Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - HAEMONETICS CORP | haeq2sep2018ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - HAEMONETICS CORP | haeq2sep2018ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - HAEMONETICS CORP | haeq2sep2018ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - HAEMONETICS CORP | haeq2sep2018ex311.htm |
| EX-10.5 - EXHIBIT 10.5 - HAEMONETICS CORP | haeq2sep2018ex105.htm |
| EX-10.4 - EXHIBIT 10.4 - HAEMONETICS CORP | haeq2sep2018ex104.htm |
| EX-10.3 - EXHIBIT 10.3 - HAEMONETICS CORP | haeq2sep2018ex103.htm |
| EX-10.2 - EXHIBIT 10.2 - HAEMONETICS CORP | haeq2sep2018ex102.htm |
| EX-10.1 - EXHIBIT 10.1 - HAEMONETICS CORP | haeq2sep2018ex101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the quarter ended: September 30, 2017
Commission File Number: 001-14041
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts (State or other jurisdiction of incorporation or organization) | 04-2882273 (I.R.S. Employer Identification No.) | |
400 Wood Road, Braintree, MA 02184
(Address of principal executive offices)
Registrant’s telephone number, including area code: (781) 848-7100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ | No o | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ | No o | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | ||||
Non-accelerated filer o | (Do not check if a smaller reporting company) | ||||
Smaller reporting company o | |||||
Emerging growth company o | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o | No þ | |
The number of shares of $0.01 par value common stock outstanding as of November 3, 2017: 52,818,234
HAEMONETICS CORPORATION
INDEX
PAGE | |
2
ITEM 1. FINANCIAL STATEMENTS
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited in thousands, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | ||||||||||||
Net revenues | $ | 225,377 | $ | 220,253 | $ | 436,328 | $ | 430,209 | |||||||
Cost of goods sold | 120,815 | 116,005 | 240,101 | 234,905 | |||||||||||
Gross profit | 104,562 | 104,248 | 196,227 | 195,304 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 7,521 | 8,336 | 15,714 | 19,773 | |||||||||||
Selling, general and administrative | 72,783 | 71,118 | 139,644 | 158,618 | |||||||||||
Total operating expenses | 80,304 | 79,454 | 155,358 | 178,391 | |||||||||||
Operating income | 24,258 | 24,794 | 40,869 | 16,913 | |||||||||||
Gain on divestiture | — | — | 8,000 | — | |||||||||||
Interest and other expense, net | (1,397 | ) | (1,962 | ) | (2,756 | ) | (4,139 | ) | |||||||
Income before provision for income taxes | 22,861 | 22,832 | 46,113 | 12,774 | |||||||||||
Provision for income taxes | 2,759 | 3,007 | 5,874 | 3,295 | |||||||||||
Net income | $ | 20,102 | $ | 19,825 | $ | 40,239 | $ | 9,479 | |||||||
Net income per share - basic | $ | 0.38 | $ | 0.39 | $ | 0.77 | $ | 0.19 | |||||||
Net income per share - diluted | $ | 0.38 | $ | 0.38 | $ | 0.76 | $ | 0.18 | |||||||
Weighted average shares outstanding | |||||||||||||||
Basic | 52,619 | 51,378 | 52,531 | 51,200 | |||||||||||
Diluted | 52,981 | 51,701 | 52,896 | 51,463 | |||||||||||
Comprehensive income | 21,937 | 19,037 | 45,703 | 7,804 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2017 | April 1, 2017 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 203,622 | $ | 139,564 | |||
Accounts receivable, less allowance of $2,224 at September 30, 2017 and $2,184 at April 1, 2017 | 143,693 | 152,683 | |||||
Inventories, net | 168,592 | 176,929 | |||||
Prepaid expenses and other current assets | 37,482 | 40,853 | |||||
Total current assets | 553,389 | 510,029 | |||||
Property, plant and equipment, net | 320,221 | 323,862 | |||||
Intangible assets, less accumulated amortization of $232,714 at September 30, 2017 and $215,772 at April 1, 2017 | 169,379 | 177,540 | |||||
Goodwill | 211,125 | 210,841 | |||||
Deferred tax asset | 4,478 | 3,988 | |||||
Other long-term assets | 12,571 | 12,449 | |||||
Total assets | $ | 1,271,163 | $ | 1,238,709 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Notes payable and current maturities of long-term debt | $ | 108,589 | $ | 61,022 | |||
Accounts payable | 41,764 | 42,973 | |||||
Accrued payroll and related costs | 37,364 | 43,534 | |||||
Other liabilities | 67,282 | 63,650 | |||||
Total current liabilities | 254,999 | 211,179 | |||||
Long-term debt, net of current maturities | 178,015 | 253,625 | |||||
Deferred tax liability | 13,380 | 12,114 | |||||
Other long-term liabilities | 23,516 | 22,181 | |||||
Total stockholders’ equity | |||||||
Common stock, $0.01 par value; Authorized — 150,000,000 shares; Issued and outstanding — 52,694,556 shares at September 30, 2017 and 52,255,495 shares at April 1, 2017 | 527 | 523 | |||||
Additional paid-in capital | 497,980 | 482,044 | |||||
Retained earnings | 330,155 | 289,916 | |||||
Accumulated other comprehensive loss | (27,409 | ) | (32,873 | ) | |||
Total stockholders’ equity | 801,253 | 739,610 | |||||
Total liabilities and stockholders’ equity | $ | 1,271,163 | $ | 1,238,709 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Six Months Ended | |||||||
September 30, 2017 | October 1, 2016 | ||||||
Cash Flows from Operating Activities: | |||||||
Net income | $ | 40,239 | $ | 9,479 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Non-cash items: | |||||||
Depreciation and amortization | 43,986 | 45,253 | |||||
Gain on divestiture | (8,000 | ) | — | ||||
Stock-based compensation expense | 4,199 | 4,235 | |||||
Provision for losses on accounts receivable and inventory | 688 | 6,902 | |||||
Impairment of assets | — | 2,505 | |||||
Other non-cash operating activities | 312 | (1,241 | ) | ||||
Change in operating assets and liabilities: | |||||||
Change in accounts receivable | 10,739 | 6,807 | |||||
Change in inventories | 7,284 | (12,661 | ) | ||||
Change in prepaid income taxes | 776 | (324 | ) | ||||
Change in other assets and other liabilities | 3,920 | 2,836 | |||||
Change in accounts payable and accrued expenses | (6,815 | ) | 6,169 | ||||
Net cash provided by operating activities | 97,328 | 69,960 | |||||
Cash Flows from Investing Activities: | |||||||
Capital expenditures | (29,125 | ) | (41,624 | ) | |||
Proceeds from divestiture | 9,000 | — | |||||
Proceeds from sale of property, plant and equipment | 1,346 | 197 | |||||
Net cash used in investing activities | (18,779 | ) | (41,427 | ) | |||
Cash Flows from Financing Activities: | |||||||
Repayment of term loan borrowings | (28,455 | ) | (18,970 | ) | |||
Proceeds from employee stock purchase plan | 1,622 | 1,979 | |||||
Proceeds from exercise of stock options | 10,120 | 13,532 | |||||
Net increase (decrease) in short-term loans | 417 | (1,116 | ) | ||||
Net cash used in financing activities | (16,296 | ) | (4,575 | ) | |||
Effect of exchange rates on cash and cash equivalents | 1,805 | (211 | ) | ||||
Net Change in Cash and Cash Equivalents | 64,058 | 23,747 | |||||
Cash and Cash Equivalents at Beginning of Period | 139,564 | 115,123 | |||||
Cash and Cash Equivalents at End of Period | $ | 203,622 | $ | 138,870 | |||
Supplemental Disclosures of Cash Flow Information: | |||||||
Interest paid | $ | 3,768 | $ | 4,118 | |||
Income taxes paid | $ | 5,449 | $ | 3,867 | |||
Transfers from inventory to fixed assets for placement of Haemonetics equipment | $ | 3,965 | $ | 3,477 | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated. Operating results for the six months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2018 or any other interim period. Operating results for the three months ended October 1, 2016 include an overstatement of net income, which was determined to be immaterial to all periods impacted. Absent this correction, our operating income and net income for the three and six months ended October 1, 2016 would have been $0.9 million and $1.2 million lower, respectively, than the amount included in the accompanying consolidated statements of income and comprehensive income. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended April 1, 2017.
We consider events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Refer to Note 3, Restructuring, for information pertaining to a restructuring initiative that was approved after the balance sheet date but prior to the issuance of the financial statements. There were no other subsequent events identified.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
In March 2016, the FASB issued ASU No. 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The purpose of the update is to simplify several areas of the accounting for share-based payment transactions. We adopted ASU No. 2016-09 on a prospective basis in our first quarter of fiscal 2018; therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 did not have a material effect on our financial position or results of operations.
ASU No. 2016-09 allows a company to elect to account for award forfeitures as they occur or to continue to estimate forfeitures. We have elected to continue to estimate potential forfeitures.
In addition, ASU No. 2016-09 eliminates additional paid in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the consolidated statement of operations when the awards vest or are settled. Amendments related to accounting for excess tax benefits resulted in an immaterial tax benefit for the three and six months ended September 30, 2017. In connection with the adoption of this new standard, we also recorded a cumulative-effect adjustment to accumulated deficit and deferred tax assets for certain off balance sheet federal and state net operating loss carry-forwards totaling $1.6 million as of April 1, 2017, with an equal offsetting adjustment to the valuation allowance.
3. RESTRUCTURING
On an ongoing basis, we review the global economy, the healthcare industry, and the markets in which we compete to identify opportunities for efficiencies, enhance commercial capabilities, align our resources and offer our customers better solutions. In order to realize these opportunities, we undertake restructuring-type activities to transform our business.
On November 1, 2017, we launched a Complexity Reduction Initiative (the "2018 Program"), a company-wide restructuring program designed to improve operational performance and reduce cost, freeing up resources to invest in accelerated growth. This program includes a reduction of headcount and operating costs which will enable a more streamlined organizational structure. We expect to incur aggregate charges between $50 million and $60 million associated with these actions, of which we expect $35 million to $40 million will consist of severance and other employee costs and the remainder will consist of other exit costs, primarily related to third party services. These charges, substantially all of which will result in cash outlays, will be incurred as the specific actions required to execute on these initiatives are identified and approved and are expected to continue through fiscal 2020.
