NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Haemonetics is a global healthcare company dedicated to providing a suite of innovative hematology products and solutions to customers, to help them 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.
Blood and its components (plasma, platelets, and red cells) have many vital - and frequently life-saving - clinical applications. Plasma is used for patients with major blood loss and is manufactured into biopharmaceuticals to treat a variety of illnesses, including immune diseases and coagulation disorders. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets have many uses in patient care, including supporting cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.
Haemonetics develops and markets a wide range of devices and solutions to serve our customers. We provide plasma collection systems and software which enable plasma fractionators to make life saving pharmaceuticals. We provide analytical devices for measuring hemostasis which enable healthcare providers to better manage their patients’ bleeding risk. Haemonetics makes blood processing systems and software which make blood donation more efficient and track life giving blood components. Finally, Haemonetics supplies systems and software which facilitate blood transfusions and cell processing.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The accompanying consolidated financial statements present separately our financial position, results of operations, cash flows, and changes in shareholders’ equity. All amounts presented, except per share amounts, are stated in thousands of U.S. dollars, unless otherwise indicated. Operating results for fiscal 2017 include an overstatement of inventory related charges due to the correction of capitalized manufacturing variances and corrections of certain out of period items. Absent these corrections, our operating loss for the fiscal year ended April 1, 2017 would have been
$2.4 million
lower than the amount included in the accompanying consolidated statements of (loss) income and comprehensive loss.
Operating results for fiscal 2016 include the correction of an overstated liability in fiscal 2014, the correction of capitalized manufacturing variances identified during fiscal 2017 and corrections of certain other out of period items, all of which were determined to be immaterial to all periods impacted. Absent these corrections, our net loss for the fiscal year ended April 2, 2016 would have been
$3.5 million
higher than the amount included in the accompanying consolidated statements of (loss) income and comprehensive loss.
We consider events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Refer to Note 19,
Subsequent Events,
for information pertaining to the sale of a product line which occurred after the balance sheet date but prior to the issuance of the financial statements. There were no other material subsequent events identified.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal
2017
and
2015
include
52
weeks with each quarter having
13
weeks. Fiscal
2016
includes
53
weeks with each of the first three quarters having
13
weeks and the fourth quarter having
14
weeks.
Principles of Consolidation
The accompanying consolidated financial statements include all accounts including those of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the amounts derived from our estimates and assumptions. We consider estimates to be critical if we are required to make assumptions about material matters that are uncertain at the time of estimation or if materially different estimates could have been made or it is reasonably likely that the accounting estimate will change from period to period. The following are areas considered to be critical and require management’s judgment: revenue recognition, allowance for doubtful accounts, inventory provisions, intangible asset and goodwill valuation, legal and other judgmental accruals, and income taxes.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to the current year's presentation.
Contingencies
We may become involved in various legal proceedings that arise in the ordinary course of business, including, without limitation, patent infringement, product liability and environmental matters. Accruals recorded for various contingencies including legal proceedings, employee related litigation, self-insurance and other claims are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. When a loss is probable and a range of loss is established but a best estimate cannot be made, we record the minimum loss contingency amount, which could be zero. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are reevaluated each accounting period, as additional information is available. As information becomes known, an additional loss provision is recorded when either a best estimate can be made or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount.
Revenue Recognition
Our revenue recognition policy is to recognize revenues from product sales, software and services in accordance with ASC Topic 605,
Revenue Recognition
, and ASC Topic 985-605,
Software
. These standards require that revenues are recognized when persuasive evidence of an arrangement exists, product delivery, including customer acceptance, has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We may have multiple contracts with the same customer, and each contract is typically treated as a separate arrangement. When more than one element such as equipment, disposables, and services are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a stand-alone basis. The selling price of the undelivered elements is determined by the price charged when the element is sold separately, or in cases when the item is not sold separately, by third-party evidence of selling price or by management's best estimate of selling price. For our software arrangements accounted for under the provisions of ASC 985-605,
Software
, we establish fair value of undelivered elements based upon vendor specific objective evidence.
We offer sales rebates and discounts to certain customers. We treat sales rebates and discounts as a reduction of revenue and classify the corresponding liability as current. We estimate rebates for products where there is sufficient historical information available to predict the volume of expected future rebates. If we are unable to estimate the expected rebates reasonably, we record a liability for the maximum potential rebate or discount that could be earned. In circumstances where we provide upfront rebate payments to customers, we capitalize the rebate payments and amortize the resulting asset as a reduction of revenue using a systematic method over the life of the contract.
Product Revenues
Product sales consist of the sale of our disposable blood component collection and processing sets and the related equipment. On product sales to end customers, revenue is recognized when both the title and risk of loss have transferred to the customer as determined by the shipping terms and all obligations have been completed. For product sales to distributors, we recognize revenue for both equipment and disposables upon shipment of these products to our distributors. Our standard contracts with our distributors state that title to the equipment passes to the distributors at point of shipment to a distributor’s location. The distributors are responsible for shipment to the end customer along with installation, training and acceptance of the equipment by the end customer. Payments from distributors are not contingent upon resale of the product. We also place equipment at customer sites. While we retain ownership of this equipment, the customer has the right to use it for a period of time provided they meet certain agreed to conditions. We recover the cost of providing the equipment from the sale of disposables.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Software Revenues
We offer a variety of software solutions to support our plasma, blood collection and hospital customers. We provide information technology platforms and technical support for donor recruitment, blood and plasma testing laboratories, and for efficient and compliant operations of blood and plasma collection centers. For plasma customers, we also provide information technology platforms for managing distribution of plasma from collection centers to plasma fractionation facilities. For hospitals, we provide solutions to help improve patient safety, reduce cost and ensure compliance.
Our software revenues also include revenue from software sales which includes per collection or monthly subscription fees for the license and support of the software as well as hosting services. A significant portion of our software sales are perpetual licenses typically accompanied with significant implementation service fees related to software customization as well as other professional and technical service fees.
We generally recognize revenue from the sale of perpetual licenses on a percentage-of-completion basis which requires us to make reasonable estimates of the extent of progress toward completion of the contract. These arrangements most often include providing customized implementation services to our customer. We also provide other services, including in some instances hosting, technical support, and maintenance, for the payment of periodic, monthly, or quarterly fees. We recognize these fees and charges as earned, typically as these services are provided during the contract period.
Non-Income Taxes
We are required to collect sales or valued added taxes in connection with the sale of certain of our products. We report revenues net of these amounts as they are promptly remitted to the relevant taxing authority.
We are also required to pay a medical device excise tax relating to U.S. sales of Class I, II and III medical devices. This excise tax went into effect January 1, 2013, established as part of the March 2010 U.S. healthcare reform legislation, and has been included in selling, general and administrative expenses. In December 2015, this tax was suspended for two years, beginning on January 1, 2016. This tax may be imposed again beginning on January 1, 2018, unless the suspension is extended or the medical device excise tax is permanently repealed.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries are translated at the rate of exchange at year-end while sales and expenses are translated at an average rate in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of stockholders' equity. Foreign currency transaction gains and losses, including those resulting from intercompany transactions, are charged directly to earnings and included in other expense, net on the consolidated statements of (loss) income. The impact of foreign exchange on long-term intercompany loans, for which repayment has not been scheduled or planned, are recorded in accumulated other comprehensive loss on the consolidated balance sheet.
Cash and Cash Equivalents
Cash equivalents include various instruments such as money market funds, U.S. government obligations and commercial paper with maturities of
three months
or less at date of acquisition. Cash and cash equivalents are recorded at cost, which approximates fair market value. As of
April 1, 2017
, our cash and cash equivalents consisted of investments in United States Government Agency and institutional money market funds.
Allowance for Doubtful Accounts
We establish a specific allowance for customers when it is probable that they will not be able to meet their financial obligation. Customer accounts are reviewed individually on a regular basis and appropriate reserves are established as deemed appropriate. We also maintain a general reserve using a percentage that is established based upon the age of our receivables and our collection history. We establish allowances for balances not yet due and past due accounts based on past experience.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined with the first-in, first-out method. We have based our provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. Significant changes in the timing or level of demand for our products results in recording additional provisions for excess, expired and obsolete inventory. Additionally, uncertain timing of next-generation product approvals, variability in product launch strategies, non-cancelable purchase commitments, product recalls and variation in product utilization all affect our estimates related to excess, expired and obsolete inventory.
Property, Plant and Equipment
Property, plant and equipment is recorded at historical cost. We provide for depreciation and amortization by charges to operations using the straight-line method in amounts estimated to recover the cost of the building and improvements, equipment, and furniture and fixtures over their estimated useful lives as follows:
|
|
|
|
Asset Classification
|
|
Estimated
Useful Lives
|
Building
|
|
30-40 Years
|
Building improvements
|
|
5-20 Years
|
Plant equipment and machinery
|
|
3-15 Years
|
Office equipment and information technology
|
|
2-10 Years
|
Haemonetics equipment
|
|
3-7 Years
|
We evaluate the depreciation periods of property, plant and equipment to determine whether events or circumstances warrant revised estimates of useful lives. All property, plant and equipment are also tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Our installed base of devices includes devices owned by us and devices sold to the customer. The asset on our balance sheet classified as Haemonetics equipment consists of medical devices installed at customer sites but owned by Haemonetics. Generally the customer has the right to use it for a period of time as long as they meet the conditions we have established, which among other things, generally include one or more of the following:
|
|
•
|
Purchase and consumption of a certain level of disposable products
|
|
|
•
|
Payment of monthly rental fees
|
|
|
•
|
An asset utilization performance metric, such as performing a minimum level of procedures per month per device
|
Consistent with the impairment tests noted below for other intangible assets subject to amortization, we review Haemonetics equipment and their related useful lives at least once a year, or more frequently if certain conditions arise, to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. To conduct these reviews we estimate the future amount and timing of demand for disposables used with these devices, from which we generate revenues. We also consider product life cycle in our evaluation of useful life and recoverability. Changes in expected demand can result in additional depreciation expense, which is classified as cost of goods sold. Any significant unanticipated changes in demand could impact the value of our devices and our reported operating results.
Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Maintenance and repairs are generally expensed to operations as incurred. When the repair or maintenance costs significantly extend the life of the asset, these costs may be capitalized. When equipment and improvements are sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss, if any, is included in the consolidated statements of (loss) income.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. Goodwill is not amortized. Instead goodwill is reviewed for impairment at least annually in accordance with ASC Topic 350, Intangibles - Goodwill and Other ("Topic 350"), or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter for each of our reporting units.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In fiscal 2017, we early adopted ASU No. 2017-04,
Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.
Under this amendment, entities perform their goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. A reporting unit is defined as an operating segment or one level below an operating segment, referred to as a component. We determine our reporting units by first identifying our operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within an operating segment that have similar economic characteristics. Our reporting units for purposes of assessing goodwill impairment are organized primarily based on operating segments and geography and include: (a) North America Plasma, (b) North America Blood Center, (c) North America Hospital, (d) Europe, Middle East, and Africa (collectively "EMEA"), (e) Asia-Pacific and (f) Japan. In the prior period, North America Blood Center and North America Hospital were components of a single reporting unit, Americas Blood Center and Hospital. During the fourth quarter of
fiscal 2017
, we completed certain organizational changes which resulted in the disaggregation of Americas Blood Center and Hospital into two separate reporting units. The goodwill associated with the legacy Americas Blood Center and Hospital reporting unit was allocated to the North America Blood Center and North America Hospital reporting units based on their relative fair values. The North America Plasma reporting unit is a separate operating segment with dedicated segment management due to the size and scale of the Plasma business unit.
When allocating goodwill from business combinations to our reporting units, we assign goodwill to the reporting units that we expect to benefit from the respective business combination at the time of acquisition. In addition, for purposes of performing our goodwill impairment tests, assets and liabilities, including corporate assets, which relate to a reporting unit’s operations, and would be considered in determining its fair value, are allocated to the individual reporting units. We allocate assets and liabilities not directly related to a specific reporting unit, but from which the reporting unit benefits, based primarily on the respective revenue contribution of each reporting unit.
In fiscal 2017 and 2016, we used the income approach, specifically the discounted cash flow method, to derive the fair value of each of our reporting units in preparing our goodwill impairment assessments. This approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. We selected this method as being the most meaningful in preparing our goodwill assessments because the use of the income approach typically generates a more precise measurement of fair value than the market approach. In applying the income approach to our accounting for goodwill, we make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our discounted cash flow analysis is based on our most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in our discounted cash flow analysis and reflects our best estimates for stable, perpetual growth of our reporting units. We use estimates of market-participant risk adjusted weighted average cost of capital as a basis for determining the discount rates to apply to our reporting units’ future expected cash flows. We corroborated the valuations that arose from the discounted cash flow approach by performing both a market multiple valuation and by reconciling the aggregate fair value of our reporting units to our market capitalization at the time of the test.
During the fourth quarter of fiscal 2017, we performed our annual goodwill impairment test under the guidelines of ASU No. 2017-04. The results of the goodwill impairment test performed indicated that the estimated fair value of all of our reporting units exceeded their respective carrying values, with the exception of North America Blood Center, for which we recorded an impairment charge of
$57.0 million
, which represented the entire goodwill balance associated with this reporting unit. There were no other reporting units at risk of impairment as of the fiscal 2017 annual test date.
