Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with both our interim condensed consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and our annual consolidated financial statements, notes thereto and the MD&A contained in our Annual Report on Form 10-K for the fiscal year ended March 28, 2020. The following discussion may contain forward-looking statements and should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Information” in this discussion.
Introduction
Haemonetics is a global healthcare company dedicated to providing a suite of innovative hematology products and solutions to customers to help improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets including blood and plasma component collection, the surgical suite, and hospital transfusion services. When used in this report, the terms “we,” “us,” “our” and “the Company” mean Haemonetics.
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We view our operations and manage our business in three principal reporting segments: Plasma, Blood Center and Hospital. For that purpose, “Plasma” includes plasma collection devices and disposables, plasma donor management software, and anticoagulant and saline sold to plasma customers. “Blood Center” includes blood collection and processing devices and disposables for red cells, platelets and whole blood. “Hospital”, which is comprised of Hemostasis Management, Cell Salvage and Transfusion Management products, includes devices and methodologies for measuring coagulation characteristics of blood, surgical blood salvage systems, specialized blood cell processing systems and disposables and blood transfusion management software.
We believe that Plasma and Hospital have growth potential, while Blood Center competes in challenging markets which require us to manage the business differently, including reducing costs, shrinking the scope of the current product line, and evaluating opportunities to exit unfavorable customer contracts.
Recent Developments
Acquisitions
Cardiva Medical, Inc.
On January 17, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cardiva Medical, Inc., (“Cardiva”), an industry-leading manufacturer of vascular closure systems based in Santa Clara, California. In connection with this acquisition, we will pay upfront consideration of $475.0 million in cash, subject to customary working capital and certain other adjustments as of the closing of the transaction, as well as up to $35.0 million in additional contingent consideration payable over the next two years based on sales growth. The transaction is not subject to a financing contingency, and we expect to finance the transaction through a combination of our cash on hand, revolving credit facility and an additional $150.0 million term loan anticipated to be borrowed under our existing credit facility. The transaction is expected to close in the fourth quarter of fiscal 2021.
Cardiva’s portfolio includes two catheter-based vascular access site closure devices. The VASCADE ® vascular closure system is designed for “small-bore” femoral arterial and venous closure, generally used in interventional cardiology and peripheral vascular procedures. The VASCADE MVP ® vascular closure system is designed for “mid-bore” multi-access femoral venous closure, generally used in electrophysiology procedures, and is the only U.S. Food and Drug Administration (“FDA”) approved closure device for use following cardiac ablation procedures requiring two or more access sites within the same vessel. The addition of the VASCADE portfolio to our Hospital business unit includes products with demonstrated benefits and enhances penetration into the large and growing interventional cardiology and electrophysiology markets.
HAS Intellectual Property
In January 2021, we entered into an agreement to acquire certain intellectual property owned by HemoAssay Science and Technology (Suzhou) Co. Ltd., a China-incorporated company, and its affiliates (collectively, “HemoAssay”) underlying their HAS viscoelastic diagnostic devices, related assays and disposables. We previously entered into exclusive manufacturing and distribution agreements with HemoAssay pursuant to which we have exclusive rights to commercialize HemoAssay’s HAS devices in China. In connection with the transaction, we have agreed to pay up to $15.0 million to HemoAssay in contingent consideration based on certain developmental and manufacturing based milestones. These products augment our portfolio of hemostasis analyzers within the Hospital business unit.
enicor GmbH
On April 1, 2020, we acquired 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.
Refer to Note 4, Acquisitions , to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
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Persona TM
On October 2, 2020, we received FDA 510(k) clearance for our NexSys PCS ® with Persona technology. NexSys PCS with Persona technology uses a percent plasma nomogram that customizes plasma collection based on an individual donor's body composition. The new, proprietary Persona technology strengthens the NexSys PCS value proposition and reinforces our commitment to supporting the plasma industry.
COVID-19
We continue to closely manage the impacts of the COVID-19 pandemic on our business results of operations and financial condition. The progression of the COVID-19 pandemic during fiscal 2021 significantly impacted our financial results. While the duration and additional implications remain uncertain, the full extent of the impact will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.
