HAEMONETICS CORP (HAE) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
Haemonetics is a global healthcare company dedicated to providing a suite of innovative medical products and solutions for customers, to help them improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets: blood and plasma component collection, the surgical suite and hospital transfusion services.
We view our operations and manage our business in three principal reporting segments: Plasma, Blood Center and Hospital. For that purpose, “Plasma” includes plasma collection devices and disposables, plasma donor management software and anticoagulant and saline sold to plasma customers. “Blood Center” includes blood collection and processing devices and disposables for red cells, platelets and whole blood. “Hospital”, which is comprised of Hemostasis Management, Vascular Closure, Cell Salvage and Transfusion Management products, includes devices and methodologies for measuring coagulation characteristics of blood, vascular closure devices, specialized blood cell processing systems and disposables, surgical blood salvage systems and blood transfusion management software.
We believe that Plasma and Hospital have growth potential, while Blood Center competes in challenging markets that 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.
Recent Developments
Share Repurchase Program
In August 2022, we announced that our Board of Directors had approved a new three-year share repurchase program authorizing the repurchase of up to $300.0 million of Haemonetics common stock from time to time, based on market conditions, through August 2025. In November 2022, the Company completed a $75.0 million repurchase of its common stock pursuant to an accelerated share repurchase agreement (“ASR”) entered into with Citibank N.A. in August 2022. The total number of shares repurchased under the ASR was 1.0 million at an average price per share upon final settlement of $75.20.
As of April 1, 2023, the total remaining authorization for repurchase of the Company’s common stock was $225.0 million.
Debt Issuance and Repayment
On July 26, 2022, we entered into an amended and restated credit agreement with certain lenders to refinance the credit facilities under our 2018 credit agreement (as amended from time to time) and extend the applicable maturity date through June 2025. Our Revised Credit Facilities include a $280.0 million senior unsecured term loan, the proceeds of which have been used to retire the balance of the term loan under our 2018 credit agreement, and a $420.0 million senior unsecured revolving credit facility. In September 2022, we amended two prior interest rate swap agreements and entered into certain supplemental interest rate swap agreements to effectively convert between 70% to 80% of borrowings under our Revised Credit Facilities from a variable Term Secured Overnight Financing Rate (“SOFR”) rate to a fixed rate of interest through June 2025.
Market Trends
Plasma Market
There are two key aspects to the market for our plasma products - the growth in demand for plasma-derived biopharmaceuticals and the limited number of significant biopharmaceutical companies in this market.
Changes in demand for plasma-derived biopharmaceuticals, particularly immunoglobulin, are the key driver of plasma collection volumes in the biopharmaceutical market. Various factors related to the supply of plasma and the production of plasma-derived biopharmaceuticals also affect collection volume, including the following:
•Biopharmaceutical companies are seeking more yield from each plasma collection to meet growing demand for biopharmaceuticals without requiring an equivalent increase in plasma donations.
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•Newly approved indications for auto-immune diseases treated with plasma-derived therapies, the growing understanding and diagnosis of these diseases, longer lifespans and a growing aging patient population increase the demand for plasma.
•Geographical expansion of biopharmaceuticals also increases demand for plasma.
Despite the overall growth in the market, the number of biopharmaceutical companies that collect and fractionate source plasma is low and industry consolidation is ongoing. Significant barriers to entry exist for new entrants due to high capital outlay requirements for fractionation, long regulatory pathways to the licensing of collection centers and fractionation facilities and approval of plasma-derived biopharmaceuticals. As a result, there are relatively few customers for our Plasma products, especially in the U.S. where approximately 70% of the world’s source plasma is collected and only a few customers provide the majority of our Plasma revenue. However, certain jurisdictions such as Egypt and the United Kingdom have begun to collect or are considering collection of plasma for fractionation for their local needs, which could expand the Plasma market.
Blood Center Market
In the Blood Center market, we sell automated blood component and manual whole blood collection systems. While we sell products around the world, a significant portion of our sales are to a limited number of customers due to relatively limited number of blood collectors.
Within the Blood Center market, we have seen three trends that have negatively impacted growth of the overall marketplace despite the overall increase in aging populations. Overall, we expect a flat to low single-digit decline in this business.
