10-Q 1 haeq3december201410q.htm 10-Q HAE Q3, December 2014 10Q
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 28, 2013
Commission File Number: 001-14041
HAEMONETICS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction
of incorporation or organization)
 
04-2882273
(I.R.S. Employer Identification No.)
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 þ
 
No o
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).
Yes þ
 
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 þ
 
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 þ
The number of shares of $0.01 par value common stock outstanding as of December 28, 2013:
51,888,835



HAEMONETICS CORPORATION
INDEX
 
PAGE
 
 
 
 
 
 
Unaudited Consolidated Balance Sheets - December 28, 2013 and March 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 5. (Removed and Reserved)
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

2



ITEM 1. FINANCIAL STATEMENTS

HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Net revenues
$
242,120

 
$
247,395

 
$
697,418

 
$
642,048

Cost of goods sold
120,491

 
134,280

 
344,494

 
337,058

Gross profit
121,629

 
113,115

 
352,924

 
304,990

Operating expenses:
 
 
 
 
 
 
 
Research and development
14,209

 
10,588

 
40,364

 
30,823

Selling, general and administrative
89,560

 
86,780

 
277,879

 
235,438

Total operating expenses
103,769

 
97,368

 
318,243

 
266,261

Operating income
17,860

 
15,747

 
34,681

 
38,729

Interest and other expense, net
(2,852
)
 
(2,542
)
 
(8,035
)
 
(3,518
)
Income before provision for income taxes
15,008

 
13,205

 
26,646

 
35,211

Income tax (benefit)/expense
(1,282
)
 
3,301

 
1,682

 
8,972

Net income
$
16,290

 
$
9,904

 
$
24,964

 
$
26,239

 
 
 
 
 
 
 
 
Net income per share - basic
$
0.31

 
$
0.19

 
$
0.48

 
$
0.51

Net income per share - diluted
$
0.31

 
$
0.19

 
$
0.48

 
$
0.50

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
51,730

 
51,707

 
51,485

 
51,364

Diluted
52,511

 
52,606

 
52,300

 
52,264

 
 
 
 
 
 
 
 
Comprehensive income
$
17,289

 
$
12,239

 
$
24,462

 
$
24,020

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




HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
December 28,
2013
 
March 30,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
177,846

 
$
179,120

Accounts receivable, less allowance of $1,840 at December 28, 2013 and $1,727 at March 30, 2013
149,585

 
170,111

Inventories, net
209,331

 
183,784

Deferred tax asset, net
14,178

 
13,782

Prepaid expenses and other current assets
52,392

 
50,213

Total current assets
603,332

 
597,010

Property, plant and equipment:
 
 
 
Total property, plant and equipment
676,388

 
632,720

Less: accumulated depreciation
(416,283
)
 
(375,767
)
Net property, plant and equipment
260,105

 
256,953

Other assets:
 
 
 
Intangible assets, less accumulated amortization of $94,341 at December 28, 2013 and $72,393 at March 30, 2013
275,287

 
264,388

Goodwill
337,029

 
330,474

Deferred tax asset, long term
1,751

 
1,751

Other long-term assets
10,389

 
11,341

Total other assets
624,456

 
607,954

Total assets
$
1,487,893

 
$
1,461,917

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable and current maturities of long-term debt
$
40,810

 
$
23,150

Accounts payable
43,106

 
49,893

Accrued payroll and related costs
44,581

 
45,697

Accrued income taxes
3,247

 
4,053

Other liabilities
57,264

 
57,351

Total current liabilities
189,008

 
180,144

Long-term debt, net of current maturities
406,418

 
456,944

Long-term deferred tax liability
29,664

 
29,552

Other long-term liabilities
37,583

 
26,095

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; Authorized — 150,000,000 shares; Issued and outstanding — 51,888,835 shares at December 28, 2013 and 51,031,563 shares at March 30, 2013
519

