HAEMONETICS CORP 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposures relative to market risk are due to foreign exchange risk and interest rate risk. Foreign Exchange Risk See the section above entitled Foreign Exchange for a discussion of how foreign currency affects our business. It is our policy to minimize, for a period of time, the unforeseen impact on our financial results of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge anticipated cash flows from forecasted foreign currency denominated sales and costs. We do not use the financial instruments for speculative or trading activities. We estimate the change in the fair value of all forward contracts assuming both a 10% strengthening and weakening of the U.S. dollar relative to all other major currencies. As of April 3, 2021, in the event of a 10% strengthening of the U.S. dollar, the change in fair value of all forward contracts would result in a $7.2 million increase in the fair value of the forward contracts, whereas a 10% weakening of the U.S. dollar would result in a $8.2 million decrease in the fair value of the forward contracts. Interest Rate Risk Our exposure to changes in interest rates is associated with borrowings under our Credit Facilities, all of which is variable rate debt. Total outstanding debt under our Credit Facilities for the fiscal year ended April 3, 2021 was $301.9 million with an interest rate of 1.4% based on prevailing LIBOR rates. An increase of 100 basis points in LIBOR rates would result in additional annual interest expense of $0.8 million. On August 21, 2018, we entered into two interest rate swap agreements to effectively convert $241.9 million of borrowings under our Credit Facilities from a variable rate to a fixed rate. These interest rate swaps are intended to mitigate the exposure to fluctuations in interest rates and qualify for hedge accounting treatment as cash flow hedges. 50 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Haemonetics Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Haemonetics Corporation and subsidiaries (the Company) as of April 3, 2021 and March 28, 2020, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended April 3, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 3, 2021 and March 28, 2020, and the results of its operations and its cash flows for each of the three years in the period ended April 3, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 3, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 26, 2021 expressed an unqualified opinion thereon. Adoption of New Accounting Standards As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases effective March 31, 2019 due to adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 51 Table of Contents Valuation of goodwill Description of the Matter As discussed in Note 11 to the consolidated financial statements, the Company had approximately $466 million of goodwill allocated among its three reporting units as of April 3, 2021. The Company performs its annual quantitative impairment analysis as of the first day of the fourth quarter, and more frequently if the Company believes indicators of impairment exist, utilizing a discounted cash flow income approach in order to value reporting units for the test. Auditing the annual goodwill impairment test was especially complex and judgmental due to the significant estimation required in determining the fair values of the reporting units. In particular, the fair value estimates involve judgmental assumptions including discount rates, terminal values, and the amount and timing of expected future cash flows, which are all affected by expectations about future market or economic conditions and reporting unit specific risk factors. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over management's review of the significant inputs and assumptions used in determining the reporting unit fair values. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing fair value methodologies, testing the significant assumptions discussed above and the completeness and accuracy of the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry trends, historical financial results of the reporting unit, and other relevant factors. We considered the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. In addition, we involved our valuation professionals to assist in our evaluation of the significant assumptions used to develop the fair value estimates. We also evaluated the reconciliation of the estimated aggregate fair value of the reporting units to the market capitalization of the Company. Income taxes - valuation allowance Description of the Matter As described in Note 6 to the consolidated financial statements, the Company had gross deferred tax assets on temporary differences of approximately $94 million offset by an approximately $11 million valuation allowance as of April 3, 2021. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of all available evidence, both positive and negative, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Auditing management’s analysis of the realizability of its deferred tax assets was especially challenging and complex in relation to estimating projections of future taxable income that involved significant judgment and assumptions that may be affected by future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s analysis of the realizability of deferred tax assets. This included controls over management’s projections of future taxable income. To test the Company’s analysis of the realizability of deferred tax assets and the resultant valuation allowance, we performed audit procedures with the assistance of tax professionals that included, among others, evaluating the analyses used by management to consider the four sources of taxable income. We evaluated the assumptions used by the Company to develop projections of future taxable income by jurisdiction and tested the completeness and accuracy of the underlying data used in its projections. For example, we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. We also considered the historical accuracy of management’s projections and compared the projections of future taxable income with other forecasted financial information prepared by the Company. 