•Declining transfusion rates in mature markets due to the development of more minimally invasive procedures with lower associated blood loss, as well as better blood management.
•Competition in multi-unit collection technology for automated blood component collection systems has intensified and has negatively impacted our sales in markets where these collections are prevalent.
▪Industry consolidation through group purchasing organizations has intensified pricing competition particularly in the manual whole blood collection systems.
Hospital Markets
Hemostasis Management Market - The use of routine coagulation testing is well established throughout the world in various medical procedures, including cardiovascular surgery, organ transplantation, trauma, post-partum hemorrhage and percutaneous coronary intervention. While standard tests like prothrombin time, partial thromboplastin time and platelet count have limited ability to reveal a patient’s risk for bleeding, they do not provide information on the patient’s risk for thrombosis. In addition, these routine tests do not provide specific data about clot quality or stability. As a result of these limitations, clinicians are increasingly utilizing advanced hemostasis testing to provide more information about a patient’s hemostasis status, resulting in improved clinical decision-making. In addition, advanced hemostasis testing supports hospital efforts to reduce the risks, complications and costs associated with unnecessary blood component transfusions.
Haemonetics’ TEG, ClotPro and HAS hemostasis analyzer systems are advanced diagnostic tools that provide a comprehensive assessment of a patient’s overall hemostasis. This information enables clinicians to decide the most appropriate clinical treatment for the patient to minimize blood loss and reduce clotting risk. For example, TEG analyzers have been used to support clinical decision making in open cardiovascular surgery and organ transplantation, becoming the standard of care in liver transplants. In more recent years, interest has grown into the utilization of TEG in trauma and other procedures in which the risk of hemorrhage and thrombosis are high.
Geographically, TEG systems have achieved the highest market penetration in North America, Europe and China. However, there are considerable growth opportunities in these as well as other markets, as TEG systems become more established as the standard of care around the world. Our ClotPro system is currently available in select European and Asian markets and is not available for use or sale in the U.S. The HAS-100 is currently commercialized in China.
Vascular Closure Market - The target markets for our Vascular Closure products, coronary and peripheral procedures and electrophysiology procedures, are highly concentrated in the U.S. The mature market of coronary and peripheral procedures consists of interventions to diagnose and treat vascular diseases. Electrophysiology procedures consist of catheter-based
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interventions to diagnose and treat cardiac arrhythmias. This procedure category is expected to grow based on the increasing incidence and prevalence of cardiac arrhythmias, mainly in the U.S. Additionally, our VASCADE and VASCADE MVP vascular closure systems received CE mark clearance in fiscal 2023, providing a pathway for country-specific introduction of these products in the EU.
Cell Salvage Market - In recent years, more efficient blood use and less invasive surgeries have reduced demand for autotransfusion in these procedures and contributed to intense competition in mature markets, while increased access to healthcare in emerging economies has provided new markets and sources of growth. Orthopedic procedures have seen similar changes with improved blood management practices, including the use of tranexamic acid to treat and prevent postoperative bleeding, significantly reducing the number of transfusions and autotransfusion. Geographically, the Cell Saver has achieved the highest market penetration in North America, Europe and Japan. However, there are considerable growth opportunities in certain Asia Pacific and other emerging markets as addressable procedure volumes grow and the use of autotransfusion is becoming accepted as a standard of care.
Transfusion Management Market - Revenues from BloodTrack have increased in the U.S. and Europe in recent years as hospitals seek means to improve efficiencies and meet compliance guidelines for tracking and dispositioning blood components to patients. SafeTrace Tx’s leading market share in the U.S. remains steady and in fiscal 2021 launched in the United Kingdom. We continue to explore opportunities to expand the portfolio internationally.