6
During fiscal 2017, we launched a restructuring program (the "2017 Program") designed to reposition our organization and improve our cost structure. During the three and six months ended September 30, 2017, we incurred $5.2 million and $7.7 million, respectively, of restructuring and turnaround costs under this program. During the three and six months ended October 1, 2016, we incurred $1.1 million and $18.8 million, respectively, of restructuring and turnaround charges under this program. As of September 30, 2017, the 2017 Program was substantially complete.
The following summarizes the restructuring activity for the six months ended September 30, 2017:
(In thousands) | Severance and Other Employee Costs | Other Costs | Total Restructuring | ||||||||
Balance at April 1, 2017 | $ | 7,001 | $ | 467 | $ | 7,468 | |||||
Costs incurred, net of reversals | 446 | 761 | 1,207 | ||||||||
Payments | (3,872 | ) | (470 | ) | (4,342 | ) | |||||
Balance at September 30, 2017 | $ | 3,575 | $ | 758 | $ | 4,333 | |||||
Substantially all of the restructuring costs for the six months ended September 30, 2017 have been included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income. As of September 30, 2017, we had a restructuring liability of $4.3 million, of which approximately $3.9 million is payable within the next twelve months.
In addition to the restructuring costs included in the table above, during the three and six months ended September 30, 2017, we also incurred costs of $5.6 million and $7.1 million, respectively, that do not constitute restructuring under ASC 420, Exit and Disposal Cost Obligations, which we refer to as turnaround costs. These costs, substantially all of which have been included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income, consist primarily of expenditures directly related to our restructuring initiative and include program management, implementation of the global strategic review initiatives and accelerated depreciation.
The tables below present restructuring and turnaround costs by reportable segment:
Restructuring costs | Three Months Ended | Six Months Ended | |||||||||||||
(in thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Japan | $ | 2 | $ | (38 | ) | $ | 111 | $ | 836 | ||||||
EMEA | 15 | (63 | ) | 25 | 3,011 | ||||||||||
North America Plasma | — | (7 | ) | — | 368 | ||||||||||
All Other | 134 | (246 | ) | 1,071 | 11,817 | ||||||||||
Total | $ | 151 | $ | (354 | ) | $ | 1,207 | $ | 16,032 | ||||||
Turnaround costs | Three Months Ended | Six Months Ended | |||||||||||||
(in thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Japan | $ | — | $ | 1 | $ | — | $ | 2 | |||||||
EMEA | 20 | 55 | 26 | 81 | |||||||||||
North America Plasma | 197 | 936 | 349 | 936 | |||||||||||
All Other | 5,419 | 959 | 6,688 | 3,362 | |||||||||||
Total | $ | 5,636 | $ | 1,951 | $ | 7,063 | $ | 4,381 | |||||||
Total restructuring and turnaround costs | $ | 5,787 | $ | 1,597 | $ | 8,270 | $ | 20,413 | |||||||
7
4. DIVESTITURE
On April 27, 2017, we sold our SEBRA line of benchtop and hand sealers to Machine Solutions Inc. because it was no longer aligned with our long-term strategic objectives. In connection with this transaction, we received net proceeds of $9.0 million and recorded a pre-tax gain of $8.0 million. The proceeds were subject to a post-closing adjustment based on final asset values as determined during the 90 day transition period. During the second quarter of fiscal 2018, the 90 day transition period ended and there were no post-close adjustments necessary.
The SEBRA portfolio included a suite of products which primarily include radio frequency sealers that are used to seal tubing as part of the collection of whole blood and blood components, particularly plasma.
5. INCOME TAXES
We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition to the United States. Our reported tax rate is generally lower than the U.S. federal statutory rate as the income tax rates in the foreign jurisdictions in which we operate are generally lower than the U.S. statutory tax rate. Additionally, our reported tax rate is lower than the statutory tax rate as a result of the release of valuation allowance against tax attributes in certain jurisdictions which can be utilized to offset current year earnings.
During the three months ended September 30, 2017 and October 1, 2016, we reported an income tax provision of $2.8 million and $3.0 million, respectively, representing effective tax rates of 12.1% and 13.2%, respectively. For the six months ended September 30, 2017 and October 1, 2016, we reported an income tax provision of $5.9 million and $3.3 million, respectively, representing effective tax rates of 12.7% and 25.8%, respectively. The change in our reported tax rate for both the three and six months ended September 30, 2017 was primarily the result of changes in the jurisdictional mix of earnings. Our effective tax rate for six months ended October 1, 2016 was also impacted by a non-recurring discrete tax expense of $1.4 million related to a workforce reduction during the first quarter of fiscal 2017 in a foreign subsidiary where we were required to maintain certain levels of headcount for a multi-year period, which resulted in the establishment of a tax reserve.
The income tax provision for the six months ended September 30, 2017 was primarily attributable to applying our estimated annual effective tax rate to our year-to-date consolidated income before provision for income taxes.
We are in a three year cumulative loss position in the U.S. and, accordingly, maintain a valuation allowance against our U.S. deferred tax assets. Additionally, we also maintain a valuation allowance against certain other deferred tax assets primarily in Switzerland, Puerto Rico, Luxembourg and France which we have concluded are not more-likely-than-not realizable.
6. EARNINGS PER SHARE (“EPS”)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands, except per share amounts) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Basic EPS | |||||||||||||||
Net income | $ | 20,102 | $ | 19,825 | $ | 40,239 | $ | 9,479 | |||||||
Weighted average shares | 52,619 | 51,378 | 52,531 | 51,200 | |||||||||||
Basic income per share | $ | 0.38 | $ | 0.39 | $ | 0.77 | $ | 0.19 | |||||||
Diluted EPS | |||||||||||||||
Net income | $ | 20,102 | $ | 19,825 | $ | 40,239 | $ | 9,479 | |||||||
Basic weighted average shares | 52,619 | 51,378 | 52,531 | 51,200 | |||||||||||
Net effect of common stock equivalents | 362 | 323 | 365 | 263 | |||||||||||
Diluted weighted average shares | 52,981 | 51,701 | 52,896 | 51,463 | |||||||||||
Diluted income per share | $ | 0.38 | $ | 0.38 | $ | 0.76 | $ | 0.18 | |||||||
Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. For the three and six months ended September 30, 2017, weighted average shares outstanding,
8
assuming dilution, excludes the impact of 0.9 million and 0.8 million anti-dilutive shares, respectively. For both the three and six months ended October 1, 2016, weighted average shares outstanding, assuming dilution, excludes the impact of 1.7 million anti-dilutive shares.
7. INVENTORIES
Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined using the first-in, first-out method.
(In thousands) | September 30, 2017 | April 1, 2017 | ||||||
Raw materials | $ | 50,197 | $ | 52,052 | ||||
Work-in-process | 12,234 | 10,400 | ||||||
Finished goods | 106,161 | 114,477 | ||||||
Total inventories | $ | 168,592 | $ | 176,929 | ||||
8. CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS
For costs incurred related to the development of software to be sold, leased or otherwise marketed, we apply the provisions of ASC 985-20, Software - Costs of Software to be Sold, Leased or Marketed, which specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers.
We capitalized $6.4 million in software development costs for ongoing initiatives during both the six months ended September 30, 2017 and October 1, 2016. At September 30, 2017 and April 1, 2017, we had a total of $69.1 million and $62.7 million of capitalized software costs, respectively, of which $19.1 million and $12.7 million are related to in-process software development initiatives, respectively. There were no capitalized costs placed into service during the six months ended September 30, 2017. During the six months ended October 1, 2016, $4.5 million of capitalized costs were placed into service. The costs capitalized for each project are included in intangible assets in the consolidated financial statements.
9. PRODUCT WARRANTIES
We generally provide warranty on parts and labor for one year after the sale and installation of each device. We also warrant our disposables products through their use or expiration. We estimate our potential warranty expense based on our historical warranty experience and periodically assess the adequacy of our warranty accrual, making adjustments as necessary.
Six Months Ended | ||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | ||||||
Warranty accrual as of the beginning of the period | $ | 176 | $ | 420 | ||||
Warranty provision | 796 | 390 | ||||||
Warranty spending | (537 | ) | (583 | ) | ||||
Warranty accrual as of the end of the period | $ | 435 | $ | 227 | ||||
10. DERIVATIVES AND FAIR VALUE MEASUREMENTS
We manufacture, market and sell our products globally. During the three and six months ended September 30, 2017, 38.4% and 38.2% of our sales were generated outside the U.S., generally in foreign currencies. We also incur certain manufacturing, marketing and selling costs in international markets in local currency.
9
Accordingly, our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. Dollar, our reporting currency. 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 impact on our financial results from changes in foreign exchange rates. We utilize foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, Australian Dollar, Canadian Dollar and the Mexican Peso. This does not eliminate the impact of the volatility of foreign exchange rates. However, because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation.
Designated Foreign Currency Hedge Contracts
All of our designated foreign currency hedge contracts as of September 30, 2017 and April 1, 2017 were cash flow hedges under ASC 815, Derivatives and Hedging ("ASC 815"). We record the effective portion of any change in the fair value of designated foreign currency hedge contracts in other comprehensive income until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, we would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had designated foreign currency hedge contracts outstanding in the contract amount of $58.4 million as of September 30, 2017 and $68.4 million as of April 1, 2017. At September 30, 2017, losses of $1.4 million, net of tax, will be reclassified to earnings within the next twelve months. Substantially all currency cash flow hedges outstanding as of September 30, 2017 mature within twelve months.
Non-Designated Foreign Currency Contracts
We manage our exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. We use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These foreign currency forward contracts are entered into for periods consistent with currency transaction exposures, generally one month. They are not designated as cash flow or fair value hedges under ASC 815. These forward contracts are marked-to-market with changes in fair value recorded to earnings. We had non-designated foreign currency hedge contracts under ASC 815 outstanding in the contract amount of $37.6 million as of September 30, 2017 and $55.4 million as of April 1, 2017.
Interest Rate Swaps
On December 21, 2012, we entered into two interest rate swap agreements (the "Swaps") on a total notional amount of $250.0 million of debt. We designated the Swaps as cash flow hedges of variable interest rate risk associated with $250.0 million of indebtedness. For three and six months ended September 30, 2017 and October 1, 2016, we recorded nominal activity in accumulated other comprehensive loss to recognize the effective portion of the fair value of interest rate swaps that qualify as cash flow hedges. The Swaps matured on August 1, 2017.
