HAEMONETICS CORPORATION Our Business
Haemonetics is a global healthcare company dedicated to providing a suite of innovative hematology products and solutions to customers to help improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets including blood and plasma component collection, the surgical suite, and hospital transfusion services. When used in this report, the terms "we," "us," "our" and "the Company" mean Haemonetics. We view our operations and manage our business in three principal reporting segments: Plasma,Blood Center and Hospital. For that purpose, "Plasma" includes plasma collection devices and disposables, plasma donor management software, and anticoagulant and saline sold to plasma customers. "Blood Center " includes blood collection and processing devices and disposables for red cells, platelets and whole blood as well as related donor management software. "Hospital", which is comprised of Hemostasis Management, Cell Salvage and Transfusion Management products, includes devices and methodologies for measuring coagulation characteristics of blood, surgical blood salvage systems, specialized blood cell processing systems and disposables and blood transfusion management software.
We believe that Plasma and Hospital have growth potential, while
Recent Developments COVID-19 We are closely managing the impacts of the COVID-19 pandemic on our business results of operations and financial condition. As a result of the timing of the pandemic relative to our fiscal year end, we experienced only limited effects of COVID-19 in fiscal 2020. While the duration and implications remain uncertain, we believe our business operations will experience a higher impact from COVID-19 in fiscal 2021. The extent of such impact will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Our immediate response to the COVID-19 pandemic has been to focus on business continuity and the safety of our employees. This includes prioritizing employee safety with remote work and travel restrictions, and limiting exposure for our manufacturing and customer facing employees, including field service and sales teams, to ensure supplies and services for our customers. We have been able to continue to supply our products to our customers worldwide and all of our manufacturing facilities continue to operate. While we currently do not anticipate any material interruptions in our manufacturing process, it is possible that the COVID-19 pandemic and response efforts may have an impact on our future ability to manufacture our products or to have our products reach all markets. We are also focused on preserving cash and have implemented a number of actions to help us protect cash flow and allocate capital such as reducing non-essential spending, delaying certain compensation-related items, inventory management, reviewing capital projects and the associated costs, and restricting travel. InApril 2020 , we borrowed an additional$150.0 million under our revolving credit facility, increasing our cash on hand to approximately$300 million . Refer to Liquidity and Capital Resources within our Management's Discussion and Analysis for additional information regarding our cash position and liquidity. We believe that demand for our products is resilient, even within an environment of constrained spending. While we believe that our product segments are beginning to shift to recovery, with markets inAsia and parts of theU.S. andEurope reopening, the recovery could be protracted and disrupted by additional resurgences and lockdowns. For additional information regarding the expected impacts to our business units and the various risks posed by the COVID-19 pandemic, refer to Results of Operations within Management's Discussion and Analysis and Risk Factors contained in Item 1A of this Annual Report on Form 10-K. 27
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Acquisitions
On
OnJanuary 13, 2020 , we purchased the technology underlying the TEG® 6s Hemostasis Analyzer System fromCora Healthcare, Inc. andCoraMed Technologies, LLC (the "Cora Parties") for$35.0 million . In connection with this transaction, we acquired ownership of intellectual property previously licensed from the Cora Parties on an exclusive basis in the field of hospitals and hospital laboratories. This acquisition will allow us to pursue site of care opportunities beyond the hospital setting.
Divestiture
OnMay 21, 2019 , we transferred toCSL Plasma Inc. ("CSL") substantially all of the tangible assets held by Haemonetics relating to the manufacture of anti-coagulant and saline at ourUnion, South Carolina facility and CSL assumed certain related liabilities pursuant to the terms of a settlement, release and asset transfer agreement between the parties datedMay 13, 2019 . At the closing, we received$9.8 million of proceeds and were concurrently released from our obligations to supply liquid solutions under a 2014 supply agreement with CSL. We recognized an asset impairment in the first quarter of fiscal 2020 of$48.7 million as a result of this transaction.
Share Repurchase Programs
InMay 2019 , our Board of Directors authorized the repurchase of up to$500 million of Haemonetics common shares over the next two years. InJuly 2019 , we completed a$75.0 million repurchase of our common stock pursuant to an accelerated share repurchase agreement ("ASR") entered into withCitibank N.A . ("Citibank") inJune 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 . InOctober 2019 , we completed a$50.0 million repurchase of our common stock pursuant to an ASR entered into withMorgan Stanley & Co. LLC ("Morgan Stanley") inSeptember 2019 . 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 . InJanuary 2020 , we completed an additional$50.0 million repurchase of our common stock pursuant to an ASR entered into withBank of America, N.A . ("Bank of America ") inDecember 2019 . The total number of shares repurchased under the ASR was 0.4 million at an average price per share upon final settlement of$114.73 .
As of
Restructuring Program
InJuly 2019 , our Board of Directors approved a new Operational Excellence Program (the "2020 Program") and delegated authority to 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. We estimate that we 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. Savings from the 2020 Program are targeted to reach$80 million to$90 million on an annualized basis once the program is completed. During the fiscal year endedMarch 28, 2020 , we incurred$11.9 million of restructuring and turnaround costs under this program.