Financial Summary
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share data) | 2023 | 2022 | % Increase/(Decrease) | |||||||||
| Net revenues | $ | 1,168,660 | $ | 993,196 | 17.7 | % | ||||||
| Gross profit | $ | 615,097 | $ | 505,502 | 21.7 | % | ||||||
| % of net revenues | 52.6 | % | 50.9 | % | ||||||||
| Operating expenses | $ | 459,064 | $ | 424,752 | 8.1 | % | ||||||
| Operating income | $ | 156,033 | $ | 80,750 | 93.2 | % | ||||||
| % of net revenues | 13.4 | % | 8.1 | % | ||||||||
| Interest and other expense, net | $ | (14,630) | $ | (17,121) | (14.5) | % | ||||||
| Income before provision for income taxes | $ | 141,403 | $ | 63,629 | 122.2 | % | ||||||
| Provision for income taxes | $ | 26,002 | $ | 20,254 | 28.4 | % | ||||||
| % of pre-tax income | 18.4 | % | 31.8 | % | ||||||||
| Net income | $ | 115,401 | $ | 43,375 | 166.1 | % | ||||||
| % of net revenues | 9.9 | % | 4.4 | % | ||||||||
| Net income per share - basic | $ | 2.27 | $ | 0.85 | 167.1 | % | ||||||
| Net income per share - diluted | $ | 2.24 | $ | 0.84 | 166.7 | % |
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal years 2023 and 2022 included 52 weeks with each quarter having 13 weeks.
Net revenues for fiscal 2023 increased 17.7% compared with fiscal 2022. Without the effects of foreign exchange, net revenues increased 20.3% compared with fiscal 2022. Revenue increases in our Plasma and Hospital businesses, primarily related to volume and price, drove the overall increase in revenue during the fiscal year ended April 1, 2023.
Operating income increased 93.2% during fiscal 2023 as compared with fiscal 2022, primarily due to increased revenues in Plasma and Hospital, savings from the Operational Excellence Program (“2020 Program”), decreased spending on acquisitions in fiscal 2023 and decreased amortization of acquired intangible assets, partially offset by higher performance-based compensation, lower revenues in Blood Center, increased freight costs in our global supply chain and increased sales and marketing expense.
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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 revenue between the current and prior year periods using a constant currency conversion rate. We have provided this non-GAAP financial measure because we believe it provides meaningful information regarding our results on a consistent and comparable basis for the periods presented.
RESULTS OF OPERATIONS
Net Revenues by Geography
| Fiscal Year | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Reported Growth | Currency impact | Constant currency growth (1) | |||||||||||||
| United States | $ | 842,897 | $ | 639,322 | 31.8 | % | — | % | 31.8 | % | ||||||||
| International | 325,763 | 353,874 | (7.9) | % | (7.1) | % | (0.8) | % | ||||||||||
| Net revenues | $ | 1,168,660 | $ | 993,196 | 17.7 | % | (2.6) | % | 20.3 | % | ||||||||
| (1) Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency. See “Management's Use of Non-GAAP Measures.” |
International Operations and the Impact of Foreign Exchange
Our principal operations are in the United States, Europe, Japan and other parts of Asia. Our products are marketed in approximately 90 countries around the world through a combination of our direct sales force and independent distributors and agents.
The percentage of revenue generated in our principal operating regions is summarized below:
| Fiscal Year | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| United States | 72.1 | % | 64.4 | % | |
| Japan | 5.2 | % | 7.6 | % | |
| Europe | 13.4 | % | 16.5 | % | |
| Asia | 8.9 | % | 11.2 | % | |
| Other | 0.4 | % | 0.3 | % | |
| Total | 100.0 | % | 100.0 | % |
International sales are generally conducted in local currencies, primarily Japanese Yen, Euro and Chinese Yuan. Our results of operations are impacted by changes in foreign exchange rates, particularly in the value of the Yen and Euro, 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.
