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 April 2, 2022. 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 Corporation is a global healthcare company dedicated to providing a suite of innovative medical products and solutions for customers to help them improve patient care and reduce the cost of healthcare. Our technology addresses important medical markets: blood and plasma component collection, the surgical suite and hospital transfusion services. When used in this report, the terms “we,” “us,” “our,” “Haemonetics” and the “Company” mean Haemonetics Corporation.
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, Transfusion Management and Vascular Closure products, includes devices and methodologies for measuring coagulation characteristics of blood, surgical blood salvage systems, specialized blood cell processing systems and disposables, blood transfusion management software and vascular closure devices.
We believe that Plasma and Hospital have growth potential, while Blood Center competes in challenging markets that require us to manage the business differently, including reducing costs, shrinking the scope of the current product line, and evaluating opport unities to exit unfavorable customer contracts.
Recent Developments
Share Repurchase Program
In August 2022, our Board of Directors authorized the repurchase of up to $300 million of Haemonetics common stock from time to time, based on market conditions, over the next three years. In November 2022, the Company completed a $75.0 million repurchase of its common stock pursuant to an accelerated share repurchase agreement (“ASR”) entered into with Citibank N.A. (“Citibank”) in August 2022. The total number of shares repurchased under the ASR was 1.0 million at an average price per share upon final settlement of $75.20.
As of December 31, 2022, the total remaining authorization for repurchase of the Company’s common stock was $225 million.
Debt Issuance and Repayment
22
On July 26, 2022, we entered into an amended and restated credit agreement with certain lenders to refinance the credit facilities under our 2018 credit agreement (as amended from time to time) and extend the applicable maturity date through June 2025. The amended and restated credit agreement provides for a $280.0 million senior unsecured term loan, the proceeds of which have been used to retire the balance of the term loan under our 2018 credit agreement, and a $420.0 million senior unsecured revolving credit facility. In September 2022, we amended two prior interest rate swap agreements and entered into certain supplemental interest rate swap agreements to effectively convert between 70% to 80% of borrowings under our Revised Credit Facilities from a variable Term Secured Overnight Financing Rate (“SOFR”) rate to a fixed rate of interest through June 2025. In September 2022, we amended two prior interest rate swap agreements and entered into certain supplemental interest rate swap agreements to effectively convert between 70% to 80% of borrowings under our Revised Credit Facilities from a variable Term SOFR rate to a fixed rate of interest through June 2025.
Operational Excellence Program
During fiscal 2022, our Board of Directors approved the revised Operational Excellence Program (the “2020 Program”). The revised program is designed to improve product and service quality, reduce cost principally in our manufacturing and supply chain operations and ensure sustainability while helping to offset impacts from a previously announced customer loss, rising inflationary pressures and effects of the COVID-19 pandemic. We now expect to incur aggregate charges between $95 million and $105 million by the end of fiscal 2025 and to achieve total gross savings of $115 million to $125 million on an annualized basis once the program is completed. The majority of charges will result in cash outlays, including severance and other employee costs, and will be incurred as the specific actions required to execute these initiatives are identified and approved. During the three and nine months ended December 31, 2022, the Company incurred $4.1 million and $10.7 million, respectively, of restructuring and restructuring related costs under this program. Total cumulative charges under this program are $66.4 million as of December 31, 2022.
Financial Summary
Three Months Ended Nine Months Ended
(In thousands, except per share data) December 31,
2022 January 1,
2022 % Increase/ (Decrease) December 31,
2022 January 1,
2022 % Increase/ (Decrease)
Net revenues $ 305,301 $ 259,769 17.5 % $ 864,244 $ 728,194 18.7 %
Gross profit $ 158,707 $ 138,565 14.5 % $ 458,848 $ 369,191 24.3 %
% of net revenues 52.0 % 53.3 % 53.1 % 50.7 %
Operating expenses $ 115,428 $ 102,914 12.2 % $ 338,070 $ 307,640 9.9 %
Operating income $ 43,279 $ 35,651 21.4 % $ 120,778 $ 61,551 96.2 %
% of net revenues 14.2 % 13.7 % 14.0 % 8.5 %
Interest and other expense, net $ (1,055) $ (4,263) (75.3) % $ (12,001) $ (13,249) (9.4) %
Income before provision for income taxes $ 42,224 $ 31,388 34.5 % $ 108,777 $ 48,302 125.2 %
Provision for income taxes $ 9,280 $ 8,156 13.8 % $ 22,759 $ 14,668 55.2 %
% of pre-tax income 22.0 % 26.0 % 20.9 % 30.4 %
Net income $ 32,944 $ 23,232 41.8 % $ 86,018 $ 33,634 155.7 %
% of net revenues 10.8 % 8.9 % 10.0 % 4.6 %
Net income per share - basic $ 0.65 $ 0.45 44.4 % $ 1.69 $ 0.66 156.1 %
Net income per share - diluted $ 0.64 $ 0.45 42.2 % $ 1.67 $ 0.65 156.9 %
Net revenues increased 17.5% and 18.7% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, net revenues increased 20.8% and 21.5% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Revenue increases in our Plasma and Hospital businesses, primarily related to volume and price, drove the overall increase in revenue during the three and nine months ended December 31, 2022.