Relocation of Corporate Headquarters
InDecember 2018 , we entered into a lease for office space inBoston, MA to serve as our new corporate headquarters and replace our prior corporate headquarters located inBraintree, MA. During the second quarter of fiscal 2020, we sold$7.8 million of real estate and other assets associated with theBraintree corporate headquarters and entered into a lease with the buyer that allowed the Company to leaseback that facility on a rent-free basis throughDecember 31, 2019 until the completion of our relocation toBoston, MA , which occurred during the third quarter of fiscal 2020. As a result of this transaction, we received net cash proceeds of$15.0 million and non-cash consideration of$0.9 million related to a free rent period ending inDecember 2019 . The transaction resulted in a net gain of$8.1 million . 28
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Change in Reportable Segments
EffectiveMarch 31, 2019 , we completed the transition of our operating structure to three global business units - Plasma,Blood Center and Hospital - and accordingly reorganized our operating and reporting structure to align with our three global business units. This new segment structure has been realigned in accordance with the respective markets to accurately reflect the ongoing performance of each business and excludes revenue for service, maintenance and parts related to the applicable business unit. The discussion of our results of operations that follows has been revised to reflect our new reportable segments. Market Trends Plasma Market
There are two key aspects to the market for our plasma products - the growth in demand for plasma-derived biopharmaceuticals and the limited number of significant biopharmaceutical companies in this market.
Changes in demand for plasma-derived biopharmaceuticals, particularly immunoglobulin, are the key driver of plasma collection volumes in the biopharmaceutical market. Various factors related to the supply of plasma and the production of plasma-derived biopharmaceuticals also affect collection volume, including the following:
• Biopharmaceutical companies are seeking more yield from the collected
plasma to meet growing demand for biopharmaceuticals without requiring an
equivalent increase in plasma supply.
• Newly approved indications for auto-immune diseases treated with
plasma-derived therapies, the growing understanding and diagnosis of thesediseases, longer lifespans and a growing aging patient population increase
the demand for plasma.
• Geographical expansion of biopharmaceuticals also increases demand for plasma.
Demand for our plasma products in fiscal 2020 continued to grow inNorth America as collection volumes benefited from an expanding end user market for plasma-derived biopharmaceuticals withU.S. produced plasma meeting the vast majority of plasma volume demand worldwide. As a result, our Plasma business' revenues are primarily from theU.S. Despite the overall growth in the market, the number of biopharmaceutical companies that collect and fractionate the majority of source plasma is low and industry consolidation is ongoing. Significant barriers to entry exist for new entrants due to high capital outlay requirements for fractionation, long regulatory pathways to the licensing of collection centers and fractionation facilities and approval of plasma-derived biopharmaceuticals. With these factors, we do not expect meaningful new entries or diversification. As a result, there are relatively few customers for our Plasma products, especially in theU.S. where 80% of the world's source plasma is collected and only a few customers provide the majority of our Plasma revenue.
Blood Center Market
In theBlood Center market, we sell automated blood component and manual whole blood collection systems, as well as software solutions that include blood drive planning, donor recruitment and retention, blood collection, component manufacturing and distribution. While we sell products around the world, a significant portion of our sales are to a limited number of customers due to relatively limited number of blood collectors. Within theBlood Center market, we have seen three trends that have negatively impacted growth of the overall marketplace despite the overall increase in aging populations. Overall, we continue to expect a decline in this business in the low to mid single-digits.
• Declining transfusion rates in mature markets due to the development of
more minimally invasive procedures with lower associated blood loss, as
well as better blood management.
• Competition in multi-unit collection technology for automated bloodcomponent collection systems has intensified and has negatively impacted
our sales in markets where these collections are prevalent.
? Industry consolidation through group purchasing organizations has
intensified pricing competition particularly in the manual whole blood
collection systems, as well as impacting our software business where
switching large customers to new or emerging technology platforms has a
relatively high cost.
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Table of Contents Hospital Market Hemostasis Management Market - The use of routine coagulation testing is well established throughout the world in various medical procedures, including cardiovascular surgery, organ transplantation, trauma, post-partum hemorrhage and percutaneous coronary intervention. While standard tests like prothrombin time, partial thromboplastin time and platelet count have limited ability to reveal a patient's risk for bleeding, they do not provide information on the patient's risk for thrombosis. In addition, these routine tests do not provide specific data about clot quality or stability. As a result of these limitations, clinicians are increasingly utilizing advanced hemostasis testing to provide more information about a patient's hemostasis status, resulting in improved clinical decision-making. In addition, advanced hemostasis testing supports hospital efforts to reduce the risks, complications and costs associated with unnecessary blood component transfusions. Haemonetics' TEG® and ClotPro hemostasis analyzer systems are advanced diagnostic tools that provide a comprehensive assessment of a patient's overall hemostasis. This information enables clinicians to decide the most appropriate clinical treatment for the patient to minimize blood loss and reduce clotting risk. For example, TEG analyzers have been used to support clinical decision making in open cardiovascular surgery and organ transplantation, becoming the standard of care in liver transplants. In more recent years, interest has grown into the utilization of TEG in trauma and other procedures in which the risk of hemorrhage and thrombosis are high.