52 Table of Contents Accounting for Convertible Senior Notes Description of the Matter As discussed in Note 13 to the consolidated financial statements, in March 2021 the Company issued $500 million of 0% convertible senior notes due March 2026 (the “2026 Notes”), which requires the Company to settle the principle in cash and any conversion premium in cash or stock at its option. Concurrent with the offering of the 2026 Notes, the Company entered into separate capped call transactions to reduce potential dilution upon conversion of the 2026 Notes. These transactions are collectively referred to as the Convertible Notes Transactions. The financial statement accounts primarily affected by these transactions were debt and equity. Auditing the Company’s accounting for the 2026 Notes was complex due to the significant judgment required in determining the liability component of the related convertible senior notes as well as the balance sheet classification of the elements of the Convertible Notes Transactions. The Company accounted for the 2026 Notes as separate liability and equity components, determining the fair value of the respective liability component based on an estimate of the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The Company estimated the fair value of the liability component of the 2026 Notes using a discounted cash flow model with a risk adjusted yield for similar debt instruments, absent any embedded conversion feature. In estimating the risk adjusted yield, the Company utilized both an income and market approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company performed an evaluation of issuances of debt securities issued by other comparable companies and broader market indices. Additionally, a detailed analysis of the terms of the Convertible Notes Transactions was required to determine existence of any derivatives that may require separate mark-to-market accounting under applicable accounting guidance. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s Convertible Notes Transactions. For example, we tested the Company’s controls over the initial recognition and measurement of the Convertible Notes Transactions, including the recording of the associated liability and equity components. Our testing of the Company’s initial accounting for the Convertible Notes Transactions, among other procedures, included reading the underlying agreements and evaluating the Company’s accounting analysis of the initial accounting of the Convertible Notes Transactions, including the determination of the balance sheet classification of each transaction and identification of any derivatives included in the arrangements. Our testing of the fair value of the liability component of the 2026 Notes, included, among other procedures, evaluating the Company's selection of the valuation methodology and significant assumptions used by the Company and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. Specifically, when assessing the key assumptions, we focused on the Company’s assumptions used to determine the risk adjusted yield, which was based on a calibration to the convertible senior notes’ issuance price and corroborated by an analysis of comparable issuances of debt securities by other companies. In addition, we involved valuation professionals to assist in our evaluation of the methodology used by the Company and significant assumptions. 53 Table of Contents Accounting for Acquisitions Description of the Matter As described in Note 4 to the consolidated financial statements, the Company completed two acquisitions in fiscal year 2021 for total purchase consideration of $510.3 million consisting of a combination of cash and future contingent earnout payments. The acquisitions were accounted for as business combinations. The most significant was the acquisition of all the outstanding equity of Cardiva Medical, Inc. for purchase consideration of $489.8 million. The recognition, measurement and disclosure of the Company’s business combinations in the 2021 consolidated financial statements was considered especially challenging and required significant auditor judgment due to the complex nature in the determination by management of the appropriate assumptions and related valuation models for the valuation of acquired assets and assumed liabilities related to the Cardiva Medical, Inc. acquisition, including, but not limited to, the developed technology intangible asset and contingent consideration liability. The financial statement accounts primarily affected by these transactions were intangible assets, goodwill, and contingent consideration liabilities. Auditing the Company's accounting for the Cardiva Medical, Inc. acquisition was especially challenging due to the significant estimation required by management in determining the fair value of the developed technology intangible asset and contingent consideration liability of $230 million and $24 million, respectively. The significant estimation was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of the intangible asset and contingent consideration liability, as well as the sensitivity of the respective fair values to the underlying significant assumptions. The Company used the income approach to measure the fair value of the intangible asset and a Monte Carlo simulation model to measure the fair value of the contingent consideration liability. The significant assumptions used to estimate the fair value of the intangible asset and contingent consideration liability included forecasted revenues attributable to existing technology, forecasted revenues for the contingent consideration earnout period and the discount rates. When estimating the significant assumptions to be used in the valuation the Company included a consideration of current industry information, market and economic trends, historical results of the acquired business, and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s accounting for acquisitions. We tested controls over the valuation of intangible assets and contingent consideration liabilities, including the valuation models and underlying assumptions used to develop such estimates. To test the fair value of the acquired intangible assets and contingent consideration liability, our audit procedures included, among others, evaluating the significant assumptions used, and the testing of the completeness and accuracy of underlying data. We tested the valuation models used to value the acquired intangible assets and contingent consideration liability including consideration of the nature and classification of such contingent liability. Our testing procedures over the significant assumptions included, among others, comparing them to current industry, market and economic trends, historical results of the acquired business and to other relevant factors. We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions. In addition, we involved valuation professionals to assist in our evaluation of the methodology, computations, and significant assumptions used by the Company within the valuation. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. Boston, Massachusetts May 26, 2021 54 Table of Contents