HAEMONETICS CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS HAEMONETICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (Unaudited in thousands, except per share data) Three Months Ended June 27, 2020 June 29, 2019 Net revenues $ 195,577 $ 238,451 Cost of goods sold 105,547 122,545 Gross profit 90,030 115,906 Operating expenses: Research and development 7,750 7,487 Selling, general and administrative 69,537 73,000 Impairment of assets 1,028 48,721 Total operating expenses 78,315 129,208 Operating income (loss) 11,715 ( 13,302 ) Interest and other expense, net ( 3,735 ) ( 4,423 ) Income (loss) before provision for income taxes 7,980 ( 17,725 ) Benefit for income taxes ( 2,547 ) ( 9,246 ) Net income (loss) $ 10,527 $ ( 8,479 ) Net income (loss) per share - basic $ 0.21 $ ( 0.17 ) Net income (loss) per share - diluted $ 0.21 $ ( 0.17 ) Weighted average shares outstanding Basic 50,418 51,010 Diluted 51,247 51,010 Comprehensive income (loss) $ 11,956 $ ( 12,097 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 HAEMONETICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited in thousands, except share data) June 27, 2020 March 28, 2020 ASSETS Current assets: Cash and cash equivalents $ 275,725 $ 137,311 Accounts receivable, less allowance of $3,446 at June 27, 2020 and $3,824 at March 28, 2020 141,094 165,207 Inventories, net 294,510 270,276 Prepaid expenses and other current assets 48,081 30,845 Total current assets 759,410 603,639 Property, plant and equipment, net 242,969 253,399 Intangible assets, less accumulated amortization of $299,039 at June 27, 2020 and $296,942 at March 28, 2020 137,520 133,106 Goodwill 217,298 210,652 Deferred tax asset 4,088 3,930 Other long-term assets 71,888 62,384 Total assets $ 1,433,173 $ 1,267,110 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Notes payable and current maturities of long-term debt $ 231,364 $ 76,980 Accounts payable 48,459 50,730 Accrued payroll and related costs 36,409 49,471 Other liabilities 91,595 97,641 Total current liabilities 407,827 274,822 Long-term debt, net of current maturities 296,893 305,513 Deferred tax liability 13,116 10,562 Other long-term liabilities 106,768 89,104 Total stockholders’ equity Common stock, $0.01 par value; Authorized — 150,000,000 shares; Issued and outstanding — 50,671,442 shares at June 27, 2020 and 50,322,930 shares at March 28, 2020 507 503 Additional paid-in capital 562,729 553,229 Retained earnings 89,039 78,512 Accumulated other comprehensive loss ( 43,706 ) ( 45,135 ) Total stockholders’ equity 608,569 587,109 Total liabilities and stockholders’ equity $ 1,433,173 $ 1,267,110 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 HAEMONETICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited in thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Par Value Balance, March 28, 2020 50,323 $ 503 $ 553,229 $ 78,512 $ ( 45,135 ) $ 587,109 Employee stock purchase plan 22 — 2,144 — — 2,144 Exercise of stock options 28 1 1,192 — — 1,193 Issuance of restricted stock, net of cancellations 298 3 ( 3 ) — — — Share-based compensation expense — — 6,167 — — 6,167 Net income — — — 10,527 — 10,527 Other comprehensive income — — — — 1,429 1,429 Balance, June 27, 2020 50,671 $ 507 $ 562,729 $ 89,039 $ ( 43,706 ) $ 608,569 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Par Value Balance, March 30, 2019 51,020 $ 510 $ 536,320 $ 161,418 $ ( 30,380 ) $ 667,868 Employee stock purchase plan 25 — 1,830 — — 1,830 Exercise of stock options 85 1 3,634 — — 3,635 Shares repurchased ( 616 ) ( 6 ) ( 21,473 ) ( 53,521 ) — ( 75,000 ) Issuance of restricted stock, net of cancellations 257 3 (3) — — — Share-based compensation expense — — 4,730 — — 4,730 Net loss — — — ( 8,479 ) — ( 8,479 ) Other comprehensive loss — — — — ( 3,618 ) ( 3,618 ) Balance, June 29, 2019 50,771 $ 508 $ 525,038 $ 99,418 $ ( 33,998 ) $ 590,966 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 HAEMONETICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited in thousands) Three Months Ended June 27, 2020 June 29, 2019 Cash Flows from Operating Activities: Net income (loss) $ 10,527 $ ( 8,479 ) Adjustments to reconcile net income to net cash provided by operating activities: Non-cash items: Depreciation and amortization 20,724 27,437 Impairment of assets 1,028 48,721 Share-based compensation expense 6,167 4,730 Deferred tax benefit ( 501 ) ( 5,309 ) Provision for losses on accounts receivable and inventory 1,193 ( 1,378 ) Other non-cash operating activities 66 50 Change in operating assets and liabilities: Change in accounts receivable 25,067 22,518 Change in inventories ( 24,557 ) ( 37,414 ) Change in prepaid income taxes ( 3,544 ) ( 3,228 ) Change in other assets and other liabilities 865 ( 8,208 ) Change in accounts payable and accrued expenses ( 25,223 ) ( 36,812 ) Net cash provided by operating activities 11,812 2,628 Cash Flows from Investing Activities: Capital expenditures ( 7,696 ) ( 8,249 ) Acquisition ( 16,606 ) — Proceeds from divestiture — 9,808 Proceeds from sale of property, plant and equipment 406 302 Net cash (used in) provided by investing activities ( 23,896 ) 1,861 Cash Flows from Financing Activities: Net increase in short-term loans 150,000 90,000 Repayment of term loan borrowings ( 4,375 ) ( 4,375 ) Share repurchases — ( 75,000 ) Proceeds from employee stock purchase plan 2,144 1,830 Proceeds from exercise of stock options 1,193 3,635 Other ( 11 ) — Net cash provided by financing activities 148,951 16,090 Effect of exchange rates on cash and cash equivalents 1,547 304 Net Change in Cash and Cash Equivalents 138,414 20,883 Cash and Cash Equivalents at Beginning of Period 137,311 169,351 Cash and Cash Equivalents at End of Period $ 275,725 $ 190,234 Supplemental Disclosures of Cash Flow Information: Interest paid $ 2,780 $ 3,535 Income taxes paid $ 2,063 $ 3,078 Non-Cash Investing and Financing Activities: Transfers from inventory to fixed assets for placement of Haemonetics equipment $ 2,364 $ 2,973 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 HAEMONETICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Haemonetics Corporation ("Haemonetics" or the "Company") presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) 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 the Company's 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 three months ended June 27, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 3, 2021 or any other interim period. The Company has assessed its ability to continue as a going concern. As of June 27, 2020, the Company has concluded that substantial doubt about its ability to continue as a going concern does not exist. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the fiscal year ended March 28, 2020. The Company considers 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 5, Divestitures and to Note 11, Notes Payable and Long-Term Debt , for information pertaining to three divestitures and a payment on the Company's revolving credit facility, respectively, that occurred subsequent to June 27, 2020. There were no other material recognized or unrecognized subsequent events as of or for the three months ended June 27, 2020. 2. RECENT ACCOUNTING PRONOUNCEMENTS Standards Implemented In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326). ASC Update No. 2016-13 is intended to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. The Company adopted ASC Update No. 2016-13 during the first quarter of fiscal 2021. The adoption did not have a material impact on the Company's unaudited condensed consolidated financial statements. In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles, Goodwill and Other - Internal-Use Software (Subtopic 350-40). The new guidance aligns the accounting implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting for internal-use software licenses. The Company adopted ASC Update No. 2018-15 during the first quarter of fiscal 2021. The adoption did not have a material impact on the Company's unaudited condensed consolidated financial statements. 3. RESTRUCTURING On an ongoing basis, the Company reviews the global economy, the healthcare industry, and the markets in which it competes to identify opportunities for efficiencies, enhance commercial capabilities, align its resources and offer its customers better solutions. In order to realize these opportunities, the Company undertakes restructuring-type activities to transform its business. 7 In July 2019, the Board of Directors of the Company approved a new Operational Excellence Program (the "2020 Program") and delegated authority to the Company's management to determine the detail of the initiatives that will comprise the program. The 2020 Program is designed to improve operational performance and reduce cost principally in our manufacturing and supply chain operations. The Company estimates that it will incur aggregate charges between $ 60 million and $ 70 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2023. During the three months ended June 27, 2020, the Company incurred $ 3.5 million of restructuring and turnaround costs under this program. Total cumulative charges under this program are $ 15.4 million. There were no restructuring and turnaround costs incurred during the three months ended June 29, 2019 under this program. During fiscal 2018, the Company 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. During the three months ended June 27, 2020 and June 29, 2019, the Company incurred $ 0.5 million and $ 2.0 million, respectively, of restructuring and turnaround costs under this program. Total cumulative charges under this program are $ 58.7 million. The 2018 Program is substantially complete. The following table summarizes the activity for restructuring reserves related to the 2020 Program and the 2018 and Prior Programs for the three months ended June 27, 2020, substantially all of which relates to employee severance and other employee costs: (In thousands) 2020 Program 2018 and Prior Programs Total Balance at March 28, 2020 $ 1,136 $ 1,512 $ 2,648 Costs incurred, net of reversals 1,166 ( 101 ) 1,065 Payments ( 541 ) ( 633 ) ( 1,174 ) Balance at June 27, 2020 $ 1,761 $ 778 $ 2,539 The following presents the restructuring costs by line item within our accompanying unaudited condensed consolidated statements of income (loss) and comprehensive income (loss): Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Cost of goods sold $ 503 $ 159 Research and development 319 14 Selling, general and administrative expenses 243 796 $ 1,065 $ 969 As of June 27, 2020, the Company had a restructuring liability of $ 2.5 million, of which $ 2.1 million is payable within the next twelve months. In addition to the restructuring costs included in the table above, the Company also incurred costs of $ 2.9 million that do not constitute restructuring under ASC 420, Exit and Disposal Cost Obligations, and which the Company instead refers to as turnaround costs. These costs consist primarily of expenditures directly related to the restructuring actions and include program management costs associated with the 2020 Program and operational performance improvement initiatives. 