Table of Contents

 

 

 

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: September 27, 2008   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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   x

Accelerated filer o

 

 

Non-accelerated filer   o

Smaller reporting company 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 September 27, 2008:

 

25,292,000

 

 

 



Table of Contents

 

HAEMONETICS CORPORATION

INDEX

 

PAGE

PART I.  FINANCIAL INFORMATION

 

 

 

ITEM 1.  Financial Statements

 

Unaudited Consolidated Statements of Income – Three and Six Months Ended September 27, 2008 and September 29, 2007

2

 

 

Unaudited Consolidated Balance Sheets — September 27, 2008 and March 31, 2008

3

 

 

Unaudited Consolidated Statement of Stockholders’ Equity - Six Months Ended September 27, 2008

4

 

 

Unaudited Consolidated Statements of Cash Flows - Six Months Ended September 27, 2008 and September 29, 2007

5

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

40

 

 

ITEM 4.  Controls and Procedures

41

 

 

PART II.  OTHER INFORMATION

42

 

 

ITEM 6.  Exhibits

43

 

 

Signatures

45

 

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Table of Contents

 

ITEM 1.  FINANCIAL STATEMENTS

 

HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited in thousands, except per share data)

 

 

 

Three months ended

 

Six months ended

 

 

 

September 27

 

September 29

 

September 27

 

September 29

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

145,919

 

$

121,179

 

$

290,035

 

$

243,115

 

Cost of goods sold

 

71,230

 

61,290

 

142,309

 

121,732

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

74,689

 

59,889

 

147,726

 

121,383

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

5,217

 

6,727

 

11,061

 

13,003

 

Selling, general and administrative

 

45,863

 

38,546

 

93,722

 

77,985

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

51,080

 

45,273

 

104,783

 

90,988

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

23,609

 

14,616

 

42,943

 

30,395

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(16

)

(153

)

(40

)

(360

)

Interest income

 

506

 

1,414

 

1,160

 

3,317

 

Other income, net

 

(1,290

)

731

 

(915

)

1,688

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

22,809

 

16,608

 

43,148

 

35,040

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

8,002

 

5,441

 

14,000

 

11,196

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,807

 

$

11,167

 

$

29,148

 

$

23,844

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

 

 

 

 

 

 

 

 

Net income

 

$

0.59

 

$

0.44

 

$

1.15

 

$

0.91

 

 

 

 

 

 

 

 

 

 

 

Income per common share assuming dilution

 

 

 

 

 

 

 

 

 

Net income

 

$

0.57

 

$

0.42

 

$

1.11

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

25,038

 

25,609

 

25,323

 

26,072

 

Diluted

 

25,917

 

26,461

 

26,218

 

26,934

 

 

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

 

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HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

September 27, 2008

 

March 29, 2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

111,331

 

$

133,553

 

Accounts receivable, less allowance of $2,550 at September 27, 2008 and $2,365 at March 29, 2008

 

122,500

 

120,252

 

Inventories, net

 

73,181

 

65,388

 

Deferred tax asset, net

 

10,974

 

15,832

 

Prepaid expenses and other current assets

 

23,482

 

24,409

 

Total current assets

 

341,468

 

359,434

 

Property, plant and equipment:

 

 

 

 

 

Land, building and building improvements

 

43,631

 

43,873

 

Plant equipment and machinery

 

97,491

 

88,811

 

Office equipment and information technology

 

53,222

 

52,787

 

Haemonetics equipment

 

184,472

 

178,827

 

Total property, plant and equipment

 

378,816

 

364,298

 

Less: accumulated depreciation

 

(253,911

)

(247,814

)

Net property, plant and equipment

 

124,905

 

116,484

 

Other assets:

 

 

 

 

 

Other intangibles, less amortization of $22,801 at September 27, 2008 and $19,821 at March 29, 2008

 

65,095

 

64,333

 

Goodwill

 

54,556

 

54,222

 

Deferred tax asset, long term

 

9,894

 

9,244

 

Other long-term assets

 

4,792

 

5,233

 

Total other assets

 

134,337

 

133,032

 

Total assets

 

$

600,710

 

$

608,950

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

8,055

 

$

6,326

 

Accounts payable

 

20,292

 

19,724

 

Accrued payroll and related costs

 

21,705

 

19,824

 

Accrued income taxes

 

8,008

 

5,285

 

Other liabilities

 

29,126

 

46,518

 

Total current liabilities

 

87,186

 

97,677

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

5,697

 

6,037

 

Long-term deferred tax liability

 

3,253

 

3,253

 

Other long-term liabilities

 

7,759

 

7,795

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; Authorized - 150,000,000 shares; Issued and outstanding– 25,292,000 shares at September 27, 2008 and 25,694,769 shares at March 29, 2008

 

252

 

256

 

Additional paid-in capital

 

209,427

 

186,933

 

Retained earnings

 

279,360

 

302,196

 

Accumulated other comprehensive income

 

7,776

 

4,803

 

Total Stockholders’ equity

 

496,815

 

494,188

 

Total liabilities and stockholders’ equity

 

$

600,710

 

$

608,950

 

 

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

 

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HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME

(Unaudited in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

$’s

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated Other
Comprehensive
Income / (Loss)

 

Total
Stockholders’
Equity

 

Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 29, 2008

 

25,695

 

$

256

 

$

186,933

 

$

302,196

 

$

4,803

 

$

494,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan

 

31

 

 

1,396

 

 

 

1,396

 

 

 

Exercise of stock options and related tax benefit

 

660

 

7

 

24,559

 

 

 

24,566

 

 

 

Shares repurchased

 

(1,100

)

(11

)

(8,003

)

(51,984

)

 

(59,998

)

 

 

Issuance of restricted stock, net of cancellations

 

6

 

 

 

 

 

 

 

 

Stock Compensation expense

 

 

 

4,542

 

 

 

4,542

 

 

 

Net income

 

 

 

 

29,148

 

 

29,148

 

29,148

 

Foreign currency translation adjustment

 

 

 

 

 

(5,655

)

(5,655

)

(5,655

)

Unrealized gain on hedges

 

 

 

 

 

 

 

 

 

4,690

 

4,690

 

4,690

 

Reclassification of hedge loss to earnings

 

 

 

 

 

3,938

 

3,938

 

3,938

 

Comprehensive income

 

 

 

 

 

 

 

32,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 27, 2008

 

25,292

 

$

252

 

$

209,427

 

$

279,360

 

$

7,776

 

$

496,815

 

 

 

 

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)

 

 

 

Six Months Ended

 

 

 

September 27,

 

September 29,

 

 

 

2008

 

2007

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

29,148

 

$

23,844

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Non cash items:

 

 

 

 

 

Depreciation and amortization

 

18,083

 

14,685

 

Stock compensation expense

 

4,542

 

4,611

 

Loss/(gain) on sales of plant, property and equipment

 

1,102

 

(380

)

Unrealized loss from hedging activities

 

3,706

 

245

 

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(7,350

)

(6,726

)

Increase in inventories

 

(7,847

)

(5,050

)

(Increase)/Decrease in prepaid income taxes

 

(267

)

484

 

Increase in other assets and other long-term liabilities

 

(11,105

)

(17,425

)

Tax benefit of exercise of stock options

 

2,131

 

1,147

 

Increase in accounts payable and accrued expenses

 

9,634

 

6,617

 

Net cash provided by operating activities

 

41,777

 

22,052

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures on property, plant and equipment

 

(28,775

)

(27,255

)

Proceeds from sale of property, plant and equipment

 

2,497

 

1,962

 

Acquisition of Medicell

 

(2,459

)

 

Acquisition of Infonale, Inc.

 

 

(1,386

)

Net cash used in investing activities

 

(28,737

)

(26,679

)

Cash Flows from Financing Activities:

 

 

 

 

 

Payments on long-term real estate mortgage

 

(340

)

(314

)

Net increase/(decrease) in short-term revolving credit agreements

 

2,100

 

(4,456

)

Employee stock purchase plan

 

1,396

 

1,119

 

Exercise of stock options

 

17,598

 

8,156

 

Excess tax benefit on exercise of stock options

 

5,419

 

730

 

Stock Repurchase

 

(59,998

)

(74,996

)

Net cash used in financing activities

 

(33,825

)

(69,761

)

Effect of Exchange Rates on Cash and Cash Equivalents

 

(1,437

)

144

 

Net Decrease in Cash and Cash Equivalents

 

(22,222

)

(74,244

)

Cash and Cash Equivalents at Beginning of Year

 

133,553

 

229,227

 

Cash and Cash Equivalents at End of Period

 

$

111,331

 

$

154,983

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

Transfers from inventory to fixed assets for placements of Haemonetics equipment

 

$

4,984

 

$

1,657

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

275

 

$

502

 

Income taxes paid

 

$

7,394

 

$

17,490

 

 

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

 

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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 and six month periods ended September 27, 2008. Operating results for the six month period ended September 27, 2008 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 28, 2009, or any other interim period.  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 29, 2008.

 

Our fiscal year ends on the Saturday closest to the last day of March. Fiscal years 2009 and 2008 include 52 weeks with all four quarters including 13 weeks.

 

Revenue Recognition
 

Our revenue recognition policy is to recognize revenues from product sales, software and services in accordance with SAB No. 104, “Revenue Recognition” , EITF 00-21, “Revenue Arrangements with Multiple Deliverables” and Statement of Position (“SOP”) 97-2, “Software Revenue Recognition, as amended”.  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 collectibility is reasonably assured. 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 fair value, 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 and there is objective and reliable evidence of the fair value of the undelivered items. The fair value 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 using other objective evidence as defined in EITF 00-21, or vendor specific objective evidenced under SOP 97-2.

 

Product Revenues
 
Product sales consist of the sale of our equipment devices and the related disposables used with these devices.   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. Examples of common post delivery obligations are installation and training.  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. All shipments to distributors are at contract prices and payment is not contingent upon resale of the product.

