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Haemonetics(HAE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of income and comprehensive income, balance sheets, statements of stockholders' equity, and statements of cash flows, along with their accompanying notes for the periods ended October 1, 2022 Unaudited Condensed Consolidated Statements of Income and Comprehensive Income For the three and six months ended October 1, 2022, Haemonetics Corporation reported significant increases in net revenues, gross profit, operating income, and net income compared to the prior year, with diluted EPS rising to $0.64 and $1.03, respectively Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (in thousands, except per share data) | Metric (in thousands, except per share data) | Three Months Ended Oct 1, 2022 | Three Months Ended Oct 2, 2021 | Six Months Ended Oct 1, 2022 | Six Months Ended Oct 2, 2021 | | :----------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net revenues | $297,485 | $239,897 | $558,943 | $468,425 | | Gross profit | $157,878 | $122,541 | $300,141 | $230,626 | | Operating income | $46,732 | $24,510 | $77,499 | $25,900 | | Net income | $33,197 | $14,856 | $53,074 | $10,402 | | Net income per share - diluted | $0.64 | $0.29 | $1.03 | $0.20 | Unaudited Condensed Consolidated Balance Sheet As of October 1, 2022, the company's total assets slightly increased to $1,865,112 thousand from April 2, 2022, primarily driven by an increase in property, plant and equipment, net, while total current liabilities decreased significantly due to a reduction in notes payable and current maturities of long-term debt Unaudited Condensed Consolidated Balance Sheet (in thousands) | Metric (in thousands) | October 1, 2022 | April 2, 2022 | | :-------------------- | :-------------- | :------------ | | Total current assets | $715,789 | $756,031 | | Total assets | $1,865,112 | $1,859,734 | | Total current liabilities | $262,175 | $442,266 | | Long-term debt, net of current maturities | $759,552 | $559,441 | | Total stockholders' equity | $729,009 | $749,424 | Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $749,424 thousand at April 2, 2022, to $729,009 thousand at October 1, 2022, primarily due to share repurchases totaling $75,000 thousand, partially offset by net income of $33,197 thousand and share-based compensation Unaudited Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | April 2, 2022 | October 1, 2022 | | :-------------------- | :------------ | :-------------- | | Total Stockholders' Equity | $749,424 | $729,009 | | Shares Repurchased | — | $(75,000) | | Net Income | — | $33,197 | | Share-based compensation expense | — | $5,735 | | Accumulated Other Comprehensive Loss | $(25,954) | $(40,255) | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended October 1, 2022, net cash provided by operating activities significantly increased to $129,032 thousand, while net cash used in investing activities and financing activities also increased, resulting in a net decrease in cash and cash equivalents of $18,296 thousand Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended Oct 1, 2022 | Six Months Ended Oct 2, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $129,032 | $41,780 | | Net cash used in investing activities | $(89,282) | $(36,371) | | Net cash used in financing activities | $(49,081) | $(4,949) | | Net Change in Cash and Cash Equivalents | $(18,296) | $115 | | Cash and Cash Equivalents at End of Period | $241,200 | $192,420 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, covering basis of presentation, recent accounting pronouncements, restructuring activities, income taxes, earnings per share, revenue recognition, inventories, leases, debt, financial instruments, commitments, contingencies, segment information, and accumulated other comprehensive loss 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, with all necessary adjustments included. The Company made a €20 million investment in Vivasure Medical LTD in November 2022, increasing its total investment to €30 million - In November 2022, the Company made a €20 million investment in Vivasure Medical LTD, bringing the total investment to €30 million, classified as other long-term assets19 2. