HAEMONETICS CORPORATION Our Business
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 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 expect to incur an additional$3.4 million of accelerated depreciation expense relating to disposables manufacturing equipment previously placed into service that will cease being used.
Issuance of Convertible Senior Notes
InMarch 2021 , we 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 andU.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$486.7 million . The 2026 Notes will mature onMarch 1, 2026 , unless earlier converted, redeemed or repurchased. Approximately$47.4 million of the net proceeds from the offering were used to fund the cost of entering into Capped Call Transactions and the balance was used to reduce our indebtedness under the Credit Facilities and for working capital and other general corporate purposes. AcquisitionsCardiva Medical, Inc. OnMarch 1, 2021 , we acquired Cardiva an industry-leading manufacturer of vascular closure systems based inSanta Clara, California for total consideration of$489.8 million , which consisted of upfront payments of$465.5 million ($418.2 million net of cash acquired) and the fair value of contingent consideration of$24.3 million . The purchase price is subject to customary working capital and certain other adjustments as of the closing of the transaction and a maximum of$35.0 million in contingent consideration payable over the next two years based on sales growth. We financed the acquisition through a combination of cash, borrowings under our Revolving Credit Facility and an additional$150.0 million term loan. These borrowings were subsequently paid in full during the same period using the proceeds from the 2026 Notes. 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 32 -------------------------------------------------------------------------------- Table of Contents 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 onlyU.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 our Hospital business unit includes products with demonstrated benefits and enhances penetration into the large and growing interventional cardiology and electrophysiology markets.
HAS Intellectual Property
InJanuary 2021 , we entered into an agreement to acquire certain intellectual property owned byHemoAssay Science and Technology (Suzhou) Co. Ltd. , aChina -incorporated company, and its affiliates (collectively, "HemoAssay") underlying their HAS viscoelastic diagnostic devices, related assays and disposables. We previously entered into exclusive manufacturing and distribution agreements with HemoAssay pursuant to which we have exclusive rights to commercialize HemoAssay's HAS devices inChina . In connection with the transaction, we have agreed to pay up to$15.0 million to HemoAssay in contingent consideration based on certain developmental and manufacturing based milestones. These products augment our portfolio of hemostasis analyzers within the Hospital business unit. enicorGmbH OnApril 1, 2020 , we acquired enicorGmbH ("enicor"), the manufacturer of ClotPro®, a new generation whole blood coagulation testing system that is currently available in select European andAsia 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.
Refer to Note 4, Acquisitions, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
Persona®
OnOctober 2, 2020 , we received FDA 510(k) clearance for our NexSys PCS® with Persona technology. NexSys PCS with Persona technology uses a percent plasma nomogram that customizes plasma collection based on an individual donor's body composition. The new, proprietary Persona technology strengthens the NexSys PCS value proposition and reinforces our commitment to supporting the plasma industry.
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 2021 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 Analysis and Risk
Factors contained in Item 1A of this Annual Report on Form 10-K.
33
--------------------------------------------------------------------------------
Table of Contents
Divestitures
Fajardo, Puerto Rico Manufacturing Operations
OnJune 29, 2020 , we sold our 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 addition, the two parties 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. This divestiture will allow Haemonetics to utilize GVS' experience and scale in filtration to deliver reliable, cost-efficient products to its customers.
OnJuly 1, 2020 , we sold certainU.S. blood donor management software solution assets within ourBlood Center business unit to theGPI Group for an upfront cash payment of$14.0 million ($13.6 million , net of working capital adjustments) and recognized a$13.2 million gain on the sale. In addition to the cash received upon closing, we may also receive up to an additional$14.0 million , contingent upon the achievement of certain performance measures. This divestiture better positions Haemonetics for sustainable growth by enabling the Company to focus on its core capabilities while delivering quality products and services where it brings distinct value.
Inlog Holdings France
OnSeptember 18, 2020 , we sold our wholly-owned subsidiary Inlog Holdings France SAS to Abénex Capital ("Abénex"), a private equity firm based inFrance for$30.5 million ($24.5 million , net of cash transferred) and recognized a gain of$20.0 million . Inlog Holdings France SAS, through its subsidiary In Log SAS, develops and sells blood bank and hospital software solutions used predominantly inFrance and in several other countries outside of theU.S. This divestiture and the sale of ourU.S. blood donor management software better position us to focus on our growth segments.
