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: December 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 December 27, 2008:

 

25,431,571

 

 

 



Table of Contents

 

HAEMONETICS CORPORATION

INDEX

 

 

PAGE

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.  Financial Statements

 

 

Unaudited Consolidated Statements of Income — Three and Nine Months Ended December 27, 2008 and December 29, 2007

 

2

 

 

 

Unaudited Consolidated Balance Sheets —December 27, 2008 and March 29, 2008

 

3

 

 

 

Unaudited Consolidated Statement of Stockholders’ Equity - Nine Months Ended December 27, 2008

 

4

 

 

 

Unaudited Consolidated Statements of Cash Flows - Nine Months Ended December 27, 2008 and December 29, 2007

 

5

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

 

 

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

 

25

 

 

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

40

 

 

 

ITEM 4.  Controls and Procedures

 

41

 

 

 

PART II.  OTHER INFORMATION

 

42

 

 

 

ITEM 6.  Exhibits

 

42

 

 

 

Signatures

 

43

 

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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

 

Nine months ended

 

 

 

December 27
2008

 

December 29
2007

 

December 27
2008

 

December 29
2007

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

155,447

 

$

134,587

 

$

445,482

 

$

377,701

 

Cost of goods sold

 

77,151

 

68,029

 

219,460

 

189,761

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

78,296

 

66,558

 

226,022

 

187,940

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

5,840

 

5,529

 

16,901

 

18,532

 

Selling, general and administrative

 

47,965

 

41,432

 

141,687

 

119,418

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

53,805

 

46,961

 

158,588

 

137,950

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

24,491

 

19,597

 

67,434

 

49,990

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

449

 

1,070

 

1,569

 

4,037

 

Other (expense)/income, net

 

(1,451

)

225

 

(2,366

)

1,905

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

23,489

 

20,892

 

66,637

 

55,932

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

7,273

 

6,538

 

21,272

 

17,733

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,216

 

$

14,354

 

$

45,365

 

$

38,199

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

 

 

 

 

 

 

 

 

Net income

 

$

0.64

 

$

0.56

 

$

1.79

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

Income per common share assuming dilution

 

 

 

 

 

 

 

 

 

Net income

 

$

0.62

 

$

0.54

 

$

1.73

 

$

1.43

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

25,375

 

25,500

 

25,340

 

25,881

 

Diluted

 

26,056

 

26,437

 

26,163

 

26,776

 

 

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

 

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Table of Contents

 

HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

December 27, 2008

 

March 29, 2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

125,325

 

$

133,553

 

Accounts receivable, less allowance of $1,994 at December 27, 2008 and $2,365 at March 29, 2008

 

124,575

 

120,252

 

Inventories, net

 

73,557

 

65,388

 

Deferred tax asset, net

 

8,491

 

12,058

 

Prepaid expenses and other current assets

 

21,944

 

28,183

 

Total current assets

 

353,892

 

359,434

 

Property, plant and equipment:

 

 

 

 

 

Land, building and building improvements

 

42,487

 

43,873

 

Plant equipment and machinery

 

101,232

 

88,811

 

Office equipment and information technology

 

52,844

 

52,787

 

Haemonetics equipment

 

189,531

 

178,827

 

Total property, plant and equipment

 

386,094

 

364,298

 

Less: accumulated depreciation

 

(256,624

)

(247,814

)

Net property, plant and equipment

 

129,470

 

116,484

 

Other assets:

 

 

 

 

 

Other intangibles, less amortization of $24,078 at December 27, 2008 and $19,821 at March 29, 2008

 

63,936

 

64,333

 

Goodwill

 

55,434

 

54,222

 

Deferred tax asset, long term

 

14,784

 

9,244

 

Other long-term assets

 

4,832

 

5,233

 

Total other assets

 

138,986

 

133,032

 

Total assets

 

$

622,348

 

$

608,950

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

4,434

 

$

6,326

 

Accounts payable

 

17,201

 

19,724

 

Accrued payroll and related costs

 

24,967

 

19,824

 

Accrued income taxes

 

6,466

 

5,285

 

Other liabilities

 

32,466

 

46,518

 

Total current liabilities

 

85,534

 

97,677

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

5,522

 

6,037

 

Long-term deferred tax liability

 