 

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Software and Service Revenues
 
At this time, our software and services business principally provides support to our plasma and blood collection customers.  Through our Haemonetics Software Solutions unit, (formerly 5D™ Information Management (“5D”) and Information Data Management (“IDM”)), 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. Software license revenues are generally billed periodically, monthly or quarterly and recognized over the period in which the service is provided. Our software and service business model includes the provision of 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.
 

2.   RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45”. The FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The provisions of the FSP that amend Statement 133 and Interpretation 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.  We have not issued or purchased credit derivatives.  Nonetheless, we are currently evaluating the potential impact of FSP No. 133-1 and FIN 45-4 on our financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the American Institute of Certified Public Accountants’ (AICPA) Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. We are currently evaluating the potential impact of SFAS No. 162 on our financial position and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, as an amendment of SFAS No. 133”. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for any reporting period (annual or quarterly interim) beginning on or after November 15, 2008. We are currently evaluating the potential impact of SFAS No. 161 on our financial position and results of operations. This statement is effective for our fourth quarter interim period ending March 28, 2009 and our 2009 annual financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). In SFAS 141(R), the FASB retained the fundamental requirements of SFAS No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes

 

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the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the potential impact of SFAS 141(R) on our financial position and results of operations. This statement is effective for our fiscal year 2010.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”, of which the objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way - as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the potential impact of SFAS No. 160 on our financial position and results of operations. This statement is effective for our fiscal year 2010.

 

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 SFAS 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.

 

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For the Three Months Ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands, except per share amounts)

 

Basic EPS

 

 

 

 

 

Net income

 

$

14,807

 

$

11,167

 

 

 

 

 

 

 

Weighted average shares

 

25,038

 

25,609

 

 

 

 

 

 

 

Basic income per share

 

$

0.59

 

$

0.44

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Net income

 

$

14,807

 

$

11,167

 

 

 

 

 

 

 

Basic weighted average shares

 

25,038

 

25,609

 

Dilutive effect of stock options

 

879

 

851

 

 

 

 

 

 

 

Diluted weighted average shares

 

25,917

 

26,461

 

 

 

 

 

 

 

Diluted income per share

 

$

0.57

 

$

0.42

 

 

 

 

For the Six Months Ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands, except per share amounts )

 

Basic EPS

 

 

 

 

 

Net income

 

$

29,148

 

$

23,844

 

 

 

 

 

 

 

Weighted average shares

 

25,323

 

26,072

 

 

 

 

 

 

 

Basic income per share

 

$

1.15

 

$

0.91

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Net income

 

$

29,148

 

$

23,844

 

 

 

 

 

 

 

Basic weighted average shares

 

25,323

 

26,072

 

Dilutive effect of stock options

 

895

 

863

 

 

 

 

 

 

 

Diluted weighted average shares

 

26,218

 

26,934

 

 

 

 

 

 

 

Diluted income per share

 

$

1.11

 

$

0.89

 

 

4.   STOCK-BASED COMPENSATION

 

Stock-based compensation expense of $4.5 million and $4.6 million was recognized for the six months ended September 27, 2008 and September 29, 2007, respectively.  The related income tax benefit recognized was $1.3 million for each of the six month periods ended September 27, 2008 and September 29, 2007, respectively. We recognize stock-based compensation on a straight line basis.

 

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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 29, 2008.   Our stock-based compensation plans currently consist of stock options, restricted stock awards, restricted stock units and an employee stock purchase plan.  Options become exercisable in the manner specified by the Compensation Committee of our Board of Directors.  With the exception of one performance based restricted stock award granted in the first quarter of this year, all options, restricted stock awards and restricted stock units granted to employees in the six months ended September 27, 2008 vest over a four year period of time and the options 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. This excess tax benefit was $4.1 million and $0.2 million for the three months ended September 27, 2008 and September 29, 2007, respectively, and $5.4 million and $0.8 million for the six months ended September 27, 2008 and September 29, 2007, respectively.

 

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

 

 

 

Options
Outstanding

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Life
(Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

($000’s)

 

Outstanding at March 29, 2008

 

3,657,566

 

$

37.05

 

4.61

 

$

79,183

 

 

 

 

 

 

 

 

 

 

 

Granted

 

842

 

$

57.86

 

 

 

 

 

Exercised

 

(180,095

)

$

26.52

 

 

 

 

 

Forfeited

 

(40,030

)

$

45.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 28, 2008

 

3,438,283

 

$

37.51

 

4.37

 

$

69,606

 

 

 

 

 

 

 

 

 

 

 

Granted

 

46,138

 

$

58.45

 

 

 

 

 

Exercised

 

(480,045

)

$

26.69

 

 

 

 

 

Forfeited

 

(10,589

)

$

39.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 27, 2008

 

2,993,787

 

$

39.55

 

4.35

 

$

63,933

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 27, 2008

 

2,098,037

 

$

35.19

 

4.08

 

$

53,959

 

 

 

 

 

 

 

 

 

 

 

Expected to Vest at September 27, 2008

 

2,797,723

 

$

38.86

 

4.31

 

$

61,681

 

 

The total intrinsic value of options exercised during the three month periods ended September 27, 2008 and September 29, 2007, was $16.4 million and $1.3 million, respectively, and $22.6 million and $6.8 million for the six month periods ended September 27, 2008 and September 29, 2007, respectively.

 

As of September 27, 2008 and September 29, 2007, there was $11.0 million and $15.0 million, respectively, of total unrecognized compensation cost related to non vested stock options. That cost is expected to be recognized over a weighted average period of 1.9 years and 2.2 years. The total fair value of shares fully vested during the six months ended September 27, 2008 and September 29, 2007 was $26.6 million $25.5 million, respectively.

 

The weighted average fair value for our options granted in the first six months of fiscal year 2009 and 2008 was $18.07 and $17.78, 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

 

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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:

 

 

 

Six Months Ended

 

 

 

September 27, 2008

 

September 29, 2007

 

Stock Options Black-Scholes assumptions (weighted average):

 

 

 

 

 

Volatility

 

29.07

%

30.18

%

Expected life (years)

 

4.9

 

5.0

 

Risk-free interest rate

 

3.26

%

4.61

%

Dividend yield

 

0.00

%

0.00

%

 

As of September 27, 2008 and September 29, 2007, there was $0.4 and $0.3 million, respectively, of total unrecognized compensation cost related to non vested restricted stock awards. That cost was expected to be recognized over a weighted average period of 2.17 and 3.59 years, respectively. The total fair value of restricted stock awards vested during the six months ended September 27, 2008 was $0.1 million and $0.0 million during the six months ended September 29, 2007.

 

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

 

 

 

Shares

 

Weighted Average
Share Price at
Grant Date

 

Nonvested at March 29, 2008

 

10,000

 

$

48.09

 

 

 

 

 

 

 

Granted

 

3,456

 

$

57.22

 

Released

 

(2,500

)

$

48.09

 

Forfeited

 

 

 

Terminated

 

 

 

 

 

 

 

 

 

Nonvested at June 28, 2008

 

10,956

 

$

50.97

 

 

 

 

 

 

 

Granted

 

 

 

Released

 

 

 

Forfeited

 

 

 

Terminated

 

 

 

 

 

 

 

 

 

Nonvested at September 27, 2008

 

10,956

 

$

50.97

 

 

As of September 27, 2008 and September 29, 2007, there was $2.1 and $0.1 million, respectively, of total unrecognized compensation cost related to non vested restricted stock units. That cost was expected to be recognized over a weighted average period of 3.0 and 2.02 years, respectively. The total fair value of shares fully vested was $0.1 million and $0.0 million for the six months ended September 27, 2008 and September 29, 2007, respectively.

 

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

 

 

 

Shares

 

Weighted Average
Share Price

 

Nonvested at March 29, 2008

 

58,332

 

$

51.52

 

 

 

 

 

 

 

Granted

 

210

 

$

57.23

 

Vested

 

 

 

Forfeited

 

(1,905

)

$

50.90

 

 

 

 

 

 

 

Nonvested at June 28, 2008

 

56,637

 

$

51.56

 

 

 

 

 

 

 

Granted

 

5,591

 

$

58.19

 

Vested

 

(2,225

)

$

50.23

 

Forfeited

 

(937

)

$

51.33

 

 

 

 

 

 

 

Nonvested at September 27, 2008

 

59,066

 

$

52.24

 

 

As of September 27, 2008 and September 29, 2007, there was $0.3 and $0.1 million, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to the Employee Stock Purchase Plan (“ESPP”) shares.  That cost was expected to be recognized over the remainder of fiscal year 2009 and fiscal year 2008, respectively.

 

During the six months ended September 27, 2008 and September 29, 2007, there were 31,474 and 28,968 shares purchased under the ESPP, respectively.  They were purchased at $44.353 and $38.6325 per share under the ESPP.

 

5.   ACCOUNTING FOR SHIPPING AND HANDLING COSTS

 

Shipping and handling costs are included in cost of goods sold with the exception of $5.9 million and $4.4 million for the six months ended September 27, 2008 and September 29, 2007, respectively, that 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.

 

6.   FOREIGN CURRENCY

 

We enter into forward exchange contracts to hedge the probable cash flows from forecasted inter-company foreign currency denominated revenues, principally Japanese Yen and Euro. The purpose of our hedging strategy is to lock in foreign exchange rates for 12 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 forward exchange contracts are recorded at fair value and are included in other current assets or other current liabilities on our consolidated balance sheets.  The gains or losses on the forward exchange contracts designated as hedges are recorded in net revenues on our consolidated statements of income when the underlying hedge transaction affects earnings.  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.   In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, the Company would reclassify any gain or loss on the related cash flow hedge from

 

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other comprehensive income to earnings at that time.  The ineffective portion of a derivative’s change in fair value is recognized currently in other income, net in our consolidated statements of income.

 

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 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.

