UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended: June 30, 2007   Commission File Number:   1-10730

HAEMONETICS CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts		04-2882273
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)

 

400 Wood Road, Braintree, MA 02184

(Address of principal executive offices)

Registrant’s telephone number, including area code:         (781) 848-7100

Indicate by check mark whether the registrant (1.) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) (2.) has been subject to the filing requirements for at least the past 90 days.

Yes   x      No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   x         Accelerated filer   o         Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes   o      No   x

The number of shares of $.01 par value common stock outstanding as of June 30, 2007:

26,326,564

HAEMONETICS CORPORATION

INDEX

PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements
Unaudited Consolidated Statements of Income - Three Months Ended June 30, 2007 and July 1, 2006
Unaudited Consolidated Balance Sheets — June 30, 2007 and March 31, 2007
Unaudited Consolidated Statement of Stockholders’ Equity - Three Months Ended June 30, 2007
Unaudited Consolidated Statements of Cash Flows - Three Months Ended June 30, 2007 and July 1, 2006
Notes to Unaudited Consolidated Financial Statements
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk
ITEM 4.  Controls and Procedures
PART II.  OTHER INFORMATION
ITEM 6.  Exhibits
Signatures

 

1

ITEM 1.  FINANCIAL STATEMENTS

HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited in thousands, except per share data)

		June 30,			July 1,
		2007			2006 (a)
Net revenues		$	121,936		$	110,674
Cost of goods sold		60,442			53,301
Gross profit		61,494			57,373
Operating expenses:
Research and development		6,276			5,422
Selling, general and administrative		39,439			36,908
Cost to Equity		—			152
Total operating expenses		45,715			42,482
Operating income		15,779			14,891
Interest expense		(207		)	(425		)
Interest income		1,903			2,026
Other income, net		957			912
Income before provision for income taxes		18,432			17,404
Provision for income taxes		5,755			6,248
Net income		$	12,677		$	11,156
Basic income per common share
Net income		$	0.48		$	0.41
Income per common share assuming dilution
Net income		$	0.46		$	0.40
Weighted average shares outstanding
Basic		26,534			26,900
Diluted		27,403			27,929

 

(a)             Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition on July 18, 2006.

The accompanying notes are an integral part of these consolidated financial statements

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HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited in thousands)

		June 30, 2007			March 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	216,056		$	229,227
Accounts receivable, less allowance of $1,553 at June 30, 2007 and $1,440 at March 31, 2007		91,917			91,832
Inventories, net		68,209			61,797
Deferred tax asset, net		11,064			11,748
Prepaid expenses and other current assets		15,820			9,067
Total current assets		403,066			403,671
Property, plant and equipment:
Land, building and building improvements		46,266			41,649
Plant equipment and machinery		76,798			85,140
Office equipment and information technology		43,427			34,320
Haemonetics equipment		154,265			149,745
Total property, plant and equipment		320,756			310,854
Less: accumulated depreciation		225,426			220,079
Net property, plant and equipment		95,330			90,775
Other assets:
Other intangibles, less amortization of $18,200 at June 30, 2007 and $17,284 at March 31, 2007		35,059			33,857
Goodwill		34,703			34,958
Deferred tax asset, long term		5,200			4,513
Other long-term assets		4,746			4,961
Total other assets		79,708			78,289
Total assets		$	578,104		$	572,735
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt		$	18,601		$	22,201
Accounts payable		17,740			17,187
Accrued payroll and related costs		14,903			14,522
Accrued income taxes		1,032			1,163
Other liabilities		33,839			26,944
Total current liabilities		86,115			82,017
Long-term debt, net of current maturities		6,522			6,675
Other long-term liabilities		8,912			4,395
Commitments and contingencies (Note12)
Stockholders’ equity:
Common stock, $0.01 par value; Authorized - 150,000,000 shares;
Issued and outstanding — 26,473,061 shares at June 30, 2007 and 26,516,979 shares at March 1, 2007		262			265
Additional paid-in capital		172,763			163,815
Retained earnings		302,515			315,767
Accumulated other comprehensive income / (loss)		1,015			(199		)
Total Stockholders’ equity		476,555			479,648
Total liabilities and stockholders’ equity		$	578,104		$	572,735

 

The accompanying notes are an integral part of these consolidated financial statements.