8 The tables below present restructuring and turnaround costs by reportable segment: Restructuring costs Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Plasma $ 568 $ 153 Blood Center 154 42 Hospital 129 203 Corporate 214 571 Total $ 1,065 $ 969 Turnaround costs Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Plasma $ — $ 48 Blood Center 16 — Hospital 9 — Corporate 2,910 1,010 Total $ 2,935 $ 1,058 Total restructuring and turnaround costs $ 4,000 $ 2,027 4. ACQUISITION On April 1, 2020, the Company acquired all of the outstanding equity of enicor GmbH ("enicor"), the manufacturer of ClotPro ® , a new generation whole blood coagulation testing system that is currently available in select European and Asia Pacific markets, for total consideration of $ 20.5 million, which consisted of upfront payments of $ 16.6 million and the fair value of contingent consideration of $ 3.9 million. The contingent consideration, which could total a maximum of $ 4.5 million, consists of payments related to the achievement of certain revenue and regulatory milestones. The acquisition of this viscoelastic diagnostic device augments the Company's portfolio of hemostasis analyzers within the Hospital business unit. Purchase Price Allocation The Company accounted for the acquisition of enicor GmbH as a business combination, and in accordance with FASB ASC Topic 805, Business Combinations ( Topic 805 ), recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period as required by Topic 805. As of June 27, 2020, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the projection of the underlying cash flows used to determine the fair value of the identified tangible, intangible and financial assets and liabilities. 9 The following amounts represent the preliminary determination of the fair value of the identifiable assets acquired and liabilities assumed for enicor completed during the first three months of fiscal 2021: (In thousands) June 27, 2020 Inventory $ 634 Other current assets 685 Property, plant and equipment 289 Intangible assets 14,090 Goodwill 8,153 Total assets acquired $ 23,851 Other current liabilities 289 Contingent consideration (current) 504 Contingent consideration (non-current) 3,416 Deferred tax liability 3,036 Total liabilities assumed $ 7,245 Net assets acquired $ 16,606 The Company determined the identifiable intangible assets were completed technology, customer relationships and trademark. The fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using a rate of 20%. The cash flows were based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital. The benefits of adding a viscoelastic diagnostic device to the Company’s portfolio of hemostasis analyzers within the Hospital business unit contributed to an acquisition price in excess of the fair value of net assets acquired for enicor, which resulted in the establishment of goodwill. In addition, the benefits of lower cost manufacturing and complementary sales channels also contributed to the establishment of goodwill for this acquisition. None of the goodwill is expected to be deductible for income tax purposes. Intangible assets acquired consist of the following: (In thousands) Amount Weighted-Average Amortization Period Completed technology $ 13,441 10 Customer relationships 347 10 Trademark 302 10 Total $ 14,090 10 Acquisition-Related Costs The amount of acquisition-related costs incurred associated the acquisition was $ 0.2 million for three months ended June 27, 2020. Unaudited Pro Forma Financial Information enicor had an immaterial impact to the Company's net sales and net income for the period post acquisition through June 27, 2020. The unaudited estimated pro forma impact of the results of the acquisition of enicor as if it was consummated on March 29, 2020 are immaterial. 10 5. DIVESTITURES Subsequent to the first quarter, which ended on June 27, 2020, the Company completed or announced the following divestitures. Fajardo, Puerto Rico Manufacturing Operations On June 29, 2020, the Company sold its Fajardo, Puerto Rico, manufacturing operations to GVS, S.p.A ("GVS"), a leading provider of advanced filtration solutions for critical applications for $ 15.5 million ($ 8.1 million, net of cash transferred). Under the terms of the agreement, Haemonetics retained all intellectual property rights to its proprietary blood filters currently manufactured at its Fajardo facility and GVS acquired certain assets consisting primarily of property, plant and equipment, inventory and cash and has assumed certain related liabilities. In connection with this transaction, the