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted ASC Update No. 2019-12 (Income Taxes) and ASC Update No. 2021-05 (Leases) with no material impact. Early adoption of ASC Update No. 2020-06 (Debt with Conversion and Other Options) effective April 4, 2021, resulted in a $61.2 million decrease to additional paid-in capital and an $80.3 million increase to non-current convertible notes, net - Early adoption of ASC Update No. 2020-06 (Debt with Conversion and Other Options) effective April 4, 2021, resulted in a $61.2 million decrease to additional paid-in capital, a $20.0 million decrease to non-current deferred tax liabilities, and an $80.3 million increase to non-current convertible notes, net21 3. RESTRUCTURING The Company's Operational Excellence Program (2020 Program) aims to improve product quality, reduce costs, and ensure sustainability, with expected aggregate charges between $95 million and $105 million by fiscal 2025. During the three and six months ended October 1, 2022, $3.1 million and $6.6 million, respectively, were incurred in restructuring and related costs - The Operational Excellence Program (2020 Program) is expected to incur aggregate charges between $95 million and $105 million by the end of fiscal 202524 Restructuring Costs (in thousands) | Restructuring Costs (in thousands) | Three Months Ended Oct 1, 2022 | Six Months Ended Oct 1, 2022 | | :--------------------------------- | :----------------------------- | :--------------------------- | | Restructuring costs | $165 | $121 | | Restructuring related costs | $3,029 | $6,551 | | Total | $3,194 | $6,672 | - Total cumulative charges under the 2020 Program reached $62.3 million as of October 1, 202224 4. INCOME TAXES The Company reported income tax expense of $7.9 million and $13.5 million for the three and six months ended October 1, 2022, respectively, with effective tax rates of 19.1% and 20.3%. These rates include discrete tax benefits and expenses related to tax rate changes and stock compensation Income Tax Metrics (in thousands) | Metric (in thousands) | Three Months Ended Oct 1, 2022 | Six Months Ended Oct 1, 2022 | Three Months Ended Oct 2, 2021 | Six Months Ended Oct 2, 2021 | | :-------------------- | :----------------------------- | :--------------------------- | :----------------------------- | :--------------------------- | | Income tax expense | $7,862 | $13,479 | $5,066 | $6,512 | | Effective tax rate | 19.1% | 20.3% | 25.4% | 38.5% | 5. EARNINGS PER SHARE Basic and diluted earnings per share significantly increased for both the three and six months ended October 1, 2022. The Company also initiated a $300 million share repurchase program in August 2022, completing a $75 million accelerated share repurchase (ASR) by November 2022 Earnings Per Share (in thousands, except per share amounts) | Metric (in thousands, except per share amounts) | Three Months Ended Oct 1, 2022 | Three Months Ended Oct 2, 2021 | Six Months Ended Oct 1, 2022 | Six Months Ended Oct 2, 2021 | | :---------------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Basic income per share | $0.65 | $0.29 | $1.04 | $0.20 | | Diluted income per share | $0.64 | $0.29 | $1.03 | $0.20 | - In August 2022, the Board authorized a $300 million share repurchase program over three years. A $75 million Accelerated Share Repurchase (ASR) was initiated, with 0.8 million shares initially delivered and approximately 0.2 million additional shares delivered upon settlement in November 20223435 6. REVENUE Revenue is recognized when performance obligations are satisfied, with transaction prices allocated based on standalone selling prices. As of October 1, 2022, the Company had $23.0 million in remaining performance obligations, with 74% expected to be recognized within the next twelve months - As of October 1, 2022, the Company had $23.0 million of its transaction price allocated to remaining performance obligations, with approximately 74% expected to be recognized as revenue within the next twelve months39 Contract Balances (in thousands) | Metric (in thousands) | October 1, 2022 | April 2, 2022 | | :-------------------- | :-------------- | :------------ | | Contract assets | $7,600 | $5,500 | | Contract liabilities | $24,400 | $26,800 | 7. INVENTORIES Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. Total inventories decreased from $293,027 thousand at April 2, 2022, to $254,680 thousand at October 1, 2022, primarily due to a reduction in finished goods Inventory Breakdown (in thousands) | Inventory Category (in thousands) | October 1, 2022 | April 2, 2022 | | :-------------------------------- | :-------------- | :------------ | | Raw materials | $83,602 | $88,886 | | Work-in-process | $21,853 | $17,187 | | Finished goods | $149,225 | $186,954 | | Total inventories | $254,680 | $293,027 | 8. LEASES The Company leases medical devices to customers, primarily under operating lease arrangements where a substantial majority of revenue is variable and tied to disposable product sales. Operating lease revenue constitutes approximately 3% of total net sales - Operating lease revenue, primarily from medical devices installed at customer sites, represents approximately 3% of the Company's total net sales45 9. NOTES PAYABLE AND LONG-TERM DEBT The Company has $500.0 million in 0% convertible senior notes due 2026, classified as long-term debt. In July 2022, it refinanced its credit facilities, establishing a $280.0 million senior unsecured term loan and a $420.0 million revolving credit facility, maturing in June 2025. As of October 1, 2022, $278.3 million was outstanding on the term loan at a 4.2% effective interest rate, and $50.0 million on the revolving credit facility - The Company has $500.0 million aggregate principal amount of 0% convertible senior notes due 2026, with a net convertible note payable of $490.8 million as of October 1, 20224649 - In July 2022, the Company refinanced its credit facilities, establishing a $280.0 million senior unsecured term loan and a $420.0 million senior unsecured revolving credit facility, both maturing in June 202551 - As of October 1, 2022, $278.3 million was outstanding under the term loan with an effective interest rate of 4.2%, and $50.0 million was outstanding under the revolving credit facility53 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS The Company uses derivative financial instruments, including foreign currency forward contracts and interest rate swaps, to mitigate exposure to foreign currency exchange rates and variable interest rates. These derivatives are primarily classified as Level 2 in the fair value hierarchy. Contingent consideration liabilities are classified as Level 3, valued at $0.8 million as of October 1, 2022 - The Company uses foreign currency forward contracts to hedge anticipated cash flows from foreign currency transactions, primarily Japanese Yen and Euro, with $30.9 million in designated hedge contracts outstanding as of October 1, 20225657 - Interest rate swaps are used to convert variable interest rates on credit facilities to fixed rates, with $194.8 million notional value effectively converted as of October 1, 20226263 Fair Value Measurements (in thousands) | Fair Value Category (in thousands) | October 1, 2022 | April 2, 2022 | | :--------------------------------- | :-------------- | :------------ | | Derivative Assets | $5,427 | $3,232 | | Derivative Liabilities | $1,542 | $1,894 | | Contingent consideration (Level 3) | $779 | $33,675 | 11. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings, including a subpoena from the U.S. Attorney's Office regarding apheresis and autotransfusion devices (DOJ decided not to intervene) and a putative class action lawsuit under the Illinois Biometric Information Privacy Act (BIPA), which the Company is vigorously defending - The U.S. Department of Justice decided not to intervene in the qui tam action related to a subpoena regarding the Company's apheresis and autotransfusion devices79 - A putative class action lawsuit (Mary Crumpton v. Haemonetics Corporation) alleges violation of the Illinois Biometric Information Privacy Act (BIPA) regarding fingerprint scanning for plasma donation, which the Company believes is without merit80 12. SEGMENT AND ENTERPRISE-WIDE INFORMATION The Company operates in three reportable segments: Plasma, Blood Center, and Hospital. Net revenues increased significantly in Plasma and Hospital for the three and six months ended October 1, 2022, while Blood Center revenues decreased. The U.S. remains the largest revenue-generating region - The Company's reportable segments are Plasma, Blood Center, and Hospital85 Net Revenues by Business Unit (in thousands) | Net Revenues by Business Unit (in thousands) | Three Months Ended Oct 1, 2022 | Six Months Ended Oct 1, 2022 | | :------------------------------------------- | :----------------------------- | :--------------------------- | | Plasma | $128,888 | $231,930 | | Blood Center | $75,652 | $142,225 | | Hospital | $92,562 | $181,746 | Net Revenues by Region (in thousands) | Net Revenues by Region (in thousands) | Three Months Ended Oct 1, 2022 | Six Months Ended Oct 1, 2022 | | :------------------------------------ | :----------------------------- | :--------------------------- | | United States | $211,724 | $393,720 | | Japan | $15,129 | $29,007 | | Europe | $41,850 | $82,307 | | Asia | $27,861 | $52,285 | 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated Other Comprehensive Loss increased from $(25,954) thousand at April 2, 2022, to $(40,255) thousand at October 1, 2022, primarily due to a significant increase in foreign currency translation losses Accumulated Other Comprehensive Loss Components (in thousands) | Component (in thousands) | Balance as of April 2, 2022 | Balance as of October 1, 2022 | | :----------------------- | :-------------------------- | :---------------------------- | | Foreign Currency | $(27,919) | $(44,905) | | Defined Benefit Plans | $1,619 | $1,619 | | Net Unrealized Gain/(Loss) on Derivatives | $346 | $3,031 | | Total | $(25,954) | $(40,255) | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting significant revenue growth driven by Plasma and Hospital segments, improved profitability, and strategic initiatives like the share repurchase program and debt refinancing. It also discusses operational challenges such as inflation and foreign exchange impacts Introduction Haemonetics Corporation is a global healthcare company providing medical products and solutions across three principal reporting segments: Plasma, Blood Center, and Hospital. Plasma and