Our priorities continue to be the safety of our employees and business continuity while continuing to invest in growth opportunities. Our manufacturing and supply chain remain operational without significant disruptions and we continue to operate in all of our markets.
Although the pace and timing of the recovery is uncertain, we remain confident in the long term strength of the end markets that we serve across our three business units. For additional information regarding the expected impacts to our business units and the various risks posed by the COVID-19 pandemic, refer to Results of Operations within Management's Discussion and Analysis and Risk Factors contained in this Quarterly Report on Form 10-Q.
Divestitures
Fajardo, Puerto Rico Manufacturing Operations
On June 29, 2020, we sold our Fajardo, Puerto Rico, manufacturing operations to GVS, S.p.A (“GVS”), a leading provider of advanced filtration solutions for critical applications for $15.1 million ($7.8 million, net of cash transferred). Under the terms of the agreement, Haemonetics retained all intellectual property rights to its proprietary blood filters currently manufactured at its Fajardo facility and GVS acquired certain assets consisting primarily of property, plant and equipment, inventory and cash and has assumed certain related liabilities. In addition, the two parties entered into a long-term supply and development agreement that, among other things, grants GVS exclusive rights to manufacture and supply the blood filters currently produced at the Fajardo facility for Haemonetics. This divestiture will allow Haemonetics to utilize GVS' experience and scale in filtration to deliver reliable, cost-efficient products to its customers.
U.S. Blood Donor Management Software
On July 1, 2020, we sold certain U.S. blood donor management software solution assets within our Blood Center business unit to the GPI Group for an upfront cash payment of $14.0 million ($13.6 million, net of working capital adjustments) and recognized a $13.2 million gain on the sale. In addition to the cash received upon closing, we may also receive up to an additional $14.0 million, contingent upon the achievement of certain performance measures. This divestiture better positions Haemonetics for sustainable growth by enabling the Company to focus on its core capabilities while delivering quality products and services where it brings distinct value.
Inlog Holdings France
On September 18, 2020, we sold our wholly-owned subsidiary Inlog Holdings France SAS to Abénex Capital (“Abénex”), a private equity firm based in France for $30.5 million ($24.5 million, net of cash transferred) and recognized a gain of $19.8 million. 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 divestiture and the sale of our U.S. blood donor management software better position us to focus on our growth segments.
Refer to Note 5, Divestitures , to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information pertaining to these divestitures.
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Restructuring Program
In July 2019, our Board of Directors approved a new Operational Excellence Program (the “2020 Program”) and delegated authority to management to determine the detail of the initiatives that will comprise the program. The 2020 Program is designed to improve operational performance and reduce cost principally in our manufacturing and supply chain operations. We estimate that we will incur aggregate charges between $60 million and $70 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2023. Savings from the 2020 Program are targeted to reach $80 million to $90 million on an annualized basis once the program is completed. During the three and nine months ended December 26, 2020, we incurred $3.1 million and $11.1 million, respectively, of restructuring and turnaround costs under this program.
Financial Summary
Three Months Ended Nine Months Ended
(In thousands, except per share data) December 26,
2020 December 28,
2019 % Increase/
(Decrease) December 26,
2020 December 28,
2019 % Increase/
(Decrease)
Net revenues $ 240,371 $ 258,970 (7.2) % $ 645,434 $ 749,987 (13.9) %
Gross profit $ 120,257 $ 128,050 (6.1) % $ 316,031 $ 370,956 (14.8) %
% of net revenues 50.0 % 49.4 % 49.0 % 49.5 %
Operating expenses $ 79,832 $ 87,143 (8.4) % $ 205,109 $ 293,612 (30.1) %
Operating income $ 40,425 $ 40,907 (1.2) % $ 110,922 $ 77,344 43.4 %
% of net revenues 16.8 % 15.8 % 17.2 % 10.3 %
Interest and other expense, net $ (3,051) $ (3,078) (0.9) % $ (10,612) $ (12,152) (12.7) %
Income before provision for income taxes $ 37,374 $ 37,829 (1.2) % $ 100,310 $ 65,192 53.9 %
Provision for income taxes $ 5,492 $ 7,934 (30.8) % $ 9,800 $ 6,290 55.8 %
% of pre-tax income 14.7 % 21.0 % 9.8 % 9.6 %
Net income $ 31,882 $ 29,895 6.6 % $ 90,510 $ 58,902 53.7 %
% of net revenues 13.3 % 11.5 % 14.0 % 7.9 %
Net income per share - basic $ 0.63 $ 0.59 6.8 % $ 1.79 $ 1.16 54.3 %
Net income per share - diluted $ 0.62 $ 0.58 6.9 % $ 1.77 $ 1.13 56.6 %
Net revenues decreased 7.2% and 13.9% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, net revenues decreased 8.5% and 14.5% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Revenue decreases in Plasma due to the COVID-19 pandemic primarily drove the overall decrease in revenue during the three and nine months ended December 26, 2020.