Geographically, TEG systems have achieved the highest market penetration in
Cell Salvage Market - In recent years, more efficient blood use and less invasive surgeries have reduced demand for autotransfusion in these procedures and contributed to intense competition in mature markets, while increased access to healthcare in emerging economies has provided new markets and sources of growth. Orthopedic procedures have seen similar changes with improved blood management practices, including the use of tranexamic acid to treat and prevent postoperative bleeding, significantly reducing the number of transfusions and autotransfusion. Geographically, the Cell Saver® has achieved the highest market penetration inNorth America ,Europe andJapan . However, there are considerable growth opportunities in certainAsia Pacific and other emerging markets as addressable procedure volumes grow and the use of autotransfusion is becoming accepted as a standard of care. Transfusion Management Market - Revenues from BloodTrack® have increased in theU.S. andEurope in recent years as hospitals seek means to improve efficiencies and meet compliance guidelines for tracking and dispositioning blood components to patients. SafeTrace Tx®'s leading market share in theU.S. remains steady with potential opportunity to expand internationally. 30
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Financial Summary
Fiscal Year
(In thousands, except per % Increase/(Decrease) % Increase/(Decrease)
share data) 2020 2019 2018 20 vs. 19 19 vs. 18
Net revenues $ 988,479 $ 967,579 $ 903,923 2.2 % 7.0 %
Gross profit $ 484,513 $ 417,536 $ 411,908 16.0 % 1.4 %
% of net revenues 49.0 % 43.2 % 45.6 %
Operating expenses $ 381,162 $ 333,991 $ 355,751 14.1 % (6.1 )%
Operating income $ 103,351 $ 83,545 $ 56,157 23.7 % 48.8 %
% of net revenues 10.5 % 8.6 % 6.2 %
Gain on divestiture $ - $ - $ 8,000 - % (100.0 )%
Interest and other expense,
net $ (16,199 ) $ (9,912 ) $ (4,525 ) 63.4 % n/m
Income before taxes $ 87,152 $ 73,633 $ 59,632 18.4 % 23.5 %
Tax expense $ 10,626 $ 18,614 $ 14,060 (42.9 )% 32.4 %
% of pre-tax income 12.2 % 25.3 % 23.6 %
Net income $ 76,526 $ 55,019 $ 45,572 39.1 % 20.7 %
% of net revenues 7.7 % 5.7 % 5.0 %
Net income per share -
basic $ 1.51 $ 1.07 $ 0.86 41.1 % 24.4 %
Net income per share -
diluted $ 1.48 $ 1.04 $ 0.85 42.3 % 22.4 %
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal 2020, 2019 and 2018 include 52 weeks with each quarter having 13 weeks.
Net revenues for fiscal 2020 increased 2.2% compared with fiscal 2019. Without the effects of foreign exchange, net revenues increased 2.8% compared with fiscal 2019. Revenue increases in Plasma and Hospital primarily drove the overall increase in revenue during the fiscal year endedMarch 28, 2020 . This increase was partially offset by declines in ourBlood Center business unit. Net revenues for fiscal 2019 increased 7.0% compared with fiscal 2018 both with and without the effects of foreign exchange, as revenue increases in Plasma and Hospital were partially offset by declines in ourBlood Center business unit. Operating income increased during fiscal 2020 as compared with fiscal 2019, primarily due to favorable pricing, product mix and incremental savings from both the 2020 Program and the Complexity Reduction Initiative (the "2018 Program"). The gain recognized on the sale of real estate and other assets associated with theBraintree corporate headquarters also contributed to the increase. Impairment charges associated with the divestiture of our plasma liquid solutions operations to CSL partially offset these increases during fiscal 2020. Operating income increased during fiscal 2019 as compared with fiscal 2018, primarily due to increased revenue volumes, favorable price and product mix, lower restructuring and turnaround costs and annualized savings as a result of the prior year restructuring initiatives. This increase was partially offset by asset impairments, accelerated depreciation related to PCS2® devices, higher freight, fuel and carrier fees and increased investments within our Plasma and Hospital business units.
Management's Use of Non-GAAP Measures
Management uses non-GAAP financial measures, in addition to financial measures in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"), to monitor the financial performance of the business, make informed business decisions, establish budgets and forecast future results. These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance withU.S. GAAP. Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency conversion rate. We have provided this non-GAAP financial measure because we believe it provides meaningful information regarding our results on a consistent and comparable basis for the periods presented. 31
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Table of Contents RESULTS OF OPERATIONSNet Revenues by Geography Fiscal Year Fiscal 2020 versus 2019 Fiscal 2019 versus 2018 Constant currency Constant growth currency (In thousands) 2020 2019 2018 Reported
Growth Currency impact (1) Reported Growth Currency impact growth (1)
6.5 % - % 6.5 % 10.6 % - % 10.6 %
International 342,275 360,734 355,192 (5.1 )% (1.9 )% (3.2 )% 1.6 % - % 1.6 %
Net revenues $ 988,479 $ 967,579 $ 903,923 2.2 % (0.6 )% 2.8 % 7.0 % - % 7.0 %
(1) Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency. See
"Management's Use of Non-GAAP Measures."
International Operations and the Impact of Foreign Exchange
Our principal operations are in the United States , Europe , Japan and other parts
of Asia . Our products are marketed in approximately 85 countries around the
world through a combination of our direct sales force and independent
distributors and agents.
The percentage of revenue generated in our principle operating regions is
summarized below:
Fiscal Year
2020 2019 2018
United States 65.4 % 62.7 % 60.7 %
Japan 7.2 % 7.2 % 7.5 %
Europe 15.5 % 17.0 % 18.2 %
Asia 11.1 % 12.3 % 12.7 %
Other 0.8 % 0.8 % 0.9 %
Total 100.0 % 100.0 % 100.0 %
International sales are generally conducted in local currencies, primarily
Japanese Yen, Euro, Chinese Yuan and Australian Dollar. Our results of
operations are impacted by changes in foreign exchange rates, particularly in
the value of the Yen, Euro and Australian Dollar relative to the U.S. Dollar. We
have placed foreign currency hedges to mitigate our exposure to foreign currency
fluctuations.
Please see section entitled "Foreign Exchange" in this discussion for a more
complete explanation of how foreign currency affects our business and our
strategy for managing this exposure.