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Net Revenues by Business Unit
| Fiscal Year | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Reported Growth | Currency impact | Constant currency growth(1) | |||||||||||
| Plasma | $ | 496,923 | $ | 351,347 | 41.4% | (0.8)% | 42.2% | |||||||||
| Blood Center | 279,962 | 298,512 | (6.2)% | (4.4)% | (1.8)% | |||||||||||
| Hospital(2) | 371,731 | 322,804 | 15.2% | (2.4)% | 17.6% | |||||||||||
| Service | 20,044 | 20,533 | (2.4)% | (5.3)% | 2.9% | |||||||||||
| Net revenues | $ | 1,168,660 | $ | 993,196 | 17.7% | (2.6)% | 20.3% | |||||||||
| (1) Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency. See “Management's Use of Non-GAAP Measures.” | ||||||||||||||||
| (2) Hospital revenue includes Hemostasis Management revenue of $138.9 million and $127.4 million for fiscal years 2023 and 2022, respectively. Hemostasis Management revenue increased 9.0% during fiscal 2023 as compared with fiscal 2022. Without the effect of foreign exchange, Hemostasis Management revenue increased 11.3% as compared with fiscal 2022. Vascular Closure revenue increased 35.1% during fiscal 2023 as compared with fiscal 2022. |
Plasma
Plasma revenue increased 41.4% during fiscal 2023 as compared with fiscal 2022. Without the effect of foreign exchange, Plasma revenue increased 42.2% during fiscal 2023 as compared with fiscal 2022. This revenue increase was primarily driven by volume and price.
During the third quarter of fiscal 2022, we amended our supply agreement with CSL, which CSL had previously notified us of its intent not to renew and was initially set to expire in June 2022, to allow CSL to continue to use our PCS2 plasma collection system devices and purchase disposable plasmapheresis kits on a non-exclusive basis through December 2023. During the third quarter of fiscal 2023, we further amended our supply agreement with CSL to extend the term through December 2025. CSL has a minimum purchase commitment under the non-exclusive supply agreement that slightly exceeds $100.0 million in fiscal 2024, and we expect that CSL will continue to provide a meaningful contribution to our Plasma business revenue in fiscal 2025.
Blood Center
Blood Center revenue decreased 6.2% during fiscal 2023 as compared with fiscal 2022. Without the effect of foreign exchange, Blood Center revenue decreased 1.8% during fiscal 2023. The decrease was primarily driven by declines in the volume of apheresis disposables, partially offset by an increase in whole blood disposables.
Hospital
Hospital revenue increased 15.2% during fiscal 2023 as compared with fiscal 2022. Without the effect of foreign exchange, Hospital revenue increased 17.6% during fiscal 2023. The increase was primarily attributable to Vascular Closure revenue, as well as increases in Hemostasis Management disposables revenue and Transfusion Management revenue.
Gross Profit
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | % Increase/(Decrease) | |||||||||
| Gross profit | $ | 615,097 | $ | 505,502 | 21.7 | % | ||||||
| % of net revenues | 52.6 | % | 50.9 | % |
Gross profit increased 21.7% during fiscal 2023 as compared with fiscal 2022. Without the effects of foreign exchange, gross profit increased 26.1% during fiscal 2023. The increase was primarily driven by volume, price, decreased spend on both restructuring and restructuring related costs and integration and transaction costs, as well as productivity savings from the 2020 Program. These drivers were partially offset by inflationary pressures in our global manufacturing and supply chain and increased depreciation expense.
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Operating Expenses
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | % Increase/(Decrease) | |||||||||
| Research and development | $ | 50,131 | $ | 46,801 | 7.1 | % | ||||||
| % of net revenues | 4.3 | % | 4.7 | % | ||||||||
| Selling, general and administrative | $ | 376,675 | $ | 340,140 | 10.7 | % | ||||||
| % of net revenues | 32.2 | % | 34.2 | % | ||||||||
| Amortization of acquired intangible assets | $ | 32,640 | $ | 47,414 | (31.2) | % | ||||||
| % of net revenues | 2.8 | % | 4.8 | % | ||||||||
| Gains on divestiture | $ | (382) | $ | (9,603) | (96.0) | % | ||||||
| % of net revenues | — | % | (1.0) | % | ||||||||
| Total operating expenses | $ | 459,064 | $ | 424,752 | 8.1 | % | ||||||
| % of net revenues | 39.3 | % | 42.8 | % |
Research and Development
Research and development expenses increased 7.1% during fiscal 2023 as compared with fiscal 2022. Without the effects of foreign exchange, research and development expenses increased 7.4% during fiscal 2023. The increase in fiscal 2023 was primarily due to increased investments into product innovation, partially offset by decreased spend on MDR and IVDR.