Operating income decreased during the three months ended December 26, 2020, as compared with the same period of fiscal 2020, due to the impact of the COVID-19 pandemic on revenue and gross margin, net of savings in operating expenses from cost containment actions taken to offset these negative effects. Operating income increased during the nine months ended December 26, 2020, as compared with the same period of fiscal 2020, due to the gains on divestitures, incremental savings from the 2020 Program and the absence of impairment charges associated with the divestiture of our plasma liquid solutions operations in the prior year.
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.
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RESULTS OF OPERATIONS
Net Revenues by Geography
Three Months Ended
(In thousands) December 26,
2020 December 28,
2019 Reported growth Currency impact Constant currency growth (1)
United States $ 147,608 $ 167,238 (11.7) % — % (11.7) %
International 92,763 91,732 1.1 % 4.0 % (2.9) %
Net revenues $ 240,371 $ 258,970 (7.2) % 1.3 % (8.5) %
(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. ”
Nine Months Ended
(In thousands) December 26,
2020 December 28,
2019 Reported growth Currency impact Constant currency growth (1)
United States $ 382,601 $ 485,493 (21.2) % — % (21.2) %
International 262,833 264,494 (0.6) % 2.6 % (3.2) %
Net revenues $ 645,434 $ 749,987 (13.9) % 0.6 % (14.5) %
(1) Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency. See “ Management's Use of Non-GAAP Measures. ”
Our principal operations are in the U.S, Europe, Japan and other parts of Asia. Our products are marketed in approximately 85 countries around the world through a combination of our direct sales force, independent distributors and agents. Our revenue generated outside the U.S. was 38.6% and 40.7%, respectively, of total net revenues during the three and nine months ended December 26, 2020, as compared with 35.4% and 35.3%, respectively, during the three and nine months ended December 28, 2019. International sales are generally conducted in local currencies, primarily Japanese Yen, Euro, Chinese Yuan and Australian Dollars. Our results of operations are impacted by changes in foreign exchange rates, particularly in the value of the Yen, Euro and Australian Dollar relative to the U.S. Dollar. We have placed foreign currency hedges to mitigate our exposure to foreign currency fluctuations.
Please see the section entitled “Foreign Exchange” in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.
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Net Revenues by Business Unit
Three Months Ended
(In thousands) December 26,
2020 December 28,
2019 Reported growth Currency impact Constant currency growth (1)
Plasma $ 101,934 $ 120,420 (15.4) % 0.2 % (15.6) %
Blood Center 80,920 83,411 (3.0) % 2.7 % (5.7) %
Hospital (2)
52,651 50,266 4.7 % 1.6 % 3.1 %
Service 4,866 4,873 (0.1) % 4.2 % (4.3) %
Net revenues $ 240,371 $ 258,970 (7.2) % 1.3 % (8.5) %
(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 $28.5 million and $24.7 million during the three months ended December 26, 2020 and December 28, 2019, respectively. Hemostasis Management revenue increased 15.2% in the third quarter of fiscal 2021, as compared with the same period of fiscal 2020. Without the effect of foreign exchange, Hemostasis Management revenue increased 14.2% in the third quarter of fiscal 2021, as compared with the same period of fiscal 2020.
