HAEMONETICS CORPORATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with both our interim
condensed consolidated financial statements and notes thereto which appear
elsewhere in this Quarterly Report on Form 10-Q and our annual consolidated
financial statements, notes thereto and the MD&A contained in our Annual Report
on Form 10-K for the fiscal year ended April 3, 2021 . The following discussion
may contain forward-looking statements and should be read in conjunction with
the "Cautionary Statement Regarding Forward-Looking Information" in this
discussion.
22
--------------------------------------------------------------------------------Introduction
Haemonetics is a global healthcare company dedicated to providing a suite of innovative medical products and solutions for customers to help them improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets: 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. "Hospital", which is comprised of Hemostasis Management, Cell Salvage, Transfusion Management and Vascular Closure products, includes devices and methodologies for measuring coagulation characteristics of blood, surgical blood salvage systems, specialized blood cell processing systems and disposables, blood transfusion management software and vascular closure devices.
We believe that Plasma and Hospital have growth potential, while
Recent Developments
Operational Excellence Program
During the second quarter of fiscal 2022, our Board of Directors approved the revised Operational Excellence Program (the "2020 Program"). The revised program is designed to improve product and service quality, reduce cost principally in our 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. We now expect to incur aggregate charges between$95 million and$105 million by the end of fiscal 2025 and to achieve total gross savings of$115 million to$125 million on an annualized basis once the program is completed. 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 months endedJuly 3, 2021 andJune 27, 2020 , the Company incurred$9.9 million and$3.5 million , respectively, of restructuring and restructuring related costs under this program. Total cumulative charges under this program are$36.9 million as ofJuly 3, 2021 .
CSL Contract Loss
InApril 2021 , CSL informed us of its intent not to renew its supply agreement for the use of PCS2 plasma collection system devices and the purchase of disposable plasmapheresis kits (the "Supply Agreement") following the expiration of the current term of the Supply Agreement inJune 2022 . In fiscal year 2021, revenue under this Supply Agreement was$88.6 million , or 10.2% of total revenue. As a result of this anticipated contract loss, we recorded a$20.9 million one-time asset impairment charge relating to disposables manufacturing equipment and$5.0 million of additional expenses in the fourth quarter of fiscal 2021. In the first quarter of fiscal 2022, we incurred an additional$2.8 million of accelerated depreciation expense relating to disposables manufacturing equipment that is no longer in use.
COVID-19
We continue to closely manage the impacts of the COVID-19 pandemic on our business results of operations and financial condition. The progression of the COVID-19 pandemic during fiscal 2022 significantly impacted our financial results. While the duration and additional implications remain uncertain, the full extent of the 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 priorities continue to be the safety of our employees and business continuity while continuing to invest in growth opportunities. Our manufacturing and supply chain remain operational without significant disruptions and we continue to operate in all of our markets.
Although the pace and timing of the recovery is uncertain, we remain confident
in the long term strength of the end markets that we serve across our three
business units. 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
23
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Analysis contained in this Quarterly Report on Form 10-Q and Risk Factors
contained in Item 1A of the Annual Report on Form 10-K for the fiscal year ended
April 3, 2021 .
Financial Summary
Three Months Ended
July 3, June 27, % Increase/
(In thousands, except per share data) 2021 2020 (Decrease)
Net revenues $ 228,528 $ 195,577 16.8 %
Gross profit $ 108,085 $ 90,030 20.1 %
% of net revenues 47.3 % 46.0 %
Operating expenses $ 106,695 $ 78,315 36.2 %
Operating income $ 1,390 $ 11,715 (88.1) %
% of net revenues 0.6 % 6.0 %
Interest and other expense, net $ (4,398) $ (3,735) 17.8 %
(Loss) income before provision (benefit) for income taxes
$ 7,980 n/m Provision (benefit) for income taxes$ 1,446 $ (2,547) n/m % of pre-tax income (48.1) % (31.9) % Net (loss) income$ (4,454) $ 10,527 n/m % of net revenues (1.9) % 5.4 % Net (loss) income per share - basic$ (0.09) $ 0.21 n/m Net (loss) income per share - diluted$ (0.09) $ 0.21 n/m Net revenues increased 16.8% during the three months endedJuly 3, 2021 as compared with the same periods of fiscal 2021. Without the effect of foreign exchange, net revenues increased 14.0% during the three months endedJuly 3, 2021 as compared with the same periods of fiscal 2021. Revenue increases in Hospital primarily drove the overall increase in revenue during the three months endedJuly 3, 2021 . Operating income decreased during the three months endedJuly 3, 2021 , as compared with the same period of fiscal 2021, primarily due to increased spend related to the acquisition ofCardiva Medical, Inc. ("Cardiva"), including higher transaction and integration costs driven by an increase in the fair value of contingent consideration and the amortization of the fair value inventory step-up, as well as asset impairments and increased intangible amortization expense. The decrease was partially offset by favorable volumes and product mix, gains on divestitures and productivity savings from the 2020 Program.