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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited in thousands)

		Common Stock					Additional  Paid-in			Retained			Accumulated Other  Comprehensive			Total  Stockholders’			Comprehensive
		Shares		$’s			Capital			Earnings			Income / (Loss)			Equity			Income
Balance, March 31, 2007		26,517		$	265		$	163,815		$	315,767		($199		)	$	479,648
Employee stock purchase plan		29		1			1,119			—			—			1,120
Exercise of stock options and related tax benefit		260		2			9,137			—			—			9,139
Shares repurchaed		(578	)	(6		)	(3,579		)	(25,929		)				(29,514		)
Stock Compensation expense		—		—			2,271			—			—			2,271
Net income		—		—			—			12,677			—			12,677			12,677
Foreign currency translation adjustment		—		—			—			—			297			297			297
Unrealized gain on derivatives		—		—			—			—			917			917			917
Comprehensive income		—		—			—			—			—			—			13,891
Balance, June 30, 2007		26,228		$	262		$	172,763		$	302,515		$	1,015		$	476,555

 

The accompanying notes are an integral part of these consolidated financial statements.

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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)

		Three Months Ended
		June 30,			July 1,
		2007			2006 (a)
Cash Flows from Operating Activities:
Net income		$	12,677		$	11,156
Adjustments to reconcile net income to net cash provided by operating activities:
Non cash items:
Depreciation and amortization		7,180			6,742
Stock compensation expense		2,271			3,027
Gain on sales of plant, property and equipment		(193		)	(152		)
Unrealized (gain) / loss from hedging activities		(871		)	(1,837		)
Change in operating assets and liabilities:
(Increase) in accounts receivable, net		(640		)	(574		)
(Increase) in inventories		(8,049		)	(1,689		)
(Increase) in prepaid income taxes		(1,491		)	(222		)
(Increase) in other assets and other long-term liabilities		(586		)	(4,288		)
Decrease in accounts payable and accrued expenses		3,883			5,346
Net cash provided by operating activities		14,181			17,509
Cash Flows from Investing Activities:
Capital expenditures on property, plant and equipment		(11,448		)	(10,307		)
Proceeds from sale of property, plant and equipment		1,305			1,024
Net cash (used in) investing activities		(10,143		)	(9,283		)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage		(153		)	(142		)
Net (decrease) in short-term revolving credit agreements		(2,866		)	(4,179		)
Employee stock purchase plan		1,120			1,012
Exercise of stock options		7,607			3,491
Excess tax benefit on exercise of stock options		570			294
Stock Repurchase		(24,753		)	—
Net cash (used in) / provided by financing activities		(18,475		)	476
Effect of Exchange Rates on Cash and Cash Equivalents		1,266			662
Net (Decrease) / Increase in Cash and Cash Equivalents		(13,171		)	9,364
Cash and Cash Equivalents at Beginning of Year		229,227			250,667
Cash and Cash Equivalents at End of Period		$	216,056		$	260,031
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements of Haemonetics equipment		$	1,473		$	1,382
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	353		$	571
Income taxes paid		$	2,290		$	1,250

 

(a)                                  Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition on July 18, 2006

The accompanying notes are an integral part of these consolidated financial statements

5

1.   BASIS OF PRESENTATION

Our accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  All significant intercompany transactions have been eliminated.  Certain reclassifications were made to prior year balances to conform with the presentation of the financial statements for the three months ended June 30, 2007. Additionally, the FY07 amounts have been restated in accordance with Accounting Principles Board, Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” to reflect our investment in Arryx, Inc. for periods prior to the acquisition on July 18, 2006. Operating results for any other interim periods or the three month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 29, 2008.  These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended March 31, 2007.

