Haemonetics - 10-Q quarterly report FY2012 Q2

 

(Exact name of registrant as specified in its charter)

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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):

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

The number of shares of $.01 par value common stock outstanding as of October 1, 2011:

24,981,455

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

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

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

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 to the presentation of the financial statements for the six months ended October 1, 2011. Operating results for the six month period ended October 1, 2011 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2012, 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 April 2, 2011.

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated, and these financial statements reflect those material items that arose after the balance sheet date but prior to the issuance of the financial statements that would be considered recognized subsequent events. There were no material recognized subsequent events recorded in the October 1, 2011 consolidated financial statements.

Our fiscal year ends on the Saturday closest to the last day of March. Fiscal years 2012 and 2011 include 52 weeks with all four quarters each having 13 weeks.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.Update No. 2011-04 updates the accounting guidance related to fair value measurements that results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS). The updated guidance is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. We are currently evaluating the potential impact of Update No. 2011-04 on our consolidated financial statements. This statement is effective for our fourth quarter of fiscal year 2012.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Update No. 2011-05 updates the disclosure requirements for comprehensive income to include total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. Early adoption is permitted and amendments do not require any transition disclosures. This statement is effective in our first quarter of fiscal year 2013.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles — Goodwill and Other (Topic 350). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. The Company anticipates that the adoption of this standard will not have a material impact on its consolidated financial statements and footnote disclosures.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, and Accounting Standards Update No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software (the “Updates”). The Updates provide guidance on arrangements that include software elements, including tangible products that have software components that are essential to the functionality of the tangible product and will no longer be within the scope of the software revenue recognition guidance, and software-enabled products that will now be subject to other relevant revenue recognition guidance. The Updates also provide authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence of fair value for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to allocate arrangement consideration using the relative selling price method. The Updates also include new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. On April 3, 2011, the Company adopted this guidance, which did not have a material impact on our financial position or results of operations.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. Update No. 2010-29 clarifies paragraph 805-10-50-2(h) to require public entities that enter into business combinations that are material on an individual or aggregate basis to disclose pro forma information for such business combinations that occurred in the current reporting period, including pro forma revenue and earnings of the combined entity as though the acquisition date had been as of the beginning of the comparable prior annual reporting period only. We did not complete any material business acquisitions during the six months ended October 1, 2011 thus the disclosure requirements were not applicable for the period.

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. Basic EPS is computed by dividing net income by weighted average shares outstanding. Diluted EPS includes the effect of potentially dilutive common shares.

Weighted average shares outstanding, assuming dilution, excludes the impact of 0.4 million and 1.1 million stock options for the second quarter of fiscal year 2012 and 2011, respectively, 0.4 million and 0.8 million stock options for the first six months of fiscal year 2012 and 2011, respectively, because these securities were anti-dilutive during the noted periods.

Stock-based compensation expense of $4.7 million and $4.1 million was recognized for the six months ended October 1, 2011 and October 2, 2010, respectively. The related income tax benefit recognized was $1.3 million for the six months ended October 1, 2011 and October 2, 2010.

The weighted average fair value for our options granted in the first six months of fiscal year 2012 and 2011 was $18.27 and $16.89, respectively. The assumptions utilized for estimating the fair value of option grants during the periods presented are as follows:

During the six months ended October 1, 2011 and October 2, 2010, there were 41,067 and 35,992 shares, respectively, purchased under the ESPP. They were purchased at $46.80 and $45.70 per share, respectively, under the ESPP.

We generally provide a warranty on parts and labor for one year after the sale and installation of each device. We also warrant our disposables products through their use or expiration. We estimate our potential warranty expense based on our historical warranty experience, and we periodically assess the adequacy of our warranty accrual and make adjustments as necessary.

Comprehensive income is the total of net income and all other non-owner changes in stockholders’ equity. 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:

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.

We manufacture, market and sell our products globally. For the six months ended October 1, 2011, approximately 51% of our sales are generated outside the U.S. generally in local currencies. We also incur certain manufacturing, marketing and selling costs in international markets in local currency. Accordingly, our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. dollar, our reporting currency.