Company and GVS also entered into a long-term supply and development agreement that, among other things, grants GVS exclusive rights to manufacture and supply the blood filters currently produced at the Fajardo facility for Haemonetics. The Company also agreed to provide certain transition services to GVS, generally for a period of up to three months depending on the nature of the service. As a result of this transaction, Haemonetics recognized a pre-tax impairment charge of $ 1.0 million in the first quarter of fiscal 2021, as the carrying value of the assets and liabilities in the asset transfer exceeded the net of the $ 15.5 million of cash proceeds and the expected costs to sell of $ 1.5 million. As of June 27, 2020, $ 7.6 million of assets, consisting of the property, plant and equipment included in the transaction and goodwill, were treated as assets held for sale and reclassified to other current assets. U.S. Blood Donor Management Software On July 1, 2020, the Company sold certain U.S. blood donor management software solution assets within its Blood Center business unit to the GPI Group ("GPI") for an upfront cash payment of $ 14.0 million ($ 13.6 million, net of working capital adjustments). In addition to the cash received upon closing, the Company could receive up to $ 14.0 million in additional consideration contingent on the achievement of commercial milestones over the twelve month period immediately following the closing of the transaction. The Company also agreed to provide certain transition services to GPI, generally for a period of one to nine months depending on the nature of the service. As of June 27, 2020, the intellectual property and certain other related assets, including goodwill, associated with the transferred assets totaling $ 2.3 million were treated as assets held for sale and reclassified to other current assets. Inlog Holdings France On July 23, 2020, the Company entered into a definitive agreement to sell its wholly-owned subsidiary Inlog Holdings France SAS to Abénex Capital ("Abénex"), a private equity firm based in France. Inlog Holdings France SAS, through its subsidiary In Log SAS, develops and sells blood bank and hospital software solutions used predominantly in France and in several other countries outside of the U.S. This transaction is expected to close in the second quarter of fiscal 2021, subject to Abénex's receipt of financing and the satisfaction of other customary closing conditions. 6. INCOME TAXES The Company conducts business globally and reports its results of operations in a number of foreign jurisdictions in addition to the United States. The Company's reported tax rate is impacted by the jurisdictional mix of earnings in any given period as the foreign jurisdictions in which it operates have tax rates that differ from the U.S. statutory tax rate. For the three months ended June 27, 2020, the Company reported an income tax benefit of $ 2.5 million, representing an effective tax rate benefit of 31.9 %. The effective tax rate for the three months ended June 27, 2020 includes discrete tax benefits recognized from excess stock compensation deductions of $ 4.0 million. The effective tax rates were also impacted by the jurisdictional mix of earnings. During the three months ended June 27, 2020, the Company transferred certain intangible assets amongst its wholly-owned subsidiaries prior to the divestiture of its Fajardo, Puerto Rico manufacturing operations. The tax expense on the intercompany sale and the establishment of deferred tax assets (including the associated valuation allowance impacts) were included in the computation of the annual effective tax rate. For the three months ended June 29, 2019, the Company reported an income tax benefit of $ 9.2 million, representing an effective tax rate of 52.2 %. The effective tax rate for the three months ended June 29, 2019 was higher than the U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, as well as the impact of the divestiture of the Union liquid solutions 11 operation recorded in pretax income which resulted in a worldwide pretax loss for the quarter. The tax rate for the three months ended June 29, 2019 benefited from a discrete stock compensation windfall benefit of $ 4.9 million. 7. EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. Three Months Ended (In thousands, except per share amounts) June 27, 2020 June 29, 2019 Basic EPS Net income (loss) $ 10,527 $ ( 8,479 ) Weighted average shares 50,418 51,010 Basic income (loss) per share $ 0.21 $ ( 0.17 ) Diluted EPS Net income (loss) $ 10,527 $ ( 8,479 ) Basic weighted average shares 50,418 51,010 Net effect of common stock equivalents 829 — Diluted weighted average shares 51,247 51,010 Diluted income (loss) per share $ 0.21 $ ( 0.17 ) Basic earnings per share is calculated using the Company's weighted-average outstanding common stock. Diluted earnings per share is calculated using its weighted-average outstanding common stock including the dilutive effect of stock awards as determined under the treasury stock method. For the three months ended June 27, 2020, weighted average shares outstanding, assuming dilution, excludes the impact of 0.5 million anti-dilutive shares. For the three months ended June 29, 2019, the Company recognized a net loss; therefore it excluded the impact of outstanding stock awards from the diluted loss per share calculation as its inclusion would have an anti-dilutive effect. 