Our fiscal year ends on the Saturday closest to the last day of March. Fiscal year 2008 and 2007 include 52 weeks with all four quarters including 13 weeks.

2.   RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued FASB No. 157, “Fair Value Measurements” (“FASB No. 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. FASB No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively, except in the case of a limited number of financial instruments that require retrospective application. We are currently evaluating the potential impact of FASB No. 157 on our financial position and results of operations. This statement is effective for our fiscal year 2009.

In February 2007, the FASB issued FASB No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“FASB No. 159”). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FASB No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of FASB No. 159 on our financial position and results of operations. This statement is effective for our fiscal year 2009.

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3.   EARNINGS PER SHARE (“EPS”)

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations, as required by FASB Statement No. 128, “Earnings Per Share.”  Basic EPS is computed by dividing net income by weighted average shares outstanding.  Diluted EPS includes the effect of potentially dilutive common shares.

		For the Three Months Ended
		June 30, 2007			July 1, 2006
		(in thousands, except per share amounts)
Basic EPS
Net income		$	12,677		$	11,156
Weighted average shares		26,534			26,900
Basic income per share		$	0.48		$	0.41
Diluted EPS
Net income		$	12,677		$	11,156
Basic weighted average shares		26,534			26,900
Dilutive effect of stock options		869			1029
Diluted weighted average shares		27,403			27,929
Diluted income per share		$	0.46		$	0.40

 

4.   STOCK-BASED COMPENSATION

Stock-based compensation expense of $2.4 million and $3.1 million was recognized for the three months ended June 30, 2007 and July 1, 2006, respectively.  The related income tax benefit recognized was $0.7 million and $0.9 million for the quarter ended June 30, 2007 and July 1, 2006, respectively. We recognize stock-based compensation on a straight line basis.

For a more detailed description of our stock-based compensation plans, see Note 11—Capital Stock to the Company’s consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2007.   Our stock-based compensation plans currently consist of stock options, an employee stock purchase plan and restricted stock.  Options become exercisable in the manner specified by the Compensation Committee of our Board of Directors.  Options granted in the three months ended June 30, 2007 vest over a four year period of time and expire not more than 7 years from the date of grant.

Cash flows relating to the benefits of tax deductions in excess of compensation cost recognized (in our reported or proforma results) are reported as a financing cash flow, rather than as an operating cash flow, as previously required. This excess tax benefit was $0.6 million and $0.3 million for the three months ended June 30, 2007 and July 1, 2006, respectively.

A summary of information related to stock options is as follows:

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		Options  Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Life (Years)		Aggregate Intrinsic Value ($000’s)
Outstanding at March 31, 2007		4,064,478		$	35.30		5.41		$	51,057
Granted		1,799		$	47.80
Exercised		(259,742	)	$	29.20
Terminated		(6,524	)	$	36.04
Outstanding at June 30, 2007		3,800,011		$	35.72		5.20		$	64,484
Exercisable at June 30, 2007		2,322,832		$	30.32		4.85		$	51,937
Expected to Vest at June 30, 2007		3,522,005		$	34.96		5.15		$	62,437

 

The total intrinsic value of options exercised during the three month periods ended June 30, 2007 and July 1, 2006, was $3.6 million and $3.7 million, respectively.

As of June 30, 2007 and July 1, 2006, there was $16.9 million and $21.9 million, respectively, of total unrecognized compensation cost related to non vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of  2.36  years and 1.91 years. The total fair value of shares fully vested during the three months ended June 30, 2007 and July 1, 2006 was $ 14.2 million and $13.6 million, respectively.