 

 

 

For the three months ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

 

 

 

 

Warranty accrual as of the beginning of the period

 

$

960

 

$

734

 

 

 

 

 

 

 

Warranty Provision

 

341

 

506

 

 

 

 

 

 

 

Warranty Spending

 

(309

)

(506

)

 

 

 

 

 

 

Warranty accrual as of the end of the period

 

$

992

 

$

734

 

 

 

 

For the six months ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

 

 

 

 

Warranty accrual as of the beginning of the period

 

$

929

 

$

734

 

 

 

 

 

 

 

Warranty Provision

 

876

 

988

 

 

 

 

 

 

 

Warranty Spending

 

(813

)

(988

)

 

 

 

 

 

 

Warranty accrual as of the end of the period

 

$

992

 

$

734

 

 

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.

 

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

 

 

 

For the three months ended

 

(In thousands)

 

September 27, 2008

 

September 29, 2007

 

Net income

 

$

14,807

 

$

11,167

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation

 

(4,153

)

3,475

 

 

 

 

 

 

 

Unrealized gain/(loss) on cash flow hedges, net of tax

 

1,783

 

(2,681

)

Reclassifications into earnings of cash flow hedge losses, net of tax

 

1,345

 

280

 

Total comprehensive income

 

$

13,782

 

$

12,241

 

 

 

 

For the six months ended

 

(In thousands)

 

September 27, 2008

 

September 29, 2007

 

Net income

 

$

29,148

 

$

23,844

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation

 

(5,655

)

3,772

 

 

 

 

 

 

 

Unrealized gain/(loss) on cash flow hedges, net of tax

 

4,690

 

(1,930

)

Reclassifications into earnings of cash flow hedge losses, net of tax

 

3,938

 

446

 

Total comprehensive income

 

$

32,121

 

$

26,132

 

 

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:

 

 

 

September 27, 2008

 

March 29, 2008

 

 

 

(in thousands)

 

Raw materials

 

$

20,663

 

$

16,107

 

Work-in-process

 

16,387

 

14,430

 

Finished goods

 

36,131

 

34,851

 

 

 

$

73,181

 

$

65,388

 

 

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10.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The change in the carrying amount of our goodwill during the six months ended September 27, 2008 is as follows (in thousands):

 

Carrying amount as of March 29, 2008

 

$

54,222

 

Medicell (a)

 

1,020

 

Haemoscope (b)

 

22

 

Effect of change in rates used for translation

 

(708

)

 

 

 

 

Carrying amount as of September 27, 2008

 

$

54,556

 

 


(a)

 

A full description of the acquisition of Medicell Ltd., which occurred on April 4, 2008, is included in Foot Note #10, Goodwill and Other Intangibles, of our Form 10-Q for the quarter ended June 28, 2008.

 

 

 

(b)

 

See Foot Note #3, Acquisitions, in our fiscal year 2008 Form 10-K for a full description of the acquisition of Haemoscope Corporation’s TEG® Thrombelastograph® Hemostasis Analyzer business, which occurred on November 20, 2007.

 

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Table of Contents

 

Other Intangible Assets

 

As of September 27, 2008

 

 

 

Gross Carrying Amount
(in thousands)

 

Accumulated
Amortization
(in thousands)

 

Weighted Average
Useful Life (in years)

 

Amortized Intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

$

11,853

 

$

4,521

 

11

 

 

 

 

 

 

 

 

 

Capitalized Software

 

15,131

 

289

 

5

 

 

 

 

 

 

 

 

 

Other technology

 

29,193

 

10,893

 

10

 

 

 

 

 

 

 

 

 

Customer contracts and related relationships

 

30,600

 

7,056

 

11

 

 

 

 

 

 

 

 

 

Trade Names

 

600

 

42

 

12

 

 

 

 

 

 

 

 

 

Subtotal

 

87,377

 

22,801

 

10

 

 

 

 

 

 

 

 

 

Indefinite Life Intangibles Trade name

 

519

 

n/a

 

Indefinite

 

 

 

 

 

 

 

 

 

Total Intangibles

 

$

87,896

 

$

22,801

 

 

 

 

As of March 29, 2008

 

 

 

Gross Carrying Amount
(in thousands)

 

Accumulated
Amortization
(in thousands)

 

Weighted Average
Useful Life (in years)

 

Amortized Intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

$

11,725

 

$

4,073

 

12

 

 

 

 

 

 

 

 

 

Capitalized Software

 

13,638

 

296

 

6

 

 

 

 

 

 

 

 

 

Other technology

 

28,327

 

10,013

 

11

 

 

 

 

 

 

 

 

 

Customer contracts and related relationships

 

29,342

 

5,439

 

8

 

 

 

 

 

 

 

 

 

Trade Names

 

600

 

0

 

12

 

 

 

 

 

 

 

 

 

Subtotal

 

83,632

 

19,821

 

11

 

 

 

 

 

 

 

 

 

Indefinite Life Intangibles Trade name

 

522

 

n/a

 

Indefinite

 

 

 

 

 

 

 

 

 

Total Intangibles

 

$

84,154

 

$

19,821

 

 

 

 

The changes to the net carrying value of our intangible assets from March 29, 2008 to September 27, 2008, reflect the capitalization of software costs associated with our devices and software products (see Footnote #17), 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 $1.5 million and $1.0 million for the three months ended September 27, 2008 and September 29, 2007, respectively and $3.0 million and $1.9 million for the six months ended September 27, 2008 and September 29, 2007, respectively. Annual amortization expense is

 

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expected to approximate $6.0 million for fiscal year 2009, $6.4 million for fiscal year 2010, $6.4 million for fiscal year 2011, $6.0 million for fiscal year 2012, $5.9 million for fiscal year 2013, and $6.4 million for fiscal year 2014.

 

11.    FAIR VALUE MEASUREMENT

 

We adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements, as of March 30, 2008. Statement No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. Statement No. 157 does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB released Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of Statement No. 157 for all nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. In accordance with Staff Position No. 157-2, we have not applied the provisions of Statement No. 157 to the following nonfinancial assets and nonfinancial liabilities:

 

·                  Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent reporting periods;

·                  Reporting units and nonfinancial assets and nonfinancial liabilities measured at fair value for our goodwill impairment test in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets;

·                  Indefinite-lived intangible assets measured at fair value for impairment assessment in accordance with Statement No. 142;

·                  Nonfinancial long-lived assets or asset groups measured at fair value for impairment assessment or disposal under FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets; and

·                  Nonfinancial liabilities associated with exit or disposal activities initially measured at fair value under FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

 

We will be required to apply the provisions of Statement No. 157 to these nonfinancial assets and nonfinancial liabilities as of March 29, 2009 and are currently evaluating the impact of the application of Statement No. 157 as it pertains to these items. The application of Statement No. 157 for financial assets and financial liabilities did not have a material impact on our financial position, results of operations or cash flows.

 

On a recurring basis, we measure certain financial assets and financial liabilities at fair value, including our money market funds and foreign currency derivative contracts. Statement No. 157 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.

 

Statement No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial 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.

 

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·                  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 generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

 

We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.  We determine the fair value of these instruments using the framework prescribed by Statement No. 157 by considering the estimated amount we would receive or pay to terminate these agreements at the reporting date and by taking into account current interest rates, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities.  We use a discounted cash flow model to value these forward foreign exchange contracts.  The most significant input to this model is the current foreign exchange spot rate. We have classified our derivative assets and liabilities within Level 2 of the fair value hierarchy because these observable inputs are available for substantially the full term of our derivative instruments.

 

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 September 27, 2008:

 

 

 

Quoted
Market Prices
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

 

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds

 

$

84,214

 

$

 

$

 

$

84,214

 

Forward currency exchange contracts

 

 

1,872

 

 

1,872

 

 

 

$

84,214

 

$

1,872

 

$

 

$

86,086

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Forward currency exchange contracts

 

$

 

$

904

 

$

 

$

904

 

 

 

$

 

$

904

 

$

 

$

904

 

 

There were no assets or liabilities measured at fair value using significant unobservable inputs (Level 3) during the six months ended September 27, 2008.

 

Statement No. 159

 

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, which allows an entity to elect to record financial assets and financial liabilities at fair value upon their initial recognition on a contract-by-contract basis. We adopted Statement No. 159 as of March 30, 2008 and did not elect the fair value option for our eligible financial assets and financial liabilities.

 

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Table of Contents

 

12.    INCOME TAXES

 

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

 

The reported tax rates were 35.1% and 32.4% for the three and six month periods ended September 27, 2008.  The reported tax rates were 32.8% and 32.0% for the three and six month period ended September 29, 2007.  The reported tax rate for the six month periods ended September 27, 2008 and September 29, 2007 included discrete tax benefits or $1.1 million and $0.9 million, respectively, pertaining to the reversal of reserves for uncertain tax benefits pertaining to transfer pricing as a result of the expiration of the statute of limitations in Japan.

 

For the three and six months ended September 27, 2008, the reported tax rate includes a 35.1% annual effective tax rate.  The annual effective tax rate reflects the expiration of federal research and development credits and a shift away from investing in tax-exempt interest bearing assets. On October 3, 2008, a law was enacted that reinstated the federal research and development credit that will provide a beneficial impact on the rate to be reflected in the third quarter of fiscal year 2009.

 

As of March 29, 2008, our unrecognized tax benefits totaled approximately $5.2 million which, if recognized, would favorably affect our effective tax rate in future periods.  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 six months ended September 27, 2008, approximately $1.1 million of unrecognized tax benefits may be recognized through the end of the fiscal year.  Total unrecognized tax benefits on September 27, 2008 were $4.3 million.

 

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 $0.9 million and $0.8 million are accrued for interest at September 27, 2008 and March 29, 2008, 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 2005.

 

13.  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.