Refer to Note 5, Divestitures, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
Restructuring Program
InJuly 2019 , our Board of Directors approved an 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 initially expected to incur aggregate charges between$60 million and$70 million by the end of fiscal 2023 and to achieve savings of$80 million to$90 million on an annualized basis once the program is completed. We believe the 2020 Program will continue to provide future savings, however, we are currently assessing the potential impact CSL's decision not to renew its Supply Agreement on the expected timing, charges and savings. 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 fiscal year endedApril 3, 2021 , we incurred$15.1 million of restructuring and turnaround costs under this program. Total cumulative charges under this program are$27.0 million as ofApril 3, 2021 .
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:
34
--------------------------------------------------------------------------------
Table of Contents
•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 these diseases, longer
lifespans and a growing aging patient population increase the demand for plasma.
•Geographical expansion of biopharmaceuticals also increases demand for plasma.
During fiscal 2021 the COVID-19 pandemic significantly reduced the number of source plasma collections in theU.S. , which materially reduced the demand for plasma products. We continue to view the impacts of the pandemic on plasma collection as temporary and 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. Because plasma collected in theU.S. supplies the vast majority of plasma volume demand worldwide, we anticipate continued growth inNorth America in future periods as collection volumes benefit from an expanding end user market for plasma-derived biopharmaceuticals. Despite the overall growth in the market, the number of biopharmaceutical companies that collect and fractionate 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. As a result, there are relatively few customers for our Plasma products, especially in theU.S. where over 70% 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. 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 blood component 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.
Hospital Markets
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®, ClotPro® and HAS 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
35
--------------------------------------------------------------------------------
Table of Contents
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 and in fiscal 2021 launched in theUnited Kingdom . We continue to explore opportunities to expand the portfolio internationally. Vascular Closure Market - Our target market, coronary and peripheral procedures and electrophysiology procedures, are highly concentrated in theU.S. The mature market of coronary and peripheral procedures consists of interventions to diagnose and treat vascular diseases. Electrophysiology procedures consist of catheter-based interventions to diagnose and treat cardiac arrhythmias. This procedure category is expected to grow based on the increasing incidence and prevalence of cardiac arrhythmias, mainly in theU.S. Financial Summary Fiscal Year % Increase/(Decrease) % Increase/(Decrease) (In thousands, except per share data) 2021 2020 2019 21 vs. 20 20 vs. 19 Net revenues$ 870,463 $ 988,479 $ 967,579 (11.9) % 2.2 % Gross profit$ 397,838 $ 484,513 $ 417,536 (17.9) % 16.0 % % of net revenues 45.7 % 49.0 % 43.2 % Operating expenses$ 308,091 $ 381,162 $ 333,991 (19.2) % 14.1 % Operating income$ 89,747 $ 103,351 $ 83,545 (13.2) % 23.7 % % of net revenues 10.3 % 10.5 % 8.6 % Interest and other expense, net$ (16,834) $ (16,199) $ (9,912) 3.9 % 63.4 % Income before (benefit) provision for income taxes$ 72,913 $ 87,152 $ 73,633 (16.3) % 18.4 % (Benefit) provision for income taxes$ (6,556) $ 10,626 $ 18,614 n/m (42.9) % % of pre-tax income (9.0) % 12.2 % 25.3 % Net income$ 79,469 $ 76,526 $ 55,019 3.8 % 39.1 % % of net revenues 9.1 % 7.7 % 5.7 % Net income per share - basic$ 1.57 $ 1.51 $ 1.07 4.0 % 41.1 % Net income per share - diluted$ 1.55 $ 1.48 $ 1.04 4.7 % 42.3 % Our fiscal year ends on the Saturday closest to the last day of March. Fiscal year 2021 included 53 weeks with each of the first three quarters having 13 weeks and the fourth quarter having 14 weeks. Fiscal year 2020 and 2019 included 52 weeks with each quarter having 13 weeks. Net revenues for fiscal 2021 decreased 11.9% compared with fiscal 2020. Without the effects of foreign exchange, net revenues decreased 12.9% compared with fiscal 2020. Revenue decreases in Plasma due to the COVID-19 pandemic primarily drove the overall decrease in revenue during the fiscal year endedApril 3, 2021 . 36
--------------------------------------------------------------------------------
Table of Contents
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.