Hospital segments are identified as having growth potential, while Blood Center faces challenging markets requiring cost reduction and strategic management - Haemonetics operates in three principal reporting segments: Plasma (plasma collection devices, disposables, software), Blood Center (blood collection and processing devices), and Hospital (Hemostasis Management, Cell Salvage, Transfusion Management, Vascular Closure products)91 - Plasma and Hospital segments are viewed as having growth potential, while Blood Center requires different management strategies, including cost reduction and evaluating unfavorable customer contracts92 Recent Developments Recent developments include the Board's authorization of a $300 million share repurchase program, with a $75 million accelerated share repurchase (ASR) completed in November 2022. The Company also refinanced its credit facilities in July 2022, extending maturity to June 2025, and continues its Operational Excellence Program, expecting $95-$105 million in charges by fiscal 2025 for $115-$125 million in annualized gross savings - In August 2022, the Board authorized a $300 million share repurchase program over three years, and a $75 million Accelerated Share Repurchase (ASR) was completed in November 20229394 - The Company refinanced its credit facilities in July 2022, establishing a $280 million term loan and a $420 million revolving credit facility, extending maturity to June 202595 - The revised Operational Excellence Program expects aggregate charges of $95 million to $105 million by fiscal 2025, aiming for $115 million to $125 million in annualized gross savings96 Financial Summary Haemonetics reported strong financial performance for the three and six months ended October 1, 2022, with net revenues increasing by 24.0% and 19.3% (27.0% and 21.9% at constant currency), respectively. Operating income saw substantial growth of 90.7% and 199.2%, driven by Plasma and Hospital revenue increases and savings from the 2020 Program Financial Performance Summary (in thousands, except per share data) | Metric (in thousands, except per share data) | Three Months Ended Oct 1, 2022 | % Increase | Six Months Ended Oct 1, 2022 | % Increase | | :----------------------------------------- | :----------------------------- | :--------- | :--------------------------- | :--------- | | Net revenues | $297,485 | 24.0 % | $558,943 | 19.3 % | | Gross profit | $157,878 | 28.8 % | $300,141 | 30.1 % | | Operating income | $46,732 | 90.7 % | $77,499 | 199.2 % | | Net income | $33,197 | 123.5 % | $53,074 | 410.2 % | | Net income per share - diluted | $0.64 | 120.7 % | $1.03 | 415.0 % | - Net revenues increased 24.0% (27.0% at constant currency) for the three months and 19.3% (21.9% at constant currency) for the six months ended October 1, 2022, primarily due to volume and price increases in Plasma and Hospital businesses99 - Operating income increased significantly due to higher revenues in Plasma and Hospital, savings from the 2020 Program, and decreased acquisition spending, partially offset by lower Blood Center revenues, increased freight costs, and higher sales and marketing expenses100 Management's Use of Non-GAAP Measures Management utilizes non-GAAP financial measures, such as constant currency growth, to monitor financial performance, make business decisions, and forecast results. Constant currency growth measures revenue change using a consistent currency conversion rate to provide comparable insights - Constant currency growth, a non-GAAP financial measure, is used to measure the change in revenue between periods using a constant currency conversion rate, providing meaningful information on a consistent and comparable basis101 RESULTS OF OPERATIONS This section details the Company's operational performance, including net revenues by geography and business unit, gross profit, and operating expenses, highlighting key drivers of change and segment-specific results Net Revenues by Geography U.S. net revenues showed strong growth, increasing 39.2% and 34.3% for the three and six months ended October 1, 2022, respectively. International revenues, however, decreased on a reported basis due to foreign exchange impacts, despite a slight constant currency growth for the six-month period Net Revenues by Geography (Three Months, in thousands) | Net Revenues by Geography (in thousands) | Three Months Ended Oct 1, 2022 | Reported Growth | Constant Currency Growth | | :--------------------------------------- | :----------------------------- | :-------------- | :----------------------- | | United States | $211,724 | 39.2 % | 39.2 % | | International | $85,761 | (2.3)% | 5.6 % | | Total Net Revenues | $297,485 | 24.0 % | 27.0 % | Net Revenues by Geography (Six Months, in thousands) | Net Revenues by Geography (in thousands) | Six Months Ended Oct 1, 2022 | Reported Growth | Constant Currency Growth | | :--------------------------------------- | :--------------------------- | :-------------- | :----------------------- | | United States | $393,720 | 34.3 % | 34.3 % | | International | $165,223 | (5.7)% | 0.8 % | | Total Net Revenues | $558,943 | 19.3 % | 21.9 % | - Revenue generated outside the U.S. was 28.8% and 29.6% of total net revenues for the three and six months ended October 1, 2022, respectively, down from 36.6% and 37.4% in the prior year, impacted by foreign exchange rates102 Net Revenues by Business Unit Plasma revenue surged by 56.1% (57.2% at constant currency) for the three months and 49.7% (50.8% at constant currency) for the six months ended October 1, 2022. Hospital revenue also grew significantly, while Blood Center revenue decreased on a reported basis but showed slight constant currency growth for the three-month period Net Revenues by Business Unit (Three Months, in thousands) | Net Revenues by Business Unit (in thousands) | Three Months Ended Oct 1, 2022 | Reported Growth | Constant Currency Growth | | :------------------------------------------- | :----------------------------- | :-------------- | :----------------------- | | Plasma | $127,893 | 56.1 % | 57.2 % | | Blood Center | $73,683 | (4.0)% | 0.5 % | | Hospital | $90,856 | 19.1 % | 21.9 % | | Service | $5,053 | 3.0 % | 9.3 % | Net Revenues by Business Unit (Six Months, in thousands) | Net Revenues by Business Unit (in thousands) | Six Months Ended Oct 1, 2022 | Reported Growth | Constant Currency Growth | | :------------------------------------------- | :--------------------------- | :-------------- | :----------------------- | | Plasma | $230,274 | 49.7 % | 50.8 % | | Blood Center | $139,377 | (6.9)% | (3.2)% | | Hospital | $179,349 | 15.9 % | 18.4 % | | Service | $9,943 | (2.1)% | 3.2 % | Plasma Plasma revenue increased significantly by 56.1% (57.2% at constant currency) and 49.7% (50.8% at constant currency) for the three and six months ended October 1, 2022, respectively, driven by volume and price. The supply agreement with CSL Plasma was amended to extend the use of PCS2 plasma collection systems through December 2023, including an $88.0 million minimum purchase commitment for fiscal 2023 - Plasma revenue increased 56.1% (57.2% at constant currency) for the three months and 49.7% (50.8% at constant currency) for the six months ended October 1, 2022, driven by volume and price105 - The supply agreement with CSL Plasma was amended to extend the use of PCS2 plasma collection systems and purchase of disposable kits through December 2023, including an $88.0 million minimum purchase commitment in fiscal 2023106 Blood Center Blood Center revenue decreased by 4.0% (increased 0.5% at constant currency) for the three months and 6.9% (decreased 3.2% at constant currency) for the six months ended October 1, 2022, primarily due to a decline in the volume of apheresis disposables - Blood Center revenue decreased 4.0% (0.5% increase at constant currency) for the three months and 6.9% (3.2% decrease at constant currency) for the six months ended October 1, 2022107 - The decrease in Blood Center revenue was primarily driven by a decline in the volume of apheresis disposables107 Hospital Hospital revenue increased by 19.1% (21.9% at constant currency) and 15.9% (18.4% at constant currency) for the three and six months ended October 1, 2022, respectively. This growth was primarily driven by Vascular Closure revenue, as well as increases in Transfusion Management and TEG disposables revenue - Hospital revenue increased 19.1% (21.9% at constant currency) for the three months and 15.9% (18.4% at constant currency) for the six months ended October 1, 2022108 - The increase in Hospital revenue was primarily attributable to Vascular Closure revenue (42.1% increase for three months, 38.9% for six months), Transfusion Management revenue, and TEG disposables revenue104108 Gross Profit Gross profit increased by 28.8% and 30.1% for the three and six months ended October 1, 2022, respectively, with gross profit as a percentage of net revenues rising to 53.1% and 53.7%. This improvement was driven by volume, mix, and productivity savings from the 2020 Program, partially offset by inflationary pressures and increased depreciation Gross Profit Performance (in thousands) | Metric (in thousands) | Three Months Ended Oct 1, 2022 | % of Net Revenues | Six Months Ended Oct 1, 2022 | % of Net Revenues | | :-------------------- | :----------------------------- | :---------------- | :--------------------------- | :---------------- | | Gross profit | $157,878 | 53.1 % | $300,141 | 53.7 % | - Gross profit increased 28.8% (34.7% at constant currency) for the three months and 30.1% (34.6% at constant currency) for the six months ended October 1, 2022109 - The increase was primarily driven by volume and mix, and productivity savings from the 2020 Program, partially offset by inflationary pressures and increased depreciation expense109 Operating Expenses Total operating expenses