7,655

 

3,253

 

Other long-term liabilities

 

7,849

 

7,795

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; Authorized - 150,000,000 shares; Issued and outstanding— 25,431,571 shares at December 27, 2008 and 25,694,769 shares at March 29, 2008

 

254

 

256

 

Additional paid-in capital

 

217,036

 

186,933

 

Retained earnings

 

295,576

 

302,196

 

Accumulated other comprehensive income

 

2,922

 

4,803

 

Total Stockholders’ equity

 

515,788

 

494,188

 

Total liabilities and stockholders’ equity

 

$

622,348

 

$

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

 

Additional
Paid-in

 

Retained

 

Accumulated Other
Comprehensive

 

Total
Stockholders’

 

Comprehensive

 

 

 

Shares

 

$

’s

 

Capital

 

Earnings

 

Income / (Loss)

 

Equity

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 29, 2008

 

25,695

 

$

256

 

$

186,933

 

$

302,196

 

$

4,803

 

$

494,188

 

 

 

Employee stock purchase plan

 

59

 

1

 

2,658

 

 

 

2,659

 

 

 

Exercise of stock options and related tax benefit

 

760

 

8

 

28,141

 

 

 

28,149

 

 

 

Shares repurchased

 

(1,100

)

(11

)

(8,003

)

(51,984

)

 

(59,998

)

 

 

Issuance of restricted stock, net of cancellations

 

18

 

 

 

 

 

 

 

 

Stock Compensation expense

 

 

 

7,307

 

 

 

7,307

 

 

 

Net income

 

 

 

 

45,365

 

 

45,365

 

45,365

 

Foreign currency translation adjustment

 

 

 

 

 

(7,983

)

(7,983

)

(7,983

)

Unrealized gain on hedges, net

 

 

 

 

 

 

 

 

 

1,833

 

1,833

 

1,833

 

Reclassification of hedge loss to earnings

 

 

 

 

 

4,269

 

4,269

 

4,269

 

Comprehensive income

 

 

 

 

 

 

 

43,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 27, 2008

 

25,432

 

$

254

 

$

217,036

 

$

295,576

 

$

2,922

 

$

515,788

 

 

 

 

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)

 

 

 

Nine Months Ended

 

 

 

December 27,
2008

 

December 29,
2007

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

45,365

 

$

38,199

 

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

 

 

 

 

 

Non cash items:

 

 

 

 

 

Depreciation and amortization

 

29,841

 

22,398

 

Stock compensation expense

 

7,307

 

7,122

 

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

 

142

 

(739

)

Unrealized loss/(gain) from hedging activities

 

2,333

 

(1,582

)

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(7,936

)

(13,377

)

Increase in inventories

 

(8,920

)

(2,559

)

(Increase)/Decrease in prepaid income taxes

 

(1,316

)

651

 

Increase in other assets and other long-term liabilities

 

(3,763

)

(9,165

)

Tax benefit of exercise of stock options

 

2,688

 

1,671

 

Increase in accounts payable and accrued expenses

 

6,917

 

3,171

 

Net cash provided by operating activities

 

72,658

 

45,790

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures on property, plant and equipment

 

(45,670

)

(42,497

)

Proceeds from sale of property, plant and equipment

 

2,522

 

3,149

 

Acquisition of Medicell

 

(2,459

)

 

Acquisition of HaemoScope

 

 

(45,080

)

Acquisition of Infonale, Inc.

 

 

(1,300

)

Net cash used in investing activities

 

(45,607

)

(85,728

)

Cash Flows from Financing Activities:

 

 

 

 

 

Payments on long-term real estate mortgage

 

(515

)

(473

)

Net decrease in short-term revolving credit agreements

 

(2,431

)

(10,651

)

Payments on long-term credit agreements

 

 

(5,714

)

Employee stock purchase plan

 

2,659

 

2,209

 

Exercise of stock options

 

20,299

 

14,896

 

Excess tax benefit on exercise of stock options

 

6,106

 

1,274

 

Stock Repurchase

 

(59,998

)

(74,996

)

Net cash used in financing activities

 

(33,880

)

(73,455

)

Effect of Exchange Rates on Cash and Cash Equivalents

 

(1,399

)

1,023

 