Operating income decreased during fiscal 2021 as compared with fiscal 2020, primarily due to the impact of the COVID-19 pandemic on revenue and gross margin, offset by gain on divestitures, incremental savings from the 2020 Program and lower asset impairment charges and depreciation expense.
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.
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. RESULTS OF OPERATIONSNet Revenues by Geography Fiscal Year Fiscal 2021 versus 2020 Fiscal 2020 versus 2019 Constant Constant Reported currency growth currency growth (In thousands) 2021 2020 2019 Growth Currency impact (1) Reported Growth Currency impact (1)United States $ 522,607 $ 646,204 $ 606,845 (19.1) % - % (19.1) % 6.5 % - % 6.5 % International 347,856 342,275 360,734 1.6 % 3.0 % (1.4) % (5.1) % (1.9) % (3.2) % Net revenues$ 870,463 $ 988,479 $ 967,579 (11.9) % 1.0 % (12.9) % 2.2 % (0.6) % 2.8 %
(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 percentage of revenue generated in our principle operating regions is
summarized below:
Fiscal Year
2021 2020 2019
United States 60.0 % 65.4 % 62.7 %
Japan 8.9 % 7.2 % 7.2 %
Europe 18.3 % 15.5 % 17.0 %
Asia 12.2 % 11.1 % 12.3 %
Other 0.6 % 0.8 % 0.8 %
Total 100.0 % 100.0 % 100.0 %
37-------------------------------------------------------------------------------- Table of Contents 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 theU.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
Fiscal Year Fiscal 2021 versus 2020 Fiscal 2020 versus 2019
Constant currency Constant currency
(In thousands) 2021 2020 2019 Reported Growth Currency impact growth(1) Reported Growth Currency impact growth(1)
Plasma $ 332,236 $ 458,681 $ 426,650 (27.6)% -% (27.6)% 7.5% (0.4)% 7.9%
Blood Center 307,452 317,761 329,727 (3.2)% 2.4% (5.6)% (3.6)% (0.7)% (2.9)%
Hospital(2) 210,632 193,437 192,270 8.9% 0.7% 8.2% 0.6% (1.4)% 2.0%
Service 20,143 18,600 18,932 8.3% 3.6% 4.7% (1.8)% (1.4)% (0.4)%
Net revenues $ 870,463 $ 988,479 $ 967,579 (11.9)% 1.0% (12.9)% 2.2% (0.6)% 2.8%
(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 $107.4 million , $95.7 million and $85.7 million for fiscal years 2021, 2020 and 2019, respectively. Hemostasis Management revenue increased 12.2% during fiscal 2021 as
compared with fiscal 2020. Without the effect of foreign exchange, Hemostasis Management revenue increased 12.8% during fiscal 2021 as compared with fiscal 2020. Hemostasis Management revenue increased 11.7% during fiscal 2020 as compared
with fiscal 2019. Without the effect of foreign exchange, Hemostasis Management revenue increased 13.5% during fiscal 2020 as compared with fiscal 2019.
Plasma
Plasma revenue decreased 27.6% during fiscal 2021 as compared with fiscal 2020.
There was no foreign exchange impact on Plasma revenue during fiscal 2021. This
revenue decrease was primarily driven by a decline in the volume of plasma
disposables, primarily in the U.S. , due to the COVID-19 pandemic and declines in
plasma liquid solutions as a result of certain strategic exits within our liquid
solutions business. Declines in software revenue due to a one-time favorable
impact in the prior year period also contributed to the decrease.
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 . 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.Blood Center Blood Center revenue decreased 3.2% during fiscal 2021 as compared with fiscal 2020. Without the effect of foreign exchange,Blood Center revenue decreased 5.6% during fiscal 2021 primarily due to continued declines in whole blood disposables and the divestiture of certain blood donor management software solution assets. These declines were partially offset by increases in apheresis revenue, despite certain customers' conversions to alternative sources of supply, due to the impact distributor stocking orders in the first quarter and the 53rd week in fiscal 2021. The impact of the loss of this apheresis business is an incremental revenue decline of approximately$17.0 million in fiscal 2021 as compared with fiscal 2020. 38
--------------------------------------------------------------------------------
Table of Contents
We have not yet experienced the reversal of the large stocking orders made by distributors and blood collectors during the first quarter of fiscal 2021 in response to the COVID-19 pandemic, but we may experience a reversal in future periods.Blood Center revenue decreased 3.6% during fiscal 2020 as compared with fiscal 2019. Without the effect of foreign exchange,Blood Center revenue decreased 2.9% during fiscal 2020. This decrease was primarily driven by declines in whole blood disposables and software revenue. Apheresis also contributed to the overall decline as certain customers converted to alternative sources of supply.