Net Revenues by Business Unit
Fiscal Year Fiscal 2020 versus 2019 Fiscal 2019 versus 2018
Constant Constant
currency currency
Reported Currency growth Reported Currency growth
(In thousands) 2020 2019 2018 Growth impact (1) Growth impact (1)
Plasma $ 458,681 $ 426,650 $ 363,099 7.5% (0.4)% 7.9% 17.5% -% 17.5%
Blood Center 317,761 329,727 341,736 (3.6)% (0.7)% (2.9)% (3.5)% (0.1)% (3.4)%
Hospital (2) 193,437 192,270 179,269 0.6% (1.4)% 2.0% 7.3% 0.2% 7.1%
Service 18,600 18,932 19,819
(1.8)% (1.4)% (0.4)% (4.5)% (1.3)% (3.2)%
Net revenues
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Plasma
Plasma revenue increased 7.5% during fiscal 2020 as compared with fiscal 2019. Without the effect of foreign exchange, Plasma revenue increased 7.9% during fiscal 2020. This revenue growth was primarily driven by an increase in volume of plasma disposables due to continued strong performance in theU.S. , favorable NexSys PCS pricing and increases in sales of software. This increase was partially offset by declines in plasma liquid solutions during fiscal 2020 due to certain strategic exits within our plasma liquid solutions business, including the divestiture of ourUnion, South Carolina facility during fiscal 2020. We expect continued declines in our plasma liquid solutions revenue in connection with these strategic exits. However, we will continue to supply liquid solutions to our customers on an as needed basis using contract manufacturers. Due to the timing of COVID-19 relative to our fiscal year end, our Plasma business unit experienced limited effects from the pandemic in fiscal 2020. We anticipate higher impacts from COVID-19 on our fiscal 2021 Plasma results as factors like stay-at-home orders, transportation restrictions and donor safety concerns, combined with reduced collection capacity due to shutdowns and social distancing requirements, will continue to impact our revenue throughout the COVID-19 pandemic and recovery. We believe these challenges will begin to subside when we see some easing of these containment measures. Despite the current challenges, we continue to believe that the Plasma business unit has growth potential as recessionary pressures have historically contributed to greater donor availability and growth in the long-term global demand for plasma-derived pharmaceuticals is expected to continue. Plasma revenue increased 17.5% during fiscal 2019 as compared with fiscal 2018. There was no foreign exchange impact on Plasma revenue during fiscal 2019. This revenue growth was primarily driven by an increase in volume of plasma disposables due to continued strong performance in theU.S. and favorable NexSys PCS pricing during fiscal 2019. Increases in sales of liquid solutions also contributed to the growth during fiscal 2019.Blood Center Blood Center revenue decreased 3.6% during fiscal 2020 as compared with fiscal 2019. Without the effect of foreign exchange,Blood Center revenue decreased 2.9% during fiscal 2020. This decrease was primarily driven by declines in whole blood disposables and software revenue. Apheresis also contributed to the overall decline as certain customers converted to alternative sources of supply. The expected impact of the loss of this apheresis business is an incremental revenue decline of$17 million in fiscal 2021. OurBlood Center business unit experienced limited effects from the COVID-19 pandemic in fiscal 2020 due to the timing of the pandemic relative to our fiscal year end. During fiscal 2020, the impact of COVID-19 on theBlood Center business unit was limited as an initial decline in donations was followed by a rapid increase in demand, as blood collectors sought to replenish their blood product inventories and safety stocks. During fiscal 2021, there may be a greater impact onBlood Center revenue caused by an imbalance in the supply and demand for blood products. However, we expect that the demand for blood will normalize with procedure volumes.Blood Center revenue decreased 3.5% during fiscal 2019 as compared with fiscal 2018.Without the effect of foreign exchange,Blood Center revenue decreased 3.4% during fiscal 2019. This decrease was primarily driven by lower whole blood revenue due to continued market declines, the strategic exit of certain contracts, products and markets, including unfavorable order timing associated with these exits, as well as product recalls. Declines in software revenue in theU.S and platelet revenue driven by the continued shift toward double dose collection techniques inJapan also contributed to the decrease. Hospital Hospital revenue increased 0.6% during fiscal 2020 as compared with fiscal 2019. Without the effect of foreign exchange, Hospital revenue increased 2.0% during fiscal 2020. This increase was primarily attributable to the growth of disposables associated with TEG® diagnostic systems, principally in theU.S. InMay 2019 , we received FDA clearance for the use of TEG 6s in adult trauma settings. InJanuary 2020 , we purchased the technology underlying the TEG 6s system which will allow us to pursue site of care opportunities beyond the hospital setting. In addition, onApril 1, 2020 , we acquired enicor GmbH, the manufacturer of ClotPro®, a new generation whole blood coagulation testing system which further augmented our portfolio of diagnostic devices. The revenue increase during fiscal 2020 was partially offset by declines due to the discontinuance of sales of our OrthoPAT products effectiveMarch 31, 2019 and the impact of COVID-19, primarily inChina , due to declines of elective surgeries, a reduction of trauma cases, restricted vendor access at customer sites and the reallocation of hospital resources to critical intensive care needs. We expect a continued negative impact on our Hospital business unit throughout the COVID-19 pandemic and recovery. However, we believe the end-market for our product portfolio is inherently strong and demand for our hospital products will normalize as hospitals address the backlog of elective procedures coupled with the return of non-elective procedures to pre-pandemic levels. 33