Net Decrease in Cash and Cash Equivalents

 

(8,228

)

(112,370

)

Cash and Cash Equivalents at Beginning of Year

 

133,553

 

229,227

 

Cash and Cash Equivalents at End of Period

 

$

125,325

 

$

116,857

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

Transfers from inventory to fixed assets for placements of Haemonetics equipment

 

$

6,174

 

$

1,672

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

414

 

$

849

 

Income taxes paid

 

$

19,951

 

$

22,544

 

 

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 as of and for the three and nine month periods ended December 27, 2008. Operating results for the three and nine month periods ended December 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 Software Solutions Divison, (formerly 5D™ Information Management and Information Data Management), 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.  These statements became effective during this quarter and did not have an impact on our financial position and results of operation as we have not issued or purchased credit derivatives.

 

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”.  This statement became effective during this quarter and did not have an impact 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

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands, except per share amounts)

 

Basic EPS

 

 

 

 

 

Net income

 

$

16,216

 

$

14,354

 

 

 

 

 

 

 

Weighted average shares

 

25,375

 

25,500

 

 

 

 

 

 

 

Basic income per share

 

$

0.64

 

$

0.56

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Net income

 

$

16,216

 

$

14,354

 

 

 

 

 

 

 

Basic weighted average shares

 

25,375

 

25,500

 

Dilutive effect of stock options and restricted stock units

 

681

 

937

 

 

 

 

 

 

 

Diluted weighted average shares

 

26,056

 

26,437

 

 

 

 

 

 

 

Diluted income per share

 

$

0.62

 

$

0.54

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands, except per share amounts)

 

Basic EPS

 

 

 

 

 

Net income

 

$

45,365

 

$

38,199

 

 

 

 

 

 

 

Weighted average shares

 

25,340

 

25,881

 

 

 

 

 

 

 

Basic income per share

 

$

1.79

 

$

1.48

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Net income

 

$

45,365

 

$

38,199

 

 

 

 

 

 

 

Basic weighted average shares

 

25,340

 

25,881

 

Dilutive effect of stock options and restricted stock units

 

823

 

895

 

 

 

 

 

 

 

Diluted weighted average shares

 

26,163

 

26,776

 

 

 

 

 

 

 

Diluted income per share

 

$

1.73

 

$

1.43

 

 

4.   STOCK-BASED COMPENSATION

 

Stock-based compensation expense of $7.3 million and $7.1 million was recognized for the nine months ended December 27, 2008 and December 29, 2007, respectively.  The related income tax benefit recognized in the consolidated statements of income was $2.1 million for both the nine month periods ended December 27, 2008 and December 29, 2007. 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 and an option award with a five year vesting period granted in the third quarter of this year, all options, restricted stock awards and restricted stock units granted to employees in the nine months ended December 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 results) are reported as a financing cash flow, rather than as an operating cash flow and are recognized as a credit to additional paid-in-capital. This excess tax benefit was $0.7 million and $0.5 million for the three months ended December 27, 2008 and December 29, 2007, respectively, and $6.1 million and $1.3 million for the nine months ended December 27, 2008 and December 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

 

 

 

 

 

 

 

 

 

 

 

Granted

 

363,939

 

$

54.30

 

 

 

 

 

Exercised

 

(99,365

)

$

27.16

 

 

 

 

 

Forfeited

 

(22,505

)

$

49.03

 

 

 

 

 

Outstanding at December 27, 2008

 

3,235,856

 

$

41.53

 

4.44

 

$

44,426

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 27, 2008

 

2,087,991

 

$

36.20

 

3.89

 

$

39,696

 

 

 

 

 

 

 

 

 

 

 

Expected to Vest at December 27, 2008

 

2,985,496

 

$

40.75

 

4.37

 

$

43,306

 

 

The total intrinsic value of options exercised during the three month periods ended December 27, 2008 and December 29, 2007, was $2.8 million and $5.8 million, respectively.   The total intrinsic value of options exercised was $21.6 million and $16.4 million for the nine month periods ended December 27, 2008 and December 29, 2007, respectively.

 

As of December 27, 2008 and December 29, 2007, there was $13.8 million and $16.2 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 2.4 years and 2.3 years, respectively. The total fair value of shares fully vested during the nine months ended December 27, 2008 and December 29, 2007 was $29.0 million $34.0 million, respectively.