Nine Months Ended
(In thousands) December 26,
2020 December 28,
2019 Reported growth Currency impact Constant currency growth (1)
Plasma $ 248,553 $ 346,767 (28.3) % — % (28.3) %
Blood Center 233,622 241,196 (3.1) % 2.0 % (5.1) %
Hospital (2)
148,468 147,665 0.5 % (0.4) % 0.9 %
Service 14,791 14,359 3.0 % 2.6 % 0.4 %
Net revenues $ 645,434 $ 749,987 (13.9) % 0.6 % (14.5) %
(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 $78.5 million and $73.9 million during the nine months ended December 26, 2020 and December 28, 2019, respectively. Hemostasis Management revenue increased 6.2% in the first nine months of fiscal 2021, as compared with the same period of fiscal 2020. Without the effect of foreign exchange, Hemostasis Management revenue increased 7.7% in the first nine months of fiscal 2021, as compared with the same period of fiscal 2020.
Plasma
Plasma revenue decreased 15.4% and 28.3% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, Plasma revenue decreased 15.6% and 28.3% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. This revenue decrease during the three and nine months ended December 26, 2020 was driven by a decline in the volume of plasma disposables, primarily in the U.S., due to the COVID-19 pandemic and declines in plasma liquid solutions as a result of certain strategic exits within our liquid solutions business. Additionally, declines in software revenue due to a one time favorable impact in the prior year period also contributed to the decrease during the nine months ended December 26, 2020.
While we experienced growth rate improvements during the three months ended December 26, 2020 compared with the second quarter of fiscal 2021, the timing of plasma collection recovery remains uncertain and we anticipate a continued negative impact from COVID-19 on our fiscal 2021 Plasma results. We continue to view the impacts of the pandemic on plasma collection as temporary and remain confident in the strength of the plasma end market growth as the long-term global demand for plasma-derived pharmaceuticals is expected to continue.
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Blood Center
Blood Center revenue decreased 3.0% and 3.1% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, Blood Center revenue decreased 5.7% and 5.1% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. These decreases were primarily driven by continued declines in whole blood disposables and the divestiture of certain blood donor management software solution assets, partially offset by increases in apheresis revenue, including distributor stocking orders in the first quarter of fiscal 2021, despite certain customers conversions to alternative sources of supply. The expected impact of the loss of this apheresis business is an incremental revenue decline of approximately $17.0 million in fiscal 2021 as compared with fiscal 2020.
While we have not yet experienced the reversal of the large stocking orders made by distributors and blood collectors during the first quarter of fiscal 2021 in response to the COVID-19 pandemic, we may experience a partial reversal in future periods.
Hospital
Hospital revenue increased 4.7% and 0.5% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, Hospital revenue increased 3.1% and 0.9% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. The increase during the three and nine months ended December 26, 2020 was primarily due to an increase in TEG disposables revenue in the U.S. and equipment sales in Europe. These increases were partially offset by declines in Cell Salvage revenue. The divestiture of certain blood bank and hospital software solution assets also contributed to the decline during the three months ended December 26, 2020.
During the nine months ended December 26, 2020, revenue in the Hospital business unit was negatively impacted by COVID-19. We experienced these declines primarily in China and the U.S. However, we had consistent improvement in the second and third quarters of fiscal 2021 in both markets as restrictions in China eased and hospitals in the U.S. experienced an increase in procedure volume. We believe that the demand for our hospital products is inherently strong and that procedure volumes will continue to improve with a return to normal levels in future periods.
Gross Profit
Three Months Ended Nine Months Ended
(In thousands) December 26,
2020 December 28,
2019 % Increase/
(Decrease) December 26,
2020 December 28,
2019 % Increase/
(Decrease)
Gross profit $ 120,257 $ 128,050 (6.1) % $ 316,031 $ 370,956 (14.8) %
% of net revenues 50.0 % 49.4 % 49.0 % 49.5 %
Gross profit decreased 6.1% and 14.8% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, gross profit decreased 8.4% and 15.6% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. The decrease in gross profit margin during the three and nine months ended December 26, 2020 was primarily driven by decreased volumes,
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unfavorable product mix, higher operational costs and the impact of the COVID-19 pandemic and recent divestitures. The decline was partially offset by productivity savings from the 2020 Program and lower depreciation expense.
