory milestones. The acquisition of this viscoelastic diagnostic device augments the Company's portfolio of hemostasis analyzers within the Hospital business unit.
Purchase Price Allocation
The Company accounted for the acquisition of enicor as a business combination, and in accordance with FASB ASC Topic 805, Business Combinations (Topic 805), recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
The following amounts represent the determination of the fair value of the identifiable assets acquired and liabilities assumed for enicor completed during fiscal 2021:
| (In thousands) | April 1, 2020 | |||||||
| Inventory | $ | |||||||
| Other current assets | ||||||||
| Property, plant and equipment | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Total assets acquired | $ | |||||||
| Other current liabilities | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities assumed | $ | |||||||
| Net assets acquired | $ | |||||||
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The Company determined the identifiable intangible assets were completed technology, customer relationships and a trademark. The fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using a rate of 20%. The cash flows were based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital. The benefits of adding a viscoelastic diagnostic device to the Company’s portfolio of hemostasis analyzers within the Hospital business unit contributed to an acquisition price in excess of the fair value of net assets acquired for enicor, which resulted in the establishment of goodwill. In addition, the benefits of lower cost manufacturing and complementary sales channels also contributed to the establishment of goodwill for this acquisition. None of the goodwill is expected to be deductible for income tax purposes.
Intangible assets acquired consist of the following:
| (In thousands) | Amount | Weighted-Average Amortization Period | Risk-Adjusted Discount Rates used in Purchase Price Allocation | |||||||||||||||||
| Completed technology | $ | % | ||||||||||||||||||
| Customer relationships | % | |||||||||||||||||||
| Trademark | % | |||||||||||||||||||
| Total | $ | |||||||||||||||||||
Acquisition-Related Costs
The amount of acquisition-related costs incurred associated with the acquisition was $0.2 million for the three and six months ended September 26, 2020.
5. DIVESTITURES
Fajardo, Puerto Rico Manufacturing Operations
On June 29, 2020, the Company sold its Fajardo, Puerto Rico, manufacturing operations to GVS, S.p.A (“GVS”), a leading provider of advanced filtration solutions for critical applications for $15.1 million ($7.8 million, net of cash transferred). Under the terms of the agreement, Haemonetics retained all intellectual property rights to its proprietary blood filters currently manufactured at its Fajardo facility and GVS acquired certain assets consisting primarily of property, plant and equipment, inventory and cash and has assumed certain related liabilities. In connection with this transaction, the Company and GVS also entered into a long-term supply and development agreement that, among other things, grants GVS exclusive rights to manufacture and supply the blood filters currently produced at the Fajardo facility for Haemonetics. The Company also agreed to provide certain transition services to GVS, generally for a period of up to three months depending on the nature of the service.
As a result of this transaction, Haemonetics recognized a pre-tax impairment charge in its Blood Center business unit of $1.0 million in the first quarter of fiscal 2021 and an incremental loss of $0.4 million based on closing adjustments during the third quarter of fiscal 2021, as the carrying value of the assets and liabilities in the asset transfer exceeded the net of the $15.1 million of cash proceeds and an additional contingent liability of $1.5 million. The disposal group consisted of $3.3 million of inventory, $7.2 million of fixed assets, $3.2 million of other liabilities, and $0.4 million of goodwill allocated based on fair value to the business.
U.S. Blood Donor Management Software
On July 1, 2020, the Company sold certain U.S. blood donor management software solution assets within its Blood Center business unit to the GPI Group (“GPI”) for an upfront cash payment of $14.0 million ($13.6 million, net of working capital adjustments) and up to $14.0 million in additional consideration contingent on the achievement of commercial milestones over the twelve month period immediately following the closing of the transaction. The disposal group consisted of $1.4 million of accounts receivable, $0.9 million of intangible assets, other liabilities of $1.8 million and $1.4 million of goodwill allocated based on fair value to the business. The Company recognized a gain of $13.2 million associated with the transaction in fiscal 2021. During the first quarter of fiscal year 2022, the Company recognized an additional gain of $9.6 million for contingent consideration earned.