Selling, General and Administrative
Selling, general and administrative expenses increased 10.7% during fiscal 2023 as compared with fiscal 2022. Without the effects of foreign exchange, selling, general and administrative expenses increased 12.6% during fiscal 2023. The increase in fiscal 2023 was primarily driven by higher performance-based compensation, inflationary pressures and higher freight costs in our global supply chain and increased investments in sales and marketing, partially offset by cost savings related to the 2020 Program and decreased acquisition costs and restructuring and restructuring related costs in fiscal 2023.
Amortization of Acquired Intangible Assets
We recognized amortization expense related to our acquired intangible assets of $32.6 million and $47.4 million during fiscal 2023 and fiscal 2022, respectively. The decrease in fiscal 2023 is primarily the result of intangible assets that became fully amortized during fiscal 2022.
Gains on Divestitures
We recognized gains on divestitures of $0.4 million and $9.6 million during fiscal 2023 and fiscal 2022, respectively. Refer to Note 5, Divestitures, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
Interest and Other Expense, Net
Interest and other expenses decreased 14.5% during fiscal 2023 as compared with fiscal 2022. Without the effects of foreign exchange, interest and other expenses decreased 15.9% during fiscal 2023. The decrease was primarily driven by increased interest income on investments due to higher interest rates, lower interest paid on interest rate swaps due to market and rate volatility, partially offset by higher interest incurred on our term loan.
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Income Taxes
| Fiscal Year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Increase/(Decrease) | ||||||||
| Reported income tax rate | 18.4 | % | 31.8 | % | (13.4) | % |
Reported Tax Rate
We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition to the U.S. Our reported tax rate is impacted by the jurisdictional mix of earnings in any given period as the foreign jurisdictions in which we operate have tax rates that differ from the U.S. statutory tax rate.
We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry-back net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies and available sources of future taxable income. As of April 1, 2023, we maintain a valuation allowance against certain U.S. state and foreign tax credit carryforwards that are not more-likely-than-not realizable as well as a valuation allowance against the net deferred tax assets of certain foreign subsidiaries.
For the year ended April 1, 2023, we recorded income tax expense of $26.0 million on our worldwide pre-tax income of $141.4 million, resulting in a reported tax rate of 18.4%. Our effective tax rate for the year ended April 1, 2023 is lower than our effective tax rate of 31.8% for fiscal 2022, primarily due to the release of valuation allowance related to U.S. state deferred tax assets, the absence of provisions related to contingent consideration and decreased disallowed stock compensation expense, partially offset by jurisdictional mix of earnings.
Effective beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 requires the Company to capitalize, and subsequently amortize research and development expenses over five years for research activities conducted in the U.S. and over fifteen years for research activities conducted outside of the U.S. There was not a material impact on our effective tax rate in fiscal 2023 as a result of this requirement.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
| (In thousands) | April 1, 2023 | April 2, 2022 | ||||
|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 284,466 | $ | 259,496 | ||
| Working capital | $ | 517,906 | $ | 313,765 | ||
| Current ratio | 3.1 | 1.7 | ||||
| Net debt position(1) | $ | (481,420) | $ | (514,093) | ||
| Days sales outstanding (DSO) | 53 | 54 | ||||
| Inventory turnover | 1.8 | 1.4 | ||||
| (1)Net debt position is the sum of cash and cash equivalents less total debt. |
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. We believe these sources are sufficient to fund our cash requirements over at least the next twelve months. Our expected cash outlays relate primarily to acquisitions, investments, capital expenditures, including enhancements to our North American manufacturing facilities, share repurchases and cash principal and interest payments under our revised credit agreement.
In March 2021, the Company issued $500.0 million aggregate principal amount of 0% convertible senior notes due 2026, or the 2026 Notes. The 2026 Notes are governed by the terms of the Indenture between the Company and U.S. Bank National Association, as trustee. The total net proceeds from the sale of the 2026 Notes, after deducting the initial purchasers’ discounts and debt issuance costs, were approximately $486.7 million. The 2026 Notes will mature on March 1, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes have an effective interest rate of 0.5% as of April 1, 2023.