Operating Expenses
Three Months Ended Nine Months Ended
(In thousands) December 26,
2020 December 28,
2019 % Increase/
(Decrease) December 26,
2020 December 28,
2019 % Increase/
(Decrease)
Research and development $ 7,501 $ 7,000 7.2 % $ 22,014 $ 21,909 0.5 %
% of net revenues 3.1 % 2.7 % 3.4 % 2.9 %
Selling, general and administrative $ 73,446 $ 78,267 (6.2) % $ 214,680 $ 229,189 (6.3) %
% of net revenues 30.6 % 30.2 % 33.3 % 30.6 %
Impairment of assets $ — $ 1,876 (100.0) % $ 1,028 $ 50,597 (98.0) %
% of net revenues — % 0.7 % 0.2 % 6.7 %
Gains on divestitures and sale of assets $ (1,115) $ — n/m $ (32,613) $ (8,083) n/m
% of net revenues (0.5) % — % (5.1) % (1.1) %
Total operating expenses $ 79,832 $ 87,143 (8.4) % $ 205,109 $ 293,612 (30.1) %
% of net revenues 33.2 % 33.6 % 31.8 % 39.1 %
Research and Development
Research and development expenses increased 7.2% and 0.5% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, research and development expenses increased 6.9% and 0.6% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. The increase during the three and nine months ended December 26, 2020 was due to continued investments, primarily in our Hospital Business unit as well as increased spend related to a recent acquisition. The increases were partially offset by cost savings primarily related to the 2020 Program.
Selling, General and Administrative
Selling, general and administrative expenses decreased 6.2% and 6.3% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. Without the effect of foreign exchange, selling, general, and administrative expenses decreased 7.3% and 6.5% during the three and nine months ended December 26, 2020, respectively, as compared with the same periods of fiscal 2020. These decreases were due to cost containment actions taken to offset the negative effects related to the COVID-19 pandemic, a reduction in variable compensation and incremental productivity savings from the 2020 Program. These decreases were partially offset by continued investments and higher transaction costs.
Impairment of assets
We recognized impairment charges of $1.0 million during the nine months ended December 26, 2020 in connection with the sale of our Fajardo, Puerto Rico, manufacturing operations. There were no impairments recognized during the three months ended December 26, 2020. During the nine months ended December 28, 2019 we recognized $50.6 million of impairment charges primarily in connection with the sale of our Union, South Carolina facility. During the three months ended December 28, 2019, we recognized an additional $1.9 million of other asset impairments.
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Gains on divestitures
We recognized gains on divestitures of $1.1 million and $32.6 million, respectively, during the three and nine months ended December 26, 2020. Refer to Note 5, Divestitures , to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information pertaining to these divestitures. We recognized gains on sale of assets of $8.1 million during the nine months ended December 28, 2019 due to the sale of assets associated with our Braintree corporate headquarters. There were no gains on sale of assets during the three months ended December 28, 2019.
Interest and Other Expense, Net
Interest expense from our $350.0 million term loan and $350.0 million revolving loan constitutes the majority of our interest and other expenses. During the three and nine months ended December 26, 2020, our interest expense associated with this debt declined by $1.6 million and $4.8 million, respectively, despite higher loan balances in the current year period due to a decrease in the effective interest rate. The effective interest rate on total debt outstanding as of December 26, 2020 was 1.4%.
Income Taxes
We conduct business globally and report our results of operations in a number of foreign jurisdictions in addition to the United States. Our reported tax rate is 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.
For the three and nine months ended December 26, 2020, we reported income tax expense of $5.5 million and $9.8 million, respectively, representing effective tax rates of 14.7% and 9.8%, respectively. The effective tax rate for the three and nine months ended December 26, 2020 includes discrete tax benefits recognized from excess stock compensation deductions of $1.0 million and $5.1 million, respectively. The effective tax rates were also impacted by the jurisdictional mix of earnings including divestiture transactions. During the three and nine months ended December 26, 2020, we sold our Fajardo, Puerto Rico manufacturing operations, certain U.S. blood donor management software solution assets, and our wholly-owned subsidiary Inlog Holdings France SAS. The tax expense on divestitures, including the associated valuation allowance impacts, were included in the computation of the annual effective tax rate. Refer to Note 5, Divestitures , to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for information pertaining to these divestitures.