We have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. That program includes the use of derivative financial instruments to minimize for a period of time, the unforeseen impact on our financial results from changes in foreign exchange rates. We utilize foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, British Pound Sterling and the Canadian Dollar. This 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.

All of our designated foreign currency hedge contracts as of October 1, 2011 and April 2, 2011 were cash flow hedges under ASC Topic 815, Derivatives and Hedging. We record the effective portion of any change in the fair value of designated foreign currency hedge contracts in Other Comprehensive Income in the Statement of Stockholders’ Equity until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, we would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had designated foreign currency hedge contracts outstanding in the contract amount of $153.6 million as of October 1, 2011 and $154.8 million as of April 2, 2011.

During the six months ended October 1, 2011, we recognized net losses of $2.9 million in earnings on our cash flow hedges. For the six months ended October 1, 2011, $2.9 million of losses, net of tax, were recorded in Accumulated Other Comprehensive Income to recognize the effective portion of the fair value of any designated foreign currency hedge contracts that are, or previously were, designated as foreign currency cash flow hedges, as compared to net losses of $4.1 million as of October 2, 2010. At October 1, 2011, losses of $2.9 million, net of tax, may be reclassified to earnings within the next twelve months. All currency cash flow hedges outstanding as of October 1, 2011 mature within twelve months.

We manage our exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. We use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These foreign currency forward contracts are entered into for periods consistent with currency transaction exposures, generally one month. They are not designated as cash flow or fair value hedges under ASC Topic 815. These forward contracts are marked-to-market with changes in fair value recorded to earnings. We had non-designated foreign currency hedge contracts under ASC Topic 815 outstanding in the contract amount of $48.2 million as of October 1, 2011 and $45.9 million as of April 2, 2011.

The following table presents the effect of our derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC Topic 815 in our consolidated statement of income for the six months ended October 1, 2011.

We did not have fair value hedges or net investment hedges outstanding as of October 1, 2011 or April 2, 2011.

ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures, by considering the estimated amount we would receive or pay to sell or transfer these instruments at the reporting date and by taking into account current interest rates, currency exchange rates, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, we use inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of October 1, 2011, we have classified our derivative assets and liabilities within Level 2 of the fair value

hierarchy prescribed by ASC Topic 815, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments.

The following tables present the fair value of our derivative instruments as they appear in our consolidated balance sheets as of October 1, 2011 by type of contract and whether it is a qualifying hedge under ASC Topic 815.

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC Topic 820 does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. In accordance with ASC Topic 820, for the quarter and the six months ended October 1, 2011, we applied the requirements under ASC Topic 820 to our non-financial assets and non-financial liabilities. As we did not have an impairment of any non-financial assets or non-financial liabilities, there was no disclosure required relating to our non-financial assets or non-financial liabilities.

On a recurring basis, we measure certain financial assets and financial liabilities at fair value, including our money market funds, foreign currency hedge contracts, and contingent consideration. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We base fair value upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value.

ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:

Our money market funds carried at fair value are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

We recognize all derivative financial instruments in our consolidated financial statements at fair value in accordance with ASC Topic 815, Derivatives and Hedging. We determine the fair value of these instruments using the framework prescribed by ASC Topic 820 by considering the estimated amount we would receive or pay to terminate these agreements at the reporting date and by taking into account current spot rates, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. We have classified our foreign currency hedge contracts within Level 2 of the fair value hierarchy because these observable inputs are available for substantially the full term of our derivative instruments. The fair value of our foreign currency hedge contracts is the estimated amount that the Company would receive or pay upon liquidation of the contracts, taking into account the change in currency exchange rates.

Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of October 1, 2011:

Under ASC Topic 805, Business Combinations, we established a liability for payments that we might make in the future to former shareholders of Neoteric that are tied to the performance of the Blood Track business for the first three years post acquisition, beginning with fiscal year 2010. We have reviewed the expected performance versus the necessary thresholds of performance for the former shareholders to receive additional performance payments and we recorded an adjustment to the fair value of the contingent consideration as contingent consideration income of $1.6 million in the accompanying consolidated statements of income, reversing the remaining liability, as the expected performance thresholds will not be achieved.