Fair Value of Derivative Instruments
The following table presents the effect of our derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC 815 in our consolidated statements of income and comprehensive income for the six months ended September 30, 2017:
(In thousands) | Amount of (Loss) Gain Recognized in Accumulated Other Comprehensive Loss | Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings | Location in Consolidated Statements of Income and Comprehensive Income | Amount of Gain (Loss) Excluded from Effectiveness Testing | Location in Consolidated Statements of Income and Comprehensive Income | |||||||||||
Designated foreign currency hedge contracts, net of tax | $ | (1,449 | ) | $ | (121 | ) | Net revenues, COGS, and SG&A | $ | 601 | Interest and other expense, net | ||||||
Non-designated foreign currency hedge contracts | — | — | $ | (881 | ) | Interest and other expense, net | ||||||||||
Designated interest rate swaps, net of tax | $ | (64 | ) | Interest and other expense, net | ||||||||||||
10
We did not have fair value hedges or net investment hedges outstanding as of September 30, 2017 or April 1, 2017. As of September 30, 2017, no deferred tax assets were recognized for designated foreign currency hedges.
ASC 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by ASC 820, Fair Value Measurements and Disclosures, by considering the estimated amount we would receive or pay to sell or transfer these instruments at the reporting date and by taking into account current interest rates, currency exchange rates, current interest rate curves, interest rate volatilities, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, we use inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of September 30, 2017, we have classified our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC 815, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.
The following tables present the fair value of our derivative instruments as they appear in our consolidated balance sheets as of September 30, 2017 and April 1, 2017:
(In thousands) | Location in Balance Sheet | As of September 30, 2017 | As of April 1, 2017 | |||||||
Derivative Assets: | ||||||||||
Designated foreign currency hedge contracts | Other current assets | $ | 1,093 | $ | 1,645 | |||||
Non-designated foreign currency hedge contracts | Other current assets | 64 | 218 | |||||||
Designated interest rate swaps | Other current assets | — | 64 | |||||||
$ | 1,157 | $ | 1,927 | |||||||
Derivative Liabilities: | ||||||||||
Designated foreign currency hedge contracts | Other current liabilities | $ | 1,611 | $ | 894 | |||||
Non-designated foreign currency hedge contracts | Other current liabilities | 141 | 72 | |||||||
$ | 1,752 | $ | 966 | |||||||
Other Fair Value Measurements
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes the following three-level hierarchy used for measuring fair value:
• | Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. |
• | Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
• | Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Our money market funds carried at fair value are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
11
Fair Value Measured on a Recurring Basis
Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of September 30, 2017 and April 1, 2017.
As of September 30, 2017 | ||||||||||||
(In thousands) | Level 1 | Level 2 | Total | |||||||||
Assets | ||||||||||||
Money market funds | $ | 135,763 | $ | — | $ | 135,763 | ||||||
Designated foreign currency hedge contracts | — | 1,093 | 1,093 | |||||||||
Non-designated foreign currency hedge contracts | — | 64 | 64 | |||||||||
$ | 135,763 | $ | 1,157 | $ | 136,920 | |||||||
Liabilities | ||||||||||||
Designated foreign currency hedge contracts | $ | — | $ | 1,611 | $ | 1,611 | ||||||
Non-designated foreign currency hedge contracts | — | 141 | 141 | |||||||||
$ | — | $ | 1,752 | $ | 1,752 | |||||||
As of April 1, 2017 | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Assets | ||||||||||||
Money market funds | $ | 80,676 | $ | — | $ | 80,676 | ||||||
Designated foreign currency hedge contracts | — | 1,645 | 1,645 | |||||||||
Non-designated foreign currency hedge contracts | — | 218 | 218 | |||||||||
Designated interest rate swaps | — | 64 | 64 | |||||||||
$ | 80,676 | $ | 1,927 | $ | 82,603 | |||||||
Liabilities | ||||||||||||
Designated foreign currency hedge contracts | $ | — | $ | 894 | $ | 894 | ||||||
Non-designated foreign currency hedge contracts | — | 72 | 72 | |||||||||
$ | — | $ | 966 | $ | 966 | |||||||
Other Fair Value Disclosures
The Term Loan (which is carried at amortized cost), accounts receivable and accounts payable approximate fair value.
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to various other legal proceedings and claims arising out of the ordinary course of its business. We believe that except for those matters described below, there are no other proceedings or claims pending against us the ultimate resolution of which could have a material adverse effect on our financial condition or results of operations. At each reporting period, management evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies, for all matters. Legal costs are expensed as incurred.
12
Litigation and Related Matters
Italian Employment Litigation
Our Italian manufacturing subsidiary is party to several actions initiated by former employees of our facility in Ascoli-Piceno, Italy. We ceased operations at the facility in fiscal 2014 and sold the property in fiscal 2017. These include actions claiming (i) working conditions and minimum salaries should have been established by either a different classification under their national collective bargaining agreement or a different agreement altogether, (ii) certain solidarity agreements, which are arrangements between the Company, employees and the government to continue full pay and benefits for employees who would otherwise be terminated in times of low demand, are void, and (iii) rights to payment of the extra time used for changing into and out of the working clothes at the beginning and end of each shift.
In addition, a union represented in the Ascoli plant filed an action claiming that the Company discriminated against it in favor of three other represented unions by (i) interfering with an employee referendum, (ii) interfering with an employee petition to recall union representatives from office, and (iii) excluding the union from certain meetings.
Finally, we have been added as defendants on claims filed against Pall Corporation prior to our acquisition of the plant in August 2012. These claims relate to agreements to "freeze" benefit allowances for a certain period in exchange for Pall's commitments on hiring and plant investment.
The total amount of damages claimed by the plaintiffs in these matters is approximately $4.8 million. During the second quarter of fiscal 2018, we proposed a settlement offer of $0.8 million, which resulted in charges of $0.4 million during the period. As of September 30, 2017, we have recorded a total liability of $0.8 million associated with these claims. In the future, we may receive adverse rulings from the courts which could change our judgment on these cases.
SOLX Arbitration
In July 2016, H2 Equity, LLC, formerly known as Hemerus Corporation, filed an arbitration claim for $17 million in milestone and royalty payments allegedly owed as part of our acquisition of the filter and storage solution business from Hemerus Medical, LLC ("Hemerus") in fiscal 2014. The acquired storage solution is referred to as SOLX.
At the closing in April 2013, Haemonetics paid Hemerus a total of $24 million and agreed to a $3 million milestone payment due when the United States Food and Drug Administration ("FDA") approved a new indication for SOLX (the “24-Hour Approval”) using a filter acquired from Hemerus. We also agreed to make future royalty payments up to a cumulative maximum of $14 million based on the sale of products incorporating SOLX over a ten year period.
Due to performance issues with the Hemerus filter, Haemonetics filed for, and received, the 24-Hour Approval using a Haemonetics filter. Accordingly, Haemonetics did not pay Hemerus the $3 million milestone payment because the 24-Hour Approval was obtained using a Haemonetics filter, not a Hemerus filter. In addition, we have not paid any royalties to date as we have not made any sales of products incorporating SOLX.
H2 Equity claims, in part, that we owe it $3 million for the receipt of the 24-Hour Approval despite the use of a Haemonetics filter to obtain the approval and that we have failed to make commercially reasonable efforts to market and sell products incorporating SOLX. While we believe that we have meritorious defenses to these claims, as of September 30, 2017 we have recorded a liability of $0.4 million which is reflective of the current settlement discussions.
Product Recall
In June 2016, we issued a voluntary recall of certain whole blood collection kits sold to our Blood Center customers in the U.S. The recall resulted from some collection sets' filters failing to adequately remove leukocytes from collected blood. As a result of the recall, our blood center customers may have conducted further tests to confirm the blood was adequately leukoreduced, sold the blood labeled as non-leukoreduced at a lower price or discarded the blood collected using the defective sets. We recorded $7.1 million of charges during fiscal 2017, which consisted of $3.7 million of charges associated with customer returns and inventory reserves and $3.4 million of charges associated with customer claims. Although there have been no additional charges recorded in the current period, we may record incremental charges in future periods.
The $3.4 million liability associated with customer claims are based on claims seeking reimbursement for $14.2 million in
losses sustained as a result of the recall. We believe it is probable that we will incur expenses as a result of these claims and
that our range of loss is $3.4 million to $14.2 million, however, we do not have sufficient information to develop a best
13
estimate within this range. Accordingly, during fiscal 2017 we recorded a liability of $3.4 million, which represents the low end of the range. While the customers making these claims purchased substantially all the affected units, incremental charges may be recorded in future periods as additional customer returns and claims data becomes available. We have an enforceable insurance policy in place which we believe provides coverage for a portion of the claims received to date. Accordingly, as of September 30, 2017, we had an insurance receivable of $2.9 million. We will assess the potential for additional insurance recoveries as we receive more information about customer claims in future reporting periods.
Other Matters
In February 2017, we informed a customer of our intent to exit an existing contract. During the second quarter of fiscal 2018, the customer made a demand for $4.6 million, which consisted of $2.8 million in damages for non-performance under the contract and $1.8 million for the refund of two upfront payments that the customer had previously paid to us in connection with the development of a project. As of September 30, 2017, we concluded that it was probable that we would incur costs of $2.8 million in connection with this matter and accordingly have recorded have a liability to reflect this loss contingency. Additionally, we continue to maintain a deferred revenue liability of $1.8 million for the upfront payments, as we have not achieved all of the criteria necessary to recognize these payments as revenue.
12. SEGMENT AND ENTERPRISE-WIDE INFORMATION
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Our operating segments are based primarily on geography. North America Plasma is a separate operating segment with dedicated segment management due the size and scale of the Plasma business unit. We aggregate components within an operating segment that have similar economic characteristics.
The Company’s reportable segments are as follows:
• | Japan |
• | EMEA |
• | North America Plasma |
• | All Other |
The Company has aggregated the Americas Blood Center and Hospital and Asia - Pacific operating segments into the All Other reportable segment based upon their similar operational and economic characteristics, including similarity of operating margin.