Operating income increased during the three and nine months ended December 31, 2022 as compared with the same period of fiscal 2022, primarily due to increased revenues in Plasma and Hospital, savings from the 2020 Program and decreased spending on acquisitions in the current year periods, partially offset by lower revenues in Blood Center, increased freight costs in our global supply chain, increased sales and marketing expense and higher performance-based compensation.
23
Management’s Use of Non-GAAP Measures
Management uses non-GAAP financial measures, in addition to financial measures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), to monitor the financial performance of the business, make informed business decisions, establish budgets and forecast future results. These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with U.S. GAAP. Constant currency growth, a non-GAAP financial measure, measures the change in revenue between the current and prior year periods using a constant currency conversion rate. We have provided this non-GAAP financial measure because we believe it provides meaningful information regarding our results on a consistent and comparable basis for the periods presented.
RESULTS OF OPERATIONS
Net Revenues by Geography
Three Months Ended
(In thousands) December 31,
2022 January 1,
2022 Reported growth Currency impact Constant currency growth (1)
United States $ 224,104 $ 167,270 34.0 % — % 34.0 %
International 81,197 92,499 (12.2) % (9.0) % (3.2) %
Net revenues $ 305,301 $ 259,769 17.5 % (3.3) % 20.8 %
(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 31,
2022 January 1,
2022 Reported growth Currency impact Constant currency growth (1)
United States $ 617,824 $ 460,404 34.2 % — % 34.2 %
International 246,420 267,790 (8.0) % (7.4) % (0.6) %
Net revenues $ 864,244 $ 728,194 18.7 % (2.8) % 21.5 %
(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 90 countries around the world through a combination of our direct sales force, independent distributors and agents. During the three and nine months ended December 31, 2022 our revenue generated outside the U.S. was 26.6% and 28.5% of total net revenues, respectively, as compared with 35.6% and 36.8% during the three and nine months ended January 1, 2022, respectively. International sales are generally conducted in local currencies, primarily Japanese Yen, Euro, Chinese Yuan and Australian Dollars. Our results of operations are impacted by changes in foreign exchange rates, particularly in the value of the Yen, Euro and Australian Dollar relative to the U.S. Dollar. We have placed foreign currency hedges to mitigate our exposure to foreign currency fluctuations.
Please see the section entitled “Foreign Exchange” in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.
24
Net Revenues by Business Unit
Three Months Ended
(In thousands) December 31,
2022 January 1,
2022 Reported growth Currency impact Constant currency growth (1)
Plasma $ 135,461 $ 96,460 40.4 % (0.8) % 41.2 %
Blood Center 73,362 75,692 (3.1) % (6.2) % 3.1 %
Hospital (2)
91,560 82,273 11.3 % (3.1) % 14.4 %
Service 4,918 5,344 (8.0) % (6.8) % (1.2) %
Net revenues $ 305,301 $ 259,769 17.5 % (3.3) % 20.8 %
(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 $34.9 million and $33.5 million during the three months ended December 31, 2022 and January 1, 2022, respectively. Hemostasis Management revenue increased 4.2% in the third quarter of fiscal 2023, as compared with the same period of fiscal 2022. Without the effect of foreign exchange, Hemostasis Management revenue increased 7.3% in the third quarter of fiscal 2023, as compared with the same period of fiscal 2022. Vascular Closure revenue increased 32.6% in the third quarter of fiscal 2023 as compared with the same period of fiscal 2022.
Nine Months Ended
(In thousands) December 31,
2022 January 1,
2022 Reported growth Currency impact Constant currency growth (1)
Plasma $ 365,735 $ 250,244 46.2 % (0.9) % 47.1 %
Blood Center 212,739 225,379 (5.6) % (4.5) % (1.1) %
Hospital (2)
270,909 237,074 14.3 % (2.7) % 17.0 %
Service 14,861 15,497 (4.1) % (5.8) % 1.7 %
Net revenues $ 864,244 $ 728,194 18.7 % (2.8) % 21.5 %
(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 $102.7 million and $97.2 million during the nine months ended December 31, 2022 and January 1, 2022, respectively. Hemostasis Management revenue increased 5.7% in the first nine months of fiscal 2023, as compared with the same period of fiscal 2022. Without the effect of foreign exchange, Hemostasis Management revenue increased 8.1% in the first nine months of fiscal 2023, as compared with the same period of fiscal 2022. Vascular Closure revenue increased 36.6% in the first nine months of fiscal 2023 as compared with the same period of fiscal 2022.