In September 2011, we entered into an agreement to release the Company from the contingent consideration due to the former shareholders of Neoteric. Under the terms of the agreement, the former shareholders of Neoteric received $0.7 million in exchange for releasing the Company from any future claims for contingent consideration. The Company paid the $0.7 million settlement amount during September 2011 and has recorded the associated expense in the selling, general and administrative line item in the accompanying consolidated statements of income.

The fair value of our real estate mortgage obligation was $3.7 million and $4.1 million at October 1, 2011 and April 2, 2011, respectively.

The Company’s reported tax rate was 27.0% and 27.8% for the three and six month periods ended October 1, 2011, respectively. Our reported tax rate is lower than the federal statutory tax rate in both periods reported primarily due to lower foreign tax rates, including tax benefits associated with our Swiss operations.

We conduct business globally and, as a result, file consolidated federal, consolidated and separate 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 2007.

10. 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.

During the first quarter of fiscal 2012, we received customer complaints in Europe regarding a quality issue with our High Separation Core Bowl (“HS Core”), a plasma disposable product used primarily to collect plasma for transfusion. Certain of these customers have also made claims regarding financial losses alleged to have been incurred as a result of this matter. Total aggregate claims submitted to date by customers relating to this issue are approximately $8.5 million. We do not expect any additional material claims from our customers. We are in the process of evaluating the submitted claims and continue to work with affected customers to minimize disruption to their operations and ultimately determine the validity and resolution of the submitted claims. Although this process is not completed, we have determined that it is probable that we will compensate certain affected customers in order to resolve their claims. We believe our ultimate liability will be less than the total claims submitted to date. Our current best estimate of the liability associated with this matter is $2.4 million, and accordingly we have recorded this amount as an expense within selling, general and administrative expenses as of October 1, 2011. We cannot determine currently whether a liability greater than $2.4 million will ultimately be incurred. We are also in the process of determining the extent to which claims may be recoverable under the Company’s insurance policies. We do not currently believe that liabilities related to this matter will materially affect our consolidated financial position and liquidity.

11. SEGMENT INFORMATION

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

We have four global product families: plasma, blood center, hospital, and software solutions.

Our products include equipment devices and the related disposables used with these devices. Disposables include the plasma, blood center, and hospital product families. Plasma consists of the disposables used to perform apheresis for the separation of whole blood components and subsequent collection of plasma to be used as a raw material for biologically derived pharmaceuticals (also known as source plasma). Blood center consists of disposables which separate whole blood for the subsequent collection of platelets, plasma, red cells, or a combination of these components for transfusion to patients. Hospital consists of surgical disposables (principally the Cell Saver^® and Cell Saver Elite ^® autologous blood recovery systems targeted to procedures that involve rapid, high volume blood loss such as cardiovascular surgeries and the cardioPAT^® cardiovascular perioperative autotransfusion system designed to remain with the patient following surgery to recover blood and the patient’s red cells to prepare them for reinfusion), the OrthoPAT^® orthopedic perioperative autotransfusion system designed to operate both during and after surgery to recover and wash the patient’s red cells to prepare them for reinfusion, and diagnostics products (principally the TEG^® Thrombelastograph^® hemostasis analyzer used to help assess a surgical patient’s hemostasis (blood clotting ability) during and after surgery).

Disposables (single-use sterile kits used in our devices for collection or salvage of blood products) are marketed in our plasma, blood center, and hospital product businesses. Plasma disposables are used with our PCS^®2 devices to perform apheresis for the collection of plasma to be used as a raw material for biologically derived pharmaceuticals (also known as

source plasma). Blood center disposables are used with our MCS+ device to collect one or more blood components (principally platelets but also red cells and plasma) for transfusion to patients. The Hospital business consists of disposables used with our Cell Saver^® and cardioPAT^® devices to recover red cells from blood lost in a surgical procedure so that these may be made available for reinfusion to the patient (“autotransfusion”). OrthoPAT^® disposables are used for autotransfusion during and immediately following orthopedic surgeries. Diagnostics products principally reflect sales of diagnostic reagents and the TEG^® Thrombelastograph^® hemostasis analyzer which profiles a patient’s blood clotting characteristics.