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Inlog Holdings France
On September 18, 2020, the Company sold its wholly-owned subsidiary Inlog Holdings France SAS to Abénex Capital (“Abénex”), a private equity firm based in France for $30.5 million ($24.5 million, net of cash transferred). Inlog Holdings France SAS, through its subsidiary In Log SAS, develops and sells blood bank and hospital software solutions used predominantly in France and in several other countries outside of the U.S. The disposal group included $2.2 million of intangible assets, $2.2 million of accounts receivable, $0.3 million of other assets, $3.3 million of liabilities and $3.3 million of goodwill allocated based on the fair value of the business which impacted both the Blood Center and Hospital business units. The Company recognized a gain of $20.0 million upon closing of the transaction in the second quarter of fiscal 2021.
6. 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 October 2, 2021, the Company reported income tax expense of $5.1 million and $6.5 million, respectively, representing effective tax rates of 25.4 % and 38.5 %, respectively. The effective tax rates for the three and six months ended October 2, 2021 includes discrete tax expense relating to stock compensation shortfalls of $0.1 million and $0.9 million, respectively.
For the three and six months ended September 26, 2020, the Company reported income tax expense of $6.9 million and $4.3 million, respectively, representing effective tax rates of 12.5 % and 6.8 %, respectively. The effective tax rates for the three and six months ended September 26, 2020 included discrete tax benefits recognized from excess stock compensation deductions of $0.1 million and $4.1 million, respectively. The effective tax rates were also impacted by the jurisdictional mix of earnings including divestiture transactions. During the three and six months ended September 26, 2020, the Company sold its Fajardo, Puerto Rico manufacturing operations, certain U.S. blood donor management software solution assets, and its wholly-owned subsidiary, Inlog Holdings France SAS. The tax expense on divestitures, including the associated valuation allowance impacts, were included in the computation of the annual effective tax rate.
7. EARNINGS PER SHARE
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) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| 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 and the convertible senior notes as determined under the net share settlement method. From the time of the issuance of the convertible senior notes, the average market price of the Company's common shares has been less than the initial conversion price, and consequently no shares have been included in diluted earnings per share for the conversion value of the convertible senior notes. For the three and six months ended October 2, 2021, weighted average shares outstanding, assuming dilution, excludes the impact of 0.9 million anti-dilutive shares. For the three and six
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8. 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 October 2, 2021, the Company had $21.0 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 68 % of this amount as revenue within the next twelve months and the remaining balance thereafter.
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 October 2, 2021 and April 3, 2021, the Company had contract assets of $4.4 million and $4.8 million, respectively. Contract assets are classified as other current assets and other long-term assets on the Condensed Consolidated Balance Sheets.
As of October 2, 2021 and April 3, 2021, the Company had contract liabilities of $23.9 million and $20.9 million, respectively. During the three and six months ended October 2, 2021, the Company recognized $4.6 million and $13.2 million of revenue, respectively, that was included in the above April 3, 2021 contract liability balance.
9. 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) | October 2, 2021 | April 3, 2021 | ||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories | $ | $ | ||||||||||||
10. LEASES
Lessee Activity
During fiscal 2021, the Company entered into a lease for manufacturing space in Clinton, PA. The Company's current manufacturing operations in Leetsdale, PA will be relocated. The lease term associated with the new manufacturing facility is 15 years and 7 months and includes two year renewal options followed by one year renewal option. During fiscal 2021, the Company recorded a right-of-use asset of $11.3 million and corresponding liabilities of $15.4 million upon commencement of the lease term in May 2020. In addition, the Company recorded a $4.1 million lease incentive receivable associated with this lease agreement which was received during fiscal 2021.
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Lessor Activity
Assets on the Company's balance sheet classified as Haemonetics equipment primarily consist 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 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.