Hospital
Hospital revenue increased 8.9% during fiscal 2021 as compared with fiscal 2020 despite the negative impact of COVID-19, primarily inChina and theU.S , early in the fiscal year. Without the effect of foreign exchange, Hospital revenue increased 8.2% during fiscal 2021. This increase was primarily attributable to a recent acquisition, TEG® disposable revenue in theU.S. and equipment sales inEurope . The increases were partially offset by declines in Cell Salvage revenue and the divestiture of certain blood bank and hospital software solution assets. We believe that the demand for our hospital products is inherently strong and that procedure volumes will continue to improve with a return to normal levels in during fiscal 2022. Hospital revenue increased 0.6% during fiscal 2020 as compared with fiscal 2019. Without the effect of foreign exchange, Hospital revenue increased 2.0% during fiscal 2020. This increase was primarily attributable to the growth of disposables associated with TEG diagnostic systems, principally in theU.S. Gross Profit Fiscal Year % Increase/(Decrease) % Increase/(Decrease) (In thousands) 2021 2020 2019 21 vs. 20 20 vs. 19 Gross profit$ 397,838 $ 484,513 $ 417,536 (17.9) % 16.0 % % of net revenues 45.7 % 49.0 % 43.2 % Gross profit decreased 17.9% during fiscal 2021 as compared with fiscal 2020. Without the effects of foreign exchange, gross profit decreased 19.6% during fiscal 2021. The decrease in the gross profit margin during fiscal 2021 was primarily due to unfavorable volumes and product mix, asset impairments, higher operational costs from the impact of the COVID-19 pandemic, recent divestitures and the amortization of the fair value inventory step-up related to the acquisition of Cardiva. The decline was partially offset by lower depreciation expense and productivity savings from the 2020 Program, the 53rd week in fiscal 2021 and recent acquisitions. 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. 39 --------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Fiscal Year
% Increase/(Decrease) % Increase/(Decrease)
(In thousands) 2021 2020 2019 21 vs. 20 20 vs. 19Research and development$ 32,857 $ 30,883 $ 35,714 6.4 % (13.5) % % of net revenues 3.8 % 3.1 %
3.7 %
Selling, general and administrative
(2.8) % 3.1 %
% of net revenues 31.5 % 28.5 % 28.3 %
Amortization of intangible assets $ 32,830 $ 25,746 $ 24,803 27.5 % 3.8 %
% of net revenues 3.8 % 2.6 % 2.6 %
Impairment of assets $ 1,028 $ 50,599 $ - (98.0) % n/m
% of net revenues 0.1 % 5.1 % - %
Gains on divestitures and sale of
assets $ (32,812) $ (8,083) $ - n/m n/m
% of net revenues (3.8) % (0.8) % - %
Total operating expenses $ 308,091 $ 381,162 $ 333,991 (19.2) % 14.1 %
% of net revenues 35.4 % 38.6 % 34.5 %
Research and Development
Research and development expenses increased 6.4% during fiscal 2021 as compared
with fiscal 2020. Without the effects of foreign exchange, research and
development expenses increased 6.1% during fiscal 2021. The increase in fiscal
2021 was primarily due to increased spend related to European Medical Device
Regulation costs, recent acquisitions and continued investments in our Plasma
and Hospital Business units. The increases were partially offset by cost savings
primarily related to the 2020 Program.
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 in May 2019 .
Selling, General and Administrative
Selling, general and administrative expenses decreased 2.8% during fiscal 2021
as compared with fiscal 2020. Without the effects of foreign exchange, selling,
general and administrative expenses decreased 3.5% during fiscal 2021. The
decrease in fiscal 2021 was primarily due to cost containment actions taken to
offset the negative effects related to the COVID-19 pandemic, incremental
productivity savings from the 2020 Program and a reduction in restructuring and
turnaround costs.
The decrease was partially offset by higher transaction and integration costs,
increased deal amortization expense as a result of recent acquisitions and
higher share-based and variable compensation expense.
Selling, general and administrative expenses increased 3.1% during fiscal 2020
as compared with fiscal 2019. Without the effects of foreign exchange, selling,
general and administrative expenses increased 4.1% 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 incremental savings from
both the 2020 Program and the complexity reduction initiative.