Software solutions include information technology platforms that assist blood centers, plasma centers, and hospitals to more effectively manage regulatory compliance and operational efficiency.

Revenues from External Customers:

12. REORGANIZATION

During the six months ended October 1, 2011, the Company’s restructuring activities primarily consist of reorganization within our research and development, manufacturing and software operations. Employee-related costs primarily consist of employee severance and benefits. Facility-related costs primarily consist of charges associated with closing facilities, related lease obligations, and other related costs.

For the six months ended October 1, 2011, the Company incurred $3.0 million of restructuring charges. Restructuring expenses have been primarily included as a component of selling, general and administrative expense in the accompanying statements of income. We anticipate that the Company will incur approximately $5 to $6 million in additional restructuring charges related to these initiatives over the remaining six months of fiscal year 2012.

The following summarizes the restructuring activity for the six months ended October 1, 2011 and October 2, 2010, respectively:

13. CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS

For costs incurred related to the development of software to be sold, leased, or otherwise marketed, the Company applies the provisions of ASC Topic 985-20, Software, which specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers.

The Company capitalized $2.8 million and $3.4 million in software development costs for ongoing initiatives during the six month periods ended October 1, 2011 and October 2, 2010, respectively. At October 1, 2011 and April 2, 2011, we have a total of $12.2 million and $13.4 million, respectively, of costs capitalized related to in process software development initiatives. The costs capitalized for each project are included in intangible assets in the consolidated financial statements.

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 our annual consolidated financial statements, notes thereto, and the MD&A contained in our fiscal year 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 26, 2011. 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 28.

Haemonetics is a blood management solutions company. Anchored by our medical device 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 medical device systems automate the collection and processing of donated blood; assess likelihood for blood loss; salvage and process blood from surgery patients; and dispense and track blood inventory in the hospital. These systems include devices and single-use, proprietary disposable sets (“disposables”) that operate only with our specialized devices. Specifically, our plasma and blood center 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 blood diagnostics system assesses hemostasis (a patient’s clotting ability) to aid clinicians in assessing the cause of bleeding resulting in overall reductions in blood product usage. Our surgical blood salvage systems allow surgeons to collect the blood lost by a patient in surgery, cleanse the blood, and make it available for transfusion back to the patient. Our blood tracking systems automate the distribution of blood products in the hospital.

Our business services products include blood management, Six Sigma, and LEAN manufacturing consulting, which 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:

Our disposables revenue stream, which includes the sales of disposables and fees for the use of our equipment, accounted for approximately 82.4% and 81.9% of our total revenues for the first six months of fiscal year 2012 and 2011, respectively.

Net revenues increased 7.6% and 6.1% for the second quarter and first six months, respectively, of fiscal year 2012 over the comparable periods of fiscal year 2011. Without the effects of foreign exchange which accounted for an increase of 2.3% and 2.5% for the second quarter and first six months, respectively, of fiscal year 2012, net revenues increased 5.3% and 3.6% for the quarter and six months ended October 1, 2011. This increase reflects strong year over year revenue growth from our plasma, TEG and software businesses, offset by declines in our hospital businesses primarily due to a recall of certain of our OrthoPAT devices.

Gross profit increased 2.5% and 2.6% as compared to the second quarter and first six months, respectively, of fiscal year 2011. Without the effects of foreign exchange, which increased gross profit by 2.2% and 2.6% for the second quarter and first six months, respectively, of fiscal year 2012, gross profit increased 0.3% and was flat for the quarter and six months, respectively, ended October 1, 2011. Our gross profit margin decreased by 170 basis points for the first six months of fiscal year 2012. The decrease was primarily due to increased product quality costs and product mix associated with lower sales of hospital products and higher plasma disposable sales.

Operating expenses increased 21.3% and 12.5% for the second quarter and first six months, respectively, of fiscal year 2012 over the comparable periods of fiscal year 2011. Foreign exchange accounted for an increase in operating expenses of 5.5% and 4.6% for the quarter and six months, respectively. Without the effects of foreign exchange, operating expenses increased 15.8% and 7.9% in the second quarter and first six months, respectively, of fiscal year 2012. Higher operating expenses are attributable to increased restructuring costs, $2.4 million of expenses associated with customer claims arising from a quality matter with a plasma disposable product, and increased investment in research and development and sales and marketing. These increases were partially offset by lower expense associated with cash bonus compensation for this fiscal year.