 

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The weighted average fair value for our options granted in the first nine months of fiscal year 2009 and 2008 was $16.67and $17.45, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average of the high and low stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock.  The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.  The expected life of the option was estimated with reference to historical exercise patterns, the contractual term of the option and the vesting period.  The assumptions utilized for option grants during the periods presented are as follows:

 

 

 

Nine Months Ended

 

 

 

December 27, 2008

 

December 29, 2007

 

Stock Options Black-Scholes assumptions (weighted average):

 

 

 

 

 

Volatility

 

29.79

%

29.56

%

Expected life (years)

 

4.9

 

5.0

 

Risk-free interest rate

 

2.69

%

4.07

%

Dividend yield

 

0.00

%

0.00

%

 

As of December 27, 2008 and December 29, 2007, there was $0.3 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 1.92 and 3.34 years, respectively. The total fair value of restricted stock awards vested during the nine months ended December 27, 2008 was $0.1 million and $0.0 million during the nine months ended December 29, 2007.

 

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

 

 

 

Shares

 

Weighted Average
Grant Date Fair
Value

 

Nonvested at March 29, 2008

 

10,000

 

$

48.09

 

 

 

 

 

 

 

Granted

 

3,456

 

$

57.22

 

Released

 

(2,500

)

$

48.09

 

Forfeited

 

 

 

Terminated

 

 

 

 

 

 

 

 

 

Nonvested at December 27, 2008

 

10,956

 

$

50.97

 

 

As of December 27, 2008 and December 29, 2007, there was $4.2 and $2.2 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 3.4 and 3.7 years, respectively. The total fair value of shares fully vested was $0.8 million and $0.0 million for the nine months ended December 27, 2008 and December 29, 2007, respectively.

 

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

 

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Shares

 

Weighted Average
Market Value at
Grant Date

 

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

 

 

 

 

 

 

 

Granted

 

56,237

 

$

54.48

 

Vested

 

(12,417

)

$

51.33

 

Forfeited

 

(1,361

)

$

51.33

 

 

 

 

 

 

 

Nonvested at December 27, 2008

 

101,525

 

$

53.61

 

 

As of December 27, 2008 and December 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 nine months ended December 27, 2008 and December 29, 2007, there were 59,263 and 55,766 shares purchased under the ESPP, respectively.  They were purchased at $44.86 and $39.61 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 $5.0 million and $2.8 million for the three months ended December 27, 2008 and December 29, 2007, respectively, and $10.8 million and $7.2 million for the nine months ended December 27, 2008 and December 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 monetary assets and liabilities denominated in foreign currencies. These derivative financial instruments are not used for trading purposes. The forward exchange contracts are recorded at

 

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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 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

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

Warranty accrual as of the beginning of the period

 

$

992

 

$

734

 

 

 

 

 

 

 

Warranty Provision

 

620

 

431

 

 

 

 

 

 

 

Warranty Spending

 

(436

)

(431

)

 

 

 

 

 

 

Warranty accrual as of the end of the period

 

$

1,176

 

$

734

 

 

 

 

For the nine months ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

Warranty accrual as of the beginning of the period

 

$

929

 

$

734

 

 

 

 

 

 

 

Warranty Provision

 

1,496

 

1,420

 

 

 

 

 

 

 

Warranty Spending

 

(1,249

)

(1,420

)

 

 

 

 

 

 

Warranty accrual as of the end of the period

 

$

1,176

 

$

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.

 

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

 

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Table of Contents

 

 

 

For the three months ended

 

(In thousands)

 

December 27, 2008

 

December 29, 2007

 

Net income

 

$

16,216

 

$

14,354

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(2,328

)

1,479

 

 

 

 

 

 

 

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

 

(2,857

)

(1,277

)

 

 

 

 

 

 

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

 

331

 

1,098

 

Total comprehensive income

 

$

11,362

 

$

15,654

 

 

 

 

For the nine months ended

 

(In thousands)

 

December 27, 2008

 

December 29, 2007

 

Net income

 

$

45,365

 

$

38,199

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(7,983

)

5,251

 

 

 

 

 

 

 

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

 

1,833

 

(3,207

)

 

 

 

 

 