During fiscal 2016, we recorded a goodwill impairment charge of
$66.3 million
associated with the EMEA reporting unit. At the time the impairment assessment was performed, this represented the entire goodwill balance of this reporting unit. During the first quarter of fiscal 2017, management reorganized its operating segments such that certain components of the All Other operating segment became components of the EMEA operating segment. As a result, we transferred
$20.5 million
of goodwill to the EMEA operating segment, which represented the portion of the goodwill associated with these components. Refer to Note 5,
Goodwill and Intangible Assets,
for additional details regarding the goodwill impairments recorded.
We review intangible assets subject to amortization for impairment at least annually or more frequently if certain conditions arise to determine if any adverse conditions exist that would indicate that the carrying value of an asset or asset group may not be recoverable, or that a change in the remaining useful life is required. Conditions indicating that an impairment exists include but are not limited to a change in the competitive landscape, internal decisions to pursue new or different technology strategies,
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a loss of a significant customer or a significant change in the marketplace including prices paid for our products or the size of the market for our products.
When an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), we will write the carrying value down to the fair value in the period identified.
We generally calculate fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures and remaining useful lives of the asset (asset group).
If we determine the estimate of an intangible asset's remaining useful life should be reduced based on our expected use of the asset, the remaining carrying amount of the asset is amortized prospectively over the revised estimated useful life.
During fiscal
2017
, 2016 and
2015
, we determined that there were potential impairment indicators for certain intangible assets subject to amortization. As such, we performed the recoverability test described above for the relevant asset groups. In fiscal
2017
and 2016, we determined that the undiscounted cash flows did not support the carrying value of certain identified asset groups and made the decision to discontinue the use of and investment in these assets. Accordingly, we recorded impairment charges of
$4.8 million
and
$25.8 million
, respectively, in fiscal 2017 and 2016. The impairment charges in fiscal
2017
consisted of non-core and underperforming assets while the
$25.8 million
of impairment charges recorded in fiscal 2016 consisted of
$18.7 million
related to the write down of the SOLX intangible assets and
$7.1 million
related to intangible assets that were identified as part of the Company's global strategic review. In fiscal 2015, we determined that the expected undiscounted cash flows exceeded the carrying value of the asset groups identified. See Note 5,
Goodwill and Intangible Assets,
to our consolidated financial statements contained in Item 8 for additional information.
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed
ASC Topic 985-20,
Software
, specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers, at which point capitalized costs are amortized over their estimated useful life of
five
to
10 years
. Technological feasibility is established when we have a detailed design of the software and when research and development activities on the underlying device, if applicable, are completed. We capitalize costs associated with both software that we sell as a separate product and software that is embedded in a device.
We review the net realizable value of capitalized assets periodically to assess the recoverability of amounts capitalized. During
fiscal 2017
and fiscal 2016, we recorded
$4.0 million
and
$6.0 million
, respectively, of impairment charges related to the discontinuance of certain capitalized software projects. In the future, the net realizable value may be adversely affected by the loss of a significant customer or a significant change in the market place, which could result in an impairment being recorded.
Other Current Liabilities
Other current liabilities represent items payable or expected to settle within the next twelve months. The items included in the fiscal year end balances were:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
VAT liabilities
|
$
|
4,051
|
|
|
$
|
1,289
|
|
Forward contracts
|
966
|
|
|
4,210
|
|
Deferred revenue
|
26,485
|
|
|
27,053
|
|
Accrued taxes
|
4,407
|
|
|
3,876
|
|
All other
|
27,741
|
|
|
30,180
|
|
Total
|
$
|
63,650
|
|
|
$
|
66,608
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Long-Term Liabilities
Other long-term liabilities represent items that are not payable or expected to settle within the next twelve months. The items included in the fiscal year end balances were:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
Unfunded pension liability
|
14,060
|
|
|
18,067
|
|
Unrecognized tax benefit
|
1,627
|
|
|
2,283
|
|
All other
|
6,494
|
|
|
5,756
|
|
Total
|
$
|
22,181
|
|
|
$
|
26,106
|
|
Research and Development Expenses
All research and development costs are expensed as incurred.
Advertising Costs
All advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the consolidated statements of (loss) income. Advertising expenses were
$2.5 million
,
$3.9 million
, and
$4.5 million
in fiscal
2017
,
2016
and
2015
, respectively.
Shipping and Handling Costs
Shipping and handling costs are included in selling, general and administrative expenses. Freight is classified in cost of goods sold when the customer is charged for freight and in selling, general and administration when the customer is not explicitly charged for freight.
Income Taxes
The income tax provision is calculated for all jurisdictions in which we operate. The income tax provision process involves calculating current taxes due and assessing temporary differences arising from items which are taxable or deductible in different periods for tax and accounting purposes and are recorded as deferred tax assets and liabilities. Deferred tax assets are evaluated for realizability and a valuation allowance is maintained for the portion of our deferred tax assets that are not more-likely-than-not realizable.
All available evidence, both positive and negative, has been considered to determine whether, based on the weight of that evidence, a valuation allowance is needed against the deferred tax assets. Significant weight has been given to our consolidated worldwide cumulative loss position for the current and prior two years.
We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts. We record a liability for the portion of unrecognized tax benefits claimed which we have determined are not more-likely-than-not realizable. These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
We evaluate at the end of each reporting period whether some or all of the undistributed earnings of our foreign subsidiaries are permanently reinvested. We recognize deferred income tax liabilities to the extent that management asserts that undistributed earnings of its foreign subsidiaries are not permanently reinvested or will not be permanently reinvested in the future. Our position is based upon several factors including management’s evaluation of the Company and its subsidiaries’ financial requirements, the short term and long-term operational and fiscal objectives of the Company, and the tax consequences associated with the repatriation of earnings.
Derivative Instruments
We account for our derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). In accordance with ASC 815, we record all derivatives on the balance sheet at fair value. The accounting for the change in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative as a hedging instrument for accounting purposes, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In addition, ASC 815 provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are either (a) offset
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or (b) recognized in equity until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We do not use derivative financial instruments for trading or speculation purposes.
When the underlying hedged transaction affects earnings, the gains or losses on the forward foreign exchange rate contracts designated as hedges are recorded in net revenues, cost of goods sold, operating expenses and other expense, net in our consolidated statements of (loss) income, depending on the nature of the underlying hedged transactions. The cash flows related to the gains and losses are classified in the consolidated statements of cash flows as part of cash flows from operating activities. For those derivative instruments that are not designated as part of a hedging relationship we record the gains or losses in earnings currently. These gains and losses are intended to offset the gains and losses recorded on net monetary assets or liabilities that are denominated in foreign currencies. We recorded foreign currency losses of
$1.8 million
,
$1.4 million
, and
$1.1 million
in fiscal
2017
,
2016
and
2015
, respectively.
On a quarterly basis, we assess whether the cash flow hedges are highly effective in offsetting changes in the cash flow of the hedged item. We manage the credit risk of the counterparties by dealing only with institutions that we consider financially sound and consider the risk of non-performance to be remote.
Our derivative instruments do not subject our earnings or cash flows to material risk, as gains and losses on these derivatives are intended to offset losses and gains on the item being hedged. We do not enter into derivative transactions for speculative purposes and we do not have any non-derivative instruments that are designated as hedging instruments pursuant to ASC Topic 815.
Stock-Based Compensation
We expense the fair value of stock-based awards granted to employees, board members and others, net of estimated forfeitures. To calculate the grant-date fair value of our stock options we use the Black-Scholes option-pricing model and for performance share units and market stock units we use Monte Carlo simulation models.
Valuation of Acquisitions
We allocate the amounts we pay for each acquisition to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, including acquired identifiable intangible assets. We base the estimated fair value of identifiable intangible assets on detailed valuations that use historical information and market assumptions based upon the assumptions of a market participant. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. In fiscal
2017
and
2016
, one one plasma collection customer accounted for
14%
and
11%
of our net revenues, respectively. In fiscal
2015
no customer accounted for more than 10% of our net revenues.
Certain other markets and industries can expose us to concentrations of credit risk. For example, in our Plasma business unit, our sales are concentrated with several large customers. As a result, our accounts receivable extended to any one of these biopharmaceutical customers can be significant at any point in time. Also, a portion of our trade accounts receivable outside the United States include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries’ national economies. We have not incurred significant losses on government receivables. We continually evaluate all government 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.
Recent Accounting Pronouncements
Standards Implemented
In June 2014, the FASB issued ASU No. 2014-12,
Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
. ASU No. 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation—Stock Compensation, as it relates to such awards. We adopted ASU No. 2014-12 in our first quarter of fiscal
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017 using the prospective method. The adoption of ASU No. 2014-12 did not have a material effect on our financial position or results of operations.
In August 2015, the FASB issued ASU No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient
. Part I of ASU No. 2015-12 designates contract value as the only required measure for fully benefit-responsive investment contracts. Part II simplifies the investment disclosure requirements under Topics 820, 960, 962, and 965 for employee benefits plans and Part III provides a measurement date practical expedient for fiscal periods that do not coincide with a month-end date. ASU No. 2015-12 was effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The adoption of ASU No. 2015-12 did not have a material effect on our financial position or results of operations.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU No. 2014-15 defines management's responsibility to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This guidance is effective for all entities in the first annual period ending after December 15, 2016; however, early adoption is permitted. We adopted ASU No. 2014-15 in the fourth quarter of fiscal 2017. The adoption of ASU No. 2014-15 did not have a material impact our financial position or results of operations since there was no uncertainty about our ability to continue as a going concern.
In January 2017, the FASB issued ASC Update No. 2017-04,
Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.
The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The purpose of Update No. 2017-04 is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. We early adopted ASU No. 2017-04 in fiscal 2017 on a prospective basis.
3. PRODUCT WARRANTIES
We generally provide a warranty on parts and labor for
one year
after the sale and installation of each device. We also warrant our disposables products through their use or expiration. We estimate our potential warranty expense based on our historical warranty experience, and we periodically assess the adequacy of our warranty accrual and make adjustments as necessary.
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
Warranty accrual as of the beginning of the year
|
$
|
420
|
|
|
$
|
531
|
|
Warranty provision
|
400
|
|
|
948
|
|
Warranty spending
|
(644
|
)
|
|
(1,059
|
)
|
Warranty accrual as of the end of the year
|
$
|
176
|
|
|
$
|
420
|
|
4. INVENTORIES
Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead. Cost is determined with the first-in, first-out method.
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
Raw materials
|
$
|
52,052
|
|
|
$
|
62,062
|
|
Work-in-process
|
10,400
|
|
|
13,180
|
|
Finished goods
|
114,477
|
|
|
111,786
|
|
Total Inventories
|
$
|
176,929
|
|
|
$
|
187,028
|
|
Inventories include specific charges and reserves of
$11.0 million
and
$9.4 million
for fiscal
2017
and fiscal
2016
, respectively, primarily related to changes in demand for Blood Center products and the impact of the whole blood product recall in fiscal
2017
.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill Impairment Testing and Charges
Under ASC Topic 350, Intangibles - Goodwill and Other, goodwill and intangible assets determined to have indefinite useful lives are not amortized. Instead these assets are evaluated for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter for each of our reporting units. Our reporting units for purposes of assessing goodwill impairment are organized primarily based on operating segments and geography and include: (a) North America Plasma, (b) North America Blood Center, (c) North America Hospital, (d) EMEA, (e) Asia-Pacific and (f) Japan. In the prior period, North America Blood Center and North America Hospital were components of a single reporting unit, Americas Blood Center and Hospital. During the fourth quarter of
fiscal 2017
, we completed certain organizational changes which resulted in the disaggregation of Americas Blood Center and Hospital into two separate reporting units. The goodwill associated with the legacy Americas Blood Center and Hospital reporting unit was allocated to the North America Blood Center and North America Hospital reporting units based on their relative fair values. The North America Plasma reporting unit is a separate operating segment with dedicated segment management due the size and scale of the Plasma business unit.
In fiscal 2017, we early adopted ASU No. 2017-04,
Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.
Under this amendment, entities perform their goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. We utilized a discounted cash flow approach in order to value our reporting units for the test, which required that we forecast future cash flows of the reporting units and discount the cash flow stream based upon a weighted average cost of capital that was derived, in part, from comparable companies within similar industries. The discounted cash flow calculations also included a terminal value calculation that was based upon an expected long-term growth rate for the applicable reporting unit. We believe that our procedures for estimating discounted future cash flows, including the terminal valuation, were reasonable and consistent with market conditions at the time of estimation. We corroborated the valuations that arose from the discounted cash flow approach by performing both a market multiple valuation and by reconciling the aggregate fair value of our reporting units to our market capitalization at the time of the test.
The results of the goodwill impairment test performed in the fourth quarter of fiscal
2017
indicated that the estimated fair value of all of our reporting units exceeded their respective carrying values, with the exception of North America Blood Center. For North America Blood Center we recorded an impairment charge of
$57.0 million
, which represented the entire goodwill balance associated with this reporting unit. There were no other reporting units at risk of impairment as of the fiscal 2017 annual test date.
During fiscal 2016, we recorded a goodwill impairment charge of
$66.3 million
associated with the EMEA reporting unit. At the time the impairment assessment was performed, this represented the entire goodwill balance of this reporting unit. During the first quarter of fiscal 2017, management reorganized its operating segments such that certain components of the Americas Blood Center and Hospital operating segment became components of the EMEA operating segment. As a result, we transferred
$20.5 million
of goodwill to the EMEA operating segment, which represented the portion of the goodwill associated with these components.