Operating income decreased 35.8% and 20.0% for the second quarter and first six months of fiscal year 2012 over the comparable periods of fiscal year 2011. Foreign exchange accounted for a decrease of 4.6% and 1.9% for the second quarter and first six months, respectively, of fiscal year 2012. Without the effects of foreign exchange, operating income decreased 31.2% and 18.1% for the quarter and six months, respectively, as increases in operating expenses more than offset gross profit associated with revenue growth due to product mix and higher costs of quality.

Net income decreased 35.0% and 21.5% for the second quarter and first six months, respectively, of fiscal year 2012 over the comparable periods of fiscal year 2011. Without the effects of foreign exchange which accounted for a decrease in net income of 3.3% and 1.8% for the quarter and six months, respectively, net income decreased 31.7% and 19.7% for the

quarter and six months ended October 1, 2011. The decrease in net income was attributable to the decline in operating income described above.

Our principal operations are in the U.S., Europe, Japan and other parts of Asia. Our products are marketed in more than 80 countries around the world through a combination of our direct sales force and independent distributors and agents.

Our revenues generated outside the U.S. approximated 51% of net revenues for the first six months of fiscal year 2012 and 2011. Revenues in Japan accounted for approximately 16.9% and 16.5% of total revenues for the first six months of fiscal year 2012 and 2011, respectively. Revenues in Europe accounted for approximately 26.0% and 26.8% of net revenues for the first six months of fiscal year 2012 and 2011, respectively. International sales are generally conducted in local currencies, primarily the Japanese Yen and the Euro. As discussed above, our results of operations are impacted by changes in the value of the Yen and the Euro relative to the U.S. Dollar.

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.

Disposables revenue increased 8.0% and 6.8% for the second quarter and first six months, respectively, of fiscal year 2012 over the comparable periods of fiscal year 2011. Foreign exchange resulted in an increase of 2.6% for the quarter and six months ended October 1, 2011. Without the effect of foreign exchange, disposables revenue increased 5.4% and 4.2% for the second quarter and first six months, respectively, of fiscal year 2012, driven primarily by increases in our plasma business as discussed below.

Plasma disposables revenue increased 14.0% and 13.1% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Foreign exchange accounted for an increase of 1.2% and 1.3% for the quarter and six months, respectively, ended October 1, 2011. The remaining increase in plasma disposables revenue of 12.8% and 11.8% for the quarter and six months, respectively, is primarily attributable to increased plasma collections by our commercial fractionation customers in North America. We expect the strong growth in commercial collections to moderate over the balance of fiscal year 2012.

Blood center consists of disposables used to collect platelets and red cells. Platelet disposables revenue increased 6.2% and 4.5% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Foreign exchange accounted for a revenue increase of 5.7% and 5.4%, from the second quarter and first six months, respectively, of fiscal year 2011 to the same periods of fiscal year 2012. Without the effect of foreign exchange, platelet disposable revenue increased 0.5% and decreased 0.9% for the quarter and six months, respectively, ended October 1, 2012. Sales growth in the second quarter included the benefit of quality issues experienced with a competitor’s device in Japan. We expect platelet disposable sales to remain relatively flat over the balance of fiscal year 2012 as emerging market growth is expected to be offset by competitive factors negatively impacting sales in mature international markets.

Red cell disposables revenue increased 3.1% and 4.0% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Foreign exchange accounted for a revenue increase of 0.3% and 0.4% from the second quarter and first six months, respectively, of fiscal year 2011 to the same periods of fiscal year 2012. The remaining increase of 2.8% and 3.6% for the quarter and six months, respectively, was driven by increased demand for red cells in North America.