 

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

 

4,269

 

1,544

 

Total comprehensive income

 

$

43,484

 

$

41,787

 

 

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:

 

 

 

December 27, 2008

 

March 29, 2008

 

 

 

(in thousands)

 

Raw materials

 

$

22,857

 

$

16,107

 

Work-in-process

 

10,727

 

14,430

 

Finished goods

 

39,973

 

34,851

 

 

 

$

73,557

 

$

65,388

 

 

10.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

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

 

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Carrying amount as of March 29, 2008

 

$

54,222

 

Medicell (a)

 

1,020

 

Haemoscope (b)

 

22

 

Effect of change in rates used for translation

 

170

 

 

 

 

 

Carrying amount as of December 27, 2008

 

$

55,434

 

 


(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 December 27, 2008

 

 

 

Gross Carrying Amount
(in thousands)

 

Accumulated
Amortization
(in thousands)

 

Weighted Average
Useful Life (in years)

 

Amortized Intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

$

11,926

 

$

4,742

 

11

 

 

 

 

 

 

 

 

 

Capitalized Software

 

15,382

 

301

 

5

 

 

 

 

 

 

 

 

 

Other technology

 

29,682

 

11,315

 

10

 

 

 

 

 

 

 

 

 

Customer contracts and related relationships

 

29,925

 

7,561

 

12

 

 

 

 

 

 

 

 

 

Trade Names

 

1,099

 

159

 

7

 

 

 

 

 

 

 

 

 

Subtotal

 

$

88,014

 

$

24,078

 

14

 

 

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 December 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.

 

For the three months ended December 27, 2008 and December 29, 2007, amortization expense for amortized other intangible assets was $1.4 million and $0.9 million, respectively. For the nine months ended December 27, 2008 and December 29, 2007,  amortization expense for amortized other intangible assets was $4.4 million and $2.6 million, respectively. Annual amortization expense is expected to approximate $5.8 million for fiscal year

 

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2009, $6.8 million for fiscal year 2010, $6.7 million for fiscal year 2011, $6.2 million for fiscal year 2012, $6.1 million for fiscal year 2013, and $6.7 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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Table of Contents

 

·                  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 December 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

 

$

89,043

 

$

 

$

 

$

89,043

 

Forward currency exchange contracts

 

 

3,300

 

 

3,300

 

 

 

$

89,043

 

$

3,300

 

$

 

$

92,343

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Forward currency exchange contracts

 

$

 

$

5,847

 

$

 

$

5,847

 

 

 

$

 

$

5,847

 

$

 

$

5,847

 

 

There were no assets or liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended December 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.

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

December 27, 2008

 

December 29, 2007

 

December 27, 2008

 

December 29, 2007

 

 

 

 

 

 

 

 

 

 

 

Annual Effective Tax Rate

 

35.1

%

35.9

%

35.1

%

35.0

%

Discrete Items

 

(4.1

)%

(4.6

)%

(3.2

)%

(3.3

)%

Reported Income Tax Rate

 

31.0

%

31.3

%

31.9

%

31.7

%

 

The annual effective rate for the three months ended December 27, 2008 was 35.1%, a decrease of 0.8% over the three months ended December 29, 2007.  This decrease is a result of changes in the global distribution of our income, partially offset by a reduction in tax exempt income.  The annual effective rate for the nine months ended December 27, 2008 was 35.1%, an increase of 0.1% over that for the nine months ended December 29, 2007.  This increase is a result of a reduction in tax exempt income, partially offset by a change in the global distribution of our income.

 

Discrete tax benefits were recognized in the three months ended December 27, 2008 and December 29, 2007.  For the third quarter of fiscal 2009, the discrete benefits totaled $973,000.  The noted discrete benefits were comprised of the release of $1.1 million tax reserves due to a statute of limitations expiration and a $135,000 discrete benefit for the reinstated research & development credit for the first and second quarter of fiscal 2009 that was offset in part by a $301,000 tax provision due to the finalization of our fiscal 2008 U.S. Federal income tax returns.  For the nine months ended December 27, 2008 discrete tax benefits totaled $2.1 million, including the amounts described above, and benefits of $1.2 million related to a statute of limitations expiration in Japan.

 

Future adjustments may increase or decrease the reported tax rate.