 

14. 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:

 

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For the three months ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

Service Cost

 

$

150

 

$

143

 

Interest cost on benefit obligation

 

66

 

52

 

Expected return on plan assets

 

(19

)

(18

)

Amortization of unrecognized prior service cost, unrecognized gain and unrecognized initial obligation

 

(4

)

(3

)

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

193

 

$

174

 

 

 

 

For the six months ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

Service Cost

 

$

300

 

$

286

 

Interest cost on benefit obligation

 

132

 

105

 

Expected return on plan assets

 

(38

)

(36

)

Amortization of unrecognized prior service cost, unrecognized gain and unrecognized initial obligation

 

(8

)

(6

)

 

 

 

 

 

 

Net periodic benefit cost

 

$

386

 

$

349

 

 

15.    SEGMENT INFORMATION

 

Segment Definition Criteria

 

We manage our business on the basis of one operating segment: the design, manufacture and marketing of automated blood management solutions.  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 connections 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 during or after surgery as well as a blood loss diagnostic product.  Software and services include information technology platforms and business services that assist blood banks, plasma centers, and hospitals more effectively manage regulatory compliance and operational efficiency.

 

Donor

 

The blood bank products include devices, single use disposables and solutions that perform “apheresis,” (the automated, on-line separation of a blood donor’s whole blood into its components, followed by the diversion of one or more blood components targeted for collection and the automated return to the donor of the “unwanted” components) as well as the washing of red blood cells for certain procedures. The main devices used for these blood component procedures are the MCS®+ mobile collection systems and the ACP® 215 automated cell processing system.

 

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Table of Contents

 

Red cell products include devices, single use disposables and solutions that perform apheresis for the collection of red blood cells. The devices used for the collection of red blood cells is the MCS®+ 8150 mobile collection system and the Cymbal mobile collection system.

 

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

 

Patient

 

Patient products include devices and single use disposables that process surgical blood. Patient devices include the OrthoPAT, Cell Saver and cardioPAT surgical blood salvage systems, and the SmartSuction Harmony surgical suction product. Cell Saver is used in cardiovascular surgeries with high blood loss, other high blood loss surgeries, and trauma.  The Cell Saver is mainly used intra-operatively.  The cardioPAT is used in lower blood loss and minimally invasive cardiovascular surgeries.  The cardioPAT can be used both intra-operatively 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.
 
The SmartSuction Harmony is an auto-regulating suction system which removes blood and debris from the surgical field.  The systems are used in conjunction with surgical blood salvage.
 

In November of 2007, we acquired the TEG® Thrombelastograph® Hemostasis Analyzer business (“TEG®” or “TEG”) from Haemoscope Corporation.  The TEG system is a diagnostic tool which allows clinicians to determine before, during, or after surgery, the platelet function of a particular patient, and consequently the likelihood that that patient will clot or bleed and therefore, need a transfusion.  The TEG system allows the surgeon or anesthesiologist to decide upon the best blood-related clinical treatment for the individual patient.

 

Software Solutions and Services

 

Software and services revenue include revenue generated from Haemonetics’ Software Solutions business, equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous sales. Haemonetics Software Solutions provides information technology platforms and related services to plasma collectors, blood banks and the US Department of Defense. Our business services products include service offerings that assist blood banks, plasma centers, and hospitals more effectively manage regulatory compliance and operational efficiency.

 

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Table of Contents

 

Revenues from External Customers:

 

 

 

Three Months Ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

Disposables Revenues by Product Family

 

 

 

 

 

Donor:

 

 

 

 

 

Plasma

 

$

49,924

 

$

37,581

 

Blood Bank

 

36,294

 

34,160

 

Red Cell

 

11,758

 

10,835

 

 

 

$

97,976

 

$

82,576

 

 

 

 

 

 

 

Patient:

 

 

 

 

 

Surgical

 

$

20,747

 

$

15,232

 

OrthoPAT

 

8,393

 

7,849

 

 

 

$

29,140

 

$

23,081

 

 

 

 

 

 

 

Disposables Revenue

 

$

127,116

 

$

105,657

 

 

 

 

 

 

 

Equipment

 

$

8,853

 

$

6,833

 

Software Solutions

 

$

9,950

 

$

8,689

 

 

 

 

 

 

 

Total revenues from external customers

 

$

145,919

 

$

121,179

 

 

 

 

Six Months Ended

 

 

 

September 27, 2008

 

September 29, 2007

 

 

 

(in thousands)

 

Disposables Revenues by Product Family

 

 

 

 

 

Donor:

 

 

 

 

 

Plasma

 

$

96,792

 

$

73,536

 

Blood Bank

 

71,953

 

67,192

 

Red Cell

 

23,600

 

21,779

 

 

 

$

192,345

 

$

162,507

 

 

 

 

 

 

 

Patient:

 

 

 

 

 

Surgical

 

$

43,110

 

$

31,926

 

OrthoPAT

 

17,189

 

16,036

 

 

 

$

60,299

 

$

47,962

 

 

 

 

 

 

 

Disposables Revenue

 

$

252,644

 

$

210,469

 

 

 

 

 

 

 

Equipment

 

$

17,142

 

$

13,801

 

Software Solutions

 

$

20,249

 

$

18,845

 

 

 

 

 

 

 

Total revenues from external customers

 

$

290,035

 

$

243,115

 

 

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Table of Contents

 

16.    REORGANIZATION

 

During the last two years, the Company embarked on 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.

 

On May 1, 2008, management announced a plan to transform our Technical Operations organization, which includes research, development and engineering, quality systems and manufacturing. Our goal is to better align our Technical Operations resources with our strategy to be the global leader in blood management solutions for our customers. This transformation will include: optimizing the products manufactured in our plants to best support our global customer base and concentrating our research, development and engineering resources on one platform project at a time.

 

Over the course of fiscal year 2009, we intend to finalize and implement the Technical Operations organization transformation plan. In accordance with the Company’s revised guidance, once finalized and implemented, we expect to incur exit related costs of $5 million to $7 million. For the six months ended September 27, 2008, we incurred costs totaling $2.1 million of one-time termination benefits and related costs (principally severance and outplacement costs) recorded as selling, general and administrative expenses.

 

We expect this transformation will align our resources with our vision of being the global leader in blood management solutions.

 

As part of our Technical Operations organization transformation plan, we are finalizing the consolidation of our customer support functions in Europe into our European Headquarters in Signy, Switzerland. The consolidated center in Signy now includes finance, customer and sales support, and logistics supply chain management. The majority of the consolidation of these functions occurred during fiscal year 2008.  For the six months ended September 27, 2008 and September 29, 2007, we recorded pre-tax restructuring costs of $0.8 million and $2.3 million, respectively, as selling, general, and administrative costs.  Additionally, we incurred other transformation costs relating to the hiring of new personnel in our new shared services center in Signy, Switzerland of $0.3 million and $0.5 million for the six months ended September 27, 2008 and September 29, 2007, respectively.  The other transformation costs related to the hiring of new personnel are not included in the table below.

 

The following summarizes the restructuring activity for the six months ended September 27, 2008 and September 29, 2007, respectively:

 

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Table of Contents

 

 

 

Six Months Ended September 27, 2008

 

(Dollars in thousands)

 

Balance at March
29, 2008

 

Cost Incurred

 

Payments

 

Asset Write
down

 

Restructuring
Accrual Balance at
September 27, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

521

 

$

1,988

 

$

1,498

 

$

 

$

1,011

 

Facility related costs

 

42

 

71

 

71

 

 

42

 

Other Exit & Termination Costs

 

78

 

 

 

 

78

 

 

 

$

641

 

$

2,059

 

$

1,569

 

$

 

$

1,131

 

 

 

 

Six Months Ended September 29, 2007

 

(Dollars in thousands)

 

Balance at March
31, 2007

 

Cost Incurred

 

Payments

 

Asset Write
down

 

Restructuring
Accrual Balance at
September 29, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

 

$

2,000

 

$

520

 

$

 

$

1,480

 

Facility related costs

 

 

276

 

176

 

47

 

53

 

 

 

$

 

$

2,276

 

$

696

 

$

47

 

$

1,533

 

 

17.    CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS

 

The Company is implementing an Enterprise Resource Planning (ERP) system. In Fiscal 2007, we began our plan to implement the system in two phases over three years.  The Company has completed and put into service costs relating to Phase I.  Phase II began during the three months ended June 28, 2008.

 

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 $2.0 million and $4.9 million, respectively, during the six month periods ended September 27, 2008 and September 29, 2007, 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 project to date include $1.8 million for the cost of the software license and $16.4 million in third party development costs and internal personnel.

 

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 the software for our next generation Donor apheresis platform, the Company capitalized $0.7 million during the six month period ended September 27, 2008 and a project to date total of $11.9 million.  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.  Work on the Donor apheresis platform has been temporarily suspended while the Company focuses on completing another

 

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Table of Contents

 

project, which is expected to be completed by early to mid fiscal year 2010.  Work on the Donor apheresis platform is expected to resume mid fiscal year 2010.  We will begin to amortize these costs when the device is released for sale.

 

Additionally, the Company capitalized $1.6 million in software development costs for other ongoing initiatives during the six month period ended September 27, 2008. We will begin to amortize these costs when the products are released for sale.

 

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Table of Contents

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with both our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A contained in our fiscal year 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 27, 2008. The following discussion may contain forward-looking statements and should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Information” beginning on page 40.

 

Our Business

 

Haemonetics is a blood management solutions company for our customers.  Anchored by our reputable medical devices systems, we also provide information technology platforms and value added services to provide customers with business solutions which support improved clinical outcomes for patients and efficiency in the blood supply chain.

 

Our systems automate the collection and processing of donated blood; assess likelihood for blood loss; and salvage and process surgical patient blood.  These systems include devices and single-use, proprietary disposable sets (“disposables”) that operate only with our specialized devices. Our systems allow users to collect and process only the blood component(s) they target – plasma, platelets, or red blood cells – increasing donor and patient safety as well as collection efficiencies. Our information technology platforms are used by blood and plasma collectors to improve the safety and efficiency of blood collection logistics by eliminating previously manual functions at not-for-profit blood banks and commercial plasma centers.  Our business services products include consulting, Six Sigma, LEAN manufacturing and Insight Opportunity Model offerings that support our customers’ needs for regulatory compliance and operational efficiency in the blood supply chain.