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Hospital revenue increased 7.3% during fiscal 2019 as compared with fiscal 2018. Without the effect of foreign exchange, Hospital revenue increased 7.1% during fiscal 2019. This increase was primarily attributable to the growth of disposables associated with TEG® diagnostic systems, principally in theU.S. andChina . The increase during fiscal 2019 was partially offset by the continued decline in OrthoPAT® revenue. Gross Profit Fiscal Year % Increase/(Decrease) % Increase/(Decrease) (In thousands) 2020 2019 2018 20 vs. 19 19 vs. 18 Gross profit$ 484,513 $ 417,536 $ 411,908 16.0 % 1.4 % % of net revenues 49.0 % 43.2 % 45.6 % Gross profit increased 16.0% during fiscal 2020 as compared with fiscal 2019. Without the effects of foreign exchange, gross profit increased 17.1% during fiscal 2020. The increase in the gross profit margin during fiscal 2020 was primarily due to favorable pricing driven by the annualization of NexSys PCS device conversions, incremental savings from both the 2020 Program and the complexity reduction initiative, product mix, and the absence of impairment charges that were incurred in the prior year. Gross profit increased 1.4% during fiscal 2019 as compared with fiscal 2018. Without the effects of foreign exchange, gross profit increased 0.5% during fiscal 2019. Gross profit margin percentage decreased by 240 basis points for fiscal 2019 as compared with fiscal 2018. The decrease in the gross profit margin during fiscal 2019 was primarily due to increased depreciation expense primarily due to Plasma devices and asset impairments. This decrease was partially offset by favorable price and volume mix as well as savings as a result of the prior year restructuring initiative. Operating Expenses Fiscal Year % Increase/(Decrease) % Increase/(Decrease) (In thousands) 2020 2019 2018 20 vs. 19 19 vs. 18 Research and development$ 30,883 $ 35,714 $ 39,228 (13.5 )% (9.0 )% % of net revenues 3.1 % 3.7 % 4.3 % Selling, general and administrative$ 299,680 $ 298,277 $ 316,523 0.5 % (5.8 )% % of net revenues 30.3 % 30.8 % 35.0 % Impairment of assets$ 50,599 $ - $ - 100.0 % - % % of net revenues 5.1 % - % - % Total operating expenses$ 381,162 $ 333,991 $ 355,751 14.1 % (6.1 )% % of net revenues 38.6 % 34.5 % 39.4 % Research and Development Research and development expenses decreased 13.5% during fiscal 2020 as compared with fiscal 2019. Without the effects of foreign exchange, research and development expenses decreased 13.4% during fiscal 2020. The decrease in fiscal 2020 was primarily driven by investments made in clinical programs in the prior year period in order to support FDA clearance for the use of TEG 6s in adult trauma settings, which was received inMay 2019 . Research and development expenses decreased 9.0% during fiscal 2019 as compared with fiscal 2018. Without the effects of foreign exchange, research and development expenses decreased 8.4% during fiscal 2019. The decrease in fiscal 2019 was primarily driven by lower restructuring and turnaround costs partially offset by our continued investment of resources in clinical programs, primarily in our Hospital business unit, as well as continued investment in our Plasma business unit. Selling, General and Administrative Selling, general and administrative expenses increased 0.5% during fiscal 2020 as compared with fiscal 2019. Without the effects of foreign exchange, selling, general and administrative expenses increased 1.4% during fiscal 2020. The increase in fiscal 2020 was primarily due to an increase in investments, share-based compensation expense, restructuring and turnaround costs and PCS2 related costs. This increase was partially offset by the gain recognized on the sale of assets associated with theBraintree corporate headquarters and incremental savings from both the 2020 Program and the 2018 Program. 34
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Selling, general and administrative expenses decreased 5.8% during fiscal 2019 as compared with fiscal 2018. Without the effects of foreign exchange, selling, general and administrative expenses decreased 5.6% during fiscal 2019. The decrease in fiscal 2019 was primarily the result of lower restructuring and turnaround costs and annualized savings from restructuring initiatives. This decrease was partially offset by increased investments within our Plasma and Hospital business units, higher freight, fuel and carrier fees and an increase in variable compensation and share-based compensation expense. Impairment of Assets We recognized impairment charges of$50.6 million during fiscal 2020 primarily as a result of the transfer to CSL of substantially all of our tangible assets related to the manufacture of anti-coagulant and saline at ourUnion, South Carolina facility. Refer to Note 5, Divestiture, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for information pertaining to this agreement. Interest and Other Expense, Net Interest and other expenses increased 63.4% during fiscal 2020 as compared with fiscal 2019. Without the effects of foreign exchange, interest and other expenses increased 68.3% during fiscal 2020. The increase is primarily driven by a reduction in capitalized interest, realized losses on interest rate swaps due to declining rates, and an increase in interest expense from borrowings under our$350.0 million term loan and$350.0 million revolving loan. The effective interest rate on total debt outstanding for the fiscal year endedMarch 28, 2020 was 2.9%. Interest expense increased$4.9 million during fiscal 2019 as compared with fiscal 2018 due to an increase in the Term Loan balance as well as an increase in the effective interest rate. Income Taxes Fiscal Year % Increase/(Decrease) % Increase/(Decrease) 2020 2019 2018 20 vs. 19 19 vs. 18
Reported income tax rate 12.2 % 25.3 % 23.6 % (13.1 )% 1.7 % Reported Tax Rate We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition tothe United States . Our reported tax rate is impacted by the jurisdictional mix of earnings in any given period as the foreign jurisdictions in which we operate have tax rates that differ from theU.S. statutory tax rate. We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry-back net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies and available sources of future taxable income. As ofMarch 28, 2020 , we maintain a valuation allowance against certainU.S. deferred tax assets that are not more-likely-than-not realizable and have a full valuation allowance against the net deferred tax assets of certain foreign subsidiaries. For the year endedMarch 28, 2020 , we recorded an income tax provision of$10.6 million on our worldwide pre-tax income of$87.2 million , resulting in a reported tax rate of 12.2%. Our effective tax rate for the year endedMarch 28, 2020 is lower than our effective tax rates of 25.3% and 23.6% for the years endedMarch 30, 2019 andMarch 31, 2018 , respectively. Our decrease in tax rate for fiscal 2020, as compared with fiscal 2019, is primarily the result of tax benefits associated with windfall stock compensation deductions and favorable changes in the jurisdictional mix of earnings partially offset by the impact of changes in valuation allowance, tax reserves and increased nondeductible executive compensation. The rate was higher than the fiscal 2018 tax rate due to the impact ofU.S. tax reform provisions that became effective in fiscal 2019, including global intangible low taxed income and nondeductible executive compensation, partially offset by windfall tax benefits on stock compensation deductions. Income Tax Acts Beginning in fiscal 2019, we incorporated the certain provisions of the Tax Cuts and Jobs Act (the "Act") in the calculation of the tax provision and effective tax rate, including the provisions related to global intangible low taxed income ("GILTI"), foreign derived intangible income ("FDII"), base erosion anti abuse Tax ("BEAT"), as well as other provisions which limit tax deductibility of expenses. For fiscal 2020, the GILTI provisions have the most significant impact. Under the new law,U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. The ability to 35