The weighted average fair value for our options granted in the first three months of 2007 and 2006 was $17.00 and $19.48, respectively. 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. 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:

		Three Months Ended
		June 30, 2007		July 1, 2006
Stock Options Black-Scholes assumptions (weighted average):
Volatility		30.50	%	31.00	%
Expected life (years)		5.0		5.0
Risk-free interest rate		4.50	%	5.00	%
Dividend yield		0.00	%	0.00	%

 

As of June 30, 2007 and July 1, 2006, there was $0.5 million and $0.0 million, respectively, of total unrecognized compensation cost related to non vested restricted stock awards. That cost is expected to be recognized over a weighted average period of 3.84 years. The total fair value of shares fully vested during the three months ended June 30, 2007 and July 1, 2006 was $0.0 million and $0.0 million, respectively.

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A summary of information related to restricted stock is as follows:

		Shares		Weighted Average
Nonvested at March 31, 2007		0		$	0.00
Granted		10,000		$	48.09
Vested		—		—
Forfeited		—		—
Terminated		—		—
Nonvested at June 30, 2007		10,000		$	48.09

 

As of June 30, 2007, there was $0.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to Employee Stock Purchase Plan (“ESPP”) shares.  That cost is expected to be recognized during 2007.

During the three months ended June 30, 2007 and July 1, 2006, there were 28,968 and 24,372 shares purchased under the ESPP, respectively.  They were purchased at $38.6325 and $41.5225 per share under ESPP.

5.   ACCOUNTING FOR SHIPPING AND HANDLING COSTS

Shipping and handling costs are included in costs of goods sold with the exception of $1.9 million and $1.6 million for the three month periods ended June 30, 2007 and July 1, 2006, respectively, that are included in selling, general and administrative expenses.  Freight is classified in costs 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.

6.   FOREIGN CURRENCY

We enter into forward exchange contracts to hedge the anticipated cash flows from forecasted foreign currency denominated revenues, principally Japanese Yen and Euro.  The purpose of our hedging strategy is to lock in foreign exchange rates for twelve months to minimize, for this period of time, the unforeseen impact on our results of operations of fluctuations in foreign exchange rates.  We also enter into forward contracts that settle within 35 days to hedge certain inter-company receivables denominated in foreign currencies.  These derivative financial instruments are not used for trading purposes.  The cash flows related to the gains and losses on these foreign currency hedges are classified in the consolidated statements of cash flows as part of cash flows from operating activities.

7.   PRODUCT WARRANTIES

We provide a warranty on parts and labor for one year after the sale and installation of each device. We also warrant our disposable 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.

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		For the three months ended
		June 30, 2007			July 1, 2006
		(in thousands)
Warranty accrual as of the beginning of the period		$	734		$	676
Warranty Provision		350			370
Warranty Spending		(350		)	(369		)
Warranty accrual as of the end of the period		$	734		$	677

 

8.   COMPREHENSIVE INCOME

Comprehensive income is the total of net income and all other non-owner changes in stockholders’ equity.  For us, all other non-owner changes are primarily foreign currency translation, the change in our net minimum pension liability and the changes in fair value of the effective portion of our outstanding cash flow hedge contracts.

A summary of the components of other comprehensive income is as follows:

		For the three months ended
(In thousands)		June 30, 2007			July 1, 2006
Net income		$	12,677		$	11,156
Other comprehensive income:
Foreign currency translation		297			2,760
Unrealized gain / (loss) on cash flow hedges, net of tax		750			(1,722		)
Reclassifications into earnings of cash flow hedge losses / (gains), net of tax		167			(737		)
Total comprehensive income		$	13,891		$	11,457

 

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9.   INVENTORIES

Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead.  Cost is determined on the first-in, first-out method.