 

We either sell our devices to customers (resulting in equipment revenue) or place our devices with customers subject to certain conditions. When the device remains our property, the customer has the right to use it for a period of time as long as the customer meets certain conditions we have established, which among other things, generally include one or more of the following:

 

·                  Purchase and consumption of a minimum level of disposables products;

·                  Payment of monthly rental fees; and

·                  An asset utilization performance metric, such as performing a minimum level of procedures per month per device.

 

Our disposables revenue stream (including sales of disposables and fees for the use of our equipment) accounted for approximately 87.1% and 87.2% of our total revenues for the second quarter of fiscal year 2009 and 2008, respectively and 87.1% and 86.6% of our total revenues for the first six months of fiscal year 2009 and 2008, respectively.

 

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Table of Contents

 

Financial Summary

 

 

 

For the three months ended

 

For the six months ended

 

 

 

 

 

 

 

% Increase/

 

 

 

 

 

% Increase/

 

(in thousands, except per

 

September 27,

 

September 29,

 

(Decrease)
Q2FY09 vs.

 

September 27,

 

September 29,

 

(Decrease)
YTDFY09 vs.

 

share data)

 

2008

 

2007

 

Q2FY08

 

2008

 

2007

 

YTDFY08

 

Net revenues

 

$

145,919

 

$

121,179

 

20.4

%

$

290,035

 

$

243,115

 

19.3

%

Gross profit

 

$

74,689

 

$

59,889

 

24.7

%

$

147,726

 

$

121,383

 

21.7

%

% of net revenues

 

51.2

%

49.4

%

 

 

50.9

%

49.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

23,609

 

$

14,616

 

61.5

%

$

42,943

 

$

30,395

 

41.3

%

% of net revenues

 

16.2

%

12.1

%

 

 

14.8

%

12.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(16

)

$

(153

)

(89.5

)%

$

(40

)

$

(360

)

(88.9

)%

Interest income

 

$

506

 

$

1,414

 

(64.2

)%

$

1,160

 

$

3,317

 

(65.0

)%

Other income/(expense), net

 

$

(1,290

)

$

731

 

(276.5

)%

$

(915

)

$

1,688

 

(154.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

22,809

 

$

16,608

 

37.3

%

$

43,148

 

$

35,040

 

23.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income tax

 

$

8,002

 

$

5,441

 

47.1

%

$

14,000

 

$

11,196

 

25.0

%

% of pre-tax income

 

35.1

%

32.8

%

 

 

32.4

%

32.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,807

 

$

11,167

 

32.6

%

$

29,148

 

$

23,844

 

22.2

%

% of net revenues

 

10.1

%

9.2

%

 

 

10.0

%

9.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share-diluted

 

$

0.57

 

$

0.42

 

35.3

%

$

1.11

 

$

0.89

 

25.6

%

 

Net revenues increased 20.4% and 19.3% for the second quarter and the first six months of fiscal year 2009 over the comparable period of fiscal year 2008.  The effects of foreign exchange accounted for an increase of 5.5% and 5.3% for the second quarter and six months, respectively. The remaining increase of 14.9% for the quarter and 14.0% for the six months is mainly due to increases in our disposables revenue and equipment sales.  The increase in disposables revenue for the quarter resulted primarily from disposable unit increases across all of our Donor and Patient product lines, including $4.7 million and $9.7 million of revenues for the second quarter and six months, respectively related to the TEG® Thrombelastograph® Hemostasis Analyzer business (“TEG®” or “TEG”)  which was acquired in the third quarter of fiscal year 2008 and the Medicell business which was acquired in the first quarter of fiscal year 2009.

 

Gross profit increased 24.7% and 21.7% for the second quarter and the first six months of fiscal year 2009 over the comparable period of fiscal year 2008. The favorable effects of foreign exchange accounted for an increase of 9.2% and 7.3% for the second quarter and first six months of fiscal year 2009, respectively. The remaining

 

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Table of Contents

 

increase of 15.5% for the quarter and 14.4% for the six months was due primarily to increased sales offset partly by changes in product mix driven by higher sales of lower margin plasma products.

 

Operating income increased 61.5% and 41.3% for the second quarter and the first six months of fiscal year 2009 over the comparable period of fiscal year 2008. The favorable effects of foreign exchange accounted for an increase of 27.2% and 14.7% for the secord quarter and first six months of fiscal year 2009, respectively. Without the effects of foreign exchange operating income increased 34.3% for the quarter and 26.6% for the six months. These increases were a result of the gross profit changes described above offset by higher operating expenses of 8.3% and 9.9% for the secord quarter and first six months of fiscal year 2009, respectively, that are largely related to the expenses that were brought on from the recent acquisitions, including TEG®.

 

Net income increased 32.6% and 22.2% for the second quarter and the first six months of fiscal year 2009 over the comparable periods of fiscal year 2008.  The main factor that affected net income was the increase in operating income, due to the reasons mentioned above and to a lower tax rate for second quarter of fiscal year 2009 as compared to that of fiscal year 2008.  The increase in operating income was partially offset by lower interest income and by higher other expense, net relating to lower cash on hand stemming from the TEG® business acquisition and share repurchase program, lower investment yield, and increased expense relating to hedge points.

 

RESULTS OF OPERATIONS

 

Net Revenues
by Geography

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

66,511

 

$

53,773

 

23.7

%

$

132,300

 

$

108,604

 

21.8

%

International

 

79,408

 

67,406

 

17.8

%

157,735

 

134,511

 

17.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

145,919

 

$

121,179

 

20.4

%

$

290,035

 

$

243,115

 

19.3

%

 

International Operations and the Impact of Foreign Exchange

 

Our principal operations are in the U.S., Europe, Japan and other parts of Asia.  Our products are marketed in more than 50 countries around the world via a direct sales force as well as independent distributors.

 

Our revenues generated outside the U.S. approximated 54.4% and 55.6% of total sales for the second quarter of fiscal years 2009 and 2008, respectively and 54.4% and 55.3% for the first six months of fiscal years 2009 and 2008, respectively.  Revenues in Japan accounted for approximately 16.6% and 19.6% of total revenues for the second quarter of fiscal year 2009 and 2008, respectively and 15.9% and 18.2% of total revenues for the first six months of fiscal year 2009 and 2008, respectively. Revenues in Europe accounted for approximately 29.6% and 27.5% of total revenues for the second quarters of fiscal year 2009 and 2008 and 30.5% and 29.1% of total revenues for the first six months of fiscal year 2009 and 2008, respectively. International sales are primarily conducted in local currencies, primarily the Japanese Yen and the Euro. As discussed above, our results of operations can be impacted by changes in the value of the Yen and the Euro relative to the U.S. dollar.

 

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Table of Contents

 

Please see section entitled “Foreign Exchange” in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.

 

Net Revenues

By Product Type Net Revenues

By Product Type

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposables

 

$

127,116

 

$

105,657

 

20.3

%

$

252,644

 

$

210,469

 

20.0

%

Software Solutions

 

9,950

 

8,689

 

14.5

%

20,249

 

18,845

 

7.5

%

Equipment

 

8,853

 

6,833

 

29.6

%

17,142

 

13,801

 

24.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

145,919

 

$

121,179

 

20.4

%

$

290,035

 

$

243,115

 

19.3

%

 

Disposables Revenues

By Product Type

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Donor:

 

 

 

 

 

 

 

 

 

 

 

 

 

Plasma

 

$

49,924

 

$

37,581

 

32.8

%

$

96,792

 

$

73,536

 

31.6

%

Blood Bank

 

36,294

 

34,160

 

6.2

%

71,953

 

67,192

 

7.1

%

Red Cell

 

11,758

 

10,835

 

8.5

%

23,600

 

21,779

 

8.4

%

Subtotal

 

$

97,976

 

$

82,576

 

18.6

%

$

192,345

 

$

162,507

 

18.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patient:

 

 

 

 

 

 

 

 

 

 

 

 

 

Surgical & Diagnostic

 

$

20,747

 

$

15,232

 

36.2

%

$

43,110

 

$

31,926

 

35.0

%

OrthoPat

 

8,393

 

7,849

 

6.9

%

17,189

 

16,036

 

7.2

%

Subtotal

 

$

29,140

 

$

23,081

 

26.3

%

$

60,299

 

$

47,962

 

25.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total disposables revenue

 

$

127,116

 

$

105,657

 

20.3

%

$

252,644

 

$

210,469

 

20.0

%

 

DONOR PRODUCTS

 

Donor products include the plasma, blood bank and red cell product lines.  Disposables revenue for donor products increased 18.6% compared to the second quarter of fiscal year 2008 and 18.4% for the first six months over the comparable period in fiscal year 2008. Foreign exchange resulted in a 6.4% increase for the second quarter and 5.7% increase for the first six months over the comparable period in fiscal year 2008.  The remaining increase of 12.2% for the quarter and 12.7% for the first six months was driven by increases in the Plasma along with increases in the other product lines, as discussed below.

 

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Plasma

 

Plasma disposable revenue increased 32.8% and 31.6%, respectively, for the second quarter and the first six months of fiscal year 2009 compared to the same periods in fiscal year 2008. Foreign exchange resulted in a 5.1% and 4.4% increase on plasma disposables revenue for the quarter and the first six months, respectively.  The two main reasons for the remaining increase for the quarter and for the first six months are (1) increased demand for our products due to the demand for plasma derived pharmaceuticals and (2) new customers added over the last twelve months.  Demand for source plasma to make pharmaceuticals remains strong, increasing collections by our customers and resulting in higher sales.  To meet this higher demand, over the past year we have continued to place additional equipment with existing and new customers.  As market share growth rates trend down and our customers’ demand levels normalize, we expect plasma disposable growth rates to moderate to a low double-digit rate.