Hospital consists of Surgical, OrthoPAT, and Diagnostics products. Surgical disposables revenue consists principally of the Cell Saver and cardioPAT products. Revenues from our surgical disposables increased 1.2% and decreased 1.3% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Foreign exchange resulted in an increase in surgical disposables revenue of 2.7% and 3.1% for the quarter and six months, respectively, ended October 1, 2011. The decrease of 1.5% and 4.4% excluding the effect of foreign exchange for the second quarter and first six months of fiscal year 2012, respectively, was the result of a decrease in demand across our European and North American markets, driven primarily by competitive pressures, and market conditions resulting in fewer elective surgeries.

Revenues from our OrthoPAT disposables decreased 11.9% and 12.7% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Foreign exchange resulted in an increase in OrthoPAT disposables revenue of 1.7% and 1.8% for the quarter and six months, respectively. Without the effect of foreign currency, OrthoPAT disposables revenue decreased by 13.6% and 14.5% for the second quarter and first six months, respectively, of fiscal year 2012. Our voluntary recall of our OrthoPAT devices manufactured prior to 2002 initiated during the first quarter adversely impacted our business. We expect to complete the build of replacement devices in our fourth quarter. Accordingly, we expect this trend to continue but moderate in future periods.

Diagnostics product revenue consists principally of the TEG products. Revenues from our diagnostics products increased 21.8% and 20.5% for the second quarter and first six months, respectively, of fiscal year 2012 compared to the same periods in fiscal year 2011. Currency exchange accounted for a decrease of 0.6% and 0.5% for the quarter and six months, respectively. Without the effect of currency, diagnostics product revenues increased by 22.4% and 21.0% for the quarter and six months, respectively. The revenue increase is due to continued adoption of our TEG equipment, including significant new business in emerging markets.

Our software solutions revenues include sales of our information technology software platforms and consulting services. Software revenues increased 6.7% and 8.5% for the second quarter and first six months, respectively, of fiscal year 2012 over the comparable periods of fiscal year 2011. Foreign exchange resulted in a 0.2% and 1.6% increase for the quarter and six months, respectively, ended October 1, 2011. The remaining increase of 6.5% for the second quarter of fiscal 2012 was driven primarily by installed base growth in our SafeTraceTX and BloodTrack products. The increase for the six months ended October 1, 2011 also included the benefit of strong plasma-related sales growth in the first quarter of fiscal 2012.

Our equipment and other revenues include revenue from equipment sales, repairs performed under preventive maintenance contracts or emergency service visits, spare part sales, and various service and training programs. These revenues are primarily composed of equipment sales, which tend to vary from period-to-period more than our disposable business due to the timing of order patterns, particularly in our distribution markets. Equipment and other revenues increased 4.4% and decreased 3.8% for the second quarter and first six months, respectively of fiscal year 2012 over the comparable periods of fiscal year 2011. Foreign exchange resulted in a 1.7% and 2.8% increase for the quarter and six months ended October 1, 2011. Without the effect of currency exchange, the increase of 2.7% for the second quarter of fiscal 2012 was primarily driven by the positive impact of the timing of a key customer award in our distribution markets, offset by lower equipment sales to the military in North America. The decrease of 6.6% for the first six months of fiscal year 2012 was primarily driven by the decline in military orders noted as well as lower equipment sales in our distribution business.

Gross profit increased 2.5% and 2.6% as compared to the second quarter and first six months, respectively, of fiscal year 2011. Without the effects of foreign exchange, which increased gross profit by 2.2% and 2.6% for the second quarter and first six months, respectively, of fiscal year 2012, gross profit increased 0.3% and was flat for the quarter and six months, respectively, ended October 1, 2011. Our gross profit margin decreased by 250 and 170 basis points for the three and six month periods ending October 1, 2011, respectively. The decrease was primarily due to increased product quality costs and product mix associated with lower sales of hospital products and higher plasma disposable sales. The increased product quality costs included the shipment of a higher cost substitute product for certain plasma disposable sales in Europe in response to customer complaints that we are currently addressing. For further discussion related to this matter, refer to the discussion under selling, general and administrative expense below. We expect the product quality and mix trends noted to continue to impact gross profit over the balance of fiscal year 2012.