Plasma
Plasma revenue increased 40.4% and 46.2% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, Plasma revenue increased 41.2% and 47.1% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The increases during the three and nine months ended December 31, 2022, as compared with the same period of fiscal 2022 were driven by volume and price.
During the third quarter of fiscal 2022, we amended our supply agreement with CSL Plasma Inc. (“CSL”), which CSL had previously notified us of its intent not to renew and was initially set to expire in June 2022, to allow CSL to continue to use our PCS2 plasma collection system devices and purchase disposable plasmapheresis kits on a non-exclusive basis through December 2023. During the third quarter of fiscal 2023, we further amended our supply agreement with CSL to extend the term through December 2025.
Blood Center
Blood Center revenue decreased 3.1% and 5.6% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, Blood Center revenue increased 3.1% and decreased 1.1% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The increase during the three months ended December 31, 2022, as compared to the same period of fiscal 2022 was primarily due to an increase in our whole blood business. The decrease during the nine months ended December 31, 2022, as compared with the same period of fiscal 2022 was primarily driven by a decline in the volume of apheresis disposables.
25
Hospital
Hospital revenue increased 11.3% and 14.3% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, Hospital revenue increased 14.4% and 17.0% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The increase during the three and nine months ended December 31, 2022 was primarily attributable to Vascular Closure revenue, as well as increases in Hemostasis Management disposables revenue and Transfusion Management revenue.
Gross Profit
Three Months Ended Nine Months Ended
(In thousands) December 31,
2022 January 1,
2022 % Increase December 31,
2022 January 1,
2022 % Increase
Gross profit $ 158,707 $ 138,565 14.5 % $ 458,848 $ 369,191 24.3 %
% of net revenues 52.0 % 53.3 % 53.1 % 50.7 %
Gross profit increased 14.5% and 24.3% for the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, gross profit increased 18.4% and 28.5% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The increase during the three and nine months ended December 31, 2022 was primarily driven by volume, price and productivity savings from the 2020 Program, partially offset by inflationary pressures in our global manufacturing and supply chain and increased depreciation expense.
Operating Expenses
Three Months Ended Nine Months Ended
(In thousands) December 31,
2022 January 1,
2022 % Increase/
(Decrease) December 31,
2022 January 1,
2022 % Increase/
(Decrease)
Research and development $ 12,689 $ 10,037 26.4 % $ 34,487 $ 33,591 2.7 %
% of net revenues 4.2 % 3.9 % 4.0 % 4.6 %
Selling, general and administrative $ 94,661 $ 80,726 17.3 % $ 279,299 $ 247,722 12.7 %
% of net revenues 31.0 % 31.1 % 32.3 % 34.0 %
Amortization of intangible assets $ 8,078 $ 12,151 (33.5) % $ 24,666 $ 35,930 (31.3) %
% of net revenues 2.6 % 4.7 % 2.9 % 4.9 %
Gains on divestiture $ — $ — — % $ (382) $ (9,603) (96.0) %
% of net revenues — % — % — % (1.3) %
Total operating expenses $ 115,428 $ 102,914 12.2 % $ 338,070 $ 307,640 9.9 %
% of net revenues 37.8 % 39.6 % 39.1 % 42.2 %
Research and Development
Research and development expenses increased 26.4% and 2.7% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, research and development expenses increased 26.9% and 3.2% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. This increase was due to increased investments into product innovation.
26
Selling, General and Administrative
Selling, general and administrative expenses increased 17.3% and 12.7% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. Without the effect of foreign exchange, selling, general, and administrative expenses increased 19.7% and 14.7% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The increase during the three and nine months ended December 31, 2022 was primarily driven by inflationary pressures and higher freight costs in our global supply chain, higher investments in sales and marketing and higher performance-based compensation, partially offset by cost savings related to the 2020 Program and decreased acquisition related costs in the current year.
Amortization of Intangible Assets
We recognized amortization expense of $8.1 million and $24.7 million during the three and nine months ended December 31, 2022, respectively, and $12.2 million and $35.9 million during the three and nine months ended January 1, 2022, respectively. The decrease is primarily the result of intangible assets that became fully amortized during fiscal 2022.