The changes in the carrying amount of goodwill by operating segment for fiscal
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Japan
|
|
EMEA
|
|
North America Plasma
|
|
All Other
|
|
Total
|
Carrying amount as of March 28, 2015
|
$
|
24,899
|
|
|
$
|
72,695
|
|
|
$
|
26,415
|
|
|
$
|
210,301
|
|
|
$
|
334,310
|
|
Impairment charge
|
—
|
|
|
(66,305
|
)
|
|
—
|
|
|
—
|
|
|
(66,305
|
)
|
Transfer of goodwill between segments
|
—
|
|
|
(6,390
|
)
|
|
—
|
|
|
6,390
|
|
|
—
|
|
Currency translation
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
(149
|
)
|
|
(165
|
)
|
Carrying amount as of April 2, 2016
|
$
|
24,883
|
|
|
$
|
—
|
|
|
$
|
26,415
|
|
|
$
|
216,542
|
|
|
$
|
267,840
|
|
Impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,989
|
)
|
|
(56,989
|
)
|
Transfer of goodwill between segments
|
—
|
|
|
20,545
|
|
|
—
|
|
|
(20,545
|
)
|
|
—
|
|
Currency translation
|
(3
|
)
|
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
|
(10
|
)
|
Carrying amount as of April 1, 2017
|
$
|
24,880
|
|
|
$
|
20,543
|
|
|
$
|
26,415
|
|
|
$
|
139,003
|
|
|
$
|
210,841
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible Asset Impairment
During fiscal
2017
, we impaired
$4.8 million
of intangible assets as a result of our review of non-core and underperforming assets and our decision to discontinue the use of and investment in certain assets, of which
$4.0 million
was included within cost of goods sold and
$0.8 million
was included within impairment of assets on the consolidated statements of (loss) income. These impairments impacted our All Other reportable segment.
During fiscal 2016, we recorded intangible asset impairment charges of
$25.8 million
, of which
$6.6 million
was included within cost of goods sold, while the remaining
$19.2 million
was included within impairment of assets on the consolidated statements of (loss) income. Of these intangible impairments,
$6.6 million
related to EMEA and the remaining
$19.2 million
related to our All Other reportable segment. These impairment charges primarily related to the SOLX technology acquired from Hemerus Medical, LLC, which resulted in impairment charges of
$18.7 million
and included the reversal of the
$4.9 million
of contingent consideration associated with the acquisition. The remaining
$7.1 million
of impairment charges recorded in fiscal 2016 was due to changes in the strategic direction of the Company.
The gross carrying amount of intangible assets and the related accumulated amortization as of
April 1, 2017
and
April 2, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
(1)
|
|
Net
|
As of April 1, 2017
|
|
|
|
|
|
|
|
Amortizable:
|
|
|
|
|
|
Patents
|
$
|
9,183
|
|
|
$
|
8,043
|
|
|
$
|
1,140
|
|
Capitalized software
|
49,948
|
|
|
21,563
|
|
|
28,385
|
|
Other developed technology
|
117,712
|
|
|
72,594
|
|
|
45,118
|
|
Customer contracts and related relationships
|
194,876
|
|
|
108,073
|
|
|
86,803
|
|
Trade names
|
7,017
|
|
|
5,499
|
|
|
1,518
|
|
Total
|
$
|
378,736
|
|
|
$
|
215,772
|
|
|
$
|
162,964
|
|
Non-amortizable:
|
|
|
|
|
|
In-process software development
|
$
|
12,743
|
|
|
|
|
|
In-process patents
|
1,833
|
|
|
|
|
|
Total
|
$
|
14,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
(1)
|
|
Net
|
As of April 2, 2016
|
|
|
|
|
|
|
|
Amortizable:
|
|
|
|
|
|
Patents
|
$
|
8,545
|
|
|
$
|
7,542
|
|
|
$
|
1,003
|
|
Capitalized software
|
40,488
|
|
|
14,791
|
|
|
25,697
|
|
Other developed technology
|
126,142
|
|
|
73,475
|
|
|
52,667
|
|
Customer contracts and related relationships
|
196,085
|
|
|
89,804
|
|
|
106,281
|
|
Trade names
|
7,083
|
|
|
5,204
|
|
|
1,879
|
|
Total
|
$
|
378,343
|
|
|
$
|
190,816
|
|
|
$
|
187,527
|
|
Non-amortizable:
|
|
|
|
|
|
In-process software development
|
$
|
14,427
|
|
|
|
|
|
In-process patents
|
2,504
|
|
|
|
|
|
Total
|
$
|
16,931
|
|
|
|
|
|
(1)
Includes impairment of SOLX and other intangible assets, as discussed above.
|
Intangible assets include the value assigned to license rights and other developed technology, patents, customer contracts and relationships and trade names. The estimated useful lives for all of these intangible assets are
2
to
19
years. The changes to the net carrying value of our intangible assets from
April 2, 2016
to
April 1, 2017
reflect the impact of amortization expense and impairments of intangible assets, partially offset by the investment in capitalized software.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Aggregate amortization expense for amortized intangible assets for fiscal
2017
and
2016
was
$37.2 million
and
$59.3 million
, respectively, which included
$4.0 million
and
$25.4 million
, respectively, of amortization expense as a result of the intangible asset impairments discussed above. Fiscal
2015
amortization expense was
$33.5 million
. Future annual amortization expense on intangible assets is estimated to be as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
Fiscal 2018
|
|
$
|
31,495
|
|
Fiscal 2019
|
|
$
|
30,089
|
|
Fiscal 2020
|
|
$
|
28,091
|
|
Fiscal 2021
|
|
$
|
26,190
|
|
Fiscal 2022
|
|
$
|
25,485
|
|
6. DERIVATIVES AND FAIR VALUE MEASUREMENTS
We manufacture, market and sell our products globally. For the fiscal year ended
April 1, 2017
,
41.0%
of our sales were generated outside the U.S. in local currencies. We also incur certain manufacturing, marketing and selling costs in international markets in local currency.
Accordingly, our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. Dollar, our reporting currency. 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 impact on our financial results from changes in foreign exchange rates. We utilize foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, Australian Dollar, Canadian Dollar and the Mexican Peso. This does not eliminate the impact of the volatility of foreign exchange rates, 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.
Designated Foreign Currency Hedge Contracts
All of our designated foreign currency hedge contracts as of
April 1, 2017
and
April 2, 2016
were cash flow hedges under ASC Topic 815,
Derivatives and Hedging
. We record the effective portion of any change in the fair value of designated foreign currency hedge contracts in other comprehensive income (loss) until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, we would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had designated foreign currency hedge contracts outstanding in the contract amount of
$68.4 million
as of
April 1, 2017
and
$107.4 million
as of
April 2, 2016
.
During fiscal
2017
, we recognized net losses of
$4.6 million
in earnings on our cash flow hedges, compared to recognized net gains of
$8.8 million
and
$6.5 million
during
fiscal 2016
and
2015
, respectively. For the fiscal year ended
April 1, 2017
, a
$0.5 million
loss, net of tax, was recorded in accumulated other comprehensive loss to recognize the effective portion of the fair value of any designated foreign currency hedge contracts that are, or previously were, designated as foreign currency cash flow hedges, as compared to a loss of
$3.9 million
, net of tax, for the fiscal year ended
April 2, 2016
and a gain of
$12.2 million
, net of tax, for the
fiscal year ended March 28, 2015
. At
April 1, 2017
, losses of
$0.5 million
, net of tax, will be reclassified to earnings within the next twelve months. All currency cash flow hedges outstanding as of
April 1, 2017
mature within twelve months.
Non-Designated Foreign Currency Contracts
We manage our exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. We use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These foreign currency forward contracts are entered into for periods consistent with currency transaction exposures, generally one month. They are not designated as cash flow or fair value hedges under ASC Topic 815. These forward contracts are marked-to-market with changes in fair value recorded to earnings. We had non-designated foreign currency hedge contracts under ASC Topic 815 outstanding in the contract amount of
$55.4 million
as of
April 1, 2017
and
$48.8 million
as of
April 2, 2016
.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Rate Swaps
On
December 21, 2012
, we entered into
two
interest rate swap agreements (the "Swaps") on a total notional value of
$250.0 million
of debt. The Swaps are amortizing and mature on
August 1, 2017
. We designated the Swaps as cash flow hedges of variable interest rate risk associated with
$250.0 million
of indebtedness. As of
April 1, 2017
, the notional amount of these Swaps was
$50.0 million
. For fiscal 2017, 2016 and 2015, we recorded nominal activity in accumulated other comprehensive loss to recognize the effective portion of the fair value of the Swaps that qualify as cash flow hedges.
Fair Value of Derivative Instruments
The following table presents the effect of our derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC Topic 815 in our consolidated statements of loss and comprehensive loss for the
fiscal year ended April 1, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Loss
|
|
Amount of Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings
|
|
Location in Consolidated Statements of (Loss) Income and Comprehensive Loss
|
|
Amount of Gain Excluded from
Effectiveness
Testing (*)
|
|
Location in Consolidated Statements of (Loss) Income and Comprehensive Loss
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Designated foreign currency hedge contracts, net of tax
|
|
$
|
(524
|
)
|
|
$
|
(4,647
|
)
|
|
Net revenues, COGS, and SG&A
|
|
$
|
636
|
|
|
Other expense, net
|
Non-designated foreign currency hedge contracts
|
|
—
|
|
|
—
|
|
|
|
|
$
|
221
|
|
|
Other expense, net
|
Designated interest rate swaps, net of tax
|
|
$
|
160
|
|
|
|
|
|
Other expense, net
|
|
$
|
—
|
|
|
|
(*)
We exclude the difference between the spot rate and hedge forward rate from our effectiveness testing.
|
We did not have fair value hedges or net investment hedges outstanding as of
April 1, 2017
or
April 2, 2016
. As of
April 1, 2017
, we have not recognized any deferred tax assets or deferred tax liabilities for designated foreign currency hedges.
ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by ASC Topic 820,
Fair Value Measurements and Disclosures
, by considering the estimated amount we would receive or pay to sell or transfer these instruments at the reporting date and by taking into account current interest rates, currency exchange rates, current interest rate curves, interest rate volatilities, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, we use inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of
April 1, 2017
, we have classified our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC Topic 815, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present the fair value of our derivative instruments as they appear in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Location in
Balance Sheet
|
|
April 1, 2017
|
|
April 2, 2016
|
Derivative Assets:
|
|
|
|
|
|
|
|
Designated foreign currency hedge contracts
|
Other current assets
|
|
$
|
1,645
|
|
|
$
|
335
|
|
Non-designated foreign currency hedge contracts
|
Other current assets
|
|
218
|
|
|
92
|
|
Designated interest rate swaps
|
Other current assets
|
|
64
|
|
|
—
|
|
|
|
|
$
|
1,927
|
|
|
$
|
427
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
Designated foreign currency hedge contracts
|
Other current liabilities
|
|
$
|
894
|
|
|
$
|
3,910
|
|
Non-designated foreign currency hedge contracts
|
Other current liabilities
|
|
$
|
72
|
|
|
$
|
146
|
|
Designated interest rate swaps
|
Other current liabilities
|
|
—
|
|
|
154
|
|
|
|
|
$
|
966
|
|
|
$
|
4,210
|
|
Other Fair Value Measurements
ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC Topic 820 does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. In accordance with ASC Topic 820, for the fiscal years ended
April 1, 2017
and
April 2, 2016
, we applied the requirements under ASC Topic 820 to our non-financial assets and non-financial liabilities.
On a recurring basis, we measure certain financial assets and financial liabilities at fair value, including our money market funds, foreign currency hedge contracts, and contingent consideration. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We base fair value upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value.
ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
|
|
•
|
Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
|
|
|
•
|
Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
|
|
|
•
|
Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
|
Our money market funds carried at fair value are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measured on a Recurring Basis
Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 1, 2017
|
Level 1
|
|
Level 2
|
|
Total
|
(In thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
80,676
|
|
|
$
|
—
|
|
|
$
|
80,676
|
|
Designated foreign currency hedge contracts
|
—
|
|
|
1,645
|
|
|
1,645
|
|
Non-designated foreign currency hedge contracts
|
—
|
|
|
218
|
|
|
218
|
|
Designated interest rate swaps
|
—
|
|
|
64
|
|
|
64
|
|
|
$
|
80,676
|
|
|
$
|
1,927
|
|
|
$
|
82,603
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Designated foreign currency hedge contracts
|
$
|
—
|
|
|
$
|
894
|
|
|
$
|
894
|
|
Non-designated foreign currency hedge contracts
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
966
|
|
|
$
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 2, 2016
|
Level 1
|
|
Level 2
|
|
Total
|
(In thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
72,491
|
|
|
$
|
—
|
|
|
$
|
72,491
|
|
Designated foreign currency hedge contracts
|
—
|
|
|
335
|
|
|
335
|
|
Non-designated foreign currency hedge contracts
|
—
|
|
|
92
|
|
|
92
|
|
|
$
|
72,491
|
|
|
$
|
427
|
|
|
$
|
72,918
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Designated foreign currency hedge contracts
|
$
|
—
|
|
|
$
|
3,910
|
|
|
$
|
3,910
|
|
Non-designated foreign currency hedge contracts
|
—
|
|
|
146
|
|
|
146
|
|
Designated interest rate swaps
|
—
|
|
|
154
|
|
|
154
|
|
|
$
|
—
|
|
|
$
|
4,210
|
|
|
$
|
4,210
|
|
Other Fair Value Disclosures
The Term Loan (which is carried at amortized cost), accounts receivable and accounts payable approximate fair value. Details pertaining to the Term Loan can be found in Note 7,
Notes Payable and Long-Term Debt
.