40
--------------------------------------------------------------------------------
Table of Contents
Amortization of Intangible Assets
We recognized amortization expense of
Impairment of Assets
We recognized impairment charges of$1.0 million during fiscal 2021 in connection with the sale of our Fajardo,Puerto Rico , manufacturing operations. We recognized impairment charges of$50.6 million during fiscal 2020 in connection with the sale of ourUnion, South Carolina facility. Refer to Note 5, Divestitures, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for information pertaining to these agreements.
Gains on Divestitures
We recognized gains on divestitures of$32.8 million during fiscal 2021. Refer to Note 5, Divestitures, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for information pertaining to these divestitures. We recognized gains of$8.1 million due to the sale of assets associated with ourBraintree corporate headquarters during fiscal 2020.
Interest and Other Expense, Net
Interest and other expenses increased 3.9% during fiscal 2021 as compared with fiscal 2020. Without the effects of foreign exchange, interest and other expenses increased 4.8% during fiscal 2021. The increase is primarily driven by realized losses on interest rate swaps due to declining rates, interest and debt issuance costs incurred in connection with short-term financing for the Cardiva acquisition and amortization of the debt discount associated with the 2026 Notes partially offset by a reduction 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 endedApril 3, 2021 was 1.4%. 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 was 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%. Income Taxes Fiscal Year % Increase/(Decrease) % Increase/(Decrease) 2021 2020 2019 21 vs. 20 20 vs. 19 Reported income tax rate (9.0) % 12.2 % 25.3 % (21.2) % (13.1) % Reported Tax Rate We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition to theU.S. 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 ofApril 3, 2021 , we maintain a valuation allowance against certainU.S. state 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 endedApril 3, 2021 , we recorded an income tax benefit of$6.6 million on our worldwide pre-tax income of$72.9 million , resulting in a reported tax rate of (9.0)%. Our effective tax rate for the year endedApril 3, 2021 is lower than our effective tax rates of 12.2% and 25.3% for the years endedMarch 28, 2020 andMarch 30, 2019 , respectively. The decrease in our tax rate for fiscal 2021, as compared with fiscal 2020, is primarily the result of a deferred tax asset recorded related to theU.S. purchase of intellectual property, a non-recurring tax benefit from the release of a portion of the valuation allowance due to 41 -------------------------------------------------------------------------------- Table of Contents taxable temporary differences acquired with the acquisition of Cardiva being available as a source of income to realize certain pre-existing deferred tax assets, favorable changes in the jurisdictional mix of earnings, and a decrease in the global intangible low taxed income inclusion due to legislation enacted during the year, offset by lower tax benefits associated with windfall stock compensation deductions as compared to fiscal 2020. 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.
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. Under the GILTI provisions, U.S. taxes are imposed on foreign income
in excess of a deemed return on tangible assets of its foreign subsidiaries. The
ability to 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.
In July 2020 , the U.S. Treasury issued final regulations and additional proposed
regulations that address the application of the high-taxed exclusion from GILTI.
Under these regulations, the Company can make an annual election to exclude from
its GILTI calculation, income from its foreign subsidiaries whose effective
income tax rate exceeds 18.9% for that year. The regulations must be applied for
tax years beginning after July 23, 2020 but companies have the option to apply
them retroactively for tax years beginning after December 31, 2017 and before
July 23, 2020 .