Gains on Divestiture
We recognized gains on divestiture of $0.4 million during the nine months ended December 31, 2022 and $9.6 million during the nine months ended January 1, 2022.
Interest and Other Expense, Net
Interest and other expenses decreased 75.3% and 9.4% during the three and nine months ended December 31, 2022, respectively, as compared with the same period of fiscal 2022. Without the effects of foreign exchange, interest and other expenses decreased 73.1% and 10.5% during the three and nine months ended December 31, 2022, respectively, as compared with the same periods of fiscal 2022. The decrease was primarily driven by foreign currency impact due to market and rate volatility, partially offset by higher interest rates which impacted the interest incurred on our term loan.
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 31, 2022, we reported income tax expense of $9.3 million and $22.8 million, respectively, representing effective tax rates of 22.0% and 20.9%, respectively. The effective tax rate for the three months ended December 31, 2022 includes $0.1 million of discrete tax expense relating to stock compensation shortfalls. The effective tax rate for the nine months ended December 31, 2022 includes a discrete tax benefit of $0.5 million related to tax rate changes enacted in the period and $0.4 million of discrete tax expense relating to stock compensation shortfalls.
For the three and nine months ended January 1, 2022, we reported income tax expense of $8.2 million and $14.7 million, respectively, representing effective tax rates of 26.0% and 30.4%, respectively. The effective tax rate for the nine months ended January 1, 2022 includes discrete tax expense relating to stock compensation shortfalls of $0.9 million, with no discrete tax expense relating to stock compensation shortfalls recorded in the three months ended January 1, 2022.
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 31,
2022 April 2,
2022
Cash & cash equivalents $ 224,002 $ 259,496
Working capital $ 479,420 $ 313,765
Current ratio 3.1 1.7
Net debt (1)
$ (542,773) $ (514,093)
Days sales outstanding (DSO) 53 54
Inventory turnover 1.8 1.4
(1) Net debt position is the sum of cash and cash equivalents less total debt.
27
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. We believe these sources are sufficient to fund our cash requirements over at least the next twelve months. Our expected cash outlays relate primarily to acquisitions, investments, capital expenditures, including enhancements to our North American manufacturing facilities, share repurchases and cash payments under our revised credit agreement.
In March 2021, the Company issued $500.0 million aggregate principal amount of 0% convertible senior notes due 2026, or the 2026 Notes. The 2026 Notes are governed by the terms of the Indenture between the Company and U.S. Bank National Association, as trustee. The total net proceeds from the sale of the 2026 Notes, after deducting the initial purchasers’ discounts and debt issuance costs, were approximately $486.7 million. The 2026 Notes will mature on March 1, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes have an effective interest rate of 0.5% as of December 31, 2022.
As of December 31, 2022, we had $224.0 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 July 26, 2022, we entered into an amended and restated credit agreement with certain lenders to refinance our prior credit agreement entered into on June 15, 2018, which consisted of a $350.0 million term loan and a $350.0 million revolving loan (together, as amended from time to time, the “2018 Credit Facilities”), and extend the maturity date through June 2025. The amended and restated credit agreement provides for a $280 million senior unsecured term loan, the proceeds of which have been used to retire the balance of the term loan under the 2018 Credit Facilities, and a $420 million senior unsecured revolving credit facility (together, the “Revised Credit Facilities”). Loans under the Revised Credit Facilities bear interest at an annual rate equal to the Adjusted Term SOFR Rate (as specified in the amended and restated credit agreement), which is subject to a floor of 0%, plus an applicable rate ranging from 1.125% to 1.750% based on the Company’s consolidated net leverage ratio (as specified in the amended and restated credit agreement) at the applicable measurement date. Adjusted Term SOFR Rate loans are also subject to a credit spread adjustment of 0.10% per annum. The revolving credit facility carries an unused fee that ranges from 0.125% to 0.250% annually based on the Company’s consolidated net leverage ratio at the applicable measurement date. Under the Revised Credit Facilities, the Company is required to maintain certain leverage and interest coverage ratios specified in the amended and restated credit agreement as well as other customary non-financial affirmative and negative covenants. The Revised Credit Facilities mature on June 15, 2025. The principal amount of the term loan under the Revised Credit Facilities is repayable quarterly through the maturity date at a rate of 2.5% for the first year and 5% thereafter, with the unpaid balance due at maturity. As of December 31, 2022, $276.5 million was outstanding under the term loan with an effective interest rate of 6.0%. There were no borrowings outstanding under the revolving credit facility at December 31, 2022. We also had $21.4 million of uncommitted operating lines of credit to fund our global operations under which there were no outstanding borrowings as of December 31, 2022. Additionally, the Company was in compliance with the leverage and interest coverage ratios specified in the amended and restated credit agreement as well as all other bank covenants as of December 31, 2022.