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benefit from a deduction and foreign tax credits against a portion of the GILTI income may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income, and other potential limitations within the foreign tax credit calculation. Interpretive guidance on the accounting for GILTI states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has made the accounting policy election to recognize GILTI as a period expense. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted inthe United States onMarch 27, 2020 . The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides extensive tax changes in response to the COVID-19 pandemic, the provisions are not expected to have a significant impact on the Company's financial results.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
March 28, March 30,
(In thousands) 2020 2019
Cash and cash equivalents $ 137,311 $ 169,351
Working capital $ 328,817 $ 340,362
Current ratio 2.2 2.4
Net debt position(1) $ (245,182 ) $ (180,769 )
Days sales outstanding (DSO) 62 67
Inventory turnover 1.7
2.5
(1)Net debt position is the sum of cash and cash equivalents less total debt.
InJuly 2019 , our Board of Directors approved the 2020 Program. We estimate that we 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 the fiscal year endedMarch 28, 2020 , we incurred$11.9 million of restructuring and turnaround costs under this program. Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations, our revolving credit line and proceeds from employee stock option exercises. We believe these sources are sufficient to fund our cash requirements over at least the next twelve months. Our expected cash outlays relate primarily to investments, restructuring and turnaround initiatives, capital expenditures, including investments in our manufacturing facilities and production of NexSys PCS devices, share repurchases and cash payments under the loan agreement. As ofMarch 28, 2020 , we had$137.3 million in cash and cash equivalents, the majority of which is held in theU.S. or in countries from which it can be freely repatriated to theU.S. OnJune 15, 2018 , we entered into a five-year credit agreement which provided for a$350.0 million term loan and a$350.0 million revolving loan. Interest on the term loan and revolving loan is established using LIBOR plus 1.13% - 1.75%, depending on our leverage ratio. Under the Credit Facilities, we are 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, all of which we were in compliance with as ofMarch 28, 2020 . As ofMarch 28, 2020 ,$323.8 million was outstanding under the Term Loan and$60.0 million was outstanding on the Revolving Credit Facility, both, with an effective interest rate of 2.9%. We also had$25.6 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as ofMarch 28, 2020 . During fiscal 2020, we paid$13.1 million in scheduled principal repayments for the Term Loan. We have scheduled principal repayments of$323.8 million required through fiscal 2024. We were in compliance with the leverage and interest coverage ratios specified in the credit agreement as well as all other bank covenants as ofMarch 28, 2020 . We continue to manage the ongoing impacts of the COVID-19 pandemic. While the duration and impacts of the pandemic remain uncertain, we are focused on preserving cash and have implemented a number of actions to help us protect cash flow and allocate capital such as reducing non-essential spending, delaying certain compensation-related items, inventory 36
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management, reviewing capital projects and the associated costs, and restricting travel. InApril 2020 , we borrowed an additional$150.0 million under the Revolving Credit Facility, increasing our cash on hand to approximately$300 million . Our leverage ratio remains low subsequent to the incremental$150.0 million of borrowings, and we have an additional$131.7 million of undrawn capacity remaining under the revolving credit line.
Cash Flow Overview
Fiscal Year
% Increase/(Decrease) % Increase/(Decrease)
(In thousands) 2020 2019 2018 20 vs. 19 19 vs. 18Net cash provided by (used in): Operating activities$ 158,217 $ 159,281 $ 220,350 $ (1,064 ) $ (61,069 ) Investing activities (57,176 ) (116,148 ) (63,041 ) (58,972 ) 53,107 Financing activities (131,208 ) (50,628 ) (120,643 ) 80,580 (70,015 ) Effect of exchange rate changes on cash and cash equivalents(1) (1,873 ) (3,323 ) 3,939 1,450 (7,262 ) Net (decrease) increase in cash and cash equivalents$ (32,040 ) $ (10,818 ) $ 40,605
(1)The balance sheet is affected by spot exchange rates used to translate local currency amounts into
Operating Activities
Net cash provided by operating activities was$158.2 million during fiscal 2020, a decrease of$1.1 million as compared with fiscal 2019. The decrease in cash provided by operating activities was primarily due to a working capital outflow driven by an increase in inventory build to support the launch of the NexSys PCS devices and decreases in accounts payable and accrued payroll. Net income, as adjusted for depreciation, amortization and other non-cash charges and a decrease in accounts receivable due to the timing of collections partially offset the decrease in operating activities. Net cash provided by operating activities was$159.3 million during fiscal 2019, a decrease of$61.1 million as compared with fiscal 2018. The decrease in cash provided by operating activities was primarily due to a working capital outflow driven largely by an increase accounts receivable due to higher revenue growth and collections timing, an increase in inventory and prepaid expenses to support the launch of the NexSys PCS device and decreases in accrued payroll due to severance payments associated with the 2018 Program. Net income, as adjusted for depreciation, amortization and other non-cash charges, partially offset the decrease in operating activities.