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As of April 1, 2023, we had $284.5 million in cash and cash equivalents, the majority of which is held in the U.S. or in countries from which it can be repatriated to the U.S. On July 26, 2022, we entered into an amended and restated credit agreement with certain lenders to refinance our prior credit agreement entered into on June 15, 2018, which consisted of a $350.0 million term loan and a $350.0 million revolving loan (together, as amended from time to time, the “2018 Credit Facilities”), and extend the maturity date through June 2025. Our Revised Credit Facilities include a $280.0 million senior unsecured term loan, the proceeds of which have been used to retire the balance of the term loan under the 2018 Credit Facilities, and a $420.0 million senior unsecured revolving credit facility. Loans under the Revised Credit Facilities bear interest at an annual rate equal to the Adjusted Term SOFR Rate (as specified in the amended and restated credit agreement), which is subject to a floor of 0%, plus an applicable rate ranging from 1.125% to 1.750% based on the Company’s consolidated net leverage ratio (as specified in the amended and restated credit agreement) at the applicable measurement date. Adjusted Term SOFR Rate loans are also subject to a credit spread adjustment of 0.10% per annum. The revolving credit facility carries an unused fee that ranges from 0.125% to 0.250% annually based on the Company’s consolidated net leverage ratio at the applicable measurement date. Under the Revised Credit Facilities, the Company is required to maintain certain leverage and interest coverage ratios specified in the amended and restated credit agreement as well as other customary non-financial affirmative and negative covenants. The Revised Credit Facilities mature on June 15, 2025. The principal amount of the term loan under the Revised Credit Facilities is repayable quarterly through the maturity date at a rate of 2.5% for the first year and 5% thereafter, with the unpaid balance due at maturity.
As of April 1, 2023, $274.7 million was outstanding under the term loan with an effective interest rate of 6.3%. There were no borrowings outstanding on the revolving loan. We also had $21.3 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as of April 1, 2023. Additionally, the Company was in compliance with the leverage and interest coverage ratios specified in the credit agreement as well as all other bank covenants as of April 1, 2023.
The Company has scheduled principal payments of $12.3 million required during fiscal 2024.
During fiscal 2022, our Board of Directors approved a revised 2020 Program. We now estimate that we will incur aggregate charges between $95 million and $105 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2025. During the fiscal years ended April 1, 2023 and April 2, 2022, the Company incurred $11.5 million and $28.7 million, respectively, of restructuring and restructuring related costs under this program.
Cash Flows
| Fiscal Year | ||||||
|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | ||||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | 273,058 | $ | 172,263 | ||
| Investing activities | (143,788) | (86,345) | ||||
| Financing activities | (100,364) | (15,749) | ||||
| Effect of exchange rate changes on cash and cash equivalents(1) | (3,936) | (2,978) | ||||
| Net change in cash and cash equivalents | $ | 24,970 | $ | 67,191 | ||
| (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 eliminated the effect of foreign currency throughout our cash flow statement, except for its effect on our cash and cash equivalents. |
Operating Activities
Net cash provided by operating activities was $273.1 million during fiscal 2023, an increase of $100.8 million as compared with fiscal 2022. The increase in cash provided by operating activities was primarily the result of higher net income, decreased inventory driven by NexSys PCS device placements and increased accrued performance-based compensation, partially offset by increases in accounts receivable during fiscal 2023.
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Investing Activities
Net cash used in investing activities was $143.8 million during fiscal 2023, an increase of $57.4 million as compared with fiscal 2022. The increase in cash used in investing activities was primarily the result of an increase in capital expenditures, driven by NexSys PCS device placements, and other investments made in fiscal 2023, partially offset by lower proceeds received from divestitures in fiscal 2023.
Financing Activities
Net cash used in financing activities was $100.4 million during fiscal 2023, an increase of $84.6 million as compared with fiscal 2022. The increase in cash used in financing activities during fiscal 2023 was primarily due to share repurchases and acquisition-related contingent consideration payments made in fiscal 2023.