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1, 2017
|
|
April 2, 2016
|
Term loan, net of financing fees
|
$
|
314,218
|
|
|
$
|
406,175
|
|
Bank loans and other borrowings
|
429
|
|
|
1,825
|
|
Less current portion
|
(61,022
|
)
|
|
(43,471
|
)
|
Long-term debt
|
$
|
253,625
|
|
|
$
|
364,529
|
|
On
August 1, 2012
, we entered into a credit agreement ("Credit Agreement") with certain lenders (together, “Lenders”) which provided for a
$475.0 million
term loan ("Term Loan") and a
$50.0 million
revolving loan (“Revolving Credit Facility” and together with the Term Loan, the “Credit Facilities”). On
June 30, 2014
, we modified our existing Credit Facilities by extending the maturity date to
July 1, 2019
, extending the principal repayments of the Term Loan, and modifying certain restrictive covenants to allow greater operational flexibility and enhanced near term liquidity. The amended Credit Agreement provides for a
$100.0 million
Revolving Credit Facility and establishes interest rates in the range of
LIBOR
plus
1.125%
to
1.500%
depending on certain conditions. At
April 1, 2017
,
$315.4 million
was outstanding under the Term Loan with an interest rate of
2.25%
and
no
amount was outstanding on the Revolving Credit Facility. No additional amounts were borrowed
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as a result of this modification. The fair value of debt approximates its current value of approximately
$315.4 million
as of
April 1, 2017
.
Under the terms of this Credit Agreement, the Company may borrow at a spread to an index, including the LIBOR index of 1-month, 3-months, 6-months, etc. From the date of the Credit Agreement, the Company has chosen to borrow against the 1-month USD-LIBOR-BBA rounded up, if necessary, to the nearest 1/16
th
of 1%. The terms of the Credit Agreement also allow the Company to borrow in multiple tranches. The Company currently borrows in
four
tranches.
Interest for the Credit Facilities was based on Adjusted
LIBOR
plus a range of
1.125%
to
1.500%
depending on the achievement of leverage ratios and customary credit terms which included financial and negative covenants. Revolving loans may be borrowed, repaid and re-borrowed to fund our working capital needs and for other general corporate purposes. The current margin of the Term Loan is
1.250%
over Adjusted
LIBOR
and our effective interest rate inclusive of prepaid financing costs and other fees was approximately
2.25%
as of
April 1, 2017
. The Term Loan or portions thereof may be prepaid at any time, or from time to time without penalty. Once repaid, such amount may not be re-borrowed.
Under the Credit Facilities, we are required to maintain a Consolidated Total Leverage Ratio not to exceed
3.0
:1.0 and a Consolidated Interest Coverage Ratio not to be less than
4.0
:1.0 during periods when the Credit Facilities are outstanding. In addition, we are required to satisfy these covenants, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) on the Revolving Credit Facility as of the time of such borrowings. The Consolidated Interest Coverage Ratio is calculated as the Consolidated EBITDA divided by Consolidated Interest Expense while the Consolidated Total Leverage Ratio is calculated as Consolidated Total Debt divided by Consolidated EBITDA. Consolidated EBITDA includes EBITDA adjusted by non-recurring and unusual transactions specifically as defined in the Credit Facilities.
The Credit Facilities also contain usual and customary non-financial affirmative and negative covenants which include certain restrictions with respect to subsequent indebtedness, liens, loans and investments (including acquisitions), financial reporting obligations, mergers, consolidations, dissolutions or liquidation, asset sales, affiliate transactions, change of our business, capital expenditures, share repurchase and other restricted payments. These covenants are subject to important exceptions and qualifications set forth in the Credit Agreement.
Any failure to comply with the financial and operating covenants of the Credit Facilities would prevent us from being able to borrow additional funds and would constitute a default, which could result in, among other things, the amounts outstanding including all accrued interest and unpaid fees, becoming immediately due and payable. In addition, the Credit Facilities include customary events of default, in certain cases subject to customary cure periods. As of
April 1, 2017
, we were in compliance with the covenants. The goodwill and intangible asset impairment charges discussed in Note 5,
Goodwill and Intangible Assets,
and the property, plant and equipment impairment charges discussed in Note 12,
Property Plant and Equipment
, are excluded from the definition of Consolidated EBITDA in the Credit Agreement.
Commitment fee
Pursuant to the Credit Agreement, we are required to pay the Lenders, on the last day of each calendar quarter, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee is subject to a pricing grid based on our Consolidated Total Leverage Ratio. The commitment fee ranges from
0.175%
to
0.300%
. The current commitment fee on the undrawn portion of the Revolving Credit Facility is
0.200%
.
Debt issuance costs and interest
Expenses associated with the issuance of the Term Loan were capitalized and are amortized to interest expense over the life of the term loan using the effective interest method. As of
April 1, 2017
, the
$315.4 million
term loan balance was netted down by the
$1.2 million
of remaining debt discount, resulting in a net note payable of
$314.2 million
.
Interest expense was
$7.9 million
and
$8.5 million
for
fiscal years ended April 1, 2017 and April 2, 2016
, respectively. Accrued interest associated with our outstanding debt is included as a component of accrued expenses and other current liabilities in the accompanying consolidated balance sheets. As of both
April 1, 2017
and
April 2, 2016
, we had an insignificant amount of accrued interest associated with our outstanding debt.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Maturity Profile
The maturity profile of all gross long-term debt, exclusive of debt discounts, as of
April 1, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
(in thousands)
|
|
Credit Facilities
|
|
Bank loans and other borrowings
|
|
Total
|
2018
|
|
$
|
61,654
|
|
|
$
|
156
|
|
|
$
|
61,810
|
|
2019
|
|
194,445
|
|
|
138
|
|
|
194,583
|
|
2020
|
|
59,282
|
|
|
100
|
|
|
59,382
|
|
2021
|
|
—
|
|
|
28
|
|
|
28
|
|
2022
|
|
—
|
|
|
2
|
|
|
2
|
|
Thereafter
|
|
—
|
|
|
5
|
|
|
5
|
|
|
|
$
|
315,381
|
|
|
$
|
429
|
|
|
$
|
315,810
|
|
8. INCOME TAXES
Domestic and foreign income before provision for income tax is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Domestic
|
$
|
(44,724
|
)
|
|
$
|
(18,526
|
)
|
|
$
|
(17,265
|
)
|
Foreign
|
17,248
|
|
|
(34,890
|
)
|
|
48,430
|
|
Total
|
$
|
(27,476
|
)
|
|
$
|
(53,416
|
)
|
|
$
|
31,165
|
|
The income tax provision from continuing operations contains the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(1,424
|
)
|
|
$
|
12
|
|
|
$
|
3,526
|
|
State
|
436
|
|
|
(660
|
)
|
|
898
|
|
Foreign
|
6,580
|
|
|
3,842
|
|
|
5,614
|
|
Total current
|
$
|
5,592
|
|
|
$
|
3,194
|
|
|
$
|
10,038
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
(8,711
|
)
|
|
3,532
|
|
|
1,227
|
|
State
|
(953
|
)
|
|
319
|
|
|
3,215
|
|
Foreign
|
2,864
|
|
|
(4,882
|
)
|
|
(212
|
)
|
Total deferred
|
$
|
(6,800
|
)
|
|
$
|
(1,031
|
)
|
|
$
|
4,230
|
|
Total
|
$
|
(1,208
|
)
|
|
$
|
2,163
|
|
|
$
|
14,268
|
|
Our subsidiary in Puerto Rico has been granted a
fifteen
year tax grant which expires in calendar 2027. Our qualification for the tax grant is dependent on the continuation of our manufacturing activities in Puerto Rico. We benefit from a reduced tax rate on our earnings in Puerto Rico under the tax grant.
Our subsidiary in Switzerland operates as a principal company for direct federal tax purposes. Operating under this structure affords our Swiss subsidiary a reduced tax rate in Switzerland. Our Swiss subsidiary also operates under a
10
year tax holiday set to expire in fiscal 2018.
Our subsidiary in Malaysia has been granted a full income tax exemption to manufacture whole blood and apheresis devices that could be in effect for up to
ten years
, provided certain conditions are satisfied. The income tax exemption was in effect beginning June 1, 2016.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax affected, significant temporary differences comprising the net deferred tax liability are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
Deferred tax assets:
|
|
|
|
Depreciation
|
$
|
934
|
|
|
$
|
1,749
|
|
Amortization of intangibles
|
1,150
|
|
|
4,417
|
|
Inventory
|
7,419
|
|
|
7,607
|
|
Hedging
|
—
|
|
|
382
|
|
Accruals, reserves and other deferred tax assets
|
13,907
|
|
|
12,590
|
|
Net operating loss carry-forward
|
11,742
|
|
|
13,484
|
|
Stock based compensation
|
6,014
|
|
|
9,622
|
|
Tax credit carry-forward, net
|
17,852
|
|
|
16,191
|
|
Gross deferred tax assets
|
59,018
|
|
|
66,042
|
|
Less valuation allowance
|
(25,872
|
)
|
|
(24,297
|
)
|
Total deferred tax assets (after valuation allowance)
|
33,146
|
|
|
41,745
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
(30,422
|
)
|
|
(28,972
|
)
|
Amortization of goodwill and intangibles
|
(7,732
|
)
|
|
(23,626
|
)
|
Unremitted earnings
|
(1,065
|
)
|
|
(700
|
)
|
Other deferred tax liabilities
|
(2,053
|
)
|
|
(2,769
|
)
|
Total deferred tax liabilities
|
(41,272
|
)
|
|
(56,067
|
)
|
Net deferred tax liabilities
|
$
|
(8,126
|
)
|
|
$
|
(14,322
|
)
|
The valuation allowance increased by
$1.6 million
during fiscal
2017
, primarily as the result of discrete valuation allowance establishments in several of our foreign subsidiaries, current year income and loss and tax credits generated in domestic and foreign jurisdictions in which we have concluded that our deferred tax assets are not more-likely-than-not realizable and the impact of foreign exchange. In determining the need for a valuation allowance, we have given consideration for our worldwide cumulative loss position, resulting from significant impairment and restructuring charges incurred in fiscal 2017 and 2016, when assessing the weight of the sources of taxable income that can be used to support the realizability of our deferred tax assets. We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry-back net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies and available sources of future taxable income. We have also considered the ability to implement certain strategies that would, if necessary, be implemented to accelerate taxable income and use expiring deferred tax assets. We believe we are able to support the deferred tax assets recognized as of the end of the year based on all of the available evidence. The worldwide net deferred tax liability as of
April 1, 2017
includes deferred tax liabilities related to amortizable tax basis in goodwill, which are indefinite lived and are not considered to be a source of taxable income.
As of
April 1, 2017
, we maintain a valuation allowance against our U.S. net deferred tax assets that are not more-likely-than-not realizable and a full valuation allowance against the net deferred tax assets of certain foreign subsidiaries.
As of
April 1, 2017
, we have U.S. federal net operating loss carry-forwards of approximately
$23.3 million
, U.S. state net operating loss carry-forwards of
$33 million
, federal tax credit carry-forwards of
$15.1 million
and state tax credit carry-forwards of
$4.2 million
that are available to reduce future taxable income. A portion of the federal net operating losses are subject to an annual limitation due to the ownership change limitations set forth under Internal Revenue Code Sections 382. Certain of the aforementioned amounts have not been recognized because they relate to excess stock based compensation. At
April 1, 2017
,
$4.0 million
of the federal net operating loss carry-forwards,
$5.2 million
of the state net operating loss carry-forwards, none of the federal tax credit carry-forwards and none of the state tax credit carry-forwards relate to excess stock based compensation tax deductions. We will record these off balance sheet net operating losses as a deferred tax asset, offset with an increase in the valuation allowance upon the adoption of ASU 2016-09. The federal and state net operating losses begin to expire in fiscal 2022 and 2019, respectively. The federal and state tax credits begin to expire in fiscal 2024 and 2025, respectively.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our net operating loss and tax credit carry-forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent as defined under Section 382 and 383 of the U.S. Internal Revenue Code of 1986, respectively, as well as similar state provisions. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forward to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
As of
April 1, 2017
, we have foreign net operating losses of approximately
$19.2 million
that are available to reduce future income having unlimited carry-forward.
As of
April 1, 2017
, we have provided
$1.1 million
of U.S. deferred taxes on approximately
$8.4 million
of unremitted earnings which are not indefinitely reinvested. Of this amount,
$0.1 million
affected the Company's effective tax rate in fiscal
2017
. We have not provided U.S. deferred income taxes or foreign withholding taxes on unremitted earnings of foreign subsidiaries of approximately
$233.0 million
as such amounts are considered to be indefinitely reinvested in the business. The accumulated earnings in the foreign subsidiaries are primarily utilized to fund working capital requirements as our subsidiaries continue to expand their operations, to service existing debt obligations and to fund future foreign acquisitions. We do not believe it is practicable to estimate the amount of income taxes payable on the earnings that are indefinitely reinvested in foreign operations.