 

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 the nine months ended December 27, 2008, there was a release of $2.0 million of tax reserves as a result of the expiration of the statute of limitations.  Total unrecognized tax benefits on December 27, 2008 were $3.2 million.  At this time, we do not expect any further release of tax reserves in fiscal 2009.

 

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 December 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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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:

 

 

 

For the three months ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

 

 

 

 

Service Cost

 

$

150

 

$

152

 

Interest cost on benefit obligation

 

66

 

56

 

Expected return on plan assets

 

(19

)

(19

)

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

 

(4

)

(4

)

Net periodic benefit cost

 

$

193

 

$

185

 

 

 

 

For the nine months ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

 

 

 

 

Service Cost

 

$

450

 

$

438

 

Interest cost on benefit obligation

 

198

 

160

 

Expected return on plan assets

 

(57

)

(55

)

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

 

(12

)

(10

)

Net periodic benefit cost

 

$

579

 

$

533

 

 

15.  SEGMENT INFORMATION

 

Segment Definition Criteria

 

We manage our business on the basis of one operating segment: the design, manufacture, marketing and delivery of 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

 

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surgery as well as a blood loss diagnostic product.  Software and services include information technology platforms, maintenance services for our donor and patient products, 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, 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.

 

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 Cell Saver and cardioPAT surgical blood salvage systems, OrthoPAT, 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 Software Solutions Divison, equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous sales and business services that assist blood banks, plasma centers, and hospitals more effectively manage regulatory compliance and operational efficiency. The Software Solutions Divison 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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Revenues from External Customers:

 

 

 

Three Months Ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

Disposables Revenues by Product Family

 

 

 

 

 

Donor:

 

 

 

 

 

Plasma

 

$

53,594

 

$

41,253

 

Blood Bank

 

36,435

 

33,207

 

Red Cell

 

13,051

 

12,478

 

 

 

$

103,080

 

$

86,938

 

 

 

 

 

 

 

Patient:

 

 

 

 

 

Surgical

 

$

22,967

 

$

18,981

 

OrthoPAT

 

9,112

 

9,086

 

 

 

$

32,079

 

$

28,067

 

 

 

 

 

 

 

Disposables Revenue

 

$

135,159

 

$

115,005

 

 

 

 

 

 

 

Equipment

 

$

10,246

 

$

8,485

 

Software Solutions and Services

 

$

10,042

 

$

11,097

 

 

 

 

 

 

 

Total revenues from external customers

 

$

155,447

 

$

134,587

 

 

 

 

Nine Months Ended

 

 

 

December 27, 2008

 

December 29, 2007

 

 

 

(in thousands)

 

Disposables Revenues by Product Family

 

 

 

 

 

Donor:

 

 

 

 

 

Plasma

 

$

150,386

 

$

114,789

 

Blood Bank

 

108,388

 

100,399

 

Red Cell

 

36,651

 

34,257

 

 

 

$

295,425

 

$

249,445

 

 

 

 

 

 

 

Patient:

 

 

 

 

 

Surgical

 

$

66,077

 

$

50,907

 

OrthoPAT

 

26,301

 

25,122

 

 

 

$

92,378

 

$

76,029

 

 

 

 

 

 

 

Disposables Revenue

 

$

387,803

 

$

325,474

 

 

 

 

 

 

 

Equipment

 

$

27,388

 

$

22,286

 

Software Solutions and Services

 

$

30,291

 

$

29,941

 

 

 

 

 

 

 

Total revenues from external customers

 

$

445,482

 

$

377,701

 

 

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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 in the range of $6 million to $7 million.

 

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

 

We are also 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 nine months ended December 27, 2008 and December 29, 2007, we recorded pre-tax restructuring costs of $2.1 million and $2.9 million, respectively, as selling, general, and administrative costs.  Additionally, we incurred other transformation costs relating to the hiring of personnel in our new shared services center in Signy, Switzerland of $0.5 million and $0.7 million for the nine months ended December 27, 2008 and December 29, 2007, respectively.  The other transformation costs related to the hiring of personnel are not included in the table below.