 

Blood Bank

 

Blood bank disposable revenue for donor products increased 6.2% and 7.1%, respectively, for the second quarter and the first six months of fiscal year 2009 compared to the same periods in of fiscal year 2008.  Foreign exchange resulted in a 7.9% increase in blood bank disposables revenue during the quarter and 7.5% increase in the first six months over the comparable periods in fiscal year 2008. Without the effect of currency, blood bank revenue decreased 1.7% and 0.4% for the second quarter and first six months.  Blood bank sales consist of our products which collect platelets, and certain blood processing equipment. The decrease was driven by declines in European direct sales and Japan partially offset by increased sales to Canadian Blood Services and the Asia Pacific region.  While the overall market for platelet collections has seen nominal growth rates in Europe, U.S. and Japan, we have seen increased demand in certain emerging markets which has driven increased sales in those geographies.  The sales to the Canadian Blood Services are the result of a contract implemented in the fourth quarter of fiscal year 2008.

 

Red Cell

 

Red cell disposable revenue increased 8.5% compared to the second quarter of fiscal year 2008 and 8.4% compared to the first six months of fiscal year 2008. Foreign exchange accounted for an increase of 4.8% in the quarter and an increase of 2.9% for the first six months over the comparable period in fiscal year 2008.  The remaining increase of 3.7% for the quarter and 5.5% for the first six months was primarily due to additional equipment placements over the last year in North America.

 

PATIENT PRODUCTS

 

The patient product line includes the following brand platforms: the Cell Saver® brand, the TEG® products and the OrthoPAT® brand and the cardioPAT® brand. Patient disposables revenue increased 26.3% compared to the second quarter of fiscal year 2008 and 25.7% compared to the first six months of fiscal year 2008. Foreign exchange resulted in a 4.9% increase in patient disposables revenue during the quarter and a 4.6% increase during the first six months. The remaining increase of 21.4% for the quarter and 21.1% for the first six months were the result of increases in each of the product lines, as discussed below.

 

Surgical & Diagnostic

 

Revenues from our surgical disposables and diagnostic products increased 36.2% as compared to the second quarter of fiscal year 2008 and increased 35.0% as compared to the first six months of fiscal 2008. Surgical and diagnostic disposables revenue consists principally of the Cell Saver, cardioPAT, and TEG products. Foreign exchange resulted in a 5.4% increase in surgical and diagnostic disposables revenue during the quarter and a 5.0% increase the first six months. Without the effect of currency, surgical disposables and diagnostic revenue increased 30.8% for the quarter and 30.0% for the first six months.  The growth is principally driven by the

 

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Table of Contents

 

impact of adding the TEG® product line, which had sales of $4.8 million in the second quarter and $9.9 million in the first six months of fiscal year 2009, to the surgical product portfolio. The TEG product line was added through its acquisition from Haemoscope Corporation in the third quarter of fiscal year 2008.  In the first quarter of fiscal year 2009, Medicell (previously, Haemoscope’s UK distributor) was acquired.

 

OrthoPAT

 

Our OrthoPAT products serve orthopedic procedures that involve slower, lower volume blood loss that occurs for up to six hours after surgery (post op).  Revenues are driven by adoption of the technology by surgeons and hospitals, and particularly by increased usage among existing customers. OrthoPAT disposables revenue increased 6.9% as compared to the second quarter of fiscal year 2008 and 7.2% for the first six months of fiscal 2008. Foreign exchange resulted in a 3.8% increase in OrthoPAT disposables revenue during the quarter and a 3.7% increase for the first six months. Without foreign exchange, revenues increased by 3.1% and 3.5%, respectively for the second quarter and the first six months of fiscal year 2009 compared to the same period in fiscal year 2008.  This growth was driven by increases in Japan.

 

Other Revenues

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27, 2008

 

September 29, 2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27, 2008

 

September 29, 2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software and services

 

$

9,950

 

$

8,689

 

14.5

%

$

20,249

 

$

18,845

 

7.5

%

Equipment

 

8,853

 

6,833

 

29.6

%

17,142

 

13,801

 

24.2

%

Total other revenues

 

$

18,803

 

$

15,522

 

21.1

%

$

37,391

 

$

32,646

 

14.5

%

 

Our software and services revenues include revenue from software sales and services revenues derived from repairs performed under preventive maintenance contracts or emergency service visits, spare part sales, and various service and training programs.

 

Software solutions and services revenues increased 14.5% for the second quarter and 7.5% for the first six months as compared to the same periods of fiscal year 2008.  Software solutions revenues increased 41.2% and 34.3% as compared to the second quarter and first six months of fiscal year 2008, respectively.  Foreign exchange did not impact the results as sales were primarily in U.S. dollars.  The increase was driven by increased sales to commercial plasma customers.  Services revenues declined 21.9% and 27.7% as compared to the second quarter and first six months of fiscal year 2008, respectively.  Without foreign exchange, revenues decreased by 22.0% and 34.8% for the second quarter and first six months of fiscal year 2009 as compared to the same periods in fiscal year 2008.  The decrease in revenues is primarily due to the completion of a non-recurring consulting contract in North America where service was performed through the first six months of fiscal year 2008 and was completed toward the end of fiscal year 2008.

 

Revenue from equipment sales increased 29.6% as compared to the second quarter of fiscal year 2008 and 24.2% for the first six months compared to that of fiscal year 2008. Foreign exchange resulted in a 4.9% increase in equipment revenue during the quarter and 5.5% increase for the first six months.  The remaining increase of 24.7% for the quarter and 18.7% for the first six months over the same periods of fiscal year 2008 relates to platelet equipment sales primarily in distribution markets and cell processing equipment to military customers.

 

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Gross Profit

 

 

 

For the three months ended

 

For the six months ended

 

 

 

September 27,
2008

 

September 29,
2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

74,689

 

$

59,889

 

24.7

%

$

147,726

 

$

121,383

 

21.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit Margin

 

51.2

%

49.4

%

 

 

50.9

%

49.9

%

 

 

 

Gross profit increased 24.7% and 21.7%, respectively, as compared to the second quarter and first six months of fiscal year 2008.  Foreign exchange resulted in an increase in gross profit of 9.2% for the quarter and 7.3% for the first six months as compared to fiscal year 2008. The remaining increase of 15.5% for the quarter and 14.4% for the first six months was due primarily to the net increase in sales. Gross margin percent improved 100 basis points for the first six months of fiscal year 2009 as compared to the same period of fiscal year 2008.  Of the gross margin percent improvement, 90 basis points resulted from foreign exchange impact. Without the effect of foreign exchange, the improvement can be attributed to price increases and the growth of our higher margin TEG business, offset by higher raw material costs and change in product mix due to the exceptionally strong revenue growth in our lower margin plasma business.

 

Operating Expenses

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Increase /
(Decrease)
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase /
(Decrease)
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

5,217

 

$

6,727

 

(22.4

)%

$

11,061

 

$

13,003

 

(14.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of net revenues

 

3.6

%

5.6

%

 

 

3.8

%

5.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

$

45,863

 

$

38,546

 

19.0

%

$

93,722

 

$

77,985

 

20.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of net revenues

 

31.4

%

31.8

%

 

 

32.3

%

32.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses

 

$

51,080

 

$

45,273

 

 

 

$

104,783

 

$

90,988

 

 

 

% of net revenues

 

35.0

%

37.4

%

 

 

36.1

%

37.4

%

 

 

 

Research and Development

 

Research and development expenses decreased 22.4% as compared to the same quarter of fiscal year 2008 and 14.9% for the first six months of fiscal year 2008.  The significant factors in the decrease for the quarter and the first six months are lower spending in certain core technology projects partly offset by increased research and development investments in the Arryx technology.

 

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Table of Contents

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased 19.0% in the second quarter of fiscal year 2008 and 20.2% for the first six months of fiscal year 2008 as compared to the comparable periods of fiscal year 2007. Foreign exchange resulted in a 5.2% increase in selling, general and administrative during the quarter and a 6.0% increase during the first six months.  Excluding the impact of foreign exchange, selling, general and administrative expense increased 13.8% for the second quarter and 14.2% for the first six months as compared to the comparable periods in fiscal year 2007.  The increase was due largely to expenses brought on from recent acquisitions of the TEG® Thrombelastograph® Hemostasis Analyzer business, Medicell, and Infonalé (blood management consulting services business) that had not been reflected in the second quarter and first six months of fiscal year 2008 and increased employee performance based compensation expense in the second quarter and first six months of fiscal year 2009 based on strong Company performance versus pre-established targets .

 

Operating Income

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

23,609

 

$

14,616

 

61.5

%

$

42,943

 

$

30,395

 

41.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of net revenues

 

16.2

%

12.1

%

 

 

14.8

%

12.5

%

 

 

 

Operating income increased 61.5% and 41.3%, respectively, as compared to the second quarter and first six months of fiscal year 2008.  Foreign exchange resulted in a 27.2% increase in operating income during the quarter and 14.7% increase during the first six months.  Without the effects of foreign currency, operating income increased 34.3% for the quarter and 26.6% for the first six months due primarily to sales and gross profit growth, partially offset by increases in operating expenses.