increased by 13.4% and 8.8% for the three and six months ended October 1, 2022, respectively. This was influenced by increased selling, general and administrative expenses, partially offset by decreased amortization of intangible assets and gains on divestiture Operating Expenses Breakdown (in thousands) | Operating Expense (in thousands) | Three Months Ended Oct 1, 2022 | % of Net Revenues | Six Months Ended Oct 1, 2022 | % of Net Revenues | | :------------------------------- | :----------------------------- | :---------------- | :--------------------------- | :---------------- | | Research and development | $10,896 | 3.7 % | $21,798 | 3.9 % | | Selling, general and administrative | $92,411 | 31.1 % | $184,638 | 33.0 % | | Amortization of intangible assets | $8,221 | 2.8 % | $16,588 | 3.0 % | | Gains on divestiture | $(382) | (0.1)% | $(382) | (0.1)% | | Total operating expenses | $111,146 | 37.4 % | $222,642 | 39.8 % | Research and Development Research and development expenses slightly increased by 0.4% for the three months ended October 1, 2022, due to continued growth investments, but decreased by 7.5% for the six-month period, primarily due to the timing of investments and cost savings from the 2020 Program - Research and development expenses increased 0.4% for the three months ended October 1, 2022, due to continued growth investments111 - R&D expenses decreased 7.5% for the six months ended October 1, 2022, primarily due to the timing of investments across quarters and cost savings related to the 2020 Program111 Selling, General and Administrative Selling, general and administrative expenses increased by 21.9% and 10.6% for the three and six months ended October 1, 2022, respectively. This rise was driven by inflationary pressures, higher freight costs, increased sales and marketing investments, and higher performance-based compensation, partially offset by 2020 Program savings and decreased acquisition-related costs - Selling, general and administrative expenses increased 21.9% for the three months and 10.6% for the six months ended October 1, 2022113 - The increase was primarily driven by inflationary pressures, higher freight costs, increased sales and marketing investments, and higher performance-based compensation, partially offset by cost savings from the 2020 Program and decreased acquisition-related costs113 Amortization of Intangible Assets Amortization expense decreased by 27.9% and 30.2% for the three and six months ended October 1, 2022, respectively, primarily because certain intangible assets became fully amortized during fiscal 2022 - Amortization expense decreased to $8.2 million (three months) and $16.6 million (six months) for the period ended October 1, 2022, primarily due to intangible assets becoming fully amortized during fiscal 2022114 Gains on Divestiture The Company recognized gains on divestiture of $0.4 million for both the three and six months ended October 1, 2022 - Gains on divestiture were $0.4 million for both the three and six months ended October 1, 2022115 Interest and Other Expense, Net Interest and other expenses, net, increased by 23.6% and 21.8% for the three and six months ended October 1, 2022, respectively, primarily due to higher foreign currency impact from market and rate volatility and increased interest rates on the term loan - Interest and other expenses, net, increased 23.6% for the three months and 21.8% for the six months ended October 1, 2022116 - The increase was primarily driven by higher foreign currency impact due to market and rate volatility and higher interest rates on the term loan116 Income Taxes Income tax expense for the three and six months ended October 1, 2022, was $7.9 million and $13.5 million, respectively, with effective tax rates of 19.1% and 20.3%. These rates reflect the jurisdictional mix of earnings and discrete tax adjustments Income Tax Expense and Effective Rate (in thousands) | Metric (in thousands) | Three Months Ended Oct 1, 2022 | Six Months Ended Oct 1, 2022 | | :-------------------- | :----------------------------- | :--------------------------- | | Income tax expense | $7,862 | $13,479 | | Effective tax rate | 19.1% | 20.3% | Liquidity and Capital Resources The Company's liquidity is supported by cash and cash equivalents ($241.2 million), internally generated cash flow, and a $420 million revolving credit facility. Working capital increased to $453.6 million, and net debt was $(576.5) million as of October 1, 2022. Expected cash outlays include acquisitions, capital expenditures, share repurchases, and debt payments Liquidity and Capital Resources Summary (in thousands) | Metric (in thousands) | October 1, 2022 | April 2, 2022 | | :-------------------- | :-------------- | :------------ | | Cash & cash equivalents | $241,200 | $259,496 | | Working capital | $453,614 | $313,765 | | Current ratio | 2.7 | 1.7 | | Net debt | $(576,546) | $(514,093) | - The Company's primary liquidity