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted in the United States on March 27, 2020 . The CARES Act is an emergency
economic stimulus package that includes spending and tax breaks to strengthen
the 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 did not 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:
April 3, March 28,
(In thousands) 2021 2020
Cash and cash equivalents $ 192,305 $ 137,311
Working capital $ 440,051 $ 328,817
Current ratio 2.7 2.2
Net debt position(1) $ (515,303) $ (245,182)
Days sales outstanding (DSO) 51 62
Inventory turnover 1.2 1.7
(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 Facility 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 and turnaround 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 4.21% as ofApril 3, 2021 . 42 -------------------------------------------------------------------------------- Table of Contents As ofApril 3, 2021 , we had$192.3 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 Credit Facility, which we refer to together as the Credit Facilities. Interest on the Term Loan and Revolving Credit Facility 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. During the fourth quarter of fiscal 2021, the Company entered into an additional$150.0 million term loan under the existing Credit Facilities and borrowed$290.0 million under the Revolving Credit Facility in connection with the acquisition of Cardiva. Both of these borrowings were subsequently paid in full during the same period using the proceeds from the 2026 Notes. In connection with the additional$150 million term loan borrowing, the Company and its lenders also 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 ofApril 3, 2021 ,$301.9 million was outstanding under the Term Loan and no borrowings were outstanding on the Revolving Credit Facility, both, with an effective interest rate of 1.4%. We also had$25.7 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as ofApril 3, 2021 . During fiscal 2021, we paid$21.9 million in scheduled principal repayments for the Term Loan. We have scheduled principal repayments of$301.9 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 ofApril 3, 2021 . 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 fiscal 2021 and 2020, we incurred$15.1 million and$11.9 million of restructuring and turnaround costs under this program, respectively. InMay 2019 , our Board of Directors authorized the repurchase of up to$500.0 million of Haemonetics common shares over the two year period endingMay 2021 . As ofApril 3, 2021 , the total remaining authorization for repurchases of the Company's common stock under the share repurchase program was$325.0 million . We did not make any additional share repurchases under this program which expired inMay 2021 . Cash Flows Fiscal Year Increase/(Decrease) Increase/(Decrease) (In thousands) 2021 2020 2019 21 vs. 20 20 vs. 19 Net cash provided by (used in): Operating activities$ 108,805 $ 158,217 $ 159,281 $ (49,412) $ (1,064) Investing activities (425,442) (57,176) (116,148) 368,266 (58,972) Financing activities 367,452 (131,208) (50,628) (498,660) 80,580 Effect of exchange rate changes on cash and cash equivalents(1) 4,179 (1,873) (3,323) 6,052 1,450 Net change in cash and cash equivalents$ 54,994 $ (32,040)
43
--------------------------------------------------------------------------------
Table of Contents
Operating Activities
Net cash provided by operating activities was $108.8 million during fiscal 2021,
a decrease of $49.4 million as compared with fiscal 2020. The decrease in cash
provided by operating activities was primarily the result of a reduction in net
income, as adjusted for depreciation, amortization and other non-cash charges
compared with the prior year period, partially offset by a decrease in working
capital outflow as compared with the prior year period due to lower inventory
growth, primarily related to NexSys PCS devices, a decline in the build of
accounts receivable due to lower sales and improved collection timing and a
payment for a compensation-related liability paid at the closing of the Cardiva
acquisition.
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.
Investing Activities
Net cash used in investing activities was$425.4 million during fiscal 2021, an increase of$368.3 million as compared with fiscal 2020. The increase in cash used in investing activities was primarily the result of cash paid for acquisitions. The increase was partially offset by an increase in proceeds received relating to divestitures and a decrease in capital expenditures. 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 fiscal 2020 due to the NexSys PCS launch and manufacturing capacity expansion projects in our Plasma business unit in fiscal 2019. 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 fiscal 2020 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.
Financing Activities
Net cash provided by financing activities was$367.5 million during fiscal 2021, an increase of$498.7 million as compared with fiscal 2020. The increase in cash provided by financing activities was primarily due to the$500.0 million of proceeds related to the 2026 Notes entered into inMarch 2021 and a decrease in share repurchases compared with the prior year period. The increase was partially offset by the repayment of borrowings on our revolving credit facility, the purchase of the Capped Call on the 2026 Notes and higher payments on our term loan. Net cash used in financing activities was$131.2 million during fiscal 2020, an increase of$80.6 million as compared with fiscal 2019. The increase in cash used in financing activities was primarily due to lower borrowings, net of payments, on our Credit Facilities and increased share repurchases in fiscal 2020. 44 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations A summary of our contractual and commercial commitments as ofApril 3, 2021 is as follows: Payments Due by Period Less than More than (In thousands) Total 1 year 1-3 years 3-5 years 5 years Convertible senior notes$ 500,000 $ - $ -$ 500,000 $ - Debt 301,875 17,500 284,375 - - Interest payments (1) 6,369 4,000 2,369 - - Operating leases 89,965 10,769 17,730 14,324 47,142 Purchase commitments(2) 139,695 139,695 - - - Expected retirement plan benefit payments 14,326 1,629 2,801 2,537 7,359 Total contractual obligations$ 1,052,230 $ 173,593
The above table does not reflect our long-term liabilities associated with unrecognized tax benefits of$3.6 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 49% of our revenue during fiscal 2021 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 legal 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.