The Company has scheduled principal payments of $1.8 million required during the remainder of fiscal 2023.
During fiscal 2022, our Board of Directors approved a revised 2020 Program. We now estimate that we will incur aggregate charges between $95 million and $105 million in connection with the 2020 Program. These charges, the majority of which will result in cash outlays, including severance and other employee costs, will be incurred as the specific actions required to execute these initiatives are identified and approved and are expected to be substantially completed by the end of fiscal 2025. During the three and nine months ended December 31, 2022, we incurred $4.1 million and $10.7 million, respectively, of restructuring and restructuring related costs under this program.
Cash Flows
Nine Months Ended
(In thousands) December 31,
2022 January 1,
2022
Net cash provided by (used in):
Operating activities $ 193,447 $ 104,213
Investing activities (125,782) (51,833)
Financing activities (98,761) (6,984)
Effect of exchange rate changes on cash and cash equivalents (1)
(4,398) (824)
Net change in cash and cash equivalents $ (35,494) $ 44,572
(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.
28
Net cash provided by operating activities increased by $89.2 million during the nine months ended December 31, 2022, as compared with the nine months ended January 1, 2022. The increase in cash provided by operating activities was primarily the result of an increase in net income, a decrease in inventories driven by NexSys PCS device placements and higher other net working capital, including higher performance-based compensation.
Net cash used in investing activities increased by $73.9 million during the nine months ended December 31, 2022, as compared with the nine months ended January 1, 2022. The increase in cash used in investing activities was primarily the result of an increase in capital expenditures, driven by NexSys PCS device placements, and other investments made in the current year period, which was partially offset by lower proceeds received from divestitures during fiscal 2023 compared to fiscal 2022 and increased sales of property, plant and equipment.
Net cash used in financing activities increased by $91.8 million during the nine months ended December 31, 2022, as compared with the nine months ended January 1, 2022, primarily due to share repurchases and acquisition-related contingent consideration payments made in the current year.
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 experienced rising inflationary pressures in our global supply chain that had an impact on our results of operations during the three and nine months ended December 31, 2022. We continue to monitor inflationary pressures generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials. We expect the inflationary pressures we have experienced in our global supply chain to continue throughout fiscal 2023. Historically, we have been able to limit the impact of the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity and by adjusting the selling prices of products, but we may not be able to fully mitigate these increases in our operational costs in the future.
Foreign Exchange
During the three and nine months ended December 31, 2022, 26.6% and 28.5%, 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.
29
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, Chinese Yuan and Mexican Pesos. This does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. These contracts are designated as cash flow hedges. The final impact of currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.
Recent Accounting Pronouncements
There are currently no recent accounting pronouncements that we expect to have a material impact 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,” “foresees,” “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; impacts of acquisitions or dispositions; 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, including the time it will take for vaccines to be broadly distributed and administered worldwide, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and its variants and mitigating the economic effects of the pandemic, including inflationary pressures and higher freight costs in our global supply chain;
• 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;
• Our ability to develop, manufacture and market new products and technologies successfully and in a timely manner and the ability of our competitors and other third parties to develop products or technologies that render our products or technologies noncompetitive or obsolete;
• 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;
• Our ability to retain and attract key personnel;
30
• 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;
• Pricing pressures resulting from trends toward healthcare cost containment, including the continued consolidation among healthcare 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, sterilization, supply and distribution;
• 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 completed or planned acquisitions, divestitures or other strategic investments 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 and the associated timing and cost of product approval;
• Our ability to comply with established and developing U.S. and foreign legal and regulatory requirements, including FCPA, EU MDR/EU IVDR and similar laws in other jurisdictions, as well as U.S. and foreign export and import restrictions and tariffs;
• Our ability to meet our debt obligations and raise additional capital when desired on terms reasonably acceptable to us;
• The potential impact of our convertible senior notes and related capped call transactions;
• Geopolitical and economic conditions in China, Russia and other foreign jurisdictions where we do business;
• Our ability to execute and realize anticipated benefits from our investments in emerging economies;
• 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;
• Our ability to protect intellectual property and the outcome of patent litigation;
• Costs and risks associated with product liability and other litigation claims we may be subject to now or in the future; and
• Market conditions impacting our stock price and/or our share repurchase program, and the possibility that such share repurchase program may be delayed, suspended or discontinued.
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.
31
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.