sources are cash and cash equivalents, internally generated cash flow from operations, and its $420 million revolving credit facility121123 - Expected cash outlays relate primarily to acquisitions, investments, capital expenditures (including North American manufacturing facilities enhancements), share repurchases, cash payments under the revised credit agreement, and restructuring initiatives121 Cash Flows For the six months ended October 1, 2022, net cash provided by operating activities increased by $87.3 million to $129.0 million, driven by higher net income and decreased inventories. Net cash used in investing activities increased by $52.9 million to $89.3 million due to higher capital expenditures and other investments. Net cash used in financing activities increased by $44.1 million to $49.1 million, mainly due to share repurchases and contingent consideration payments Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended Oct 1, 2022 | Six Months Ended Oct 2, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $129,032 | $41,780 | | Net cash used in investing activities | $(89,282) | $(36,371) | | Net cash used in financing activities | $(49,081) | $(4,949) | - The increase in cash provided by operating activities was primarily the result of an increase in net income, a decrease in inventories driven by NexSys PCS device placements, and higher other net working capital126 - The increase in cash used in investing activities was primarily due to increased capital expenditures (driven by NexSys PCS device placements) and other investments127 Concentration of Credit Risk The Company's credit risk is generally diversified across a large customer base, but concentrations exist in the Plasma business unit with several large biopharmaceutical customers and in international sales to government-owned healthcare systems, which are subject to payment delays and economic conditions - Concentrations of credit risk exist in the Plasma business unit with several large biopharmaceutical customers and in international sales to government-owned or supported healthcare systems, which are subject to payment delays and local economic conditions129 Inflation The Company experienced rising inflationary pressures in its global supply chain during the three and six months ended October 1, 2022, impacting procurement and production costs. While historical mitigation strategies include efficiency improvements and price adjustments, full mitigation of future cost increases may not be possible - Rising inflationary pressures in the global supply chain impacted results during the three and six months ended October 1, 2022, and are expected to continue throughout fiscal 2023131 - Historically, the Company has limited inflation impact through manufacturing/purchasing efficiencies, employee productivity, and product price adjustments, but future full mitigation is not guaranteed131 Foreign Exchange The Company has significant foreign currency exposure, particularly to the Japanese Yen, Euro, Chinese Yuan, and Australian Dollar, as 28.8% and 29.6% of sales were generated outside the U.S. for the three and six months ended October 1, 2022. A hedging program using derivative financial instruments, primarily forward contracts, is in place to mitigate the impact of exchange rate fluctuations - Foreign currency exposures primarily relate to sales denominated in Euro, Japanese Yen, Chinese Yuan, and Australian Dollars, and costs in Swiss Francs, Canadian Dollars, Mexican Pesos, and Malaysian Ringgit132133 - A program using derivative financial instruments, specifically forward foreign currency contracts, is in place to hedge anticipated cash flows from foreign currency transactions, primarily Japanese Yen and Euro, typically for one-year periods134 Recent Accounting Pronouncements The Company does not expect any recent accounting pronouncements to have a material impact on its financial position and results of operations - No recent accounting pronouncements are expected to have a material impact on the Company's financial position and results of operations135 Cautionary Statement Regarding Forward-Looking Information This section serves as a cautionary statement regarding forward-looking statements, emphasizing that actual results may differ materially due to various uncertainties and risks. Key factors include the impact of the COVID-19 pandemic, failure to achieve strategic goals, demand risks for products, product quality concerns, ability to retain key personnel, security breaches, pricing pressures, supply chain continuity, and geopolitical/economic conditions - Forward-looking statements are subject to uncertainties, risks, and changes that are difficult to predict, and actual results could vary materially from expectations137 - Key risk factors include the ongoing COVID-19 pandemic, failure to achieve strategic goals, demand and market acceptance risks for products, product quality/safety