For the three and nine months ended December 28, 2019, we reported an income tax provision of $7.9 million and $6.3 million, respectively, representing effective tax rates of 21.0% and 9.6%, respectively. The effective tax rate for the three and nine months ended December 28, 2019 was lower than the U.S. statutory tax rate primarily due to a discrete tax benefit recognized from excess stock compensation deductions of $3.1 million and $12.4 million, respectively. The effective tax rates were also impacted by the jurisdictional mix of earnings and the impact of the divestiture of the Union, South Carolina facility in the first quarter of fiscal 2020.
Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
(Dollars in thousands) December 26,
2020 March 28,
2020
Cash & cash equivalents $ 189,002 $ 137,311
Working capital $ 473,964 $ 328,817
Current ratio 3.4 2.2
Net debt (1)
$ (120,774) $ (245,182)
Days sales outstanding (DSO) 55 62
Inventory turnover 1.3 1.7
(1) Net debt position is the sum of cash and cash equivalents less total debt.
In July 2019, our Board of Directors approved the 2020 Program. We estimate that we will incur aggregate charges between $60 million and $70 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2023. During the three and nine months ended December 26, 2020, we incurred $3.1 million and $11.1 million, respectively, of restructuring and turnaround costs under this program.
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Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations, our revolving credit line and proceeds from employee stock option exercises. We believe these sources are sufficient to fund our cash requirements over at least the next twelve months. Our expected cash outlays relate primarily to acquisitions, investments, capital expenditures, including production of the NexSys PCS and the build out of our new manufacturing facility in Clinton, PA, cash payments under the loan agreement and restructuring and turnaround initiatives.
As of December 26, 2020, we had $189.0 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 June 15, 2018, we entered into a five-year credit agreement which provided for a $350.0 million term loan and a $350.0 million revolving loan (together with the term loan, the “Credit Facilities”). Interest on the term loan and revolving loan is established using LIBOR plus 1.13% - 1.75%, depending on our leverage ratio. Under the Credit Facilities, we are required to maintain certain leverage and interest coverage ratios specified in the credit agreement as well as other customary non-financial affirmative and negative covenants. At December 26, 2020, $310.6 million was outstanding under the term loan with an effective interest rate of 1.4%. There were no borrowings outstanding on the revolving loan. We also had $26.2 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as of December 26, 2020. We expect to finance the Cardiva acquisition through a combination of cash on hand, revolving credit facility and an additional $150.0 million term loan under our existing credit facility. The transaction is expected to close in the fourth quarter of fiscal 2021.
We have scheduled principal payments of $8.7 million required during the remainder of fiscal 2021. We were in compliance with the leverage and interest coverage ratios specified in the credit agreement as well as all other bank covenants as of December 26, 2020.
We continue to manage the ongoing impacts of the COVID-19 pandemic. While the duration and impacts of the pandemic remain uncertain, we have been successful in preserving cash by implementing a number of actions including restricting travel, reducing certain compensation-related items and non-essential spending and delaying hiring. Our capital allocation strategy continues to prioritize organic investments followed by inorganic opportunities and share repurchases. Our commitment to our shareholders will continue to be an important element of our capital allocation strategy, however, our priority will be focused on providing the appropriate levels of funding across our organization and ensuring that we are well positioned to address any challenges that may arise over the course of the pandemic.
In May 2019, our Board of Directors authorized the repurchase of up to $500.0 million of Haemonetics common shares over the next two years. As of December 26, 2020, the total remaining authorization for repurchases of the Company's common stock under the share repurchase program was $325.0 million. We do not expect to make additional share repurchases prior to the expiration of the share repurchase program in May 2021.
Cash Flows
Nine Months Ended
(In thousands) December 26,
2020 December 28,
2019 Increase/
(Decrease)
Net cash provided by (used in):
Operating activities $ 107,258 $ 111,811 $ (4,553)
Investing activities 3,658 (12,041) 15,699
Financing activities (65,307) (142,580) 77,273
Effect of exchange rate changes on cash and cash equivalents (1)
6,082 (124) 6,206
Net change in cash and cash equivalents $ 51,691 $ (42,934)
(1) The balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. Dollars. In accordance with U.S. GAAP, we have removed the effect of foreign currency throughout our cash flow statement, except for its effect on our cash and cash equivalents.