The income tax provision from continuing operations differs from tax provision computed at the
35.0%
U.S. federal statutory income tax rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Tax at federal statutory rate
|
$
|
(9,616
|
)
|
|
35.0
|
%
|
|
$
|
(18,695
|
)
|
|
35.0
|
%
|
|
$
|
10,907
|
|
|
35.0
|
%
|
Difference between U.S. and foreign tax
|
137
|
|
|
(0.5
|
)%
|
|
10,645
|
|
|
(19.9
|
)%
|
|
(6,929
|
)
|
|
(22.2
|
)%
|
State income taxes net of federal benefit
|
(495
|
)
|
|
1.8
|
%
|
|
134
|
|
|
(0.3
|
)%
|
|
(818
|
)
|
|
(2.6
|
)%
|
Change in uncertain tax positions
|
862
|
|
|
(3.1
|
)%
|
|
(1,820
|
)
|
|
3.4
|
%
|
|
(1,762
|
)
|
|
(5.7
|
)%
|
Unremitted earnings
|
330
|
|
|
(1.2
|
)%
|
|
735
|
|
|
(1.4
|
)%
|
|
—
|
|
|
—
|
%
|
Deferred statutory rate changes
|
(383
|
)
|
|
1.4
|
%
|
|
(2,653
|
)
|
|
5.0
|
%
|
|
—
|
|
|
—
|
%
|
Non-deductible goodwill impairment
|
3,703
|
|
|
(13.5
|
)%
|
|
2,861
|
|
|
(5.4
|
)%
|
|
—
|
|
|
—
|
%
|
Non-deductible expenses
|
896
|
|
|
(3.2
|
)%
|
|
1,491
|
|
|
(2.8
|
)%
|
|
1,237
|
|
|
4.0
|
%
|
Research credits
|
(561
|
)
|
|
2.0
|
%
|
|
(672
|
)
|
|
1.3
|
%
|
|
(1,000
|
)
|
|
(3.2
|
)%
|
Tax amortization of goodwill
|
(10,564
|
)
|
|
38.4
|
%
|
|
4,185
|
|
|
(7.8
|
)%
|
|
3,826
|
|
|
12.3
|
%
|
Valuation allowance
|
13,505
|
|
|
(49.2
|
)%
|
|
5,194
|
|
|
(9.7
|
)%
|
|
8,524
|
|
|
27.4
|
%
|
Other, net
|
978
|
|
|
(3.5
|
)%
|
|
758
|
|
|
(1.4
|
)%
|
|
283
|
|
|
0.8
|
%
|
Income tax (benefit) provision
|
$
|
(1,208
|
)
|
|
4.4
|
%
|
|
$
|
2,163
|
|
|
(4.0
|
)%
|
|
$
|
14,268
|
|
|
45.8
|
%
|
We recorded an income tax benefit of
$1.2 million
, representing an effective tax rate of
4.4%
. The effective tax rate differs from the U.S. statutory rate of
35.0%
primarily as a result of the jurisdictional mix of earnings and losses generated in the U.S. and certain foreign subsidiaries that have a valuation allowance and therefore cannot be benefited. Other significant items impacting the rate include the tax provision related to the amortization of U.S. goodwill for tax purposes which gives rise to an indefinite lived deferred tax liability and the current year goodwill impairments. We have recorded a
$0.1 million
tax provision associated with the portion of unremitted foreign earnings that are not considered indefinitely reinvested.
Unrecognized Tax Benefits
Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of
April 1, 2017
, we had
$3.4 million
of unrecognized tax benefits, of which
$1.5 million
would impact the effective tax rate, if recognized. As of
April 2, 2016
, we had
$2.5 million
of unrecognized tax benefits, of which
$0.6 million
would impact the effective tax rate, if recognized. At
March 28, 2015
, we had
$7.1 million
of unrecognized tax benefits, all of which
$2.0 million
would impact the effective tax rate, if recognized.
During the fiscal year ended
April 1, 2017
our unrecognized tax benefits were increased by
$0.8 million
. An increase of
$1.3 million
in our uncertain tax positions was triggered by a reduction in workforce which impacts a previously negotiated tax holiday that requires us to maintain certain levels of headcount for a multi-year period. The establishment of this tax reserve is offset by the release of other reserves as a result of the closure of tax statutes of limitations.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits for the fiscal years ended
April 1, 2017
,
April 2, 2016
and
March 28, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
Beginning Balance
|
$
|
2,523
|
|
|
$
|
7,070
|
|
|
$
|
5,604
|
|
Additions for tax positions of prior years
|
1,279
|
|
|
340
|
|
|
3,234
|
|
Reductions of tax positions
|
(29
|
)
|
|
(4,158
|
)
|
|
—
|
|
Settlements with taxing authorities
|
—
|
|
|
—
|
|
|
(338
|
)
|
Closure of statute of limitations
|
(403
|
)
|
|
(729
|
)
|
|
(1,430
|
)
|
Ending Balance
|
$
|
3,370
|
|
|
$
|
2,523
|
|
|
$
|
7,070
|
|
As of
April 1, 2017
we anticipate that the liability for unrecognized tax benefits for uncertain tax positions could change by up to
$1.5 million
in the next twelve months, as a result of closure of various statutes of limitations and potential settlements with tax authorities.
Our historic practice has been and continues to be to recognize interest and penalties related to federal, state and foreign income tax matters in income tax expense. Approximately
$0.2 million
and
$0.4 million
of gross interest and penalties were accrued at
April 1, 2017
and
April 2, 2016
, respectively, and is not included in the amounts above. There was a benefit included in tax expense associated with accrued interest and penalties of
$0.2 million
,
$0.3 million
and
$0.3 million
for the periods ended
April 1, 2017
,
April 2, 2016
and
March 28, 2015
, respectively.
We conduct business globally and, as a result, file consolidated and separate federal, state and foreign income tax returns in multiple jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. With a few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations for years before fiscal 2014 and foreign income tax examinations for years before fiscal 2012. To the extent that we have tax attribute carry-forwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state, or foreign tax authorities to the extent utilized in a future period.
9. COMMITMENTS AND CONTINGENCIES
We lease facilities and certain equipment under operating leases expiring at various dates through fiscal 2028. Facility leases require us to pay certain insurance expenses, maintenance costs and real estate taxes.
Approximate future basic rental commitments under operating leases as of
April 1, 2017
are as follows:
|
|
|
|
|
Fiscal Year
|
|
|
(In thousands)
|
|
2018
|
$
|
4,298
|
|
2019
|
2,966
|
|
2020
|
1,906
|
|
2021
|
1,722
|
|
2022
|
1,623
|
|
Thereafter
|
7,031
|
|
|
$
|
19,546
|
|
Rent expense in fiscal
2017
,
2016
, and
2015
was
$6.2 million
,
$6.8 million
and
$6.3 million
, respectively. Some of the Company's operating leases include renewal provisions, escalation clauses and options to purchase the facilities that we lease.
We are presently engaged in various legal actions, and although our ultimate liability cannot be determined at the present time, we believe, based on consultation with counsel, that any such liability will not materially affect our consolidated financial position or our results of operations.
Italian Employment Litigation
Our Italian manufacturing subsidiary is party to several actions initiated by former employees of our facility in Ascoli-Piceno, Italy. We ceased operations at the facility in fiscal 2014 and sold the property in fiscal 2017. These include actions claiming (i)
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
working conditions and minimum salaries should have been established by either a different classification under their national collective bargaining agreement or a different agreement altogether, (ii) certain solidarity agreements, which are arrangements between the Company, employees and the government to continue full pay and benefits for employees who would otherwise be terminated in times of low demand, are void, and (iii) rights to payment of the extra time used for changing into and out of their working clothes at the beginning and end of each shift.
In addition, a union represented in the Ascoli plant filed an action alleging that the Company discriminated against it in favor of three other represented unions by (i) interfering with an employee referendum, (ii) interfering with an employee petition to recall union representatives from office, and (iii) excluding the union from certain meetings.
Finally, we have been added as defendants on claims filed against Pall Corporation prior to our acquisition of the plant in August 2012. These claims relate to agreements to "freeze" benefit allowances for a certain period in exchange for Pall's commitments on hiring and plant investment.
As of
April 1, 2017
, the total amount of damages claimed by the plaintiffs in these matters is approximately
$4.4 million
. At this point in the proceedings, we believe the losses are unlikely and therefore
no
amounts have been accrued. In the future, we may receive adverse rulings from the courts which could change our judgment on these cases.
SOLX Arbitration
In July 2016, H2 Equity, LLC, formerly known as Hemerus Corporation, filed an arbitration claim for
$17 million
in milestone and royalty payments allegedly owed as part of our acquisition of the filter and storage solution business from Hemerus Medical, LLC ("Hemerus") in fiscal 2014. The acquired storage solution is referred to as SOLX.
At the closing in April 2013, Haemonetics paid Hemerus a total of
$24 million
and agreed to a
$3 million
milestone payment due when the U.S. Food and Drug Administration ("FDA") approved a new indication for SOLX (the “24-Hour Approval”) using a filter acquired from Hemerus. We also agreed to make future royalty payments up to a cumulative maximum of
$14 million
based on the sale of products incorporating SOLX over a
ten
year period.
Due to performance issues with the Hemerus filter, Haemonetics filed for, and received, the 24-Hour Approval using a Haemonetics filter. Accordingly, Haemonetics did not pay Hemerus the
$3 million
milestone payment because the 24-Hour Approval was obtained using a Haemonetics filter, not a Hemerus filter. In addition, we have not paid any royalties to date as we have not made any sales of products incorporating SOLX.
H2 Equity claims, in part, that we owe them
$3 million
for the receipt of the 24-Hour Approval despite the use of a Haemonetics filter to obtain the approval and that we have failed to make commercially reasonable efforts to market and sell products incorporating SOLX. We believe that we have meritorious defenses to these claims.
It is not possible to accurately evaluate the likelihood or amount of any potential losses related to this claim and therefore
no
amounts have been accrued.
Product Recall
In June 2016, we issued a voluntary recall of certain whole blood collection kits sold to our Blood Center customers in the U.S. The recall resulted from some collection sets' filters failing to adequately remove leukocytes from collected blood. As a result of the recall, our blood center customers may have conducted further tests to confirm the blood was adequately leukoreduced, sold the blood labeled as non-leukoreduced at a lower price or discarded the blood collected using the defective sets. As a result of the recall, we have recorded total charges of
$7.1 million
during
fiscal 2017
, which consists of
$3.7 million
of charges associated with customer returns and inventory reserves and
$3.4 million
of charges associated with customer claims, as discussed below. We may record incremental charges in future periods.
We determined that the affected sets were distributed between April and June 2016. Credits have been issued to customers who returned affected sets purchased during this period. During
fiscal 2017
, we recorded charges of
$3.7 million
, which consisted of
$2.5 million
of sales returns,
$1.1 million
of net inventory reserves for the affected collection sets on-hand that had not yet been shipped to customers and
$0.1 million
of freight expenses.
The
$3.4 million
of charges associated with customer claims are based on claims seeking reimbursement for
$14.2 million
in losses sustained as a result of the recall.
W
e believe it is probable that we will incur expenses as a result of these claims and that our range of loss is
$3.4 million
to
$14.2 million
, however, we do not have sufficient information to develop a best estimate within this range. Accordingly, we have recorded a liability of
$3.4 million
, which represents the low end of the range. While the customers making these claims purchased substantially all the affected units, incremental charges may be recorded in future periods as additional customer returns and claims data becomes available. We have an enforceable insurance policy in
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
place which we believe provides coverage for a portion of the claims received to date. Accordingly, as of April 1, 2017, we had an insurance receivable of
$2.9 million
. We will assess the potential for additional insurance recoveries as we receive more information about customer claims in future reporting periods.
10. CAPITAL STOCK
Stock Plans
The 2005 Long-Term Incentive Compensation Plan (the “2005 Incentive Compensation Plan”) permits the award of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, deferred stock/restricted stock units, other stock units and performance shares to the Company’s key employees, officers and directors. The 2005 Incentive Compensation Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”) consisting of
three
independent members of our Board of Directors.
The maximum number of shares available for award under the 2005 Incentive Compensation Plan is
19,824,920
. The maximum number of shares that may be issued pursuant to incentive stock options may not exceed
500,000
. Any shares that are subject to the award of stock options shall be counted against this limit as
one
share for every one share issued. Any shares that are subject to awards other than stock options shall be counted against this limit as
3.02
shares for every one share granted. The total shares available for future grant as of
April 1, 2017
were
5,045,728
.