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. 24 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Revenues by Geography
Three Months Ended
July 3, June 27, Constant currency
(In thousands) 2021 2020 Reported growth Currency impact growth (1)
United States $ 141,028 $ 111,009 27.0 % - % 27.0 %
International 87,500 84,568 3.5 % 6.1 % (2.6) %
Net revenues $ 228,528 $ 195,577 16.8 % 2.8 % 14.0 %
(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."
Our principal operations are in the U.S , Europe , Japan and other parts of Asia .
Our products are marketed in approximately 90 countries around the world through
a combination of our direct sales force, independent distributors and agents.
Our revenue generated outside the U.S. was 38.3% of total net revenues during
the three months ended July 3, 2021 , as compared with 43.2% during the three
months ended June 27, 2020 . International sales are generally conducted in local
currencies, primarily Japanese Yen, Euro, Chinese Yuan and Australian Dollars.
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 the 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
Three Months Ended
July 3, June 27, Constant currency
(In thousands) 2021 2020 Reported growth Currency impact growth (1)
Plasma $ 71,844 $ 68,211 5.3 % 0.8 % 4.5 %
Blood Center 72,945 77,789 (6.2) % 3.4 % (9.6) %
Hospital (2) 78,494 44,839 75.1 % 4.8 % 70.3 %
Service 5,245 4,738 10.7 % 7.0 % 3.7 %
Net revenues $ 228,528 $ 195,577 16.8 % 2.8 % 14.0 %
(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."
(2) Hospital revenue includes Hemostasis Management revenue of $32.2 million and
$24.0 million during the three months ended July 3, 2021 and June 27, 2020 ,
respectively. Hemostasis Management revenue increased 34.3% in the first quarter
of fiscal 2022, as compared with the same period of fiscal 2021. Without the
effect of foreign exchange, Hemostasis Management revenue increased 31.1% in the
first quarter of fiscal 2022, as compared with the same period of fiscal 2021.
Plasma
Plasma revenue increased 5.3% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effect of foreign exchange, Plasma revenue increased 4.5% during the three months endedJuly 3, 2021 as compared with the same periods of fiscal 2021. These increases were primarily driven by increase in volume of plasma disposables and increase in software revenue, partially offset by pricing adjustments and declines in plasma liquid solutions as a result of certain strategic exits within our liquid solutions business.
We continue experiencing the negative impact of COVID-19 on our business. While the timing of plasma collection recovery remains uncertain, we believe the impacts of the pandemic on plasma collection are temporary and anticipate volumes to recover by the end of fiscal 2022. We remain confident in the strength of the plasma end market growth as the long-term global demand for plasma-derived pharmaceuticals is expected to continue.
In earlyApril 2021 , CSL informed us of its intent not to renew its supply agreement for the use of PCS2 plasma collection system devices and the purchase of disposable plasmapheresis kits following the expiration of the current term of the Supply Agreement inJune 2022 . In fiscal 2021, revenue under this Supply Agreement was$88.6 million . 25 --------------------------------------------------------------------------------
Blood Center revenue decreased 6.2% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effect of foreign exchange,Blood Center revenue decreased 9.6% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. These decreases were primarily driven by the divestiture of certain blood donor management software solution assets and continued declines in whole blood disposables. We have not yet experienced the reversal of the large stocking orders made by distributors and blood collectors during the first quarter of fiscal 2021 in response to the COVID-19 pandemic, but we may experience a reversal in future periods. Hospital Hospital revenue increased 75.1% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effect of foreign exchange, Hospital revenue increased 70.3% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. These increases were primarily attributable to Vascular Closure revenue resulting from the acquisition of Cardiva and the impact of the COVID-19 pandemic on the prior year period. The increases were partially offset by the divestiture of certain blood bank and hospital software solution assets. We believe that the demand for our hospital products is inherently strong and that procedure volumes will continue to improve with a return to normal levels during fiscal 2022. Gross Profit Three Months Ended July 3, June 27, % Increase/ (In thousands) 2021 2020 (Decrease) Gross profit$ 108,085 $ 90,030 20.1 % % of net revenues 47.3 % 46.0 % Gross profit increased 20.1% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effect of foreign exchange, gross profit increased 12.5% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. These increases were primarily driven by the addition of Vascular Closure, favorable volumes and product mix, lower expenses related to the COVID-19 pandemic and productivity savings from the 2020 Program. 26 -------------------------------------------------------------------------------- The increase was partially offset by pricing adjustments, the amortization of the fair value inventory step-up related to the acquisition of Cardiva, asset impairments and recent divestitures. Operating Expenses Three Months Ended July 3, June 27, % Increase/ (In thousands) 2021 2020 (Decrease) Research and development$ 12,701 $ 7,750 63.9 % % of net revenues 5.6 % 4.0 %
Selling, general and administrative
46.4 % % of net revenues 39.9 % 31.9 %
Amortization of intangible assets
49.8 % % of net revenues 5.4 % 4.2 %
Gains on divestitures and sale of assets
n/m
% of net revenues (4.2) % - %
Total operating expenses $ 106,695 $ 78,315 36.2 %
% of net revenues 46.7 % 40.0 %
Research and Development
Research and development expenses increased 63.9% during the three months ended
July 3, 2021 as compared with the same period of fiscal 2021. Without the effect
of foreign exchange, research and development expenses increased 61.2% during
the three months ended July 3, 2021 as compared with the same period of fiscal
2021. These increases were primarily due to increased spend related to
investments in our Hospital Business unit, primarily driven by Vascular Closure,
as well as costs related to European Medical Device Regulation. These increases
were partially offset by cost savings related to the 2020 Program and lower
restructuring and restructuring related costs.