 

Other income, net

 

 

 

For the three months ended

 

For the six months ended

 

(in thousands)

 

September 27,
2008

 

September 29,
2007

 

% Decrease
Q2FY09 vs.
Q2FY08

 

September 27,
2008

 

September 29,
2007

 

% Decrease
YTDFY09 vs.
YTDFY08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(16

)

$

(153

)

 

 

$

(40

)

$

(360

)

 

 

Interest income

 

506

 

1,414

 

 

 

1,160

 

3,317

 

 

 

Other income/(expense), net

 

(1,290

)

731

 

 

 

(915

)

1,688

 

 

 

Total other income/(expense), net

 

$

(800

)

$

1,992

 

(140.2

)%

$

205

 

$

4,645

 

(95.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of net revenues

 

(0.5

)%

1.6

%

 

 

0.1

%

1.9

%

 

 

 

Total other income, net decreased 140.2% during the second quarter of fiscal year 2009 as compared to the second quarter of fiscal year 2008 and decreased 95.6% during the six month periods of fiscal year 2009 as compared to the six month periods of fiscal year 2008 due to the net of the (i) decrease in interest income due to lower interest rates and lower invested cash resulting from acquisitions and the Company’s share repurchase program, (ii) decrease in interest expense resulting from lower average fixed rate debt outstanding, and (iii) increase in other

 

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Table of Contents

 

expense associated with hedge points on forward contracts.  Points on forward contracts are amounts, either expensed or earned, based on the interest rate differential between two foreign currencies in a forward hedge contract.

 

Income Taxes

 

 

 

For the three months ended

 

For the six months ended

 

 

 

September 27, 2008

 

September 29, 2007

 

% Increase
Q2FY09 vs.
Q2FY08

 

September 27, 2008

 

September 29, 2007

 

% Increase
YTDFY09 vs.
YTDFY08

 

Reported Income Tax Rate

 

35.1

%

32.8

%

2.3

%

32.4

%

32.0

%

0.4

%

 

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

 

The reported tax rates were 35.1% and 32.4% for the three and six month periods ended September 27, 2008.  The reported tax rates were 32.8% and 32.0% for the three and six month period ended September 29, 2007.  The reported tax rate for the six month periods ended September 27, 2008 and September 29, 2007 included discrete tax benefits or $1.1 million and $0.9 million, respectively, pertaining to the reversal of reserves for uncertain tax benefits pertaining to transfer pricing as a result of the expiration of the statute of limitations in Japan.

 

For the three and six months ended September 27, 2008, the reported tax rate includes a 35.1% annual effective tax rate.  The annual effective tax rate reflects the expiration of federal research and development credits and a shift away from investing in tax-exempt interest bearing assets. On October 3, 2008, a law was enacted that reinstated the federal research and development credit that will provide a beneficial impact on the rate to be reflected in the third quarter of fiscal year 2009.

 

As of March 29, 2008, our unrecognized tax benefits totaled approximately $5.2 million which, if recognized, would favorably affect our effective tax rate in future periods.  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 six months ended September 27, 2008, approximately $1.1 million of unrecognized tax benefits may be recognized through the end of the fiscal year.  Total unrecognized tax benefits on September 27, 2008 were $4.3 million.

 

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 $0.9 million and $0.8 million are accrued for interest at September 27, 2008 and March 29, 2008, 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 2005.

 

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Table of Contents

 

Liquidity and Capital Resources

 

The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:

 

 

 

September 27, 2008

 

March 29, 2008

 

 

 

(dollars in thousands)

 

Cash & cash equivalents

 

$

111,331

 

$

133,553

 

Working capital

 

$

254,282

 

$

261,757

 

Current ratio

 

3.9

 

3.7

 

Net cash position (1)

 

$

97,579

 

$

121,190

 

Days sales outstanding (DSO)

 

75

 

78

 

Disposables finished goods inventory turnover

 

6.4

 

6.9

 

 


(1) Net cash position is the sum of cash and cash equivalents less total debt.

 

Our primary sources of capital include cash and cash equivalents, internally generated cash flows, bank borrowings and option exercises. We believe these sources to be sufficient to fund our requirements, which are primarily capital expenditures and acquisitions, new business and product development, and working capital for at least the next twelve months.

 

 

 

September 27, 2008

 

September 29, 2007

 

$ Increase /
(Decrease)

 

 

 

(dollars in thousands)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

41,777

 

$

22,052

 

$

19,725

 

Investing activities

 

(28,737

)

(26,679

)

(2,058

)

Financing activities

 

(33,825

)

(69,761

)

35,936

 

Effect of exchange rate changes on cash (1)

 

(1,437

)

144

 

(1,581

)

Net (decrease) / increase in cash and cash equivalents

 

$

(22,222

)

$

(74,244

)

$

52,022

 

 


(1)           The balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In accordance with GAAP, we have removed the effect of foreign currency throughout our cash flow statement, except for its effect on our cash and cash equivalents.

 

Through September 27, 2008, the Company repurchased approximately 1,100,000 shares of its common stock for an aggregate purchase price of $60.0 million. This completed a $60.0 million share repurchase program that was announced in May 2008.  We reflect stock repurchases in our financial statements on a “trade date” basis and as Authorized Unissued (Haemonetics is a Massachusetts company and under Massachusetts law repurchased shares are treated as authorized but unissued).

 

Cash Flow Overview:

 

Six Month Comparison

 

Operating Activities:

 

Net cash provided by operating activities increased by $19.7 million in the first six months of fiscal year 2009 as compared to 2008 due primarily to:

 

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·                  $6.3 million decreased investment in other assets and other long-term liabilities, a $5.3 million increase in net income, a $3.4 million increase in depreciation and amortization over that of the same period last year, a $3.0 million increase in accounts payable and accrued expenses, and a $1.0 million tax benefit from the exercise of stock options.

 

Investing Activities:

 

Net cash used in investing activities increased by $2.1 million during the first six months of fiscal year 2009 as compared to 2008 due primarily to the $1.5 million increased investment in capital expenditures on property, plant and equipment.

 

Financing Activities:

 

Net cash used in financing activities decreased by $35.9 million in the first six months of fiscal year 2009 as compared to 2008 due primarily to:

 

·                  $15.0 million decrease in money spent relating to stock repurchase, a $14.1 million increase in exercise of stock options and tax benefit of stock compensation, and a $6.6 million net increase in short-term revolving credit agreements..

 

Inflation

 

We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity, and by adjusting the selling prices of products.  We continue to monitor inflation pressures generally and raw materials indices that may affect our procurement and production costs.  Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.

 

Foreign Exchange

 

Approximately 54% of our sales are generated outside the U.S. in local currencies, yet our reporting currency is the U.S. dollar. Our primary foreign currency exposures in relation to the U.S. dollar are the Japanese Yen and the Euro. Foreign exchange risk arises because we engage in business in foreign countries in local currency. Exposure is partially mitigated by producing and sourcing product in local currency and expenses incurred by local sales offices. However, whenever the U.S. dollar strengthens relative to the other major currencies, there is an adverse affect on our results of operations and alternatively, whenever the U.S. dollar weakens relative to the other major currencies there is a positive effect on our results of operations.

 

It is our policy to minimize for a period of time, the unforeseen impact on our financial results of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge the anticipated cash flows from forecasted foreign currency denominated sales. Hedging through the use of forward contracts does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. We enter into forward contracts that mature one month prior to the anticipated timing of the forecasted foreign currency denominated sales. These contracts are designated as cash flow hedges and are intended to lock in the expected cash flows of forecasted foreign currency denominated sales at the available spot rate. Actual spot rate gains and losses on these contracts are recorded in sales, at the same time the underlying transactions being hedged are recorded.

 

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Table of Contents

 

We compute a composite rate index for purposes of measuring, comparatively, the change in foreign currency hedge spot rates from the hedge spot rates of the corresponding period in the prior year. The relative value of currencies in the index is weighted by sales in those currencies. The composite was set at 1.00 based upon the weighted rates at March 31, 1997. The composite rate is presented in the period corresponding to the maturity of the underlying forward contracts.

 

The favorable or (unfavorable) changes are in comparison to the same period of the prior year. A favorable change is presented when we will obtain relatively more U.S. dollars for each of the underlying foreign currencies than we did in the prior period. An unfavorable change is presented when we obtain relatively fewer U.S. dollars for each of the underlying foreign currencies than we did in the prior period. These indexed hedge rates impact sales, and as a result also gross profit, operating income and net income, in our consolidated financial statements. The final impact of currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.

 

 

 

 

 

 

 

Composite Index
Hedge Spot Rates

 

Favorable / (Unfavorable)
Change versus Prior Year

 

 

 

 

 

 

 

 

 

 

 

FY2005

 

 

 

Q1

 

0.97

 

15.7

%

 

 

 

 

Q2

 

0.99

 

5.1

%

 

 

 

 

Q3

 

0.92

 

15.5

%

 

 

 

 

Q4

 

0.89

 

14.1

%

2005

 

Total

 

 

 

0.94

 

12.7

%

 

 

 

 

 

 

 

 

 

 

FY2006

 

 

 

Q1

 

0.92

 

5.2

%

 

 

 

 

Q2

 

0.91

 

9.1

%

 

 

 

 

Q3

 

0.87

 

5.7

%

 

 

 

 

Q4

 

0.86

 

2.8

%

2006

 

Total

 

 

 

0.89

 

5.1

%

 

 

 

 

 

 

 

 

 

 

FY2007

 

 

 

Q1

 

0.89

 

3.6

%

 

 

 

 

Q2

 

0.92

 

(1.1

)%

 

 

 

 

Q3

 

0.96

 

(9.4

)%

 

 

 

 

Q4

 

0.95

 

(9.3

)%

2007

 

Total

 

 

 

0.93

 

(4.2

)%

 

 

 

 

 

 

 

 

 

 

FY2008

 

 

 

Q1

 

0.92

 

(3.1

)%

 

 

 

 

Q2

 

0.93

 

(1.0

)%

 

 

 

 

Q3

 

0.93

 

3.3

%

 

 

 

 

Q4

 

0.93

 

2.4

%

2008

 

Total

 

 

 

0.93

 

0.4

%

 

 

 

 

 

 

 

 

 

 

FY2009

 

 

 

Q1

 

0.92

 

0.5

%

 

 

 

 

Q2

 

0.90

 

3.4

%

 

 

 

 

Q3

 

0.86

 

8.3

%

 

 

 

 

Q4

 

0.82

 

13.9

%

 

 

 

 

 

 

0.87

 

6.3

%

 

 

 

 

 

 

 

 

 

 

FY2010

 

 

 

Q1

 

0.77

 

19.5

%

 

 

 

 

Q2

 

0.81

 

10.4

%

 

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Recent Accounting Pronouncements

 

In September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45”. The FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The provisions of the FSP that amend Statement 133 and Interpretation 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.  We are currently evaluating the potential impact of FSP No. 133-1 and FIN 45-4 on our financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the American Institute of Certified Public Accountants’ (AICPA) Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. We are currently evaluating the potential impact of SFAS No. 162 on our financial position and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, as an amendment of SFAS No. 133”. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for any reporting period (annual or quarterly interim) beginning on or after November 15, 2008. We are currently evaluating the potential impact of SFAS No. 161 on our financial position and results of operations. This statement is effective for our fourth quarter interim period ending March 28, 2009 and our 2009 annual financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). In SFAS 141(R), the FASB retained the fundamental requirements of SFAS No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the potential impact of SFAS 141(R) on our financial position and results of operations. This statement is effective for our fiscal year 2010.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”, of which the objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way - as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and

 

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noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective for annual periods beginning on or after December 15, 2008. We are currently evaluating the potential impact of SFAS No. 160 on our financial position and results of operations. This statement is effective for our fiscal year 2010.