Contractual Obligations
A summary of our contractual and commercial commitments as of April 1, 2023 is as follows:
| Payments Due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||
| Convertible senior notes | $ | 500,000 | $ | — | $ | 500,000 | $ | — | $ | — | ||||||||
| Debt | 274,776 | 12,276 | 262,500 | — | — | |||||||||||||
| Interest payments(1) | 37,059 | 17,363 | 19,696 | — | — | |||||||||||||
| Operating leases | 77,630 | 9,813 | 17,608 | 16,563 | 33,646 | |||||||||||||
| Purchase commitments(2) | 207,079 | 207,079 | — | — | — | |||||||||||||
| Expected retirement plan benefit payments | 19,475 | 1,453 | 2,826 | 3,542 | 11,654 | |||||||||||||
| Total contractual obligations | $ | 1,116,019 | $ | 247,984 | $ | 802,630 | $ | 20,105 | $ | 45,300 | ||||||||
| (1) Interest payments reflect the contractual interest payments on our outstanding debt and exclude the impact of interest rate swap agreements. Interest payments are projected using interest rates in effect as of April 1, 2023. Certain of these projected interest payments may differ in the future based on changes in market interest rates.(2) Includes amounts we are committed to spend on purchase orders entered in the normal course of business for capital equipment as well as commitments with contractors for the manufacture of certain disposable products and equipment. The majority of our operating expense spending does not require any advance commitment. |
The above table does not reflect our long-term liabilities associated with unrecognized tax benefits of $3.0 million recorded in accordance with ASC Topic 740, Income Taxes. We cannot reasonably make a reliable estimate of the period in which we expect to settle these long-term liabilities due to factors outside of our control, such as tax examinations.
Concentration of Credit Risk
While approximately 48% of our revenue during fiscal 2023 was generated by our ten largest customers, concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. Certain markets and industries, however, can expose us to concentrations of credit risk. For example, in the Plasma business unit, sales are concentrated with several large customers. As a result, accounts receivable extended to any one of these biopharmaceutical customers can be significant at any point in time. In addition, a portion of our trade accounts receivable outside the U.S. include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays and local economic conditions. Payment is dependent upon the financial stability and creditworthiness of those countries’ national economies.
We have not incurred significant losses on trade accounts or other 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.
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Legal Proceedings
In accordance with U.S. GAAP, we record a liability in our consolidated financial statements for legal matters when a loss is known or considered probable and the amount may be reasonably estimated. Actual settlements may be different than estimated and could have a material impact on our consolidated earnings, financial position and/or cash flows. For a discussion of our material legal proceedings refer to Note 16, Commitments & Contingencies, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Inflation
We continued to experience rising inflationary pressures in our global supply chain that had an impact on our results of operations during fiscal 2023. We continue to monitor inflationary 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. Historically, we have been able to limit the impact of the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity and by adjusting the selling prices of products, but we may not be able to fully mitigate these increases in our operational costs in the future.
Foreign Exchange
During fiscal 2023, 27.9% 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 Japanese Yen, Euro and Chinese Yuan. 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 and Yuan 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 and Yuan sales exceed the foreign currency denominated costs, whenever the U.S. Dollar strengthens relative to the Yen, Euro or Yuan, there is an adverse effect on our results of operations and, conversely, whenever the U.S. Dollar weakens relative to the Yen, Euro or Yuan, 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 Franc and Mexican Peso. 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
There are currently no recent accounting pronouncements that we expect to have a material impact on our financial position and results of operations.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates. We consider an estimate to be a “critical accounting estimate” when (i) the nature of the estimate is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimate on
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financial condition or operating performance is material. The accounting policies and estimates identified as critical are as follows:
Revenue Recognition
Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration related to rebates, product returns and volume discounts. These reserves, which are based on estimates of the amounts earned or to be claimed on the related sales, are recorded as a reduction of revenue and a current liability. Our estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. Revenue recognized in the current period related to performance obligations satisfied in prior periods was not material. If we are unable to estimate the expected rebates reasonably, we record a liability for the maximum potential rebate or discount that could be earned. In circumstances where we provide upfront rebate payments to customers, we capitalize the rebate payments and amortize the resulting asset as a reduction of revenue using a systematic method over the life of the contract. Refer to Note 2, Summary of Significant Accounting Policies and Note 8, Revenue, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information.