8. REVENUE The Company's revenue recognition policy is to recognize revenues from product sales, software and services in accordance with ASC Topic 606, Revenue from Contracts with Customers . Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; this occurs with the transfer of control of the Company’s goods or services. The Company considers revenue to be earned when all of the following criteria are met: it has a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the consideration it expects to receive for transferring goods or providing services, is determinable and it has transferred control of the promised items to the customer. A promise in a contract to transfer a distinct good or service to the customer is identified as a performance obligation. A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of the Company’s contracts have multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the estimated standalone selling prices of the good or service in the contract. For goods or services for which observable standalone selling prices are not available, the Company uses an expected cost plus a margin approach to estimate the standalone selling price of each performance obligation. As of June 27, 2020, the Company had $ 21.9 million of its transaction price allocated to remaining performance obligations related to executed contracts with an original duration of one year or more. The Company expects to recognize approximately 62 % of this amount as revenue within the next twelve months and the remaining balance thereafter. Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheets. The difference in timing between billing and revenue recognition primarily occurs in software licensing arrangements, resulting in contract assets and contract liabilities. 12 As of June 27, 2020 and March 28, 2020, the Company had contract assets of $ 6.1 million and $ 5.0 million, respectively. The change is primarily due to the delay in billings compared to the revenue recognized. Contract assets are classified as other current assets and other long-term assets on the condensed consolidated balance sheets. As of June 27, 2020 and March 28, 2020, the Company had contract liabilities of $ 21.5 million and $ 20.8 million, respectively. During the three months ended June 27, 2020, the Company recognized $ 8.9 million of revenue that was included in the above March 28, 2020 contract liability balance. Contract liabilities are classified as other liabilities and other long-term liabilities on the condensed consolidated balance sheets. 9. 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) June 27, 2020 March 28, 2020 Raw materials $ 76,224 $ 76,867 Work-in-process 11,351 11,021 Finished goods 206,935 182,388 Total inventories $ 294,510 $ 270,276 10. LEASES Lessee Activity During the first quarter of fiscal 2021, the Company entered into a lease for manufacturing space in Clinton, PA. The Company's current manufacturing operations in Leetsdale, PA will be relocated. The lease term associated with the new manufacturing facility is 15 years and 7 months and includes two five year renewal options followed by one four year renewal option. During the first quarter of fiscal 2021, the Company recorded a right-of-use asset of $ 11.3 million and corresponding liabilities of $ 15.4 million upon commencement of the lease term in May 2020. In addition, the Company recorded a $ 4.1 million lease incentive receivable associated with this lease agreement. 11. NOTES PAYABLE AND LONG-TERM DEBT On June 15, 2018, the Company entered into a credit agreement with certain lenders which provided for a $ 350.0 million term loan (the "Term Loan") and a $ 350.0 million revolving loan (the "Revolving Credit Facility" and together with the Term Loan, the "Credit Facilities"). The Credit Facilities expire on June 15, 2023. Interest on the Credit Facilities is established using LIBOR plus 1.13 % - 1.75 %, depending on the Company's leverage ratio. Under the Credit Facilities, the Company is required to maintain certain leverage and interest coverage ratios specified in the credit agreement as well as other customary non-financial affirmative and negative covenants. At June 27, 2020, $ 319.4 million was outstanding under the Term Loan with an effective interest rate of 1.4 % and $ 210.0 million was outstanding on the Revolving Credit Facility. On July 15, 2020, subsequent to the balance sheet date, the Company reduced its borrowings on the Revolving Credit Facility by $ 60.0 million. The Company also has $ 26.2 million of uncommitted operating lines of credit to fund its global operations under which there were no outstanding borrowings as of June 27, 2020. The Company has required scheduled principal payments of $ 17.5 million during the remainder of fiscal 2021, $ 17.5 million during fiscal 2022, $ 214.4 million during fiscal 2023 and $ 70.0 million during fiscal 2024. The Company was in compliance with the leverage and interest coverage ratios specified in the Credit Facilities as well as all other bank covenants as of June 27, 2020. 12. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS The Company manufactures, markets and sells its products globally. During the three months ended June 27, 2020, 43.2 % of the Company's sales were generated outside the U.S., generally in foreign currencies. The Company also incurs certain manufacturing, marketing and selling costs in international markets in local currency. 13 Accordingly, earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. Dollar, the Company's reporting currency. The Company has a program in place that is designed to mitigate the 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 its financial results from changes in foreign exchange rates. The Company utilizes 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 the Company generally enters 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 the Company's designated foreign currency hedge contracts as of June 27, 2020 and March 28, 2020 were cash flow hedges under ASC 815, Derivatives and Hedging ("ASC 815"). The Company records 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, the Company reclassifies 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, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. The Company had designated foreign currency hedge contracts outstanding in the contract amount of $ 67.5 million as of June 27, 2020 and $ 93.8 million as of March 28, 2020. At June 27, 2020, a gain of $ 1.9 million, net of tax, will be reclassified to earnings within the next twelve months. Substantially all currency cash flow hedges outstanding as of June 27, 2020 mature within twelve months. Non-Designated Foreign Currency Contracts The Company manages its exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. It uses foreign currency forward contracts as a part of its 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. The Company had non-designated foreign currency hedge contracts under ASC 815 outstanding in the contract amount of $ 131.7 million as of June 27, 2020 and $ 98.0 million as of March 28, 2020. Interest Rate Swaps On June 15, 2018, the Company entered into Credit Facilities which provided for a $ 350.0 million Term Loan and a $ 350.0 million Revolving Credit Facility. Under the terms of the Credit Facilities, interest is established using LIBOR plus 1.13 % - 1.75 %. As a result, the Company's earnings and cash flows are exposed to interest rate risk from changes to LIBOR. Part of the Company's interest rate risk management strategy includes the use of interest rate swaps to mitigate its exposure to changes in variable interest rates. The Company's objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. In August 2018, the Company entered into two interest rate swap agreements (the "Swaps") to pay an average fixed rate of 2.80 % on a total notional value of $ 241.9 million of debt. As a result of the Swaps, 70 % of the Term Loan previously exposed to interest rate risk from changes in LIBOR is now fixed at a rate of 4.05 %. The Swaps mature on June 15, 2023. The Company designated the Swaps as cash flow hedges of variable interest rate risk associated with $345.6 million of indebtedness. For the three months ended June 27, 2020, a loss of $ 2.1 million, net of tax, was recorded in accumulated other comprehensive loss to recognize the effective portion of the fair value of the Swaps that qualify as cash flow hedges. 14 Trade Receivables In the ordinary course of business, the Company grants trade credit to its customers on normal credit terms. In an effort to reduce its credit risk, the Company (i) establishes credit limits for all customers, (ii) performs ongoing credit evaluations of customers’ financial condition, (iii) monitors the payment history and aging of customers’ receivables, and (iv) monitors open orders against an individual customer’s outstanding receivable balance. The Company's allowance for credit losses is maintained for trade accounts receivable based on the expected collectability, the historical collection experience, the length of time an account is outstanding, the financial position of the customer and information provided by credit rating services. Effective March 29, 2020, the Company adopted Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) which requires consideration of events or circumstances indicating historic collection rates may not be indicative of future collectability. For example, potential adverse changes to customer liquidity from new macroeconomic events such as the COVID-19 pandemic must be taken into consideration. To date, the Company has not experienced significant customer payment defaults, or identified other significant collectability concerns as a result of the pandemic. The following is a rollfoward of the allowance for credit losses: Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Beginning balance $ 3,824 $ 3,937 Credit loss expense ( 259 ) ( 299 ) Write-offs ( 119 ) ( 14 ) Ending balance $ 3,446 $ 3,624 Fair Value of Derivative Instruments The following table presents the effect of the Company's derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC 815 in its condensed consolidated statements of income (loss) and comprehensive income (loss) for the three months