 

Cautionary Statement Regarding Forward-Looking Information

 

Statements contained in this report, as well as oral statements we make which are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. These statements are based on our current expectations and estimates as to prospective events and circumstances about which we can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of our actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include technological advances in the medical field, and our standards for transfusion medicine and our ability to successfully implement products that incorporate such advances and standards, product demand and market acceptance of our products, regulatory requirements, the effect of economic and political conditions, the impact of competitive products and pricing, price volatility in petroleum products (plastics are the principal component of our disposables, which are the main source of our revenues), the impact of industry consolidation, foreign currency exchange rates, changes in customers’ ordering patterns, the effect of industry consolidation as seen in the Plasma market, the effect of communicable diseases and the effect of uncertainties in markets outside the U.S. (including Europe and Asia) in which we operate. The foregoing list should not be construed as exhaustive.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s exposures relative to market risk are due to foreign exchange risk and interest rate risk.

 

FOREIGN EXCHANGE RISK

 

See the section entitled Foreign Exchange for a discussion of how foreign currency affects our business.  It is our policy to minimize for a period of time, the unforeseen impact on our financial results of fluctuations in foreign exchange rates by using derivative financial instruments known as forward contracts to hedge anticipated cash flows from forecasted foreign currency denominated sales.  We do not use the financial instruments for speculative or trading activities.  At September 27, 2008, we had the following significant foreign exchange contracts to hedge the anticipated cash flows from forecasted foreign currency denominated sales outstanding:

 

Hedged

 

(BUY) / SELL

 

Weighted Spot

 

Weighted Forward

 

 

 

 

 

Currency

 

Local Currency

 

Contract Rate

 

Contract Rate

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

5,500,000

 

$1.450

 

 

$1.448

 

 

$

(78,140

)

Oct 2008 - Nov 2008

 

Euro

 

9,400,000

 

$1.491

 

 

$1.472

 

 

$

94,491

 

Dec 2008 - Feb 2009

 

Euro

 

12,800,000

 

$1.568

 

 

$1.544

 

 

$

1,046,142

 

Mar 2009 - May 2009

 

Euro

 

11,200,000

 

$1.489

 

 

$1.464

 

 

$

101,191

 

Jun 2009 - Aug 2009

 

Japanese Yen

 

800,000,000

 

112.2

per US$

 

108.6

per US$

 

$

(201,127

)

Oct 2008 - Nov 2008

 

Japanese Yen

 

1,200,000,000

 

106.3

per US$

 

104.3

per US$

 

$

59,746

 

Dec 2008 - Feb 2009

 

Japanese Yen

 

1,195,000,000

 

105.3

per US$

 

103.3

per US$

 

$

94,637

 

Mar 2009 - May 2009

 

Japanese Yen

 

1,116,000,000

 

107.3

per US$

 

105.2

per US$

 

$

(148,633

)

Jun 2009 - Aug 2009

 

 

 

 

 

 

 

 

Total:

 

 

$

968,308

 

 

 

 

We estimate the change in the fair value of all forward contracts assuming both a 10% strengthening and weakening of the U.S. dollar relative to all other major currencies.  In the event of a 10% strengthening of the U.S. dollar, the change in fair value of all forward contracts would result in a $9.5 million increase in the fair value of the forward contracts; whereas a 10% weakening of the US dollar would result in a $10.3 million decrease in the fair value of the forward contracts.

 

INTEREST RATE RISK

 

All of our long-term debt is at fixed rates.  Accordingly, a change in interest rates has an insignificant effect on our interest expense amounts.  The fair value of our long-term debt, however, does change in response to interest rate movements due to its fixed rate nature.  These changes reflect the premium (when market interest rates decline below the contract fixed interest rates) or discount (when market interest rates rise above the fixed interest rate) that an investor in these long term obligations would pay in the market interest rate environment.

 

At September 27, 2008, the fair value of our long-term debt was approximately $0.8 million higher than the value of the debt reflected on our financial statements. This higher fair market is entirely related to the $5.7 million remaining principal balance of the original $10.0 million, 8.41% real estate mortgage due January, 2016.

 

Using scenario analysis, if the interest rate on all long-term maturities changed by 10% from the rate levels that existed at September 27, 2008, the fair value of our long-term debt would change by approximately $0.1 million.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

We conducted an evaluation, as of September 27, 2008, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

No change in the Company’s internal control over financial reporting occurred during the three months ended September 27, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

Not applicable

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Part 1, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 29, 2008, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

Through September 27, 2008, the Company repurchased 1,100,064 shares of its common stock for an aggregate purchase price of $60.0 million.  This completed a $60.0 million share repurchase program that was announced in May 2008.  All of the purchases during the quarter were made under the publicly announced program. All purchases were made in the open market. We reflect stock repurchases in our financial statements on a “trade date” basis and as Authorized Unissued (Haemonetics is a Massachusetts company and under Massachusetts law repurchased shares are treated as authorized but unissued).

 

 

 

 

 

Average

 

Value of Shares

 

 

 

 

 

Total

 

Price

 

Purchased as Part

 

Maximum Dollar Value

 

 

 

Number of

 

Paid per

 

of Publicly

 

of Shares that May Yet

 

 

 

Shares

 

Commissions

 

Announced Plans

 

be Purchased Under the

 

Period

 

Repurchased

 

Commissions

 

or Programs

 

Plans or Programs

 

March 30, 2008 to April 26, 2008

 

N/A

 

N/A

 

N/A

 

N/A

 

April 27, 2008 to May 24, 2008

 

295,562

 

$

54.57

 

$

16,128,367

 

$

43,871,633

 

May 25, 2008 to June 28, 2008

 

219,408

 

$

57.85

 

$

12,693,212

 

$

31,178,421

 

June 29, 2008 to July 26, 2008

 

585,094

 

$

53.28

 

$

31,176,528

 

$

1,893

 

July 27, 2008 to August 23, 2008

 

N/A

 

N/A

 

N/A

 

N/A

 

August 23, 2008 to September 27, 2008

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,100,064

 

$

54.54

 

$

59,998,107

 

$

 

 

For the six months ended September 27, 2008, the Company had 25.3 million basic weighted average shares of its Common Stock outstanding.

 

Item 3.    Defaults upon Senior Securities

 

Not applicable.

 

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Item 4.    Submission of Matters to a Vote of Security Holders

 

On July 31, 2008 the Company held its annual meeting of stockholders. At the meeting, Lawrence C. Best, Richard J. Meelia, and Ronald L. Merriman were re-elected as Directors for a term ending in 2011. The voting results were as follows:

 

Lawrence C. Best

 

For 23,277,289

 

Withheld

 

255,787

 

Richard J. Meelia

 

For 22,664,171

 

Withheld

 

868,905

 

Ronald L. Merriman

 

For 20,409,736

 

Withheld

 

3,123,340

 

 

The other members of the Board of Directors whose terms continued after the meeting were:

 

Serving a Term Ending in 2009 – Ronald G. Gelbman and Brad Nutter

 

Serving a Term Ending in 2010 – Susan Bartlett Foote, Pedro P. Granadillo, and Mark W. Kroll, Ph.D.

 

At the meeting, the stockholders voted to approve an amendment of the Haemonetics Corporation 2005 Long-Term Incentive Compensation Plan as described in the accompanying Proxy Statement.  The vote was as follows:

 

For

 

16,152,345

 

Against

 

5,791,459

 

Abstain

 

15,916

 

Broker Non-Vote

 

1,573,356

 

At the meeting, the stockholders ratified the selection by the Board of Directors of Ernst & Young LLP as independent public accountants for the current fiscal year. The vote was as follows:

 

For

 

23,414,927

 

Against

 

112,737

 

Abstain

 

5,412

 

Broker Non-Vote

 

 

Item 5.    Other Information

 

None

 

Item 6.    Exhibits

 

31.1

 

Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, of Brad Nutter, Chairman and Chief Executive Officer of the Company

 

 

 

31.2

 

Certification pursuant to Section 302 of Sarbanes-Oxley of 2002, of Christopher Lindop, Chief Financial Officer and Vice President Business Development of the Company

 

 

 

32.1

 

Certification Pursuant to 18 United States Code Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Brad Nutter, Chairman and Chief Executive Officer of the Company

 

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32.2

 

Certification Pursuant to 18 United States Code Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Christopher Lindop, Chief Financial Officer and Vice President Business Development of the Company

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

HAEMONETICS CORPORATION

 

 

 

 

 

 

Date:  November 5, 2008

By:

/s/ Brad Nutter

 

Brad Nutter, Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

 

Date:  November 5, 2008

By:

/s/ Christopher Lindop

 

Christopher Lindop, Chief Financial Officer and Vice
President Business Development (Principal Financial Officer)

 

45