Inventories consist of the following:

		June 30, 2007			March 31, 2007
		(in thousands)
Raw materials		$	20,864		$	15,190
Work-in-process		7,292			7,681
Finished goods		40,053			38,927
		$	68,209		$	61,797

 

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10.    GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The change in the carrying amount of our goodwill during the three months ended June 30, 2007 is as follows (in thousands):

Carrying amount as of March 31, 2007		$	34,958
Arryx, Inc (a)		16
IDM, Inc. (b)		(13		)
Effect of change in rates used for translation		(258		)
Carrying amount as of June 30, 2007		$	34,703

 

(a)          See Foot Note #3, Acquisitions, in our fiscal year 2007 Form 10-K for a full description of the acquisition of Arryx, Inc. which occurred on July 18, 2006.

(b)         See Foot Note #3, Acquisitions, in our fiscal year 2007Form 10-K for a full description of the acquisition of Information Data Management, Inc. (“IDM”), which occurred on January 30, 2007.

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Other Intangible Assets

As of June 30, 2007

 

		Gross Carrying Amount (in thousands)			Accumulated  Amortization (in thousands)			Weighted Average  Useful Life (in years)
Amortized Intangibles
Patents		$	13,979		$	4,984		13
Other technology		25,423			9,080			14
Customer contracts and related relationships		13,343			4,136			14
Subtotal		52,745			18,200			14
Indefinite Life Intangibles Trade name		514			n/a			Indefinite
Total Intangibles		$	53,259		$	18,200

 

As of March 31, 2007

 

		Gross Carrying Amount (in thousands)			Accumulated  Amortization (in thousands)			Weighted Average  Useful Life (in years)
Amortized Intangibles
Patents		$	13,834		$	4,679		13
Other technology		23,665			8,833			14
Customer contracts and related relationships		13,138			3,771			14
Subtotal		50,637			17,284			14
Indefinite Life Intangibles Trade name		504			n/a			Indefinite
Total Intangibles		$	51,141		$	17,284

 

Changes to the net carrying value of our intangible assets from March 31, 2007 to June 30, 2007, reflect the capitalization of software costs associated with our next generation Donor apheresis platform (see Footnote #16), the amortization expense and the effect of exchange rate changes in the translation of our intangible assets held by our international subsidiaries.

Amortization expense for amortized other intangible assets was $0.9  million and $0.6 million for the three months ended June 30, 2007 and July 1, 2006, respectively. Annual amortization expense is expected to approximate $3.6 million for fiscal years 2008, $4.2 for fiscal year 2009, $4.9 million for both fiscal years 2010 and 2011, and $4.5  million for fiscal year 2012.

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11.    INCOME TAXES

Our reported tax rate includes two principal components: an expected annual tax rate and discrete items that are recorded in the quarter that an event arises.  Events or items that give rise to discrete recognition include finalizing audit examinations for open tax years, a statute of limitation’s expiration, and a stock acquisition.

The reported tax rate was 31.2% for the current three month period ended June 30, 2007.  The reported tax rate was 35.6% for the three month period ended July 1, 2006.

The reported tax rate includes a 34.25% expected annual tax rate that reflects lower tax exempt income and export credits than in prior periods, offset by a $0.5 million discrete item representing the reversal of previously accrued foreign income taxes in Japan due to expiration of the statute of limitations.

We expect our annual tax rate to be approximately 34.25% for the remainder of fiscal year 2008.  Future adjustments may, however, increase or decrease the reported tax rate for discrete items.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” – an Interpretation of FASB Statement 109 (FIN 48), effective April 1, 2007. FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Unrecognized tax benefits represent tax positions for which reserves have been established.

As of April 1, 2007, our unrecognized tax benefits totaled approximately $6.5 million which, if recognized, would favorably affect our effective tax rate in future periods. No adjustment was made to the liability for unrecognized tax benefits as of  April 1, 2007 or June 30, 2007, or the current year’s tax provision in connection with the adoption of FIN 48. Each year the statute of limitations for income tax returns filed in various jurisdictions closes, sometimes without adjustments. In addition to the expiration of the statute of limitations in Japan during the three month period ended June 30, 2007, approximately $1.4 million of unrecognized tax benefits may be recognized through the end of the fiscal year if the statute of limitations closes and no adjustment is made to our tax position.