Stock-Based Compensation
Compensation cost related to stock-based transactions is recognized in the consolidated financial statements based on fair
value. The total amount of stock-based compensation expense, which is recorded on a straight line basis, was as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Selling, general and administrative expenses
|
$6,894
|
|
$5,183
|
|
$11,251
|
Research and development
|
1,549
|
|
|
1,060
|
|
|
1,706
|
|
Cost of goods sold
|
707
|
|
|
706
|
|
|
1,138
|
|
|
$9,150
|
|
$6,949
|
|
$14,095
|
We did
no
t recognize an income tax benefit associated with our stock-based compensation arrangements for the fiscal years ended
April 1, 2017
and
April 2, 2016
. We recognized an income tax benefit associated with our stock-based compensation arrangements of
$4.5 million
for the fiscal year ended
March 28, 2015
. There was
no
excess cash tax benefit classified as a financing cash inflow in fiscal 2017 and 2016. The excess cash tax benefit classified as a financing cash inflow in fiscal 2015 was
$1.6 million
.
Stock Options
Options are granted to purchase ordinary shares at prices as determined by the Committee, but in no event shall such exercise price be less than the fair market value of the common stock at the time of the grant. Options generally vest in equal installments over a
four
year period for employees and
one year
from grant for non-employee directors. Options expire not more than
7 years
from the date of the grant. The grant-date fair value of options, adjusted for estimated forfeitures, is recognized as expense on a straight line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of stock option activity for the fiscal year ended
April 1, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
(shares)
|
|
Weighted
Average
Exercise Price
per Share
|
|
Weighted
Average
Remaining
Life (years)
|
|
Aggregate
Intrinsic
Value
($000’s)
|
Outstanding at April 2, 2016
|
2,951,183
|
|
|
$
|
33.59
|
|
|
3.34
|
|
$
|
9,684
|
|
Granted
|
501,127
|
|
|
32.47
|
|
|
|
|
|
|
Exercised
|
(1,083,824
|
)
|
|
28.79
|
|
|
|
|
|
|
Forfeited/Canceled
|
(329,691
|
)
|
|
35.95
|
|
|
|
|
|
|
Outstanding at April 1, 2017
|
2,038,795
|
|
|
$
|
35.51
|
|
|
3.88
|
|
$
|
10,963
|
|
|
|
|
|
|
|
|
|
Exercisable at April 1, 2017
|
1,284,592
|
|
|
$
|
37.04
|
|
|
2.66
|
|
$
|
5,129
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 1, 2017
|
1,906,548
|
|
|
$
|
35.69
|
|
|
4.24
|
|
$
|
9,937
|
|
The total intrinsic value of options exercised was
$8.3 million
,
$4.5 million
, and
$5.6 million
during fiscal
2017
,
2016
, and
2015
, respectively.
As of
April 1, 2017
, there was
$4.9 million
of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of
3.09
years.
The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average of the high and low stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock over the expected term of the option. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. The expected life of the option was estimated with reference to historical exercise patterns, the contractual term of the option and the vesting period.
The assumptions utilized for option grants during the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Volatility
|
24.0
|
%
|
|
22.8
|
%
|
|
22.5
|
%
|
Expected life (years)
|
4.9
|
|
|
4.9
|
|
|
4.9
|
|
Risk-free interest rate
|
1.2
|
%
|
|
1.4
|
%
|
|
1.5
|
%
|
Dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Fair value per option
|
$
|
7.61
|
|
|
$
|
7.40
|
|
|
$
|
7.91
|
|
Restricted Stock Units
Restricted Stock Units ("RSUs") generally vest in equal installments over a
four
year period for employees and
one year
from grant for non-employee directors. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair market value of RSUs is determined based on the market value of the Company’s shares on the date of grant.
A summary of RSU activity for the fiscal year ended
April 1, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at April 2, 2016
|
380,871
|
|
|
$
|
34.33
|
|
Granted
|
212,105
|
|
|
32.61
|
|
Vested
|
(150,113
|
)
|
|
34.98
|
|
Forfeited
|
(101,222
|
)
|
|
33.70
|
|
Unvested at April 1, 2017
|
341,641
|
|
|
$
|
33.16
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average grant-date fair value of RSUs granted and total fair value of RSUs vested were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
2017
|
|
2016
|
|
2015
|
Grant-date fair value per RSU
|
$
|
32.61
|
|
|
$
|
33.19
|
|
|
$
|
34.89
|
|
Fair value of RSUs vested
|
$
|
34.98
|
|
|
$
|
36.07
|
|
|
$
|
36.62
|
|
As of
April 1, 2017
, there was
$8.4 million
of total unrecognized compensation cost related to non-vested restricted stock units. This cost is expected to be recognized over a weighted average period of
2.87
years.
Performance Stock Units
The grant date fair value of Performance Stock Units ("PSUs"), adjusted for estimated forfeitures, is recognized as expense on a straight line basis from the grant date through the end of the performance period. The value of these PSUs is based on relative shareholder return which equals total shareholder return for the Company as compared to total shareholder return of the PSU comparison group, measured over a
three
year performance period. Depending on the Company's relative performance during the performance period, a recipient of the award is entitled to receive a number of ordinary shares equal to a percentage, ranging from
0%
to
200%
, of the award granted. As a result, we may issue up to
569,250
shares related to these awards. If the Company’s total shareholder return for the performance period is negative, then any share payout will be capped at
100%
of the target award, regardless of the Company's performance relative to the Company's comparison group.
PSUs granted in fiscal 2016 and 2015 have a comparison group consisting of the Standard and Poor's ("S&P") Health Care Equipment Index, while PSUs granted in fiscal 2017 have a comparison group consisting of the S&P Small Cap 600 and the S&P Mid Cap 400 indices.
In addition to these relative shareholder return PSUs, the Company's Chief Executive Officer, upon hire, received a PSU grant with performance conditions based on the financial results of the Company and other internal metrics.
A summary of PSU activity for the fiscal year ended
April 1, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at April 2, 2016
|
102,336
|
|
|
$
|
31.38
|
|
Granted
|
228,884
|
|
|
34.07
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(46,595
|
)
|
|
30.68
|
|
Unvested at April 1, 2017
|
284,625
|
|
|
$
|
33.66
|
|
The Company uses the Monte Carlo model to estimate the probability of satisfying the performance criteria and the resulting fair value of PSU awards with market conditions. The assumptions used in the Monte Carlo model for PSUs granted during each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Expected stock price volatility
|
26.39
|
%
|
|
22.27
|
%
|
|
20.08
|
%
|
Peer group stock price volatility
|
33.86
|
%
|
|
31.95
|
%
|
|
31.52
|
%
|
Correlation of returns
|
51.17
|
%
|
|
26.27
|
%
|
|
30.52
|
%
|
The weighted-average grant-date fair value of PSUs granted was
$34.07
,
$29.20
and
$35.09
in fiscal
2017
,
2016
, and
2015
respectively.
As of
April 1, 2017
, there was
$7.8 million
of total unrecognized compensation cost related to non-vested performance share units. This cost is expected to be recognized over a weighted average period of
2.29
years.
Market Stock Units
The Company used the Monte Carlo model to determine the fair value of each market stock unit granted in fiscal 2016 and 2015. The grant date fair value of Market Stock Units ("MSUs"), adjusted for estimated forfeitures, was recognized as expense on a straight line basis from the grant date through the end of the performance period. The value of these MSUs was based the performance of Haemonetics’ stock through March 31, 2017. Because Haemonetics' stock was below the minimum threshold
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
price of
$50
per share during the relevant measurement period, the holders received
no
market share units upon vesting. There were
no
MSUs granted in fiscal 2017.
A summary of MSU activity for the fiscal year ended
April 1, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at April 2, 2016
|
152,968
|
|
|
$
|
24.84
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(116,550
|
)
|
|
—
|
|
Forfeited
|
(36,418
|
)
|
|
13.42
|
|
Unvested at April 1, 2017
|
—
|
|
|
$
|
—
|
|
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the “Purchase Plan”) under which a maximum of
3,200,000
shares (subject to adjustment for stock splits and similar changes) of common stock may be purchased by eligible employees. Substantially all of our full-time employees are eligible to participate in the Purchase Plan.
The Purchase Plan provides for
two
“purchase periods” within each of our fiscal years, the first commencing on November 1 of each year and continuing through April 30 of the next calendar year, and the second commencing on May 1 of each year and continuing through October 31 of such year. Shares are purchased through an accumulation of payroll deductions (of not less than
2%
or more than
15%
of compensation, as defined) for the number of whole shares determined by dividing the balance in the employee’s account on the last day of the purchase period by the purchase price per share for the stock determined under the Purchase Plan. The purchase price for shares is the lower of
85%
of the fair market value of the common stock at the beginning of the purchase period, or
85%
of such value at the end of the purchase period.
The fair values of shares purchased under the Employee Stock Purchase Plan are estimated using the Black-Scholes single option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Volatility
|
31.3
|
%
|
|
21.1
|
%
|
|
23.7
|
%
|
Expected life (months)
|
6
|
|
|
6
|
|
|
6
|
|
Risk-free interest rate
|
—
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
Dividend Yield
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
The weighted average grant date fair value of the
six
-month option inherent in the Purchase Plan was approximately
$7.79
,
$7.80
, and
$7.09
during fiscal
2017
,
2016
, and
2015
, respectively.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. EARNINGS PER SHARE (“EPS”)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
2017
|
|
2016
|
|
2015
|
Basic EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(26,268
|
)
|
|
$
|
(55,579
|
)
|
|
$
|
16,897
|
|
Weighted average shares
|
51,524
|
|
|
50,910
|
|
|
51,533
|
|
Basic (loss) income per share
|
$
|
(0.51
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
0.33
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(26,268
|
)
|
|
$
|
(55,579
|
)
|
|
$
|
16,897
|
|
Basic weighted average shares
|
51,524
|
|
|
50,910
|
|
|
51,533
|
|
Net effect of common stock equivalents
|
—
|
|
|
—
|
|
|
556
|
|
Diluted weighted average shares
|
51,524
|
|
|
50,910
|
|
|
52,089
|
|
Diluted (loss) income per share
|
$
|
(0.51
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
0.32
|
|
Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. For fiscal 2017 and 2016, we recognized a net loss; therefore we excluded the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an anti-dilutive effect. Fiscal 2015 weighted average shares outstanding, assuming dilution, excludes the impact of
1.6 million
stock options and restricted share units because either the effect would have been anti-dilutive or the performance criteria related to the units had not yet been met.
12. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
April 1, 2017
|
|
April 2, 2016
|
Land
|
|
$
|
7,389
|
|
|
$
|
7,905
|
|
Building and building improvements
|
|
109,933
|
|
|
117,132
|
|
Plant equipment and machinery
|
|
253,693
|
|
|
238,549
|
|
Office equipment and information technology
|
|
129,753
|
|
|
127,019
|
|
Haemonetics equipment
|
|
306,714
|
|
|
295,853
|
|
Total
|
|
807,482
|
|
|
786,458
|
|
Less: accumulated depreciation and amortization
|
|
(483,620
|
)
|
|
(448,824
|
)
|
Property, plant and equipment, net
|
|
$
|
323,862
|
|
|
$
|
337,634
|
|
During fiscal 2017, we impaired
$13.3 million
of property, plant and equipment as a result of our review of non-core and underperforming assets and our decision to discontinue the use of and investment in certain assets, of which
$0.8 million
was included within impairment of assets on the consolidated statements of (loss) income and the remaining
$12.5 million
was included within cost of goods sold. These impairments impacted Americas Blood Center and Hospital, North America Plasma and EMEA segments by
$10.6 million
,
$1.7 million
and
$1.0 million
, respectively.
During fiscal 2016, we impaired
$9.1 million
of property, plant and equipment as a result of our global strategic review, of which
$6.9 million
was included within impairment of assets on the consolidated statements of (loss) income and the remaining
$2.2 million
was included within cost of goods sold. These impairments impacted our Americas Blood Center and Hospital and EMEA segments by
$3.0 million
and
$6.1 million
, respectively.
Depreciation expense was
$66.5 million
and
$56.8 million
in fiscal
2017
and fiscal
2016
, respectively, which includes
$10.0 million
and
$0.8 million
, respectively, of additional depreciation expense due to asset impairments. Depreciation expense was
$52.6 million
for fiscal
2015
.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. RETIREMENT PLANS
Defined Contribution Plans
We have a Savings Plus Plan (the "Plan") that is a 401(k) plan that allows our U.S. employees to accumulate savings on a pre-tax basis. In addition, matching contributions are made to the Plan based upon pre-established rates. Our matching contributions amounted to approximately
$5.1 million
,
$5.4 million
, and
$5.8 million
in fiscal
2017
,
2016
, and
2015
, respectively. Upon Board approval, additional discretionary contributions can also be made. No discretionary contributions were made for the Plan in fiscal
2017
,
2016
, or
2015
.
Some of our subsidiaries also have defined contribution plans, to which both the employee and the employer make contributions. The employer contributions to these plans totaled
$0.8 million
in both fiscal
2017
and
2016
and
$1.0 million
in fiscal
2015
.
Defined Benefit Plans
ASC Topic 715,
Compensation — Retirement Benefits
, requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit post retirement plan in the year in which the changes occur. Accordingly, the Company is required to report changes in its funded status in comprehensive loss on its consolidated statement of stockholders’ equity and consolidated statement of comprehensive income (loss).
Benefits under these plans are generally based on either career average or final average salaries and creditable years of service as defined in the plans. The annual cost for these plans is determined using the projected unit credit actuarial cost method that includes actuarial assumptions and estimates which are subject to change.