Management measures and evaluates the operating segments based on operating income. Management excludes certain corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment operating income because management evaluates the operating results of the segments excluding such items. These items include restructuring and turnaround costs, deal amortization, and asset impairments. Although these amounts are excluded from segment operating income, as applicable, they are included in the reconciliations that follow. Management measures and evaluates the Company's net revenues and operating income using internally derived standard currency exchange rates that remain constant from year to year; therefore, segment information is presented on this basis.
During the first quarter of fiscal 2018, management changed the cost reporting structure such that a portion of corporate expenses were reclassified into the operating segments. Accordingly, the prior year numbers have been updated to reflect this reclassification.
14
Selected information by business segment is presented below:
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Net revenues | |||||||||||||||
Japan | $ | 17,164 | $ | 18,991 | $ | 32,396 | $ | 33,557 | |||||||
EMEA | 43,786 | 45,933 | 86,794 | 91,674 | |||||||||||
North America Plasma | 85,051 | 78,292 | 162,587 | 151,767 | |||||||||||
All Other | 80,193 | 78,411 | 158,367 | 156,431 | |||||||||||
Net revenues before foreign exchange impact | 226,194 | 221,627 | 440,144 | 433,429 | |||||||||||
Effect of exchange rates | (817 | ) | (1,374 | ) | (3,816 | ) | (3,220 | ) | |||||||
Net revenues | $ | 225,377 | $ | 220,253 | $ | 436,328 | $ | 430,209 | |||||||
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Segment operating income | |||||||||||||||
Japan | $ | 7,877 | $ | 9,017 | $ | 14,615 | $ | 15,173 | |||||||
EMEA | 8,239 | 8,577 | 16,810 | 16,853 | |||||||||||
North America Plasma | 32,184 | 26,151 | 56,286 | 51,318 | |||||||||||
All Other | 30,052 | 30,946 | 57,738 | 58,116 | |||||||||||
Segment operating income | 78,352 | 74,691 | 145,449 | 141,460 | |||||||||||
Corporate operating expenses | (42,905 | ) | (41,921 | ) | (82,216 | ) | (88,059 | ) | |||||||
Effect of exchange rates | 1,102 | 667 | (1,099 | ) | (639 | ) | |||||||||
Restructuring and turnaround costs | (5,787 | ) | (1,637 | ) | (8,270 | ) | (20,453 | ) | |||||||
Deal amortization | (6,504 | ) | (7,006 | ) | (12,995 | ) | (14,081 | ) | |||||||
Asset impairments | — | — | — | (1,315 | ) | ||||||||||
Operating income | $ | 24,258 | $ | 24,794 | $ | 40,869 | $ | 16,913 | |||||||
Our products are organized into four categories for purposes of evaluating their growth potential: Plasma, Blood Center, Cell Processing and Hemostasis Management. Management reviews revenue trends based on these business units; however, no other financial information is currently available on this basis.
15
Net revenues by business unit are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
Plasma | $ | 109,771 | $ | 103,564 | $ | 211,278 | $ | 201,213 | |||||||
Blood Center | 71,710 | 74,270 | 137,275 | 145,213 | |||||||||||
Cell Processing | 25,764 | 25,955 | 52,100 | 52,031 | |||||||||||
Hemostasis Management | 18,132 | 16,464 | 35,675 | 31,752 | |||||||||||
Net revenues | $ | 225,377 | $ | 220,253 | $ | 436,328 | $ | 430,209 | |||||||
Net revenues generated in our principle operating regions on a reported basis are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||
United States | $ | 138,779 | $ | 130,843 | $ | 269,831 | $ | 256,543 | |||||||
Japan | 16,732 | 21,666 | 31,648 | 36,630 | |||||||||||
Europe | 39,133 | 37,606 | 76,355 | 77,973 | |||||||||||
Asia | 28,831 | 28,384 | 54,771 | 55,376 | |||||||||||
Other | 1,902 | 1,754 | 3,723 | 3,687 | |||||||||||
Net revenues | $ | 225,377 | $ | 220,253 | $ | 436,328 | $ | 430,209 | |||||||
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated Other Comprehensive Loss are as follows:
(In thousands) | Foreign Currency | Defined Benefit Plans | Net Unrealized Gain/Loss on Derivatives | Total | ||||||||||||
Balance as of April 1, 2017 | $ | (29,835 | ) | $ | (2,272 | ) | $ | (766 | ) | $ | (32,873 | ) | ||||
Other comprehensive income (loss) before reclassifications(1) | 6,856 | — | (1,513 | ) | 5,343 | |||||||||||
Amounts reclassified from Accumulated Other Comprehensive Loss(1) | — | — | 121 | 121 | ||||||||||||
Net current period other comprehensive income (loss) | 6,856 | — | (1,392 | ) | 5,464 | |||||||||||
Balance as of September 30, 2017 | $ | (22,979 | ) | $ | (2,272 | ) | $ | (2,158 | ) | $ | (27,409 | ) | ||||
(1) Presented net of income taxes, the amounts of which are insignificant.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with both our interim 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 year ended April 1, 2017. 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.
Our Business
Haemonetics is a global healthcare company dedicated to providing a suite of innovative hematology products and solutions to customers to help them improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets, including blood and plasma component collection, the surgical suite, and hospital transfusion services.
Blood and its components (plasma, platelets, and red cells) have many vital and frequently life-saving clinical applications. Plasma is used for patients with major blood loss and is manufactured into biopharmaceuticals to treat a variety of illnesses, including immune diseases and coagulation disorders. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets have many uses in patient care, including supporting cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.
Haemonetics develops and markets a wide range of devices and solutions to serve our customers. We provide plasma collection systems and software which enable plasma fractionators to make life saving pharmaceuticals. We provide analytical devices for measuring hemostasis which enable healthcare providers to better manage their patients’ bleeding risk. Haemonetics makes blood processing systems and software which make blood donation more efficient and track life giving blood components. Finally, Haemonetics supplies systems and software which facilitate blood transfusions and cell processing.
Products
Our products are organized into four categories for purposes of evaluating and developing their growth potential: Plasma, Hemostasis Management, Blood Center and Cell Processing. For that purpose, “Plasma” includes plasma collection devices and disposables, plasma donor management software, and anticoagulant and saline sold to plasma customers. “Hemostasis Management” includes devices and methodologies for measuring coagulation characteristics of blood, such as our TEG® Hemostasis Analyzer. “Blood Center” includes blood collection and processing devices and disposables for red cells, platelets and whole blood as well as related donor management software. “Cell Processing” includes surgical blood salvage systems, specialized blood cell processing systems, disposables and blood transfusion management software.
We believe that Plasma and Hemostasis Management have the greatest growth potential, while Cell Processing innovation offers an opportunity to increase market share and expand into new segments. Blood Center competes in challenging markets which require us to manage the business differently, including reducing costs, shrinking the scope of the current product line, and evaluating opportunities to exit unfavorable customer contracts. We are progressing toward a streamlined operating model with a management and cost structure that can bring about sustainable productivity improvement across the organization. Overall implementation of our new operating model began in fiscal 2017 and will continue into fiscal 2019.
Plasma
Built around our automated plasma collection devices and related disposables, our portfolio of products and services is designed to support multiple facets of plasma collector operations. We have a long-standing commitment to understanding our customers' collection and manufacturing processes. As a result, we aim to design equipment that is durable, dependable, and easy to use, and provide comprehensive training and support to our plasma collection customers.
Today, the vast majority of plasma collections worldwide are performed using automated collection technology because it is safer and more cost-effective. With our PCS® (Plasma Collection System) brand automated plasma collection technology, more plasma can be collected during any one donation event because the other blood components are returned to the donor through the sterile disposable sets used for the plasma donation procedure.
We offer multiple products necessary for plasma collection and storage, including PCS brand plasma collection equipment and disposables, plasma collection containers and intravenous solutions. We also offer a portfolio of integrated information technology platforms for plasma customers to manage their donors, operations, and supply chain. Our software products automate the donor interview and qualification process, streamline the workflow process in the plasma center, provide the controls necessary to evaluate donor suitability, determine the ability to release units collected, and manage unit distribution. With our software solutions, plasma collectors can manage processes across the plasma supply chain, react quickly to business changes, and implement opportunities to reduce costs.
17
Blood Center
We offer automated blood component and manual whole blood collection systems to blood collection centers to collect blood products efficiently and cost effectively. We market the MCS® (Multicomponent Collection System) brand apheresis equipment which is designed to collect specific blood components integrated from the donor. Utilizing the MCS automated platelet collection protocols, blood centers collect one or more therapeutic “doses” of platelets during a single donation. The MCS two-unit protocol or double red cell collection device helps blood collectors optimize the collection of red cells by automating the blood separation function, eliminating the need for laboratory processing, and enabling the collection of two units of red cells from a single donor thus maximizing the amount of red cells collected per eligible donor and helping to mitigate red cell shortages in countries where this problem exists. Blood collectors can also use the MCS system to collect one unit of red cells and a "jumbo" (double) unit of plasma, or one unit of red cells and one unit of platelets from a single donor. The MCS plasma protocol, which provides the possibility of collecting 600-800ml of plasma for either transfusion to patients or for use by the pharmaceutical industry, completes the comprehensive portfolio of different blood component collection options on this device.
Haemonetics also offers a portfolio of products for manual whole blood collection and processing. Haemonetics' portfolio of disposable whole blood collection and component storage sets offer flexibility in collecting a unit of whole blood and the subsequent production and storage of the red blood cell, platelet or plasma products, including options for in-line or dockable filters for leukoreduction of any blood component.
With the ACP® (Automated Cell Processor) brand, Haemonetics offers a solution to automate the washing and freezing of red cell components. The automated red cell washing procedure removes plasma proteins within the red cell units to provide a safer product for transfusion to frequently transfused patients, neonates, or patients with a history of transfusion reactions. The automated glycerolization and deglycerolization steps are required to prepare red cells for frozen storage. Freezing the red cell units can expand the shelf life of these products up to 10 years. Customers utilize this technology to implement strategic red cell inventories for large scale catastrophes, storage of rare blood types, or enhanced inventory management.
Blood Center software solutions help blood center collectors improve efficiencies of blood collection and supply and help ensure donor safety. This includes solutions for blood drive planning, donor recruitment and retention, blood collection, component manufacturing and distribution. Our products SafeTrace® and El Dorado Donor® donation and blood unit management systems span blood center operations and automate and track operations from the recruitment of the blood donor to the disposition of the blood product. Our Hemasphere® software solution provides support for more efficient blood drive planning, and Donor Doc® and e-Donor® software help to improve recruitment and retention.