ended June 27, 2020: (In thousands) Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Loss Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings Location in Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Amount of Gain (Loss) Excluded from Effectiveness Testing Location in Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Designated foreign currency hedge contracts, net of tax $ 1,883 $ ( 129 ) Net revenues, COGS and SG&A $ ( 248 ) Interest and other expense, net Non-designated foreign currency hedge contracts $ — $ — $ ( 1,842 ) Interest and other expense, net Designated interest rate swaps, net of tax $ (3,131) $ ( 1,013 ) Interest and other expense, net $ — The Company did not have fair value hedges or net investment hedges outstanding as of June 27, 2020 or March 28, 2020. As of June 27, 2020, no material 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. The Company determines the fair value of its derivative instruments using the framework prescribed by ASC 820, Fair Value Measurements and Disclosures , by considering the estimated amount it 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 its creditworthiness for liabilities. In certain instances, the Company may utilize financial models to measure fair value. Generally, it uses 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 June 27, 2020, the Company has classified its derivative assets and 15 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 its derivative instruments. The following tables present the fair value of the Company's derivative instruments as they appear in its condensed consolidated balance sheets as of June 27, 2020 and March 28, 2020: (In thousands) Location in Condensed Consolidated Balance Sheets As of As of June 27, 2020 March 28, 2020 Derivative Assets: Designated foreign currency hedge contracts Other current assets $ 227 $ 839 Non-designated foreign currency hedge contracts Other current assets 164 $ 377 $ 391 $ 1,216 Derivative Liabilities: Designated foreign currency hedge contracts Other current liabilities $ 1,073 $ 1,854 Non-designated foreign currency hedge contracts Other current liabilities 68 1,435 Designated interest rate swaps Other current liabilities 5,875 5,581 Designated interest rate swaps Other long-term liabilities 9,243 9,475 $ 16,259 $ 18,345 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. The Company's 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. 16 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 June 27, 2020 and March 28, 2020. As of June 27, 2020 (In thousands) Level 1 Level 2 Level 3 Total Assets Money market funds $ 171,313 $ — $ — $ 171,313 Designated foreign currency hedge contracts — 227 — 227 Non-designated foreign currency hedge contracts — 164 — 164 $ 171,313 $ 391 $ — $ 171,704 Liabilities Designated foreign currency hedge contracts $ — $ 1,073 $ — $ 1,073 Non-designated foreign currency hedge contracts — 68 — 68 Designated interest rate swaps — 15,118 — 15,118 Contingent consideration — — 3,920 3,920 $ — $ 16,259 $ 3,920 $ 20,179 As of March 28, 2020 Level 1 Level 2 Level 3 Total Assets Money market funds $ 44,564 $ — $ — $ 44,564 Designated foreign currency hedge contracts — 839 — 839 Non-designated foreign currency hedge contracts — 377 — 377 $ 44,564 $ 1,216 $ — $ 45,780 Liabilities Designated foreign currency hedge contracts $ — $ 1,854 $ — $ 1,854 Non-designated foreign currency hedge contracts — 1,435 — 1,435 Designated interest rate swaps — 15,056 — 15,056 $ — $ 18,345 $ — $ 18,345 Foreign currency hedge contracts - The fair value of foreign currency hedge contracts was measured using significant other observable inputs and valued by reference to over-the-counter quoted market prices for similar instruments. The Company does not believe that the fair value of these derivative instruments differs significantly from the amount that could be realized upon settlement or maturity, or that the changes in fair value will have a significant effect on its results of operations, financial condition or cash flows. Interest rate swaps - The fair value of interest rate swaps are measured using the present value of expected future cash flows using market-based observable inputs, including credit risk and interest rate yield curves. The Company does not believe that the fair values of these derivative instruments differ significantly from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a significant effect on its results of operations, financial condition or cash flows. Contingent consideration - The fair value of contingent consideration liabilities is based on significant unobservable inputs, including management estimates and assumptions, and are measured based on the probability-weighted present value of the payments expected to be made. Accordingly, the fair value of contingent consideration has been classified as level 3 within the fair value hierarchy. The recurring level 3 fair value measurements of contingent consideration liabilities include the following significant unobservable inputs: 17 Fair Value at Valuation Unobservable (In thousands) June 27, 2020 Technique Input Range Revenue-based payments $ 1,900 Discounted cash flow Discount rate 8.5 % Projected year of payment 2021 - 2023 Regulatory-based