Selling, General and Administrative
Selling, general and administrative expenses increased 46.4% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effect of foreign exchange, selling, general, and administrative expenses increased 44.4% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. These increases were primarily due to increased spend related to the acquisition of Cardiva, including higher transaction and integration costs driven by an increase in the fair value of contingent consideration, and higher share-based and variable compensation expense, partially offset by asset impairments recognized in the prior year period and lower PCS2 related costs.
Amortization of Intangible Assets
We recognized amortization expense of$12.4 million and$8.3 million during the three months endedJuly 3, 2021 andJune 27, 2020 , respectively. The increase was primarily driven by an increase in intangible assets resulting from recent acquisitions. Gains on Divestitures We recognized gains on divestitures of$9.6 million during the three months endedJuly 3, 2021 . Refer to Note 5, Divestitures, to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information pertaining to these divestitures. There were no gains on divestitures during the three months endedJune 27, 2020 .
Interest and Other Expense, Net
Interest and other expenses increased 17.8% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. Without the effects of foreign exchange, interest and other expenses increased 16.5% during the three months endedJuly 3, 2021 as compared with the same period of fiscal 2021. The increase is primarily driven by the amortization of deferred financing fees associated with the 2026 Notes and realized losses on interest rate swaps, partially offset by a reduction in interest expense from borrowings under our$350.0 million term loan and$350.0 million revolving loan due to lower borrowings. The effective interest rate on total debt outstanding as ofJuly 3, 2021 was 1.9%. 27 --------------------------------------------------------------------------------
Income Taxes
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. For the three months endedJuly 3, 2021 , we reported income tax expense of$1.4 million representing an effective tax rate of (48.1)%. The effective tax rate for the three months endedJuly 3, 2021 includes$0.8 million discrete tax expense relating to stock compensation shortfalls. For the three months endedJune 27, 2020 , we reported an income tax benefit of$2.5 million representing an effective tax benefit of 31.9%. The effective tax rate for the three months endedJune 27, 2020 includes discrete tax benefits recognized from excess stock compensation deductions of$4.0 million . The effective tax rate was also impacted by the jurisdictional mix of earnings.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
July 3, April 3,
(Dollars in thousands) 2021 2021
Cash & cash equivalents $ 173,462 $ 192,305
Working capital $ 456,029 $ 440,051
Current ratio 3.0 2.7
Net debt(1) $ (610,908) $ (515,303)
Days sales outstanding (DSO) 52 51
Inventory turnover 1.1 1.2
(1)Net debt position is the sum of cash and cash equivalents less total debt.
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 acquisitions, investments, capital expenditures and the build out of our new manufacturing facility inClinton, PA , cash payments under the loan agreement and restructuring initiatives. InMarch 2021 , we issued$500.0 million aggregate principal amount of 0% convertible senior notes due 2026, or the 2026 Notes. The 2026 Notes are governed by the terms of the Indenture between the Company andU.S. Bank National Association , as trustee. 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 onMarch 1, 2026 , unless earlier converted, redeemed or repurchased. The 2026 Notes have an effective interest rate of 2.72% as ofJuly 3, 2021 . As ofJuly 3, 2021 , we had$173.5 million in cash and cash equivalents, the majority of which is held in theU.S. or in countries from which it can be 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 (together with the term loan, as amended from time to time, the "Credit Facilities"). 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. The Company and its lenders agreed to increase the maximum consolidated leverage ratio the Company is required to maintain for the four consecutive quarters immediately following the closing of the Cardiva acquisition to 4.25:1.0, after which the maximum consolidated leverage ratio the Company is required to maintain will revert to 3.5:1.0. As ofJuly 3, 2021 ,$297.5 million was outstanding under the term loan with an effective interest rate of 1.9%. There were no borrowings outstanding on the revolving loan. We also had$25.5 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as ofJuly 3, 2021 .
We have scheduled principal payments of
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InAugust 2021 , our Board of Directors approved a revised 2020 Program. We now estimate that we will incur aggregate charges between$95 million and$105 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 2025. During the three months endedJuly 3, 2021 , we incurred$9.9 million of restructuring and restructuring related costs under this program.
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