Some of the our foreign subsidiaries have defined benefit pension plans covering substantially all full time employees at those subsidiaries. Net periodic benefit costs for the plans in the aggregate include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Service cost
|
$
|
3,404
|
|
|
$
|
3,560
|
|
|
$
|
2,979
|
|
Interest cost on benefit obligation
|
287
|
|
|
371
|
|
|
686
|
|
Expected return on plan assets
|
(308
|
)
|
|
(330
|
)
|
|
(449
|
)
|
Actuarial loss
|
532
|
|
|
598
|
|
|
107
|
|
Amortization of unrecognized prior service cost
|
(119
|
)
|
|
(38
|
)
|
|
(29
|
)
|
Amortization of unrecognized transition obligation
|
37
|
|
|
42
|
|
|
45
|
|
Settlement loss recognized
|
289
|
|
|
—
|
|
|
—
|
|
Totals
|
$
|
4,122
|
|
|
$
|
4,203
|
|
|
$
|
3,339
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity under those defined benefit plans are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
Change in Benefit Obligation:
|
|
|
|
|
|
Benefit Obligation, beginning of year
|
$
|
(37,919
|
)
|
|
$
|
(40,567
|
)
|
Service cost
|
(3,404
|
)
|
|
(3,560
|
)
|
Interest cost
|
(287
|
)
|
|
(371
|
)
|
Benefits paid
|
1,291
|
|
|
3,780
|
|
Actuarial gain
|
4,615
|
|
|
424
|
|
Employee and plan participants contribution
|
(2,463
|
)
|
|
(1,839
|
)
|
Plan amendments
|
—
|
|
|
833
|
|
Plan settlements
|
6,960
|
|
|
—
|
|
Foreign currency changes
|
(138
|
)
|
|
3,381
|
|
Benefit obligation, end of year
|
$
|
(31,345
|
)
|
|
$
|
(37,919
|
)
|
Change in Plan Assets:
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
$
|
19,852
|
|
|
$
|
23,165
|
|
Company contributions
|
1,788
|
|
|
1,987
|
|
Benefits paid
|
(1,192
|
)
|
|
(3,779
|
)
|
Gain on plan assets
|
414
|
|
|
446
|
|
Employee and plan participants contributions
|
2,424
|
|
|
1,861
|
|
Plan settlements
|
(6,850
|
)
|
|
—
|
|
Foreign currency changes
|
849
|
|
|
(3,828
|
)
|
Fair value of Plan Assets, end of year
|
$
|
17,285
|
|
|
$
|
19,852
|
|
Funded Status
*
|
$
|
(14,060
|
)
|
|
$
|
(18,067
|
)
|
Unrecognized net actuarial loss
|
4,319
|
|
|
10,168
|
|
Unrecognized initial obligation
|
—
|
|
|
37
|
|
Unrecognized prior service cost
|
(1,019
|
)
|
|
(1,186
|
)
|
Net amount recognized
|
$
|
(10,760
|
)
|
|
$
|
(9,048
|
)
|
*
The unfunded status is all non-current
|
One of the benefit plans is funded by benefit payments made by the Company through the purchase of reinsurance contracts which do not qualify as plan assets under ASC Topic 715. Accordingly that plan has no assets included in the information presented above. The total liability for this plan was
$8.8 million
and
$8.7 million
as of
April 1, 2017
and
April 2, 2016
, respectively, and the total asset value associated with the reinsurance contracts was
$5.4 million
as of both
April 1, 2017
and
April 2, 2016
.
The accumulated benefit obligation for all plans was
$28.7 million
and
$36.4 million
for the fiscal year ended
April 1, 2017
and
April 2, 2016
, respectively. There were no plans where the plan assets were greater than the accumulated benefit obligation as of
April 1, 2017
and
April 2, 2016
.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the change recorded in our accumulated other comprehensive loss related to our defined benefit plans, net of tax, are as follows (in thousands):
|
|
|
|
|
Balance, March 29, 2014
|
$
|
(4,592
|
)
|
Obligation at transition
|
(19
|
)
|
Actuarial loss
|
(6,198
|
)
|
Prior service cost
|
1,886
|
|
Balance as of March 28, 2015
|
$
|
(8,923
|
)
|
Obligation at transition
|
33
|
|
Actuarial loss
|
681
|
|
Prior service cost
|
717
|
|
Balance as of April 2, 2016
|
$
|
(7,492
|
)
|
Obligation at transition
|
32
|
|
Actuarial loss
|
5,126
|
|
Prior service cost
|
63
|
|
Balance as of April 1, 2017
|
$
|
(2,271
|
)
|
We expect to amortize
$0.2 million
from accumulated other comprehensive loss to net periodic benefit cost during fiscal
2018
.
The weighted average rates used to determine the net periodic benefit costs and projected benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
0.76
|
%
|
|
0.72
|
%
|
|
0.93
|
%
|
Rate of increased salary levels
|
1.43
|
%
|
|
1.58
|
%
|
|
1.65
|
%
|
Expected long-term rate of return on assets
|
1.10
|
%
|
|
1.20
|
%
|
|
1.68
|
%
|
Assumptions for expected long-term rate of return on plan assets are based upon actual historical returns, future expectations of returns for each asset class and the effect of periodic target asset allocation rebalancing. The results are adjusted for the payment of reasonable expenses of the plan from plan assets.
We have no other material obligation for post-retirement or post-employment benefits.
Our investment policy for pension plans is to balance risk and return through a diversified portfolio to reduce interest rate and market risk. Maturities are managed so that sufficient liquidity exists to meet immediate and future benefit payment requirements.
ASC Topic 820,
Fair Value Measurements and Disclosures
, provides guidance for reporting and measuring the plan assets of our defined benefit pension plan at fair value as of
April 1, 2017
. Using the same three-level valuation hierarchy for disclosure of fair value measurements as described in Note 6,
Derivatives and Fair Value Measurements
, all of the assets of the Company’s plan are classified within Level 2 of the fair value hierarchy because the plan assets are primarily insurance contracts.
Expected benefit payments for both plans are estimated using the same assumptions used in determining the company’s benefit obligation at
April 1, 2017
. Benefit payments will depend on future employment and compensation levels, average years employed and average life spans, among other factors, and changes in any of these factors could significantly affect these estimated future benefit payments.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated future benefit payments are as follows:
|
|
|
|
|
(in thousands)
|
|
|
Fiscal 2018
|
$
|
1,396
|
|
Fiscal 2019
|
1,451
|
|
Fiscal 2020
|
1,394
|
|
Fiscal 2021
|
1,411
|
|
Fiscal 2022
|
1,617
|
|
Fiscal 2023-2027
|
6,869
|
|
|
$
|
14,138
|
|
The Company's contributions for
fiscal 2018
are expected to be consistent with the current year.
14. SEGMENT AND ENTERPRISE-WIDE INFORMATION
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Our operating segments are based primarily on geography. North America Plasma is a separate operating segment with dedicated segment management due the size and scale of the Plasma business unit. We aggregate components within an operating segment that have similar economic characteristics.
The Company’s reportable segments are as follows:
The Company has aggregated the Americas Blood Center and Hospital and Asia - Pacific operating segments into the All Other reportable segment based upon their similar operational and economic characteristics, including similarity of operating margin.
During the first quarter of fiscal 2017, management reorganized its operating segments such that certain components of All Other are now reported as components of EMEA. Accordingly, the prior year numbers have been updated to reflect this reclassification as well as other changes within the cost reporting structure that occurred in the first quarter of fiscal 2017. These changes did not have an impact on our ability to aggregate Americas Blood Center and Hospital with Asia - Pacific.
Management measures and evaluates the operating segments based on operating income. Management excludes certain corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment operating income because management evaluates the operating results of the segments excluding such items. These items include restructuring and turnaround costs, deal amortization, and asset impairments. Although these amounts are excluded from segment operating income, as applicable, they are included in the reconciliations that follow. Management measures and evaluates the Company's net revenues and operating income using internally derived standard currency exchange rates that remain constant from year to year, therefore segment information is presented on this basis.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Selected information by business segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Net revenues
|
|
|
|
|
|
Japan
|
$
|
74,695
|
|
|
$
|
84,270
|
|
|
$
|
83,547
|
|
EMEA
|
198,396
|
|
|
204,192
|
|
|
219,153
|
|
North America Plasma
|
309,718
|
|
|
279,803
|
|
|
240,705
|
|
All Other
|
316,771
|
|
|
342,249
|
|
|
340,427
|
|
Net revenues before foreign exchange impact
|
899,580
|
|
|
910,515
|
|
|
883,832
|
|
Effect of exchange rates
|
(13,464
|
)
|
|
(1,683
|
)
|
|
26,541
|
|
Net revenues
|
$
|
886,116
|
|
|
$
|
908,832
|
|
|
$
|
910,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Segment operating income
|
|
|
|
|
|
Japan
|
$
|
32,906
|
|
|
$
|
38,280
|
|
|
$
|
36,843
|
|
EMEA
|
49,105
|
|
|
47,168
|
|
|
60,101
|
|
North America Plasma
|
105,253
|
|
|
109,220
|
|
|
89,092
|
|
All Other
|
109,296
|
|
|
120,562
|
|
|
131,471
|
|
Segment operating income
|
296,560
|
|
|
315,230
|
|
|
317,507
|
|
Corporate operating expenses
|
176,372
|
|
|
199,072
|
|
|
193,910
|
|
Effect of exchange rates
|
(4,772
|
)
|
|
3,546
|
|
|
13,906
|
|
Restructuring and turnaround costs
|
34,337
|
|
|
42,185
|
|
|
69,697
|
|
Deal amortization
|
27,107
|
|
|
28,958
|
|
|
30,184
|
|
Impairment of assets
|
73,353
|
|
|
97,230
|
|
|
—
|
|
Contingent consideration income
|
—
|
|
|
(4,727
|
)
|
|
(2,918
|
)
|
Operating (loss) income
|
$
|
(19,381
|
)
|
|
$
|
(43,942
|
)
|
|
$
|
40,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Depreciation and amortization
|
|
|
|
|
|
Japan
|
$
|
827
|
|
|
$
|
774
|
|
|
$
|
767
|
|
EMEA
|
4,255
|
|
|
5,146
|
|
|
5,045
|
|
North America Plasma
|
13,022
|
|
|
12,944
|
|
|
11,229
|
|
All Other
|
71,629
|
|
|
71,047
|
|
|
69,012
|
|
Total depreciation and amortization (excluding impairment charges)
|
$
|
89,733
|
|
|
$
|
89,911
|
|
|
$
|
86,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
Long-lived assets
(1)
|
|
|
|
|
|
Japan
|
$
|
21,412
|
|
|
$
|
33,159
|
|
|
$
|
31,810
|
|
EMEA
|
63,854
|
|
|
63,861
|
|
|
66,223
|
|
North America Plasma
|
142,164
|
|
|
116,001
|
|
|
101,272
|
|
All Other
|
96,432
|
|
|
124,613
|
|
|
122,643
|
|
Total long-lived assets
|
$
|
323,862
|
|
|
$
|
337,634
|
|
|
$
|
321,948
|
|
(1)
Long-lived assets are comprised of property, plant and equipment.
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-lived assets in our principle operating regions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
United States
|
$
|
241,610
|
|
|
$
|
231,744
|
|
|
$
|
208,439
|
|
Japan
|
1,691
|
|
|
2,022
|
|
|
1,618
|
|
Europe
|
12,952
|
|
|
18,672
|
|
|
27,786
|
|
Asia
|
34,174
|
|
|
40,235
|
|
|
39,032
|
|
Other
|
33,435
|
|
|
44,961
|
|
|
45,073
|
|
Total
|
$
|
323,862
|
|
|
$
|
337,634
|
|
|
$
|
321,948
|
|
In fiscal 2017, we organized our current products into
four
business units for purposes of evaluating their growth potential: Plasma, Blood Center, Cell Processing and Hemostasis Management. Management reviews revenue trends based on these business units, however, no other financial information is currently available on this basis.
Net revenues by business unit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Plasma
|
410,727
|
|
|
381,776
|
|
|
352,911
|
|
Blood Center
|
303,890
|
|
|
355,108
|
|
|
386,147
|
|
Cell Processing
|
105,376
|
|
|
112,483
|
|
|
120,434
|
|
Hemostasis Management
|
66,123
|
|
|
59,465
|
|
|
50,881
|
|
Net revenues
|
$
|
886,116
|
|
|
$
|
908,832
|
|
|
$
|
910,373
|
|
Net revenues generated in our principle operating regions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
522,686
|
|
|
$
|
519,440
|
|
|
$
|
494,788
|
|
Japan
|
79,266
|
|
|
81,411
|
|
|
88,298
|
|
Europe
|
166,007
|
|
|
187,725
|
|
|
215,575
|
|
Asia
|
109,858
|
|
|
111,758
|
|
|
102,095
|
|
Other
|
8,299
|
|
|
8,498
|
|
|
9,617
|
|
Total
|
$
|
886,116
|
|
|
$
|
908,832
|
|
|
$
|
910,373
|
|
15. RESTRUCTURING
On an ongoing basis, we review the global economy, the healthcare industry, and the markets in which we compete to identify opportunities for efficiencies, enhance commercial capabilities, align our resources and offer our customers better solutions. In order to realize these opportunities, we undertake restructuring-type activities to transform our business.
During fiscal 2017, we launched a multi-year restructuring initiative designed to reposition our organization and improve our cost structure. This initiative includes a reduction of headcount and operating costs, simplification of certain product lines, and modification of manufacturing operations to align with our strategic direction.