Net cash provided by operating activities decreased by $4.6 million during the nine months ended December 26, 2020, as compared with the nine months ended December 28, 2019. The decrease in cash provided by operating activities was primarily the result of a reduction in net income, as adjusted for depreciation, amortization and other non-cash charges compared with the prior year period. A decrease in working capital as compared with the prior year period due to lower inventory growth, primarily related to NexSys PCS devices, a decline in the build of accounts receivable due to lower sales and improved collection timing, and a large payment to a key service provider in the prior year period, partially offset this decrease.
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Net cash provided by investing activities increased by $15.7 million during the nine months ended December 26, 2020, as compared with the nine months ended December 28, 2019. The increase in cash provided by investing activities was primarily the result of cash received from divestitures. This was partially offset by the cash paid for an acquisition during fiscal 2021 and proceeds received related to the divestiture of our plasma liquid solutions operations and Braintree headquarter facility in the prior year period, as well as a reduction in capital expenditures.
Net cash used in financing activities decreased by $77.3 million during the nine months ended December 26, 2020, as compared with the nine months ended December 28, 2019, primarily due to a decrease in share repurchases compared with the prior year period, partially offset by a reduction in borrowings on our revolving credit facility, net of payments, during fiscal 2021.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. 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 receivables. We continually evaluate all receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries' healthcare systems deteriorate such that their ability to make payments is uncertain, allowances may be required in future periods.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity and by adjusting the selling prices of products. We continue to monitor inflation pressures generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Foreign Exchange
During the three and nine months ended December 26, 2020, 38.6% and 40.7%, respectively, of our sales were generated outside the U.S., generally in foreign currencies, yet our reporting currency is the U.S. Dollar. We also incur certain manufacturing, marketing and selling costs in international markets in local currency. Our primary foreign currency exposures relate to sales denominated in Euro, Japanese Yen, Chinese Yuan and Australian Dollars. We also have foreign currency exposure related to manufacturing and other operational costs denominated in Swiss Francs, Canadian Dollars, Mexican Pesos and Malaysian Ringgit. The Yen, Euro, Yuan and Australian Dollar sales exposure is partially mitigated by costs and expenses for foreign operations and sourcing products denominated in foreign currencies.
Since our foreign currency denominated Yen, Euro, Yuan and Australian Dollar sales exceed the foreign currency denominated costs, whenever the U.S. Dollar strengthens relative to the Yen, Euro, Yuan or Australian Dollar, there is an adverse effect on our results of operations and, conversely, whenever the U.S. Dollar weakens relative to the Yen, Euro, Yuan or Australian Dollar, there is a positive effect on our results of operations. For Swiss Francs, Canadian Dollars Mexican Pesos and Malaysian Ringgit our primary cash flows relate to product costs or costs and expenses of local operations. Whenever the U.S. Dollar strengthens relative to these foreign currencies, there is a positive effect on our results of operations. Conversely, whenever the U.S. Dollar weakens relative to these currencies, there is an adverse effect on our results of operations.
We have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. That program includes the use of derivative financial instruments to minimize, for a period of time, the unforeseen impact on our financial results from changes in foreign exchange rates. We utilize forward foreign currency contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily Japanese Yen and Euro, and to a lesser extent Swiss Francs, Australian Dollars, Canadian Dollars and Mexican Pesos. This does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. These contracts are designated as cash flow hedges. The final impact of
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currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.
Recent Accounting Pronouncements
Standards to be Implemented
In May 2020,the Securities and Exchange Commission (“SEC”) issued a final rule that amends the financial statement requirements for acquisitions and dispositions of businesses. The amendments primarily relate to disclosures required by Rule 3-05 and Article 11 of Regulation S-X and modifies the tests provided in Rule 1-02(w) of Regulation S-X used to determine whether a subsidiary or an acquired or disposed business is significant and modifies the number of years of audited financial statements required for acquisitions with significance levels greater than specified percentages. The amendments are effective for annual periods beginning after January 1, 2021 but early adoption is permitted. We plan to early adopt the amendments during the fourth quarter of fiscal 2021.