 

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

 

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Table of Contents

 

 

 

Nine Months Ended December 27, 2008

 

(Dollars in thousands)

 

Balance at March
29, 2008

 

Cost Incurred

 

Payments

 

Asset Write
down

 

Restructuring
Accrual Balance at
December 27, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

521

 

$

1,994

 

$

(1,886

)

$

 

$

629

 

Facility related costs

 

42

 

71

 

(71

)

 

42

 

Other Exit & Termination Costs

 

78

 

 

 

 

78

 

 

 

$

641

 

$

2,065

 

$

(1,957

)

$

 

$

749

 

 

 

 

Nine Months Ended December 29, 2007

 

(Dollars in thousands)

 

Balance at March
31, 2007

 

Cost Incurred

 

Payments

 

Asset Write
down

 

Restructuring
Accrual Balance at
December 29, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

 

$

2,195

 

$

(1,791

)

$

 

$

404

 

Facility related costs

 

 

688

 

(514

)

(86

)

88

 

 

 

$

 

$

2,883

 

$

(2,305

)

$

(86

)

$

492

 

 

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 $4.5 million and $6.5 million, respectively, during the nine month periods ended December 27, 2008 and December 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. Since project inception, the total capitalized costs incurred include $1.8 million for the cost of the software license and $17.4 million in third party and internal personnel development costs.

 

SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed”, specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers. In connection with the development of the software for our next generation Donor apheresis platform, the Company capitalized $0.8 million during the nine month period ended December 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 project, which is expected to be completed by early to mid fiscal year 2010.  Work on the Donor apheresis platform is expected to resume during fiscal year 2010.  We will begin to amortize these costs when the device is released for sale.

 

Additionally, the Company capitalized $2.3 million in software development costs for other ongoing initiatives during the nine month period ended December 27, 2008. We will begin to amortize these costs when the products are released for sale.

 

18.  SUBSEQUENT EVENT

 

On January 30, 2009, a jury returned a verdict in favor of the Company in a patent infringement case pending in the federal district court of Massachusetts since December 2005 (Haemonetics Corporation v. Baxter Healthcare Corporation et al. (CV No. 05-12572-NMG)(D.Ct. MA)).  The jury determined that Fenwal’s Alyx system infringes a Haemonetics patent and awarded the Company damages for lost profits and royalties in the approximate amount of $15.7 million.  The verdict is subject to appeal.

 

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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, the consolidated financial statements and notes thereto, 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 86.9% and 85.5% of our total revenues for the third quarter of fiscal year 2009 and 2008, respectively and 87.1% and 86.2% of our total revenues for the first nine months of fiscal year 2009 and 2008, respectively.

 

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Table of Contents

 

Financial Summary

 

 

 

For the three months ended

 

For the nine months ended

 

(in thousands, except per share data)

 

December 27,
2008

 

December 29,
2007

 

% Increase/
(Decrease)
Q3FY09 vs.
Q3FY08

 

December 27,
2008

 

December 29,
2007

 

% Increase/
(Decrease)
YTDFY09 vs.
YTDFY08

 

Net revenues

 

$

155,447

 

$

134,587

 

15.5

%

$

445,482

 

$

377,701

 

17.9

%

Gross profit

 

$

78,296

 

$

66,558

 

17.6

%

$

226,022

 

$

187,940

 

20.3

%

% of net revenues

 

50.4

%

49.5

%

 

 

50.7

%

49.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

24,491

 

$

19,597

 

25.0

%

$

67,434

 

$

49,990

 

34.9

%

% of net revenues

 

15.8

%

14.6

%

 

 

15.1

%

13.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

$

449

 

$

1,070

 

(58.0

)%

$

1,569

 

$

4,037

 

(61.1

)%

Other income/(expense), net

 

$

(1,451

)

$

225

 

(744.9

)%

$

(2,366

)

$

1,905

 

(224.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

23,489

 

$

20,892

 

12.4

%

$

66,637

 

$

55,932

 

19.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income tax

 

$

7,273

 

$

6,538

 

11.2

%

$

21,272

 

$

17,733

 

20.0

%

% of pre-tax income

 

31.0

%

31.3

%

 

 

31.9

%

31.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,216

 

$

14,354

 

13.0

%

$

45,365

 

$

38,199

 

18.8

%

% of net revenues

 

10.4

%

10.7

%

 

 

10.2

%

10.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share-diluted

 

$