concerns, ability to retain key personnel, security breaches, pricing pressures, supply chain continuity, and geopolitical/economic conditions138139 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section details the Company's exposure to market risks, specifically foreign exchange risk and interest rate risk, and the strategies employed to mitigate them through derivative financial instruments Foreign Exchange Risk The Company minimizes foreign exchange risk through forward contracts to hedge anticipated cash flows. A hypothetical 10% strengthening of the U.S. Dollar would increase the fair value of forward contracts by $3.1 million, while a 10% weakening would decrease it by $3.4 million as of October 1, 2022 - A 10% strengthening of the U.S. Dollar would result in a $3.1 million increase in the fair value of all forward contracts, while a 10% weakening would result in a $3.4 million decrease, as of October 1, 2022143 Interest Rate Risk The Company's interest rate risk is associated with variable-rate debt under its credit facilities. Interest rate swaps are used to convert a portion of these borrowings to a fixed rate, mitigating exposure to fluctuations. A 100 basis point increase in Term SOFR rates would result in an additional $0.8 million in annual interest expense - An increase of 100 basis points in Term SOFR rates would result in additional annual interest expense of $0.8 million144 - The Company modified existing interest rate swaps and entered into four additional swaps in September 2022 to effectively convert $194.8 million of borrowings from a variable to a fixed rate, qualifying for hedge accounting144 ITEM 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of October 1, 2022. There were no material changes in internal control over financial reporting during the three months ended October 1, 2022 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of October 1, 2022145 - There were no material changes in internal control over financial reporting during the three months ended October 1, 2022146 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and other required disclosures ITEM 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 11, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements - Legal proceedings information is incorporated by reference from Note 11, Commitments and Contingencies147 ITEM 1A. Risk Factors There are no material changes to the Risk Factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended April 2, 2022 - No material changes from the Risk Factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended April 2, 2022148 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase activities during the second quarter of fiscal 2023, including an Accelerated Share Repurchase (ASR) agreement Issuer Purchases of Equity Securities During the second quarter of fiscal 2023, the Company repurchased 786,164 shares of common stock as part of its publicly announced program. This included an Accelerated Share Repurchase (ASR) agreement for $75.0 million, with an initial delivery of 0.8 million shares in August 2022 and approximately 0.2 million additional shares delivered upon settlement in November 2022. $225.0 million remained authorized for repurchases Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------- | :------------------------------- | :--------------------------- | | July 3, 2022 – July 30, 2022 | — | — | | July 31, 2022 - August 27, 2022 | 786,164 | (2) | | August 28, 2022 – October 1, 2022 | — | — | | Total | 786,164 | | - In August 2022, the Company entered into an ASR with Citibank to repurchase $75.0 million of common stock, receiving an initial delivery of 0.8 million shares. The ASR was completed in November 2022 with approximately 0.2 million additional shares delivered149 - As of October 1, 2022, $225.0 million remained authorized for repurchases under the share repurchase program149 ITEM 3. Defaults upon Senior Securities This item is not applicable to the Company for the reporting period - Not applicable151 ITEM 4. Mine Safety Disclosures This item is not applicable to the Company for the reporting period - Not applicable152 ITEM 5. Other Information This item is not applicable to the Company for the reporting period - Not applicable153 ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, credit agreements, certifications, and XBRL financial data - Key exhibits include Restated Articles of Organization, By-Laws, Amended and Restated Credit Agreement, and Certifications pursuant to Sections 302 and 906 of Sarbanes-Oxley Act156 SIGNATURES The report is duly signed on November 8, 2022, by Christopher A. Simon, President and Chief Executive Officer, and James C. D'Arecca, Executive Vice President, Chief Financial Officer - The report was signed by Christopher A. Simon, President and Chief Executive Officer, and James C. D'Arecca, Executive Vice President, Chief Financial Officer, on November 8, 2022160