11. NOTES PAYABLE AND LONG-TERM DEBT
Convertible Senior Notes
In March 2021, the Company issued $500.0 million aggregate principal amount of 0 % convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are governed by the terms of the Indenture between the Company and U.S. Bank National Association, as trustee (the “Indenture”). The total net proceeds from the sale of the 2026 Notes, after deducting the initial purchasers’ discounts and debt issuance costs, were approximately $486.7 million. The 2026 Notes will mature on March 1, 2026, unless earlier converted, redeemed or repurchased.
During the second quarter of fiscal 2022, the conditions allowing holders of the 2026 Notes to convert have not been met. The 2026 Notes were therefore not convertible as of October 2, 2021 and were classified as long-term debt on the Company’s Condensed Consolidated Balance Sheets.
In accounting for the issuance of the 2026 Notes, the 2026 Notes were separated into liability and equity components. The Company estimated the liability and equity components of the 2026 Notes to be $416.4 million and $83.6 million respectively, at the issuance date. On April 4, 2021, the Company adopted ASC Update No. 2020-06 using the modified retrospective method, which resulted in a decrease of $61.2 million to additional paid-in capital, a decrease to non-current deferred tax liabilities of $20.0 million, and an increase of $80.3 million to non-current convertible notes, net, on the Condensed Consolidated Balance Sheets. Additionally, retained earnings was adjusted to remove amortization expense recognized in prior periods related to the debt discount and the convertible notes no longer have a debt discount that will be amortized, net of taxes. The impact to retained earnings on the Condensed Consolidated Balance Sheets as of April 4, 2021 is an increase of $1.0 million.
As of October 2, 2021, the $500.0 million principal balance was netted down by $11.9 million of deferred financing costs.
Credit Facilities
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, as amended from time to time, 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 October 2, 2021, $293.1 million was outstanding under the Term Loan with an effective interest rate of 1.9 %. There were no borrowings outstanding on the Revolving Credit Facility. The Company also has $25.6 million of uncommitted operating lines of credit to fund its global operations under which there were no outstanding borrowings as of October 2, 2021.
The Company has required scheduled principal payments of $8.8 million during the remainder of fiscal 2022, $214.4 million during fiscal 2023 and $70.0 million during fiscal 2024.
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 October 2, 2021.
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12. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The Company manufactures, markets and sells its products globally. During the three and six months ended October 2, 2021, 36.6 % and 37.4 %, 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 October 2, 2021 and April 3, 2021 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 $61.9 million as of October 2, 2021 and $56.0 million as of April 3, 2021. At October 2, 2021, a loss of $0.8 million, net of tax, will be reclassified to earnings within the next twelve months. Substantially all currency cash flow hedges outstanding as of October 2, 2021 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 $77.4 million as of October 2, 2021 and $95.6 million as of April 3, 2021.
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 $345.6 million of indebtedness. For the six months ended October 2, 2021, a gain of $3.2 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.
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Trade Receivables
In the ordinary course of business, the Company grants trade credit to its customers on normal credit terms. In an effort to reduce its credit risk, the Company (i) establishes credit limits for all customers, (ii) performs ongoing credit evaluations of customers’ financial condition, (iii) monitors the payment history and aging of customers’ receivables, and (iv) monitors open orders against an individual customer’s outstanding receivable balance.
The Company's allowance for credit losses is maintained for trade accounts receivable based on the expected collectability, the historical collection experience, the length of time an account is outstanding, the financial position of the customer and information provided by credit rating services. Effective March 29, 2020, the Company adopted Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) which requires consideration of events or circumstances indicating historic collection rates may not be indicative of future collectability. For example, potential adverse changes to customer liquidity from new macroeconomic events such as the COVID-19 pandemic must be taken into consideration. To date, the Company has not experienced significant customer payment defaults, or identified other significant collectability concerns as a result of the pandemic.
The following is a rollforward of the allowance for credit losses:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | |||||||||||||||||||
| Credit (gain) loss | ( | ( | |||||||||||||||||||||
| Write-offs | ( | ( | ( | ( | |||||||||||||||||||
| Ending balance | $ | $ | $ | $ | |||||||||||||||||||
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 unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the six months ended October 2, 2021:
| (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 (Loss) 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 October 2, 2021 or April 3, 2021. As of October 2, 2021,