In October 2011, a facility of one of our contract manufacturers was damaged by the recent floods in Thailand. We have worked with the contract manufacturer to transition the manufacturing of the products that were made in this facility to the contract manufacturer’s facility in Japan and our own manufacturing locations. We expect some higher costs associated with the transition. We currently do not expect material supply disruption to our customers. We are actively communicating with our customers about our continuity plans. However, customers may choose to mitigate their risk by leveraging alternate suppliers, which may negatively impact future sales and gross margins.

Research and development expenses increased 30.1% and 19.4% for the second quarter and first six months, respectively, of fiscal year 2012 as compared to the same periods of fiscal year 2011. Foreign exchange resulted in an increase in research and development expense of 2.1% and 2.9% during the second quarter and first six months, respectively, of fiscal year 2012. Excluding the impact of foreign exchange, research and development expense increased 28.0% and 16.5% for the second quarter and six months, respectively, ended October 1, 2011. These increases were primarily related to the general increase in development programs in support of long-term product plans and near term quality improvements.

During the second quarter and first six months of fiscal year 2012, selling, general and administrative expenses increased 18.6% and 10.9%, respectively, compared to the same periods of fiscal year 2011. Foreign exchange resulted in an increase in selling, general and administrative expenses of 5.8% and 4.7% during the second quarter and first six months, respectively, of fiscal year 2012. Excluding the impact of foreign exchange, selling, general and administrative expense increased 12.8% and 6.2% for the second quarter and six months, respectively, ended October 1, 2011. These increases were attributable to $2.4 million of expenses associated with customer claims arising from a quality issue with a plasma disposable product, and increased investment in our worldwide sales and marketing organizations. These increases were partially offset by lower expense associated with cash bonus compensation for this fiscal year.

During the first quarter of fiscal 2012, we received customer complaints in Europe regarding a quality issue with our High Separation Core Bowl (“HS Core”), a plasma disposable product used primarily to collect plasma for transfusion. Certain of these customers have also made claims regarding financial losses alleged to have been incurred as a result of this matter. Total aggregate claims submitted to date by customers relating to this issue are approximately $8.5 million. We do not expect any additional material claims from our customers. We are in the process of evaluating the submitted claims and continue to work with affected customers to minimize disruption to their operations and ultimately determine the validity and resolution of the submitted claims. Although this process is not completed, we have determined that it is probable that we will compensate certain affected customers in order to resolve their claims. We believe our ultimate liability will be less than the total claims submitted to date. Our current best estimate of the liability associated with this matter is $2.4 million, and accordingly we have recorded this amount as an expense within selling, general and administrative expenses as of October 1, 2011. We cannot determine currently whether a liability greater than $2.4 million will ultimately be incurred. We are also in the process of determining the extent to which claims may be recoverable under the Company’s insurance policies. We do not currently believe that liabilities related to this matter will materially affect our consolidated financial position and liquidity.

Under the accounting rules for business combinations (specifically, ASC Topic 805, Business Combinations), we established a liability for payments that we might make in the future to former shareholders of Neoteric that are tied to the performance of the Blood Track business for the first three years post acquisition, beginning with fiscal year 2010. We have reviewed the expected performance versus the necessary thresholds of performance for the former shareholders to receive additional performance payments and we recorded an adjustment to the fair value of the contingent consideration as contingent consideration income of $1.6 million and $1.9 million for the six months ended October 1, 2011 and October 2, 2010, respectively.

Other income, net, increased during the second quarter of fiscal year 2012 as compared to the same period of fiscal year 2011, primarily due to the reversal of $0.6 million of interest expense on contingent consideration related to the Neoteric acquisition. Other income, net decreased for the first six months of fiscal year 2012 as compared to the same period of fiscal year 2011, primarily due to an increase in foreign exchange transaction losses of foreign currency denominated assets offset by the reversal of net interest expense of $0.6 million on contingent consideration related to the Neoteric acquisition.

The Company’s reported tax rate was 27.0% and 27.8% for the three and six month periods ended October 1, 2011, respectively. Our reported tax rate is lower than the federal statutory tax rate in both periods reported primarily due to lower foreign tax rates, including tax benefits associated with our Swiss operations.

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

Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations, and option exercises. We believe these sources are sufficient to fund our cash requirements over the next twelve months, which are primarily capital expenditures and may include share repurchases under-future programs authorized by the Board of Directors at its discretion.