Investing Activities
Net cash used in investing activities was$57.2 million during fiscal 2020, a decrease of$59.0 million as compared with fiscal 2019. The decrease in cash used in investing activities was primarily the result of a decrease in capital expenditures in the current year period due to the NexSys PCS launch and manufacturing capacity expansion projects in our Plasma business unit in the prior year period. Proceeds received related to the divestiture of our plasma liquid solutions operations and sale of real estate and other assets associated with theBraintree corporate headquarters in the current period also contributed to the decrease in cash used in investing activities. This decrease was partially offset by the acquisition of the technology underlying the TEG 6s system during fiscal 2020. Net cash used in investing activities was$116.1 million during fiscal 2019, an increase of$53.1 million as compared with fiscal 2018. The increase in cash used in investing activities was primarily the result of an increase in capital expenditures in fiscal 2019 due to the NexSys PCS launch and manufacturing capacity expansion projects in our Plasma business unit and proceeds received related to the divestiture of our SEBRA product line in fiscal 2018.
Financing Activities
Net cash used in financing activities was$131.2 million during fiscal 2020, an increase of$80.6 million as compared with fiscal 2019. The increase was primarily due to lower borrowings, net of payments, on our Credit Facilities and increased share repurchases in the current period. 37
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Net cash used in financing activities was$50.6 million during fiscal 2019, a decrease of$70.0 million as compared with fiscal 2018. Cash used in financing activities included the repayment of the$253.7 remaining outstanding balance on our 2012 credit agreement, as amended in fiscal 2014, as well as$160.0 million of share repurchases during fiscal 2019. This use in cash was partially offset by proceeds resulting from the$350.0 million Term Loan entered into inJune 2018 . Contractual Obligations A summary of our contractual and commercial commitments as ofMarch 28, 2020 is as follows: Payments Due by Period Less than More than (In thousands) Total 1 year 1-3 years 3-5 years 5 years Debt$ 383,912 $ 81,919 $ 231,967 $ 70,026 $ - Interest payments (1) 19,158 8,736 6,546 3,876 - Operating leases 72,160 9,637 15,920 11,208 35,395 Purchase commitments(2) 113,717 113,717 - - - Expected retirement plan benefit payments 14,033 1,372 2,837 2,573 7,251 Total contractual obligations$ 602,980 $ 215,381 $ 257,270 $ 87,683 $ 42,646 (1) Interest payments reflect the contractual interest payments on our outstanding debt and exclude the impact of interest rate swap agreements. Interest payments are projected using interest rates in effect as ofMarch 28, 2020 . Certain of these projected interest payments may differ in the future based on changes in market interest rates. (2) Includes amounts we are committed to spend on purchase orders entered in the normal course of business for capital equipment as well as commitments with contractors for the manufacture of certain disposable products and equipment. The majority of our operating expense spending does not require any advance commitment. The above table does not reflect our long-term liabilities associated with unrecognized tax benefits of$3.4 million recorded in accordance with ASC Topic 740, Income Taxes. We cannot reasonably make a reliable estimate of the period in which we expect to settle these long-term liabilities due to factors outside of our control, such as tax examinations.
Concentration of Credit Risk
While approximately 54% of our revenue during fiscal 2020 was generated by our ten largest customers, concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. Certain markets and industries, however, can expose us to concentrations of credit risk. For example, in the Plasma business unit, sales are concentrated with several large customers. As a result, accounts receivable extended to any one of these biopharmaceutical customers can be significant at any point in time. In addition, a portion of our trade accounts receivable outside theU.S. include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays and local economic conditions. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies. We have not incurred significant losses on receivables. We continually evaluate all receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries' healthcare systems deteriorate such that their ability to make payments is uncertain, allowances may be required in future periods.
Legal Proceedings
In accordance withU.S. GAAP, we record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount may be reasonably estimated. Actual settlements may be different than estimated and could have a material impact on our consolidated earnings, financial position and/or cash flows. For a discussion of our material legal proceedings refer to Note 16, Commitments & Contingencies, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. 38
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Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity and by adjusting the selling prices of products. We continue to monitor inflation pressures generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Foreign Exchange
During fiscal 2020, 34.6% of our sales were generated outside theU.S. , generally in foreign currencies, yet our reporting currency is theU.S. Dollar. We also incur certain manufacturing, marketing and selling costs in international markets in local currency. Our primary foreign currency exposures relate to sales denominated in Euro, Japanese Yen, Chinese Yuan and Australian Dollars. We also have foreign currency exposure related to manufacturing and other operational costs denominated in Swiss Francs, Canadian Dollars, Mexican Pesos and Malaysian Ringgit. The Yen, Euro, Yuan and Australian Dollar sales exposure is partially mitigated by costs and expenses for foreign operations and sourcing products denominated in foreign currencies. Since our foreign currency denominated Yen, Euro, Yuan and Australian Dollar sales exceed the foreign currency denominated costs, whenever theU.S. Dollar strengthens relative to the Yen, Euro, Yuan or Australian Dollar, there is an adverse effect on our results of operations and, conversely, whenever theU.S. Dollar weakens relative to the Yen, Euro, Yuan or Australian Dollar, there is a positive effect on our results of operations. For Swiss Francs, Canadian Dollars Mexican Pesos and Malaysian Ringgit, our primary cash flows relate to product costs or costs and expenses of local operations. Whenever theU.S. Dollar strengthens relative to these foreign currencies, there is a positive effect on our results of operations. Conversely, whenever theU.S. Dollar weakens relative to these currencies, there is an adverse effect on our results of operations. We have a program in place that is designed to mitigate our 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 unforeseen impact on our financial results from changes in foreign exchange rates. We utilize forward foreign currency contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily Japanese Yen and Euro, and to a lesser extent Swiss Francs, Australian Dollars, Canadian Dollars and Mexican Pesos. This does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. These contracts are designated as cash flow hedges. The final impact of currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.