Hospital
Cell Processing
Haemonetics offers a range of solutions that improve a hospital's systems for acquiring blood, storing it in the hospital, and dispensing it efficiently and correctly. Over the last few years, hospitals have become increasingly focused on of their need to control costs and improve patient safety by managing blood more effectively. Our products and integrated solution platforms help hospitals optimize performance of blood acquisition, storage, and distribution.
Cell Salvage
The Cell Saver® system is a surgical blood salvage system targeted to procedures that involve mid to high-volume blood loss, such as cardiovascular or orthopedic surgeries. It has become the standard of care for these surgeries. The Cell Saver Elite® system is our most advanced autotransfusion option to minimize allogeneic blood use for surgeries with medium to high blood loss.
The OrthoPAT® surgical blood salvage system is targeted to orthopedic procedures, such as hip and knee replacements, which involve slower, lower volume blood loss that often occurs well after surgery. The system is designed to remain with the patient following surgery, to recover blood and produce a washed red cell product for autotransfusion.
Transfusion Management
Our Transfusion Management solutions are designed to help provide safety, traceability and compliance from the hospital blood bank to the patient bedside and enable consistent care across the hospital network. The SafeTrace Tx® transfusion management software is considered the system of record for all hospital blood bank and transfusion information. BloodTrack® blood management software is a modular suite of blood management and bedside transfusion solutions that combines software with hardware components that act as an extension of the hospital’s blood bank information system. The software is designed to work with storage devices, including the BloodTrack HaemoBank® blood storage device.
18
Hemostasis Management
We have two device platforms which we market to hospitals and laboratories as an alternative to less comprehensive blood tests: the TEG® 5000 analyzer, which we acquired in the 2007 acquisition of Haemoscope Corporation, and the TEG® 6s device, which we license from Cora Healthcare, Inc., a company established by Haemoscope's founders. Under the license from Cora Healthcare, we have exclusive perpetual rights to manufacture and commercialize TEG 6s in hospitals and hospital laboratories.
Both of our TEG systems are blood diagnostic instruments that measure a patient's hemostasis. This information enables caregivers to decide the best blood-related clinical treatment for the patient in order to minimize blood loss and reduce clotting risk. The TEG 5000 analyzer is approved for a broad set of indications in all of our markets. The TEG 6s and TEG Manager are approved for the same set of indications as the TEG 5000 in Europe, Australia and Japan. In the U.S., TEG 6s is approved for limited indications, including cardiovascular surgery and cardiology. We are pursuing a broader set of indications for the TEG 6s in the U.S., including trauma.
Recent Developments
NexSys PCSTM
In July 2017, we received United States Food and Drug Administration ("FDA") 510(k) clearance for our NexSys PCSTM plasmapheresis system (formerly referred to as PCS 300). We have begun limited production of the devices and we expect to pursue further regulatory clearances for additional enhancements to the overall product offering.
Our planned roll out of this new platform includes the placement of a significant number of new devices. Such placements will require meaningful capital expenditures and new customer contracts that reflect pricing and volumes appropriate to these investments. As of September 30, 2017, approximately 20,000 of our Haemonetics owned PCS2 devices ("PCS2") are placed with customers.
Divestiture
On April 27, 2017, we sold our SEBRA line of benchtop and hand sealers to Machine Solutions Inc. because it was no longer aligned with our long-term strategic objectives. In connection with this transaction, we received net proceeds of $9.0 million and recorded a pre-tax gain of $8.0 million. The proceeds received were subject to a post-closing adjustment based on final asset values as determined during the 90 day transition period. During the second quarter of fiscal 2018, the 90 day transition period ended and there were no post-close adjustments necessary.
The SEBRA portfolio included a suite of products which primarily include radio frequency sealers that are used to seal tubing as part of the collection of whole blood and blood components, particularly plasma. The SEBRA product line generated approximately $6.5 million of revenue in our Plasma business unit in fiscal 2017.
Restructuring Initiative
On November 1, 2017, we launched a Complexity Reduction Initiative (the "2018 Program"), a company-wide restructuring program designed to improve operational performance and reduce cost, freeing up resources to invest in accelerated growth. This program includes a reduction of headcount and operating costs which will enable a more streamlined organizational structure. We expect to incur aggregate charges between $50 million and $60 million associated with these actions, of which we expect $35 million to $40 million will consist of severance and other employee costs and the remainder will consist of other exit costs, primarily related to third party services. These charges, substantially all of which will result in cash outlays, will be incurred as the specific actions required to execute on these initiatives are identified and approved and are expected to continue through fiscal 2020. We expect savings from this program of approximately $80 million on an annualized basis once the program is completed.
During fiscal 2017, we launched a restructuring program (the "2017 Program") designed to reposition our organization and improve our cost structure. During the three and six months ended September 30, 2017, we incurred $5.2 million and $7.7 million, respectively, of restructuring and turnaround costs under this program. During the three and six months ended October 1, 2016, we incurred $1.1 million and $18.8 million, respectively, of restructuring and turnaround charges under this program. As of September 30, 2017, the 2017 Program was substantially complete.
Product Recall
In June 2016, we issued a voluntary recall of certain whole blood collection kits sold to our Blood Center customers in the U.S. The recall resulted from some collection sets' filters failing to adequately remove leukocytes from collected blood. As a result of the recall, our blood center customers may have conducted further tests to confirm the blood was adequately leukoreduced, sold the blood labeled as non-leukoreduced at a lower price or discarded the blood collected using the defective sets. We
19
recorded $7.1 million of charges during fiscal 2017, which consisted of $3.7 million of charges associated with customer returns and inventory reserves and $3.4 million of charges associated with customer claims. Although there have been no additional charges recorded in the current period, we may record incremental charges in future periods.
The $3.4 million of charges associated with customer claims are based on claims seeking reimbursement for $14.2 million in losses sustained as a result of the recall. While the customers making these claims purchased substantially all the affected units, incremental charges may be recorded in future periods as additional data supporting the claims becomes available. We have an enforceable insurance policy in place which we believe provides coverage for a portion of the claims received to date. As of April 1, 2017, we had an insurance receivable of $2.9 million. We will assess the potential for additional insurance recoveries as we receive more information about customer claims in future reporting periods.
Financial Summary
Three Months Ended | Six Months Ended | ||||||||||||||||||||
(In thousands, except per share data) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | |||||||||||||||
Net revenues | $ | 225,377 | $ | 220,253 | 2.3 | % | $ | 436,328 | $ | 430,209 | 1.4 | % | |||||||||
Gross profit | $ | 104,562 | $ | 104,248 | 0.3 | % | $ | 196,227 | $ | 195,304 | 0.5 | % | |||||||||
% of net revenues | 46.4 | % | 47.3 | % | 45.0 | % | 45.4 | % | |||||||||||||
Operating expenses | $ | 80,304 | $ | 79,454 | 1.1 | % | $ | 155,358 | $ | 178,391 | (12.9 | )% | |||||||||
Operating income | $ | 24,258 | $ | 24,794 | (2.2 | )% | $ | 40,869 | $ | 16,913 | n/m | ||||||||||
% of net revenues | 10.8 | % | 11.3 | % | 9.4 | % | 3.9 | % | |||||||||||||
Interest and other expense, net | $ | (1,397 | ) | $ | (1,962 | ) | (28.8 | )% | $ | (2,756 | ) | $ | (4,139 | ) | (33.4 | )% | |||||
Income before provision for income taxes | $ | 22,861 | $ | 22,832 | 0.1 | % | $ | 46,113 | $ | 12,774 | n/m | ||||||||||
Provision for income taxes | $ | 2,759 | $ | 3,007 | (8.2 | )% | $ | 5,874 | $ | 3,295 | 78.3 | % | |||||||||
% of pre-tax income | 12.1 | % | 13.2 | % | 12.7 | % | 25.8 | % | |||||||||||||
Net income | $ | 20,102 | $ | 19,825 | 1.4 | % | $ | 40,239 | $ | 9,479 | n/m | ||||||||||
% of net revenues | 8.9 | % | 9.0 | % | 9.2 | % | 2.2 | % | |||||||||||||
Net income per share - basic | $ | 0.38 | $ | 0.39 | (2.6 | )% | $0.77 | $0.19 | n/m | ||||||||||||
Net income per share - diluted | $ | 0.38 | $ | 0.38 | — | % | $0.76 | $0.18 | n/m | ||||||||||||
Net revenues increased 2.3% and 1.4% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, net revenues increased 2.1% and 1.5% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Revenue increases in Plasma and Hemostasis Management were partially offset by declines in our Blood Center and Cell Processing business units during the three months ended September 30, 2017. During the six months ended September 30, 2017, revenue increases in Plasma, Hemostasis Management and Cell Processing were partially offset by declines in our Blood Center business unit.
Operating income decreased for the three months ended September 30, 2017, as compared to the same period of fiscal 2017, primarily due to higher restructuring and turnaround costs and variable compensation. Operating income increased for the six months ended September 30, 2017, as compared to the same period of fiscal 2017, due to significant levels of restructuring and turnaround costs incurred in the first quarter of fiscal 2017 in connection with the fiscal 2017 restructuring initiative. Annualized savings resulting from the fiscal 2017 restructuring initiative and a reduction in research and development spending also contributed to increase in operating income during the first half of fiscal 2018.
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 in the 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 with U.S. GAAP. Constant currency growth, a non-GAAP financial measure, measures the change in sales 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.
20
RESULTS OF OPERATIONS
Net Revenues by Geography
Three Months Ended | |||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | Reported growth | Currency impact | Constant currency growth (1) | ||||||||||||
United States | $ | 138,779 | $ | 130,843 | 6.1 | % | — | % | 6.1 | % | |||||||
International | 86,598 | 89,410 | (3.1 | )% | 0.6 | % | (3.7 | )% | |||||||||
Net revenues | $ | 225,377 | $ | 220,253 | 2.3 | % | 0.2 | % | 2.1 | % | |||||||
(1) Constant currency growth, a non-GAAP financial measure, measures the change in sales between the current and prior year periods using a constant currency. See "Management's Use of Non-GAAP Measures."