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 $0.8 million and $0.7 million is accrued for interest at  June 30, 2007 and March 31, 2007, 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 in jurisdictions including the U.S., Japan, Germany, France, the United Kingdom, and Switzerland. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations for years before 2004.

12.   COMMITMENTS AND CONTINGENCIES

We are presently engaged in various legal actions, and although 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.

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13.   DEFINED BENEFIT PENSION PLANS

Certain of the Company’s 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:

		For the three months ended
		June 30, 2007			July 1, 2006
		(in thousands)
Service Cost		$	143		$	187
Interest cost on benefit obligation		52			58
Expected return on plan assets		(18		)	(46		)
Amortization of unrecognized prior service cost, unrecognized gain and unrecognized initial obligation		(3		)	2
Net periodic benefit cost		$	174		$	201

 

14.   SEGMENT INFORMATION

Segment Definition Criteria

We manage our business on the basis of one operating segment: the design, manufacture and marketing of automated blood processing systems.  Our chief operating decision-maker uses consolidated results to make operating and strategic decisions.  Manufacturing processes, as well as the regulatory environment in which we operate, are largely the same for all product lines.

Enterprise Wide Disclosures About Product and Services

We have three families of products: (1) those that serve the blood donor, (2) those that serve the patient and (3) our services and software products which are used in connection with our donor and patient products.  Under the donor family of products we have included blood bank, red cell and plasma collection products. The patient products include autologous blood salvage products targeting surgical patients who lose blood while in the operating room and while in recovery.

Donor

The blood bank products include machines, single use disposables and solutions that perform “apheresis,” (the separation of whole blood into its components and subsequent collection of certain components, including platelets and plasma) as well as the washing of red blood cells for certain procedures. The main devices used for these blood component therapies are the MCS®+ mobile collection systems and the ACP® 215 automated cell processing system. In addition, the blood bank product line includes generic solutions that we produce for pharmaceutical companies pursuant to contracts.

Red cell products include machines, single use disposables and solutions that perform apheresis for the collection

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of red blood cells. The devices used for the collection red blood cells is the MCS®+ mobile collection system and the newly released Cymbal device.

Plasma collection products are machines, disposables and solutions that perform apheresis for the separation of whole blood components and subsequent collection of plasma.  The devices used in automated plasma collection are the PCS®2 plasma collection system and the Superlite™.

Patient

Patient products include machines and single use disposables that perform surgical blood salvage in orthopedic and cardiovascular surgical applications. Patient products include the OrthoPAT®, Cell Saver® and cardioPAT autologous blood recovery systems, and the Smart Suction Harmony which is a suction device designed to operate together with these blood recovery systems. Cell Saver technologies are used in cardiovascular procedures, specifically higher blood loss surgeries and trauma. The cardioPAT is used for cardiovascular surgeries where there is less bleeding and post-operatively. OrthoPAT technology is used for lower, slower blood loss orthopedic procedures, where bleeding takes place during and after surgery.  These technologies perform a procedure whereby shed blood is collected, cleansed and made available to be transfused back to the patient.

Software and Services

Software and services revenue includes revenue generated from our information services businesses, 5D and IDM  and from equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous sales, including . 5D and IDM provide software support and collection and data management systems, to plasma collectors, blood banks and the U.S. Department of Defense.