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.
45
--------------------------------------------------------------------------------
Table of Contents
Foreign Exchange
During fiscal 2021, 40.0% of our sales were generated outside the U.S. ,
generally in foreign currencies, yet our reporting currency is the U.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 the U.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 the U.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 the U.S. Dollar
strengthens relative to these foreign currencies, there is a positive effect on
our results of operations. Conversely, whenever the U.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
InDecember 2019 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("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 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. InAugust 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 applyingU.S. GAAP for certain financial instruments with characteristics of liabilities and equity. Update No. 2020-06 is effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. We early adopted ASC Update No. 2020-06 effectiveApril 4, 2021 using the modified retrospective method, which will result in a decrease of approximately$81.3 million to additional paid-in capital and an increase of approximately$80.3 million to non-current convertible notes, net, on the Consolidated Balance Sheets. Additionally, retained earnings will be adjusted to remove amortization expense recognized in prior periods related to the debt discount and the convertible notes will no longer have a debt discount that will be amortized. The impact to retained earnings on the Consolidated Balance Sheets as ofApril 4, 2021 is an increase of approximately$1.0 million . While we do not expect a material impact to our consolidated statements of operations and consolidated statements of cash flows upon adoption, non-cash interest expense associated with the amortization of debt discounts will be reduced in future periods.
Critical Accounting Policies and Estimates
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. We consider an estimate to be a "critical 46 -------------------------------------------------------------------------------- Table of Contents accounting estimate" when (i) the nature of the estimate is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimate on financial condition or operating performance is material. The accounting policies and estimates 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. Refer to 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.
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 a result 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.
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. Refer 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. 47 -------------------------------------------------------------------------------- Table of Contents 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, an
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.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in
business combinations under the purchase method of accounting. Amounts paid for
each acquisition are allocated to the assets acquired and liabilities assumed
based on their fair values at the dates of acquisition. The fair value of
identifiable intangible assets is based on detailed valuations that use
information and assumptions including forecasted cash flows, revenues
attributable to existing technology and existing customer attrition. When
estimating the significant assumptions to be used in the valuation we included a
consideration of current industry information, market and economic trends,
historical results of the acquired business, and other relevant factors. These
significant assumptions are forward-looking and could be affected by future
economic and market conditions. We allocate any excess purchase price over the
fair value of the net tangible and intangible assets acquired and liabilities
assumed to goodwill.
Contingent consideration is recorded at fair value as measured on the date of
acquisition using an appropriate valuation model, such as the Monte Carlo
simulation model. The value recorded is based on estimates of future financial
projections under various potential scenarios, in which the model runs many
simulations based on comparable companies' growth rates and their implied
volatility. Our estimates of forecasted revenues in the earn out period include
a consideration of current industry information, market and economic trends,
historical results of the acquired business, and other relevant factors. These
cash flow
48
--------------------------------------------------------------------------------
Table of Contents
projections are discounted with a risk adjusted rate. Each quarter until such
contingent amounts are earned, the fair value of the liability is remeasured at
each reporting period and adjusted as a component of operating expenses based on
changes to the underlying assumptions. The estimates used to determine the fair
value of the contingent consideration liability are subject to significant
judgment and given the inherent uncertainties in making these estimates, actual
results are likely to differ from the amounts originally recorded and could be
materially different.
Convertible Senior Notes
Significant judgment is required in determining the liability component of the
related convertible senior notes as well as the balance sheet classification of
the elements of the convertible senior notes. We account for convertible senior
notes as separate liability and equity components, determining the fair value of
the respective liability components based on an estimate of the fair value of a
similar liability without a conversion option and assigning the residual value
to the equity component.
We estimate the fair value of the liability component of the convertible senior
notes using a discounted cash flow model with a risk adjusted yield for similar
debt instruments, absent any embedded conversion feature. In estimating the risk
adjusted yield, we utilize both an income and market approach. For the income
approach, we use a convertible bond pricing model, which include several
assumptions including volatility and the risk-free rate. For the market
approach, we perform an evaluation of issuances of convertible debt securities
issued by other comparable companies. Additionally, a detailed analysis of the
terms of the convertible senior notes transactions is required to determine
existence of any derivatives that may require separate mark-to-market accounting
under applicable accounting guidance.
49--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