Six Months Ended | |||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | Reported growth | Currency impact | Constant currency growth (1) | ||||||||||||
United States | $ | 269,831 | $ | 256,543 | 5.2 | % | — | % | 5.2 | % | |||||||
International | 166,497 | 173,666 | (4.1 | )% | (0.4 | )% | (3.7 | )% | |||||||||
Net revenues | $ | 436,328 | $ | 430,209 | 1.4 | % | (0.1 | )% | 1.5 | % | |||||||
(1) Constant currency growth, a non-GAAP financial measure, measures the change in sales 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 100 countries around the world through a combination of our direct sales force, independent distributors and agents. Our revenue generated outside the U.S. was 38.4% and 38.2% of total net revenues for the three and six months ended September 30, 2017, respectively, as compared to 40.6% and 40.4% for the three and six months ended October 1, 2016, respectively. 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.
21
Net Revenues by Business Unit
Three Months Ended | |||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | Reported growth | Currency impact | Constant currency growth (1) | ||||||||||||
Plasma | $ | 109,771 | $ | 103,564 | 6.0 | % | 0.3 | % | 5.7 | % | |||||||
Blood Center | 71,710 | 74,270 | (3.4 | )% | 0.4 | % | (3.8 | )% | |||||||||
Cell Processing | 25,764 | 25,955 | (0.7 | )% | 0.1 | % | (0.8 | )% | |||||||||
Hemostasis Management | 18,132 | 16,464 | 10.1 | % | (0.3 | )% | 10.4 | % | |||||||||
Net revenues | $ | 225,377 | $ | 220,253 | 2.3 | % | 0.2 | % | 2.1 | % | |||||||
(1) Constant currency growth, a non-GAAP financial measure, measures the change in sales between the current and prior year periods using a constant currency. See "Management's Use of Non-GAAP Measures."
Six Months Ended | |||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | Reported growth | Currency impact | Constant currency growth (1) | ||||||||||||
Plasma | $ | 211,278 | $ | 201,213 | 5.0 | % | — | % | 5.0 | % | |||||||
Blood Center | 137,275 | 145,213 | (5.5 | )% | (0.1 | )% | (5.4 | )% | |||||||||
Cell Processing | 52,100 | 52,031 | 0.1 | % | (0.3 | )% | 0.4 | % | |||||||||
Hemostasis Management | 35,675 | 31,752 | 12.4 | % | (1.0 | )% | 13.4 | % | |||||||||
Net revenues | $ | 436,328 | $ | 430,209 | 1.4 | % | (0.1 | )% | 1.5 | % | |||||||
(1) Constant currency growth, a non-GAAP financial measure, measures the change in sales between the current and prior year periods using a constant currency. See "Management's Use of Non-GAAP Measures."
Plasma
Plasma revenue increased 6.0% and 5.0% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, plasma revenue increased 5.7% and 5.0% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. This revenue growth was primarily driven by an increase in sales of plasma disposables during the three and six months ended September 30, 2017 due to continued strong performance in the U.S. This increase was partially offset by a decline in sales of liquid solutions and a decrease in equipment sales resulting from the divestiture of our SEBRA product line.
We have continuing delays in the expansion of our liquid solutions production capacity that may require us or our customers to obtain alternative sources of supply. We expect purchases from these alternate sources to continue until we can complete the expansion and produce solutions at the necessary level. While these purchases continue, we will see a reduction in revenue from our liquid solutions business and increased costs to serve our customers.
Blood Center
Platelet
Platelet revenue declined by 8.1% and 6.3% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, platelet revenue decreased 8.6% and 6.0% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The decrease during the three and six months ended September 30, 2017, excluding the impact of foreign exchange, was primarily due to declines in Asia due to order timing. The continued market shift toward double dose collection techniques in Japan also contributed to the decline during the three months ended September 30, 2017. Improved collection efficiencies that increase the yield of platelets per collection have resulted in flat markets for platelet usage and related disposables in Japan. Within these flat markets, the use of "double dose" collection methods and other alternative collection procedures have increased. In Japan, usage of double dose collections comprised approximately 46% of all platelets collected during the six months ended September 30, 2017. While Platelet revenue in Japan for the six months ended September 30, 2017 increased slightly compared to the same period of fiscal 2017 due to order timing in the prior period, we expect the shift toward double dose collection techniques to result in an overall decline in revenue during fiscal 2018.
22
Red Cell and Whole Blood
Red cell revenue decreased 11.4% and 11.2% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, red cell revenue decreased 11.7% and 11.3% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. During fiscal 2016, the American Red Cross and two group purchasing organizations representing other U.S. blood collectors ("Blood Center GPOs") requested updated contracts for sole source supply on apheresis red cell collections. The American Red Cross contract resulted in our gaining 100% share of their apheresis red cell collection business and higher sales volumes, but at lower prices. The impact of the price concessions began in the third quarter of fiscal 2016, while the achievement of 100% share of the American Red Cross' business occurred in the fourth quarter of fiscal 2017. While price declines in this contract continued to have a negative impact in the first half of fiscal 2018, we anticipate stabilization in the second half of fiscal 2018 after annualization of the final price concessions.
Whole blood revenue increased 7.5% and 0.4% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, whole blood revenue increased 6.8% and 0.1% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The increase is due to higher sales in Asia during the three months ended September 30, 2017 and the negative impact of the whole blood collection kit recall on the prior period. Although we expect the demand for whole blood disposable products in the U.S. to continue to decrease in fiscal 2018 due to a sustained decline in transfusion rates and actions taken by hospitals to improve blood management techniques and protocols, we continued to see a moderation in the rate of decline of this market during the second quarter of fiscal 2018. We expect to see continued declines in transfusion rates and for the market to remain price-focused and highly competitive for the foreseeable future.
Software, Equipment and Other
Blood Center software, equipment and other revenue decreased 12.7% and 14.5% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, Blood Center software, equipment and other revenue decreased 12.7% and 14.4% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. These decreases were largely attributable to order timing in Asia and one-time sales of equipment to the American Red Cross in the prior period to support our increased share of their apheresis red cell collection business.
Cell Processing
Cell Salvage
Cell Salvage revenue consists primarily of the Cell Saver and OrthoPAT products. Cell Saver revenue declined 4.6% and 5.3% during the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, Cell Saver revenue decreased 4.7% and 5.0% for the three and six months ended September 30, 2017, as compared with the same periods of fiscal 2017, primarily due to declines in Japan and Western Europe. OrthoPAT revenue decreased 24.4% and 28.3% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, OrthoPAT revenue decreased 24.6% and 28.2% for the three months ended September 30, 2017, as compared to the same periods of fiscal 2017. Better blood management has reduced orthopedic blood loss and continues to impact demand for OrthoPAT. Recent trends in blood management, particularly the adoption of tranexamic acid to treat and prevent orthopedic post-operative blood loss, continue to lessen hospital use of OrthoPAT.
Transfusion Management
Transfusion Management software revenue includes BloodTrack, SafeTrace Tx and other hospital software. Transfusion Management software revenue increased 10.7% and 13.0% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, Transfusion Management software revenue increased by 10.0% and 13.0% for the three and six months ended September 30, 2017 as compared to the same periods of fiscal 2017, due to BloodTrack growth in the U.S. and Europe and SafeTrace Tx growth in the U.S.
23
Hemostasis Management
Revenue from our Hemostasis Management products increased 10.1% and 12.4% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, Hemostasis Management revenue increased 10.4% and 13.4% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The revenue increase was primarily attributable to the growth of TEG disposables, principally in the U.S. and China. The TEG 6s and TEG Manager are approved for the same set of indications as the TEG 5000 in Europe, Australia and Japan. In the U.S., TEG 6s is approved for limited indications, including cardiovascular surgery and cardiology. The release of TEG 6s continues to significantly contribute to the overall growth in Hemostasis Management in the U.S. and Europe. We are pursuing a broader set of indications for the TEG 6s in the U.S., including trauma.
Gross Profit
Three Months Ended | Six Months Ended | ||||||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | |||||||||||||||
Gross profit | $ | 104,562 | $ | 104,248 | 0.3 | % | $ | 196,227 | $ | 195,304 | 0.5 | % | |||||||||
% of net revenues | 46.4 | % | 47.3 | % | 45.0 | % | 45.4 | % | |||||||||||||
Gross profit increased 0.3% and 0.5% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, gross profit increased 0.2% and 1.5% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Gross profit margin decreased 90 and 40 basis points for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The decrease in gross profit margin during the three months ended September 30, 2017 was primarily due to the impact of manufacturing challenges and the impact of the divestiture of SEBRA.
The decrease in gross profit margin for the six months ended September 30, 2017 was primarily due to costs incurred associated with inventory purchases from alternate sources as a result of delays in the expansion of our liquid solutions production capacity. We expect purchases from these alternate sources to continue until we can complete the expansion and produce solutions at the necessary level. Savings achieved in the prior year period from productivity initiatives, the impact of the divestiture of SEBRA and the negative impact of foreign currency also contributed to the decline. These decreases were partially offset by the impact of the whole blood filter recall in the prior year period. Gross profit margin continues to be impacted by the inefficiency of underutilized productive capacity. We continue to seek opportunities to rationalize our manufacturing network.
Operating Expenses
Three Months Ended | Six Months Ended | ||||||||||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | September 30, 2017 | October 1, 2016 | % Increase/ (Decrease) | |||||||||||||||
Research and development | $ | 7,521 | $ | 8,336 | (9.8 | )% | $ | 15,714 | $ | 19,773 | (20.5 | )% | |||||||||
% of net revenues | 3.3 | % | 3.8 | % | 3.6 | % | 4.6 | % | |||||||||||||
Selling, general and administrative | $ | 72,783 | $ | 71,118 | 2.3 | % | $ | 139,644 | $ | 158,618 | (12.0 | )% | |||||||||
% of net revenues | 32.3 | % | 32.3 | % | 32.0 | % | 36.9 | % | |||||||||||||
Total operating expenses | $ | 80,304 | $ | 79,454 | 1.1 | % | $ | 155,358 | $ | 178,391 | (12.9 | )% | |||||||||
% of net revenues | 35.6 | % | 36.1 | % | 35.6 | % | 41.5 | % | |||||||||||||
Research and Development
Research and development expenses decreased 9.8% and 20.5% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, research and development expenses decreased 9.4% and 19.3% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The decrease was primarily driven by lower restructuring and turnaround costs and reduced spending on several projects in our Blood Center business unit to better align with our long-term product plans. The reduction in spending was partially offset by our continued investment of resources in clinical programs primarily for our Hemostasis Management business unit.