Goodwill and Intangible Assets
Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows and discount rates could result in different fair value estimates.
Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units include, but are not limited to, the following:
•Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in procedural volumes, pricing pressures, product actions and/or competitive technology developments,
•Declines in our market share and penetration assumptions due to increased competition, an inability to develop or launch new and next-generation products and technology features in line with our commercialization strategies and market and/or regulatory conditions that may cause significant launch delays or product recalls,
•Decreases in our forecasted profitability due to an inability to implement successfully and achieve timely and sustainable cost improvement measures consistent with our expectations,
•Changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses and
•Increases in our market-participant risk-adjusted weighted average cost of capital and increases in our market-participant tax rate and/or changes in tax laws or macroeconomic conditions.
Negative changes in one or more of these factors, among others, could result in future impairment charges.
We review intangible assets subject to amortization for impairment at least annually or more frequently if certain conditions arise to determine if any adverse conditions exist that would indicate that the carrying value of an asset or asset group may not be recoverable, or that a change in the remaining useful life is required. Conditions indicating that an impairment exists include but are not limited to a change in the competitive landscape, internal decisions to pursue new or different technology strategies, a loss of a significant customer or a significant change in the marketplace including prices paid for our products or the size of the market for our products. Refer Note 2, Summary of Significant Accounting Policies and Note 11, Goodwill & Intangible Assets, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
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Inventory Provisions
We base our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared with forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. Additionally, uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect our estimates related to excess, expired and obsolete inventory.
Income Taxes
The income tax provision is calculated for all jurisdictions in which we operate. The income tax provision process involves calculating current taxes due and assessing temporary differences arising from items that are taxable or deductible in different periods for tax and accounting purposes and are recorded as deferred tax assets and liabilities. Deferred tax assets are evaluated for realizability and a valuation allowance is maintained for the portion of our deferred tax assets that are not more-likely-than-not realizable. All available evidence, both positive and negative, has been considered to determine whether, based on the weight of that evidence, a valuation allowance is needed against the deferred tax assets. Refer to Note 6, Income Taxes, to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information and discussion of our income tax provision and balances.
We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. We record a liability for the portion of unrecognized tax benefits claimed that we have determined are not more-likely-than-not realizable. These tax reserves have been established based on management’s assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
Contingencies
We may become involved in various legal proceedings that arise in the ordinary course of business, including, without limitation, patent infringement, product liability and environmental matters. Accruals recorded for various contingencies including legal proceedings, employee related litigation, self-insurance and other claims are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. When a loss is probable and a range of loss is established but a best estimate cannot be made, we record the minimum loss contingency amount. These estimates are often initially developed substantially earlier than the ultimate loss is known and the estimates are reevaluated each accounting period, as additional information is available. When we are initially unable to develop a best estimate of loss, we record the minimum amount of loss, which could be zero. As information becomes known, an additional loss provision is recorded when either a best estimate can be made or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company’s results of operations or cash flows for that period or on the Company’s financial condition.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the dates of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions including forecasted cash flows, revenues attributable to existing technology and existing customer attrition. When estimating the significant assumptions to be used in the valuation we included a consideration of current industry information, market and economic trends, historical results of the acquired business and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.
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Contingent consideration is recorded at fair value as measured on the date of acquisition using an appropriate valuation model, such as the Monte Carlo simulation model. The value recorded is based on estimates of future financial projections under various potential scenarios, in which the model runs many simulations based on comparable companies’ growth rates and their implied volatility. Our estimates of forecasted revenues in the earn out period include a consideration of current industry information, market and economic trends, historical results of the acquired business and other relevant factors. These cash flow projections are discounted with a risk adjusted rate. Each quarter until such contingent amounts are earned, the fair value of the liability is remeasured at each reporting period and adjusted as a component of operating expenses based on changes to the underlying assumptions. The estimates used to determine the fair value of the contingent consideration liability are subject to significant judgment and given the inherent uncertainties in making these estimates, actual results are likely to differ from the amounts originally recorded and could be materially different.
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