In December 2019, the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740) . The new guidance will improve consistent application of and simplify the accounting for income taxes by removing certain exceptions to the general principals in Topic 740. ASC Update No. 2019-12 is effective for annual periods beginning after December 15, 2020, and is applicable to us in fiscal 2022. We are in the process of determining the effect that the adoption will have on our financial position and results of operations.
Cautionary Statement Regarding Forward-Looking Information
Certain statements that we make from time to time, including statements contained in this Quarterly Report on Form 10-Q and incorporated by reference into this report, constitute “forward looking-statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements do not relate strictly to historical or current facts and reflect management’s assumptions, views, plans, objectives and projections about the future. Forward-looking statements may be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and other words of similar meaning in conjunction with, among other things: discussions of future operations; expected operating results and financial performance; impacts of the COVID-19 pandemic; the Company’s strategy for growth; product development, commercialization and anticipated performance and benefits; regulatory approvals; impact of planned acquisitions or dispositions, including the Company's pending acquisition of Cardiva; market position and expenditures.
Because forward-looking statements are based on current beliefs, expectations and assumptions regarding future events, they are subject to uncertainties, risks and changes that are difficult to predict and many of which are outside of the Company's control. Investors should realize that if underlying assumptions prove inaccurate, or known or unknown risks or uncertainties materialize, the Company’s actual results and financial condition could vary materially from expectations and projections expressed or implied in its forward-looking statements. Investors are therefore cautioned not to rely on these forward-looking statements.
The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of these and other factors, see Item 1A. Risk Factors in our most recent Annual Report on Form 10-K.
• The effect of the ongoing COVID-19 pandemic, or outbreaks of communicable diseases, on our business, financial conditions and results of operations, which may be heightened if the pandemic and various government responses to it continue for an extended period of time;
• Failure to achieve our long-term strategic and financial-improvement goals;
• Demand for and market acceptance risks for new and existing products, including material reductions in purchasing from or loss of a significant customer;
• Product quality or safety concerns, leading to product recalls, withdrawals, regulatory action by the FDA (or similar non-U.S. regulatory agencies), reputational damage, declining sales or litigation;
• Security breaches of our information technology systems or our products, which could impair our ability to conduct business or compromise sensitive information of the Company or its customers, suppliers and other business partners, or of customers' patients;
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• Pricing pressures resulting from trends toward health care cost containment, including the continued consolidation among health care providers and other market participants;
• The continuity, availability and pricing of plastic and other raw materials, finished goods and components used in the manufacturing of our products (including those purchased from sole-source suppliers) and the related continuity of our manufacturing and distribution;
• Our ability to develop new products or enhancements on commercially acceptable terms or at all;
• Our ability to obtain the anticipated benefits of restructuring programs that we have or may undertake, including the Operational Excellence Program;
• The potential that the expected strategic benefits and opportunities from the Company's pending acquisition of Cardiva and any other planned or completed acquisition or divestiture by the Company may not be realized or may take longer to realize than expected;
• The impact of enhanced requirements to obtain regulatory approval in the U.S. and around the world, including the EU MDR and the associated timing and cost of product approval, and
• Our ability to comply with established and developing U.S. and foreign legal and regulatory requirements, including the U.S. Foreign Corrupt Practices Act, or FCPA, and similar laws in other jurisdictions, as well as U.S. and foreign export and import restrictions and tariffs;
• Our ability to execute and realize anticipated benefits from our investments in emerging economies;
• Our ability to retain and attract key personnel;
• Costs and risks associated with product liability and other litigation claims;
• Our ability to meet our debt obligations, including from the increased amount of debt we anticipate incurring to fund our pending acquisition of Cardiva, and raise additional capital when desired on terms reasonably acceptable to us;
• The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses, and resulting margins;
• The impact of changes in U.S. and international tax laws;
• Market conditions impacting our stock price and/or share repurchase program, and the possibility that our share repurchase program may be delayed, suspended or discontinued; and
• Our ability to protect intellectual property and the outcome of patent litigation.
Investors should understand that it is not possible to predict or identify all such factors and should not consider the risks described above and in Item 1A. Risk Factors in our Annual Report on Form 10-K to be a complete statement of all potential risks and uncertainties. The Company does not undertake to publicly update any forward-looking statement that may be made from time to time, whether as a result of new information or future events or developments.