24
Selling, General and Administrative
Selling, general and administrative expenses increased 2.3% and decreased 12.0% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. Without the effect of foreign exchange, selling, general, and administrative expenses increased 2.8% and decreased 11.2% for the three and six months ended September 30, 2017, as compared to the same periods of fiscal 2017. The increase for the three months ended September 30, 2017 was primarily the result of higher restructuring and turnaround costs and an increase in variable compensation expense. Although restructuring and turnaround costs were higher during the three months ended September 30, 2017, there was a reduction of this spending during the six months ended September 30, 2017 due to significant levels of such costs incurred in the first quarter of fiscal 2017 in connection with our global strategic review. Annualized savings as a result of the strategic review also contributed to the decrease in spending during the first half of fiscal 2018.
Interest and Other Expense, Net
Interest expense from our term loan borrowings, which constitutes the majority of expense, decreased during the three and six months ended September 30, 2017 as compared to the prior year period due to principal payments on our term loan and a reduction in our borrowings on our revolving credit line. The effective interest rate on total debt outstanding as of September 30, 2017 was 2.5%.
Income Taxes
We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition to the United States. Our reported tax rate is generally lower than the U.S. federal statutory rate as the income tax rates in the foreign jurisdictions in which we operate are generally lower than the U.S. statutory tax rate. Additionally, our reported tax rate is lower than the statutory tax rate as a result of the release of valuation allowance against tax attributes in certain jurisdictions which can be utilized to offset current year earnings.
During the three months ended September 30, 2017 and October 1, 2016, we reported an income tax provision of $2.8 million and $3.0 million, respectively, representing effective tax rates of 12.1% and 13.2%, respectively. For the six months ended September 30, 2017 and October 1, 2016, we reported an income tax provision of $5.9 million and $3.3 million, respectively, representing effective tax rates of 12.7% and 25.8%, respectively. The change in our reported tax rate for both the three and six months ended September 30, 2017 was primarily the result of changes in the jurisdictional mix of earnings. Our effective tax rate for six months ended October 1, 2016 was also impacted by a non-recurring discrete tax expense of $1.4 million related to a workforce reduction during the first quarter of fiscal 2017 in a foreign subsidiary where we were required to maintain certain levels of headcount for a multi-year period, which resulted in the establishment of a tax reserve.
The income tax provision for the for the six months ended September 30, 2017 was primarily attributable to applying our estimated annual effective tax rate to our year-to-date consolidated income before provision for income taxes.
We are in a three year cumulative loss position in the U.S. and, accordingly, maintain a valuation allowance against our U.S. deferred tax assets. Additionally, we maintain a valuation allowance against certain other deferred tax assets primarily in Switzerland, Puerto Rico, Luxembourg and France which we have concluded are not more-likely-than-not realizable.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
(Dollars in thousands) | September 30, 2017 | April 1, 2017 | ||||||
Cash & cash equivalents | $ | 203,622 | $ | 139,564 | ||||
Working capital | $ | 298,390 | $ | 298,850 | ||||
Current ratio | 2.2 | 2.4 | ||||||
Net debt(1) | $ | (82,982 | ) | $ | (175,083 | ) | ||
Days sales outstanding (DSO) | 58 | 60 | ||||||
Disposable finished goods inventory turnover | 4.4 | 4.2 | ||||||
(1)Net debt position is the sum of cash and cash equivalents less total debt.
On November 1, 2017, we launched the 2018 Program. Under this restructuring initiative, we expect to incur aggregate charges between $50 million and $60 million, of which we expect $35 million to $40 million will consist of severance and other employee costs and the remainder will consist of other exit costs, primarily related to third party services. These charges,
25
substantially all of which will result in cash outlays, will be incurred as the specific actions required to execute on these initiatives are identified and approved and are expected to continue through fiscal 2020.
During fiscal 2017, we launched the 2017 Program, a restructuring initiative designed to reposition our organization and improve our cost structure. During the three and six months ended September 30, 2017, we incurred $5.2 million and $7.7 million, respectively, of restructuring and turnaround costs under this program. As of September 30, 2017, the 2017 Program was substantially complete.
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and proceeds from employee stock option exercises. Although cash flow from operations could be negatively impacted by continued declines in our Blood Center business, we believe these sources are sufficient to fund our cash requirements over at least the next twelve months. Our expected cash outlays relate primarily to investments, capital expenditures, including the NexSys PCS, cash payments under the loan agreement, restructuring and turnaround initiatives and other acquisitions.
Debt
As of September 30, 2017, we had $203.6 million in cash and cash equivalents, substantially held in the U.S. or in countries from which it can be freely repatriated to the U.S. We currently have a credit agreement ("Credit Agreement") with certain lenders (together, “Lenders”) which provides for a $475.0 million term loan ("Term Loan") and a $100.0 million revolving loan ("Revolving Credit Facility" and together with the Term Loan, the "Credit Facilities"). Interest is based on the Adjusted LIBOR plus a range of 1.125% to 1.500% depending on achievement of leverage ratios and customary credit terms which include financial and negative covenants. The Credit Facilities mature on July 1, 2019. At September 30, 2017, $286.9 million was outstanding under the Term Loan and no amount was outstanding on the Revolving Credit Facility. We also have $46.5 million of uncommitted operating lines of credit to fund our global operations under which there are no outstanding borrowings as of September 30, 2017.
During the three and six months ended September 30, 2017, we paid $16.6 million and $28.5 million, respectively, in scheduled principal repayments for the Term Loan. We have scheduled principal payments of $33.2 million required during the remainder of fiscal 2018. We were in compliance with the leverage and interest coverage ratios specified in the Credit Agreement as well as all other bank covenants as of September 30, 2017.
Cash Flows
Six Months Ended | ||||||||||||
(In thousands) | September 30, 2017 | October 1, 2016 | Increase/ (Decrease) | |||||||||
Net cash provided by (used in): | ||||||||||||
Operating activities | $ | 97,328 | $ | 69,960 | $ | 27,368 | ||||||
Investing activities | (18,779 | ) | (41,427 | ) | 22,648 | |||||||
Financing activities | (16,296 | ) | (4,575 | ) | (11,721 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents(1) | 1,805 | (211 | ) | 2,016 | ||||||||
Net increase in cash and cash equivalents | $ | 64,058 | $ | 23,747 | ||||||||
(1)The balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. Dollars. In accordance with U.S. GAAP, we have removed the effect of foreign currency throughout our cash flow statement, except for its effect on our cash and cash equivalents.
Net cash provided by operating activities increased by $27.4 million during the six months ended September 30, 2017, as compared to the six months ended October 1, 2016. The increase in cash provided by operating activities was primarily due to net income, as adjusted for depreciation and amortization, and a working capital inflow driven primarily by a decrease in inventories and, to a lesser extent, a decrease in accounts receivable. The decrease in inventories was due to an inventory build of our PCS2 devices in the prior year period and the placement of those devices in fiscal 2018, as well as, the strategic management of inventory levels for this platform of devices in fiscal 2018 in anticipation of the launch of the new devices. The cash inflow was partially offset by a decrease in accrued payroll and related costs as compared to the prior year period, driven by lower restructuring and turnaround reserves.
Net cash used in investing activities decreased by $22.6 million during the six months ended September 30, 2017, as compared to the six months ended October 1, 2016. The decrease in cash used in investing activities was primarily the result of a reduction in capital expenditures during the six months ended September 30, 2017, as compared to the same period in the prior fiscal year, due to the timing of spend, which we expect will occur in the second half of fiscal 2018 and during fiscal 2019. The proceeds received related to the divestiture of our SEBRA product line also contributed to the decrease.
26
Net cash used in financing activities increased by $11.7 million during the six months ended September 30, 2017, as compared to the six months ended October 1, 2016, primarily due to principal repayments on our Term Loan and lower proceeds received from the exercise of stock options.
Concentration of Credit Risk
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. A portion of our trade accounts receivable outside the United States, however, 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.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity, and by adjusting the selling prices of products. We continue to monitor inflation pressures generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Foreign Exchange
During the three and six months ended September 30, 2017, approximately 38.4% and 38.2%, 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
Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity
27
satisfies a performance obligation. ASU No. 2014-09 will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The purpose of ASU No. 2016-08 is to clarify the guidance on principal versus agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service before it is transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as such, whether to recognize a gross or a net amount of consideration in their consolidated statement of operations. The effective date and transition requirements are consistent with ASU No. 2014-09.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The guidance clarifies that entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. ASU No. 2016-10 also addresses how to determine whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing. The effective date and transition requirements are consistent with ASU No. 2014-09.
We have established a cross-functional implementation team consisting of representatives from all of our business units and regions. During fiscal 2017, we began analyzing the impact of the standard on our contract portfolio by reviewing a representative sample of our contracts to identify potential differences that would result from applying the requirements of the new standard. The implementation team has apprised both management and the audit committee of project status on a recurring basis.
We have not finalized our assessment of the impact of Topic 606, however we believe our recognition of software revenue will be the most impacted. Software revenue accounts for approximately 8.4% of our total revenue. We continue to analyze performance obligations, variable consideration and disclosures. Additionally, we are monitoring updates issued by the FASB. During the fourth quarter of fiscal 2018, we expect to substantially complete our impact assessment and initiate efforts to redesign impacted processes, policies and controls.
Other Recent Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU No. 2016-01 also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is applicable to us in fiscal 2019. Early adoption of certain provisions is permitted. Management does not believe that the adoption of ASU No. 2016-01 will have a material effect on our financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 is intended to increase the transparency and comparability among organizations by recognizing lease asset and lease liabilities on the balance sheet, including those previously classified as operating leases under current U.S. GAAP, and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is applicable to us in fiscal 2020. Earlier adoption is permitted. The impact of adopting ASU No. 2016-02 on our financial position and results of operations is being assessed by management.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230). The guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in the Statements of Cash Flows. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to us in fiscal 2019. Early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to us in fiscal 2019. Early adoption is permitted for all entities as of the
28
beginning of an annual reporting period. The impact of adopting ASU No. 2016-16 on our financial position and results of operations is being assessed by management.