payments $ 2,000 Discounted cash flow Discount rate 4.9 % Probability of payment 0% - 100% Projected year of payment 2021 - 2023 As of June 27, 2020, the maximum potential contingent consideration that the Company could be required to pay is $ 4.5 million. The fair value of contingent consideration associated with acquisitions was $ 3.9 million at June 27, 2020. As of June 27, 2020, $ 0.5 million was included in other current liabilities and $ 3.4 million was included in other liabilities on the condensed consolidated balance sheet. Reconciliation of the change in the fair value of contingent consideration are included in the following table: (In thousands) Balance at March 28, 2020 $ — Acquisition date fair value of contingent consideration 3,920 Balance at June 27, 2020 $ 3,920 Other Fair Value Disclosures The Term Loan, which is carried at amortized cost, accounts receivable and accounts payable approximate fair value. 13. COMMITMENTS AND CONTINGENCIES The Company is a party to various legal proceedings and claims arising out of the ordinary course of its business. The Company believes there are no proceedings or claims pending against it the ultimate resolution of which could have a material adverse effect on the financial condition or results of operations. At each reporting period, the Company 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. 14. SEGMENT AND ENTERPRISE-WIDE INFORMATION The Company determines its reportable segments by first identifying its 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. Historically, the Company's operating segments were based primarily on geography. Effective as of March 31, 2019, the Company completed the transition of its operating structure to three global business units and accordingly, reorganized its reporting structure to align with its three global business units and the information that will be regularly reviewed by the Company's chief operating decision maker. Following the reorganization, the Company's reportable segments are as follows: • Plasma • Blood Center • Hospital 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, asset impairments, accelerated depreciation and related costs, costs related to compliance with the European Union Medical Device Regulation, transaction costs and certain legal charges. 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. 18 Selected information by reportable segment is presented below: Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Net revenues Plasma $ 68,715 $ 110,763 Blood Center 79,314 77,996 Hospital 45,571 47,187 Net revenues by business unit 193,600 235,946 Service (1) 5,082 4,866 Effect of exchange rates ( 3,105 ) ( 2,361 ) Net revenues $ 195,577 $ 238,451 (1) Reflects revenue for service, maintenance and parts Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Segment operating income Plasma $ 36,350 $ 53,725 Blood Center 38,745 37,719 Hospital 17,783 18,916 Segment operating income 92,878 110,360 Corporate expenses (1) ( 65,062 ) ( 61,703 ) Effect of exchange rates 711 2,769 Impairment of assets and other related charges ( 964 ) ( 51,166 ) Deal amortization ( 8,263 ) ( 5,974 ) PCS2 accelerated depreciation and related costs ( 1,542 ) ( 5,528 ) Restructuring and turnaround costs ( 4,000 ) ( 2,027 ) European Medical Device Regulation costs and other ( 753 ) ( 33 ) Transaction costs ( 1,290 ) — Operating income (loss) $ 11,715 $ ( 13,302 ) (1) Reflects shared service expenses including quality and regulatory, customer and field service, research and development, manufacturing and supply chain, as well as other corporate support functions. Management reviews revenue based on the reportable segments noted above. Although these reportable segments are primarily product-based, they differ from the Company’s product line revenues for Plasma products and services and Blood Center products and services. Specifically, the Blood Center reportable segment includes plasma products utilized for collection in blood centers primarily for transfusion purposes. Additionally, product line revenues also include service revenues which are excluded from the reportable segments. 19 Net revenues by product line are as follows: Three Months Ended (In thousands) June 27, 2020 June 29, 2019 Plasma products and services $ 88,713 $ 129,745 Blood Center products and services 60,667 59,907 Hospital products and services 46,197 48,799 Net revenues $ 195,577 $ 238,451 Net revenues generated in the Company's principle operating regions on a reported basis are as follows: Three Months Ended (In thousands) June 27, 2020 June 29, 2019 United States $ 111,009 $ 156,375 Japan 16,831 15,467 Europe 43,019 36,753 Asia 22,384 28,641 Other 2,334 1,215 Net revenues $ 195,577 $ 238,451 15. 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 March 28, 2020 $ ( 31,100 ) $ ( 209 ) $ ( 13,826 ) $ ( 45,135 ) Other comprehensive income (loss) before reclassifications (1) 1,534 — ( 1,247 ) 287 Amounts reclassified from Accumulated Other Comprehensive Loss (1) — — 1,142 1,142 Net current period other comprehensive income (loss) 1,534 — ( 105 ) 1,429 Balance as of June 27, 2020 $ ( 29,566 ) $ ( 209 ) $ ( 13,931 ) $ ( 43,706 ) (1) Presented net of income taxes, the amounts of which are insignificant.