The fiscal 2017 phase was expected to incur approximately
$26 million
of restructuring and turnaround charges and was estimated to achieve cost savings of
$40 million
. During
fiscal 2017
, we incurred
$28.7 million
of restructuring and turnaround charges under this initiative and exceeded our estimated savings target of
$40 million
. As of April 1, 2017, this initial phase was substantially complete. Additionally, during
fiscal 2017
and
fiscal 2016
, we recorded
$5.6 million
and
$42.3 million
, respectively, of restructuring and turnaround charges under a prior program. We continue to assess non-core and underperforming assets and evaluate opportunities to improve our cost structure as part of our turnaround and expect to incur additional charges and benefits during fiscal 2018 and beyond.
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes the restructuring activity for the fiscal year ended
April 1, 2017
,
April 2, 2016
, and
March 28, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance and Other Employee Costs
|
|
Other Costs
|
|
Accelerated Depreciation
|
|
Asset
Write Down
|
|
Total Restructuring
|
Balance at March 29, 2014
|
$
|
22,908
|
|
|
$
|
728
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,636
|
|
Costs incurred
|
19,879
|
|
|
15,362
|
|
|
1,326
|
|
|
296
|
|
|
36,863
|
|
Payments
|
(26,394
|
)
|
|
(15,871
|
)
|
|
—
|
|
|
—
|
|
|
(42,265
|
)
|
Non-cash adjustments
|
—
|
|
|
—
|
|
|
(1,326
|
)
|
|
(296
|
)
|
|
(1,622
|
)
|
Balance at March 28, 2015
|
$
|
16,393
|
|
|
$
|
219
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,612
|
|
Costs incurred
|
10,707
|
|
|
7,846
|
|
|
1,469
|
|
|
3,033
|
|
|
23,055
|
|
Payments
|
(18,348
|
)
|
|
(8,065
|
)
|
|
—
|
|
|
—
|
|
|
(26,413
|
)
|
Non-cash adjustments
|
—
|
|
|
—
|
|
|
(1,469
|
)
|
|
(3,033
|
)
|
|
(4,502
|
)
|
Balance at April 2, 2016
|
$
|
8,752
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,752
|
|
Costs incurred
|
19,521
|
|
|
1,512
|
|
|
—
|
|
|
800
|
|
|
21,833
|
|
Payments
|
(20,866
|
)
|
|
(1,451
|
)
|
|
—
|
|
|
—
|
|
|
(22,317
|
)
|
Non-cash adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
(800
|
)
|
|
(800
|
)
|
Balance at April 1, 2017
|
$
|
7,407
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,468
|
|
The substantial majority of restructuring expenses have been included as a component of selling, general and administrative expense in the accompanying consolidated statements of (loss) income. As of April 1, 2017, we had a restructuring liability of
$7.5 million
, of which, approximately
$7.1 million
is payable within the next twelve months.
In addition to the restructuring expenses included in the table above, we also incurred
$12.5 million
,
$19.2 million
and
$32.8 million
in fiscal 2017, 2016 and 2015, respectively, of costs that do not constitute as restructuring under ASC 420, which we refer to as "Turnaround Costs". These costs consist primarily of expenditures directly related to our restructuring initiative and include program management, implementation of the global strategic review initiatives and accelerated depreciation.
The tables below present restructuring and turnaround costs by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Japan
|
$
|
819
|
|
|
$
|
9
|
|
|
$
|
258
|
|
EMEA
|
4,272
|
|
|
3,210
|
|
|
3,310
|
|
North America Plasma
|
366
|
|
|
—
|
|
|
360
|
|
All Other
|
16,376
|
|
|
19,836
|
|
|
32,935
|
|
Total
|
$
|
21,833
|
|
|
$
|
23,055
|
|
|
$
|
36,863
|
|
|
|
|
|
|
|
Turnaround costs
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Japan
|
$
|
2
|
|
|
$
|
416
|
|
|
$
|
158
|
|
EMEA
|
94
|
|
|
961
|
|
|
838
|
|
North America Plasma
|
972
|
|
|
—
|
|
|
28
|
|
All Other
|
11,415
|
|
|
17,852
|
|
|
31,810
|
|
Total
|
$
|
12,483
|
|
|
$
|
19,229
|
|
|
$
|
32,834
|
|
|
|
|
|
|
|
Total restructuring and turnaround
|
$
|
34,316
|
|
|
$
|
42,284
|
|
|
$
|
69,697
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS
The cost of software that is developed or obtained for internal use is accounted for pursuant to ASC Topic 350,
Intangibles — Goodwill and Other
. Pursuant to ASC Topic 350, we capitalize costs incurred during the application development stage of software developed for internal use, and expense costs incurred during the preliminary project and the post-implementation operation stages of development. The costs capitalized for each project are included in intangible assets in the consolidated financial statements.
For costs incurred related to the development of software to be sold, leased, or otherwise marketed, we apply the provisions of ASC Topic 985-20,
Software - Costs of Software to be Sold, Leased or Marketed
, which specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers.
We capitalized
$11.0 million
and
$17.0 million
in software development costs for ongoing initiatives during the fiscal years ended
April 1, 2017
and
April 2, 2016
, respectively. At
April 1, 2017
and
April 2, 2016
, we have a total of
$62.7 million
and
$54.9 million
of software costs capitalized, of which
$12.7 million
and
$14.4 million
are related to in process software development initiatives, respectively, and the remaining balance represents in-service assets that are being amortized over their useful lives. The costs capitalized for each project are included in intangible assets in the consolidated financial statements. In connection with these development activities, we capitalized interest of
$0.3 million
and
$0.2 million
in fiscal
2017
and
2016
, respectively. We amortize capitalized costs when the products are released for sale. During
fiscal 2017
,
$9.5 million
of capitalized costs were placed into service, compared to
$8.7 million
of capitalized costs placed into service during
fiscal 2016
. Amortization of capitalized software development cost expense was
$9.7 million
,
$10.9 million
and
$3.2 million
for fiscal
2017
,
2016
and
2015
, respectively. Amortization expense in fiscal 2017 and 2016 includes
$4.0 million
and
$6.0 million
of impairment charges. These impairment charges are classified within costs of goods sold on our consolidated statements of (loss) income and relate to capitalized software projects included in our All Other segment.
17. SUMMARY OF QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three months ended
|
Fiscal 2017
|
|
July 2,
2016
|
|
October 1,
2016
|
|
December 31,
2016
|
|
April 1,
2017
|
Net revenues
|
|
$
|
209,956
|
|
|
$
|
220,253
|
|
|
$
|
227,841
|
|
|
$
|
228,066
|
|
Gross profit
|
|
$
|
91,056
|
|
|
$
|
104,248
|
|
|
$
|
101,079
|
|
|
$
|
82,111
|
|
Operating income (loss)
|
|
$
|
(7,881
|
)
|
|
$
|
24,794
|
|
|
$
|
21,212
|
|
|
$
|
(57,506
|
)
|
Net (loss) income
|
|
$
|
(10,346
|
)
|
|
$
|
19,825
|
|
|
$
|
15,393
|
|
|
$
|
(51,140
|
)
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
0.39
|
|
|
$
|
0.30
|
|
|
$
|
(0.98
|
)
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
0.38
|
|
|
$
|
0.30
|
|
|
$
|
(0.98
|
)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three months ended
|
Fiscal 2016
|
|
June 27,
2015
|
|
September 26,
2015
|
|
December 26,
2015
|
|
April 2,
2016
|
Net revenues
|
|
$
|
213,413
|
|
|
$
|
219,693
|
|
|
$
|
233,384
|
|
|
$
|
242,342
|
|
Gross profit
|
|
$
|
102,539
|
|
|
$
|
105,297
|
|
|
$
|
108,855
|
|
|
$
|
89,223
|
|
Operating (loss) income
|
|
$
|
3,606
|
|
|
$
|
19,179
|
|
|
$
|
(61,177
|
)
|
|
$
|
(5,550
|
)
|
Net (loss) income
|
|
$
|
(267
|
)
|
|
$
|
12,863
|
|
|
$
|
(59,440
|
)
|
|
$
|
(8,735
|
)
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.25
|
|
|
$
|
(1.17
|
)
|
|
$
|
(0.17
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.25
|
|
|
$
|
(1.17
|
)
|
|
$
|
(0.17
|
)
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The operating results for the second and fourth quarters of fiscal 2017 and all four quarters of fiscal 2016 include certain misstatements that were determined to be immaterial both individually and in the aggregate. The misstatement in the fourth quarter of fiscal 2017 was primarily driven by the correction of an error in capitalized manufacturing variances which resulted in an overstatement of net loss in the fourth quarter of fiscal 2017 and an overstatement of net income in the second quarter of fiscal 2017 and each quarter of fiscal 2016.
The operating results for the first quarter of fiscal 2016 also include the correction of an understatement of the provision for income taxes in fiscal 2015 and the operating results for the third quarter of fiscal 2016 also include the correction of an overstated liability in fiscal 2014.
Below is a summary of the net overstatement/(understatement) of the Company’s reported operating income and net income for the second and fourth quarters of fiscal 2017 and all four quarters of fiscal 2016 as a result of the misstatements in each reporting period. In the fourth quarter of fiscal 2017 and the first, third and fourth quarters of fiscal 2016, the Company reported an operating loss, a net loss or both. For such periods, an understatement of income means that the reported loss was too high, while an overstatement of income means that the reported loss was too low.
|
|
|
|
|
|
|
|
(In thousands)
|
|
Overstatement/(Understatement)
|
Three Months Ended
|
|
Operating (Loss) Income
|
|
Net (Loss) Income
|
April 1, 2017
|
|
(3,720
|
)
|
|
(4,032
|
)
|
October 1, 2016
|
|
888
|
|
|
1,224
|
|
April 2, 2016
|
|
(3,352
|
)
|
|
(2,207
|
)
|
December 26, 2015
|
|
4,776
|
|
|
4,584
|
|
September 26, 2015
|
|
1,193
|
|
|
933
|
|
June 27, 2015
|
|
1,297
|
|
|
219
|
|
18. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a roll-forward of the components of accumulated other comprehensive loss, net of tax, for the years ended
April 1, 2017
and
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign currency
|
|
Defined benefit plans
|
|
Net Unrealized Gain/loss on Derivatives
|
|
Total
|
Balance as of March 28, 2015
|
|
$
|
(20,512
|
)
|
|
$
|
(8,923
|
)
|
|
$
|
7,711
|
|
|
$
|
(21,724
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(1,987
|
)
|
|
884
|
|
|
(3,938
|
)
|
|
(5,041
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
547
|
|
|
(8,822
|
)
|
|
(8,275
|
)
|
Net current period other comprehensive (loss) income
|
|
(1,987
|
)
|
|
1,431
|
|
|
(12,760
|
)
|
|
(13,316
|
)
|
Balance as of April 2, 2016
|
|
$
|
(22,499
|
)
|
|
$
|
(7,492
|
)
|
|
$
|
(5,049
|
)
|
|
$
|
(35,040
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(7,336
|
)
|
|
4,851
|
|
|
(364
|
)
|
|
(2,849
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
369
|
|
|
4,647
|
|
|
5,016
|
|
Net current period other comprehensive (loss) income
|
|
(7,336
|
)
|
|
5,220
|
|
|
4,283
|
|
|
2,167
|
|
Balance as of April 1, 2017
|
|
$
|
(29,835
|
)
|
|
$
|
(2,272
|
)
|
|
$
|
(766
|
)
|
|
$
|
(32,873
|
)
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The details about the amount reclassified from accumulated other comprehensive loss for the years ended
April 1, 2017
and
April 2, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Loss
|
|
Affected Line in the
Statement of (Loss) Income
|
Derivative instruments reclassified to income statement
|
|
Year ended April 1, 2017
|
|
Year ended April 2, 2016
|
|
|
Realized net (loss) gain on derivatives
|
|
$
|
(5,227
|
)
|
|
$
|
8,654
|
|
|
Net revenues, cost of goods sold, other expense, net
|
Income tax effect
|
|
580
|
|
|
168
|
|
|
Provision (benefit) for income taxes
|
Net of taxes
|
|
$
|
(4,647
|
)
|
|
$
|
8,822
|
|
|
|
|
|
|
|
|
|
|
Pension items reclassified to income statement
|
|
|
|
|
|
|
Realized net loss on pension assets
|
|
$
|
450
|
|
|
$
|
602
|
|
|
Other expense, net
|
Income tax effect
|
|
(81
|
)
|
|
(55
|
)
|
|
Provision (benefit) for income taxes
|
Net of taxes
|
|
$
|
369
|
|
|
$
|
547
|
|
|
|
HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. SUBSEQUENT EVENTS
On April 27, 2017, we sold our SEBRA sealers product line to Machine Solutions Inc. because it was no longer aligned with our long-term strategic objectives. In connection with this transaction, we received net proceeds of
$9 million
. These proceeds are subject to a post-closing adjustment based on final asset values as determined during the
90 days
transition period. The preliminary pre-tax gain expected to be recorded as a result of this transaction is
$8 million
. The SEBRA portfolio includes a suite of products which primarily include radio frequency sealers that are used to seal tubing as part of the collection of whole blood and blood components, particularly plasma.