In January, 2017 the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805). The purpose of the update is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to us in fiscal 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period. The impact of adopting ASU No. 2017-01 is not expected to have a material effect on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). The guidance revises the presentation of net periodic pension cost and net periodic post-retirement benefit cost. The guidance is effective for annual periods beginning after December 15, 2018, and is applicable to us in fiscal 2020. Early adoption is permitted for all entities as of the beginning of an annual reporting period. The impact of adopting ASU No. 2017-07 is not expected to have a material effect on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting (Topic 718). The guidance clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to us in fiscal 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period. The impact of adopting ASU No. 2017-09 on our financial position and results of operations is being assessed by management.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815). The new guidance will make more financial and non-financial hedging strategies eligible for hedge accounting as well as amend the presentation and disclosure requirements and change how companies assess effectiveness. The guidance is effective for annual periods beginning after December 15, 2018, and is applicable to us in fiscal 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period. The impact of adopting ASU No. 2017-12 on our financial position and results of operations is being assessed by management.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements we make which are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. These statements are based on our current expectations and estimates as to prospective events and circumstances about which we can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of our actual future financial condition or results.
These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, demand for whole blood and blood components, changes in executive management, changes in operations, restructuring and turnaround plans, asset revaluations to reflect current business conditions, asset sales, technological advances in the medical field and standards for transfusion medicine and our ability to successfully offer products that incorporate such advances and standards, product quality, market acceptance, regulatory uncertainties, including in the receipt or timing of regulatory approvals, the effect of economic and political conditions, the impact of competitive products and pricing, blood product reimbursement policies and practices, foreign currency exchange rates, changes in customers’ ordering patterns including single-source tenders, the effect of industry consolidation as seen in the plasma and blood center markets, the effect of communicable diseases and the effect of uncertainties in markets outside the U.S. (including Europe and Asia) in which we operate and other risks detailed under Item 1A. Risk Factors included in this report, if any, as well as those described in our Annual Report on Form 10-K for the fiscal year ended April 1, 2017. The foregoing list should not be construed as exhaustive.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure relative to market risk is due to foreign exchange risk and interest rate risk.
Foreign Exchange Risk
See the section above entitled Foreign Exchange for a discussion of how foreign currency affects our business. It is our policy to minimize, for a period of time, the unforeseen impact on our financial results of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge anticipated cash flows from forecasted foreign currency denominated sales and costs. We do not use the financial instruments for speculative or trading activities.
We estimate the change in the fair value of all forward contracts assuming both a 10% strengthening and weakening of the U.S. Dollar relative to all other major currencies. In the event of a 10% strengthening of the U.S. Dollar, the change in fair value of all forward contracts would result in a $3.6 million increase in the fair value of the forward contracts; whereas a 10% weakening of the U.S. Dollar would result in a $3.5 million decrease of the fair value of the forward contracts.
Interest Rate Risk
Our exposure to changes in interest rates is associated with borrowings on our Credit Agreement, all of which is variable rate debt. Total outstanding debt under our Credit Facilities as September 30, 2017 was $286.9 million with an interest rate of 2.5% based on prevailing LIBOR rates. An increase of 100 basis points in LIBOR rates would result in additional annual interest expense of $2.9 million. On December 21, 2012, we entered into interest rate swap agreements to effectively convert $250.0 million of borrowings from a variable rate to a fixed rate. The interest rate swaps matured on August 1, 2017.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, as of September 30, 2017, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Because the material weakness in our internal control over financial reporting for inventory that existed as of April 1, 2017 has not yet been fully remediated, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017.
We have advised our audit committee of this deficiency in our internal control over financial reporting, and the fact that this deficiency constitutes a material weakness. A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.
Because a material weakness was determined to exist, we performed additional procedures to ensure our consolidated financial statements included in this quarterly report on Form 10-Q are presented fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
We have undertaken steps to strengthen our controls over accounting for inventory, including:
• | Increasing oversight by our management in the calculation and reporting of certain inventory balances; |
• | Enhancing policies and procedures relating to account reconciliation and analysis; and |
• | Strengthening communication and information flows between the inventory operations department and the corporate controller's group. |
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine that it is necessary to take additional measures to address control deficiencies or may determine that it is necessary to modify the remediation plan described below. The operation of the control change will need to be observed for a period of time before management is able to conclude that the material weakness has been remediated. If not remediated, this material weakness could result in a material misstatement to our consolidated financial statements. Management continues to monitor implementation of its remediation plan and timetable and believes the efforts described below will effectively remediate the material weaknesses.
30
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-a5(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls
Except as noted in the preceding paragraphs, there has not been any change in our system of internal control over financial reporting during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this Item may be found in Note 11, Commitments and Contingencies to the Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
Except as set forth below, there are no material changes from the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended April 1, 2017.
We may not realize the benefits we expect from our Complexity Reduction Initiative.
On November 1, 2017, we committed to and commenced our Complexity Reduction Initiative, also referred to in this report as the 2018 Program, a company-wide restructuring program designed to improve operational performance and reduce cost, freeing up resources to invest in accelerated growth. We anticipate the majority of the savings generated by the 2018 Program will result from cost reductions such as direct materials, indirect spending, facilities, freight, and workforce reduction which will be accomplished primarily through voluntary and involuntary separations. The successful implementation of the 2018 Program presents organizational challenges and in many cases will require successful negotiations with third parties, including suppliers and other business partners, and consultations with appropriate works councils. As a result, we may not be able to realize all of the anticipated benefits from our 2018 Program. Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our not realizing all of the anticipated benefits or our not realizing the anticipated benefits on our expected timetable. The 2018 Program could also yield unintended consequences, such as distraction of our management and employees, business disruption, inability to attract or retain key personnel, and reduced employee productivity, which could negatively affect our business, sales, financial condition and results of operations. If we are unable to realize the anticipated savings of the 2018 Program, our ability to fund new business initiatives may be adversely affected. Any failure to implement the 2018 Program in accordance with our expectations could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
The Compensation Committee of the Board of Directors (the "Compensation Committee") recently completed a review of our forms of executive severance agreement and change in control agreement. As a result of the review, the Compensation Committee approved (i) an updated form of executive severance agreement (the “Severance Agreement”), (ii) an updated form of change in control agreement (the “Change in Control Agreement”), (iii) the use of both the Severance Agreement and the Change in Control Agreement for certain members of the Company’s senior management, including named executive officers William P. Burke and Neil Ryding, and (iv) the implementation of similar updates to the executive severance agreement and change in control agreement previously existing with Christopher A. Simon, our Chief Executive Officer.
On November 7, 2017, we entered into a Severance Agreement and a Change in Control Agreement with each of Messrs. Simon, Burke and Ryding and other members of senior management. The Severance Agreements and Change in Control Agreements replace the executive severance agreements and change in control agreements previously existing with such named executive officers and the other members of senior management who previously were parties to executive severance agreements or change in control agreements.
32
The updated form of Severance Agreement expands the definition of “Cause” for termination of employment and provides that the executive’s severance benefits will include, in addition to the severance benefits provided under the prior form of executive severance agreement, a pro-rata portion of the annual bonus the executive would have earned with respect to the fiscal year in which the executive’s termination of employment occurs if the executive had remained actively employed by Haemonetics through the payment date for annual bonuses in respect of such fiscal year, based on the actual performance of Haemonetics during the applicable bonus period and assuming full achievement of any individual performance goals. The updated form of Severance Agreement provides that severance benefits payable thereunder will immediately cease if the executive violates certain confidentiality, non-solicitation, and non-competition obligations and that, in the event of such a violation, the executive will be required to repay to Haemonetics any installments of continued base salary and payments for welfare benefits that were previously paid to the executive as part of his or her severance entitlement.
The updated form of Change in Control Agreement modifies the definition of “Change in Control” to increase the percentage of ownership of our shares by a person or group triggering a Change in Control from 35% to 50% and to include as a Change in Control individuals who constitute the “Incumbent Board” ceasing to constitute a majority of the Board of Directors. The updated form of Change in Control Agreement also clarifies that in the event of a conflict between the terms of the Change in Control Agreement and the terms of an individual equity award with respect to vesting of equity awards upon a Change in Control, the terms of the individual equity award will control if such award provides more favorable vesting terms than the Change in Control Agreement. The updated form of Change in Control Agreement also provides that severance benefits payable thereunder will immediately cease if the executive violates certain confidentiality, non-solicitation, and non-competition obligations and that, in the event of such a violation, the executive will be required to repay to Haemonetics any cash amounts that were previously paid to the executive as part of his or her severance entitlement.
The foregoing summary of the Severance Agreement and Change in Control Agreement does not purport to be complete and is qualified in its entirety by reference to the text of the Form of Severance Agreement, Form of Change in Control Agreement, CEO Severance Agreement, and CEO Change in Control Agreement, which are attached as Exhibits 10.2, 10.3, 10.4 and 10.5, respectively, and are incorporated herein by reference.
33
Item 6. Exhibits
Form of Performance Share Unit Award Agreement Under 2005 Long-Term Incentive Compensation Plan (Internal Financial Metrics, adopted Fiscal 2018) | ||
Form of Executive Severance Agreement between the Company and executive officers other than Christopher A. Simon | ||
Form of Change in Control Agreement between the Company and executive officers other than Christopher A. Simon | ||
Executive Severance Agreement between the Company and Christopher A. Simon dated as of November 7, 2017 | ||
Change in Control Agreement between the Company and Christopher A. Simon dated as of November 7, 2017 | ||
Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, of Christopher Simon, President and Chief Executive Officer of the Company | ||
Certification pursuant to Section 302 of Sarbanes-Oxley of 2002, of William Burke, Executive Vice President, Chief Financial Officer of the Company | ||
Certification Pursuant to 18 United States Code Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Christopher Simon, President and Chief Executive Officer of the Company | ||
Certification Pursuant to 18 United States Code Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of William Burke, Executive Vice President, Chief Financial Officer of the Company | ||
101** | The following materials from Haemonetics Corporation on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL); (i) Consolidated Statements of Income and Comprehensive Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements. | |
_____________________________
† | Agreement, plan, or arrangement related to the compensation of executive officers or directors | |
** | In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for the purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. | |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HAEMONETICS CORPORATION | |||
11/7/2017 | By: | /s/ Christopher Simon | |
Christopher Simon, President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
11/7/2017 | By: | /s/ William Burke | |
William Burke, Executive Vice President, Chief Financial Officer | |||
(Principal Financial Officer) | |||
35