Revenues from External Customers:

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		Three Months Ended
		(in thousands)
		June 30, 2007			July 1, 2006
Disposables Revenues by Product Family
Donor:
Plasma		$	35,955		$	31,819
Blood Bank		33,032			31,366
Red Cell		10,944			10,600
		$	79,931		$	73,785
Patient:
Surgical		$	16,694		$	17,201
OrthoPAT		8,187			7,556
		$	24,881		$	24,757
Disposables Revenue		$	104,812		$	98,542
Equipment		$	6,968		$	5,608
Software and Services		$	10,156		$	6,524
Total revenues from external customers		$	121,936		$	110,674

 

15.   RESTRUCTURING

In FY2007, we embarked on the first year of a business transformation with the primary focus on our international businesses. The goal of the transformation was to position these businesses to complement the growth of our U.S. business.

Having completed the business transformation in both Japan and Asia, on April 2, 2007 management approved a plan to consolidate our customer support functions in Europe into our European Headquarters in Signy, Switzerland. The consolidated center in Signy will include finance, customer and sales support, and logistics supply chain management. The consolidation of these functions is planned to occur during the current fiscal year. To complete this plan we expect to incur exit related costs of $4 million to $5 million, including up to $3.5 million of one-time termination benefits and related costs (principally severance and outplacement costs), $0.75 million of relocation costs and $0.75 million of costs associated with reducing our facilities.

We expect this transformation will yield improved operating effectiveness, including improved customer service, enhanced business continuity for our global organization, and greater professional development opportunities for our employees, as well as annual operating savings of approximately $1.5 million.

During the three months ended June 30, 2007, we began the reorganization of certain of our international sales and service organizations and recorded pre-tax restructuring costs of $1.4 million as selling, general and administrative costs. Additionally, we incurred other transformation costs of $0.2 million, including the costs of hiring new personnel in Signy, Switzerland.

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The following summarizes the restructuring activity for the three months ended June 30, 2007 and July 1, 2006, respectively:

(Dollars in thousands)

														Restructuring
					Three Months Ended June 30, 2007									Accrual
		Balance at									Asset Write			Balance at
		March 31, 2007			Cost Incurred			Payments			down			June 30, 2007
Employee-related costs		$	—		$	1,283		$	106					$	1,177
Facility related costs		0			144			63			47			34
		$	—		$	1,427		$	169		$	47		$	1,211

 

(Dollars in thousands)

														Restructuring
					Three Months Ended July 1, 2006									Accrual
		Balance at									Asset Write			Balance at
		April 1, 2006			Cost Incurred			Payments			down			June 30, 2007
Employee-related costs		$	—		$	1,561		$	235		$	—		$	1,326
Facility related costs		—			—			—			—			—
		$	—		$	1,561		$	235		$	—		$	1,326

 

16.   CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS

The Company is implementing an Enterprise Resource Planning (ERP) system. We plan to implement the system in three phases over the next three years

The cost of software that is developed for internal use is accounted for pursuant to AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Pursuant to SOP 98-1, the Company capitalizes costs incurred during the application development stage of software developed for internal use, and expenses costs incurred during the preliminary project and the post-implementation operation stages of development. The Company capitalized $0.5 million and $0.0 million, respectively, during the three month periods ended June 30, 2007 and July 1, 2006,in costs incurred for acquisition of the software license and related software development costs for new internal software development that was in the application stage. The total capitalized costs incurred to date include $1.8 million for the cost of the software license and $7.4 million in internal personnel and third party development costs.

SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed”, 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. In connection with the development of our next generation Donor apheresis platform, the Company capitalized $1.2 million during the three month period ended June 30, 2007 and $7.1 million in total software development costs.  All costs capitalized were incurred after a detailed design of the software was developed and research and development activities on the underlying device were completed.  We will begin to amortize these costs when the device is released for sale.

17.    SUBSEQUENT EVENT

On July 9, 2007, the Company acquired Infonalé, Inc.( Infonalé) for approximately $1.3 million in cash plus contingent consideration based upon future operating performance. Infonalé is a leading developer of IT software and consulting services for optimizing hospital blood use and management.  The purchase price will be principally allocated to intangible assets including completed technology and goodwill.  The results of the Infonalé operations will be included in our consolidated results for periods after the acquisition date.

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