Recent Accounting Pronouncements
Standards to be Implemented
InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326). ASC Update No. 2016-13 is intended to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. ASC Update No. 2016-13 is effective for annual periods beginning afterDecember 15, 2019 , and is applicable to us in fiscal 2021. We are in the process of determining the effect that the adoption will have on our financial position and results of operations. InAugust 2018 , the FASB issued ASC Update No. 2018-15, Intangibles,Goodwill and Other -Internal-Use Software (Subtopic 350-40). The new guidance will align the accounting implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting for internal-use software licenses. The guidance is effective for annual periods beginning afterDecember 15, 2019 and is applicable to us in fiscal 2021. Early adoption is permitted for all entities, including interim periods. The impact of adopting ASC Update No. 2018-15 is not expected to have a material effect on our consolidated financial statements. InDecember 2019 , the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740). The new guidance will improve consistent application of and simplify the accounting for income taxes by removing certain exceptions to the general principals in Topic 740. ASC Update No. 2019-12 is effective for annual periods beginning afterDecember 15, 2020 , and is applicable to 39
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us in fiscal 2022. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates.
The accounting policies identified as critical are as follows:
Revenue Recognition
Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration related to rebates, product returns and volume discounts. These reserves, which are based on estimates of the amounts earned or to be claimed on the related sales, are recorded as a reduction of revenue and a current liability. Our estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Revenue recognized in the current period related to performance obligations satisfied in prior periods was not material. If we are unable to estimate the expected rebates reasonably, we record a liability for the maximum potential rebate or discount that could be earned. In circumstances where we provide upfront rebate payments to customers, we capitalize the rebate payments and amortize the resulting asset as a reduction of revenue using a systematic method over the life of the contract. See Note 2, Summary of Significant Accounting Policies and Note 8, Revenue, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information.Goodwill and Intangible Assets Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows and discount rates could result in different fair value estimates. Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units include, but are not limited to, the following:
• Decreases in estimated market sizes or market growth rates due to
greater-than-expected declines in procedural volumes, pricing pressures,
product actions and/or competitive technology developments,
• Declines in our market share and penetration assumptions due to increased
competition, an inability to develop or launch new and next-generation
products and technology features in line with our commercialization
strategies and market and/or regulatory conditions that may cause
significant launch delays or product recalls,
• Decreases in our forecasted profitability due to an inability to implement
successfully and achieve timely and sustainable cost improvement measures
consistent with our expectations,
• Changes in our reporting units or in the structure of our business as aresult of future reorganizations, acquisitions or divestitures of assets
or businesses and
• Increases in our market-participant risk-adjusted weighted average cost of
capital and increases in our market-participant tax rate and/or changes in
tax laws or macroeconomic conditions.
Negative changes in one or more of these factors, among others, could result in future impairment charges.
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We review intangible assets subject to amortization for impairment at least annually or more frequently if certain conditions arise to determine if any adverse conditions exist that would indicate that the carrying value of an asset or asset group may not be recoverable, or that a change in the remaining useful life is required. Conditions indicating that an impairment exists include but are not limited to a change in the competitive landscape, internal decisions to pursue new or different technology strategies, a loss of a significant customer or a significant change in the marketplace including prices paid for our products or the size of the market for our products. See Note 2, Summary of Significant Accounting Policies and Note 11,Goodwill & Intangible Assets, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
Inventory Provisions
We base our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared with forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. Additionally, uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to excess, expired and obsolete inventory.
Income Taxes
The income tax provision is calculated for all jurisdictions in which we operate. The income tax provision process involves calculating current taxes due and assessing temporary differences arising from items that are taxable or deductible in different periods for tax and accounting purposes and are recorded as deferred tax assets and liabilities. Deferred tax assets are evaluated for realizability and a valuation allowance is maintained for the portion of our deferred tax assets that are not more-likely-than-not realizable. All available evidence, both positive and negative, has been considered to determine whether, based on the weight of that evidence, a valuation allowance is needed against the deferred tax assets. Refer to Note 6, Income Taxes, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information and discussion of our income tax provision and balances. We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts. We record a liability for the portion of unrecognized tax benefits claimed that we have determined are not more-likely-than-not realizable. These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
Contingencies
We may become involved in various legal proceedings that arise in the ordinary
course of business, including, without limitation, patent infringement, product
liability and environmental matters. Accruals recorded for various contingencies
including legal proceedings, employee related litigation, self-insurance and
other claims are based on judgment, the probability of losses and, where
applicable, the consideration of opinions of internal and/or external legal
counsel and actuarially determined estimates. When a loss is probable and a
range of loss is established but a best estimate cannot be made, we record the
minimum loss contingency amount. These estimates are often initially developed
substantially earlier than the ultimate loss is known and the estimates are
reevaluated each accounting period, as additional information is available. When
we are initially unable to develop a best estimate of loss, we record the
minimum amount of loss, which could be zero. As information becomes known,
additional loss provision is recorded when either a best estimate can be made or
the minimum loss amount is increased. When events result in an expectation of a
more favorable outcome than previously expected, our best estimate is changed to
a lower amount.
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