 
510

Additional paid-in capital
396,607

 
365,040

Retained earnings
423,163

 
398,199

Accumulated other comprehensive income
4,931

 
5,433

Total stockholders’ equity
825,220

 
769,182

Total liabilities and stockholders’ equity
$
1,487,893

 
$
1,461,917


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

4


HAEMONETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
24,964

 
$
26,239

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Non-cash items:
 
 
 
Depreciation and amortization
59,063

 
46,741

Amortization of financing costs
1,170

 
452

Stock compensation expense
9,664

 
7,931

Purchase of in-process R&D
3,569

 

Asset write downs and loss on sale of property, plant and equipment
2,212

 
472

Unrealized loss from hedging activities
351

 
617

Contingent consideration expense
1,182

 

Change in operating assets and liabilities:
 
 
 
Decrease/(increase) in accounts receivable, net
20,432

 
(32,165
)
Increase in inventories
(24,627
)
 
(12,732
)
Increase in prepaid income taxes
(2,124
)
 
(1,673
)
Decrease/(increase) in other assets and other liabilities
5,219

 
(4,489
)
Tax benefit of exercise of stock options
2,906

 
3,905

(Decrease)/Increase in accounts payable and accrued expenses
(15,928
)
 
22,234

Net cash provided by operating activities
88,053

 
57,532

Cash Flows from Investing Activities:
 
 
 
Capital expenditures on property, plant and equipment
(43,721
)
 
(49,685
)
Proceeds from sale of property, plant and equipment
197

 
1,290

Acquisition of Whole Blood Business

 
(535,144
)
Acquisition of Hemerus
(23,124
)
 
(1,000
)
Other acquisitions and investments
(8,374
)
 

Net cash used in investing activities
(75,022
)
 
(584,539
)
Cash Flows from Financing Activities:
 
 
 
Payments on long-term real estate mortgage
(715
)
 
(658
)
Net (decrease)/increase in short-term loans
(4,426
)
 
4,557

Term loan borrowing

 
475,000

Repayment of term loan borrowings
(28,531
)
 

Debt issuance costs

 
(5,461
)
Proceeds from employee stock purchase plan
5,229

 
4,142

Proceeds from exercise of stock options
11,699

 
28,342

Excess tax benefit on exercise of stock options
2,076

 
3,158

Share repurchase

 
(18,042
)
Net cash (used in)/provided by financing activities
(14,668
)
 
491,038

Effect of exchange rates on cash and cash equivalents
363

 
289

Net Decrease in Cash and Cash Equivalents
(1,274
)
 
(35,680
)
Cash and Cash Equivalents at Beginning of Period
179,120

 
228,861

Cash and Cash Equivalents at End of Period
$
177,846

 
$
193,181

Non-cash Investing and Financing Activities:
 
 
 
Transfers from inventory to fixed assets for placements of Haemonetics equipment
$
7,967

 
$
19,606

Supplemental Disclosures of Cash Flow Information:
 
 
 
Interest paid
$
6,973

 
$
4,020

Income taxes paid
$
4,093

 
$
8,900

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

5


HAEMONETICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 adjustments) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated. Operating results for the nine months ended are not necessarily indicative of the results that may be expected for the full fiscal year ending March 29, 2014, 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 30, 2013.
We consider 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. We had no significant subsequent events.
Our fiscal year ends on the Saturday closest to the last day of March. Fiscal years 2014 and 2013 include 52 weeks with each quarter having 13 weeks.

2. RECENT ACCOUNTING PRONOUNCEMENTS
New pronouncements issued but not effective until after December 28, 2013 are not expected to have a material impact on financial position, results of operation or liquidity.
Standards Implemented
In July 2013 the Financial Accounting Standards Board ("FASB") issued ASU 2013-10 Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU 2013-10 amends ASC 815 to include the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We have evaluated the amendments and conclude that these do not impact our financial statements as we have not entered into transactions with Fed Funds Effective Swap Rate.
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in a single note; any significant amount reclassified out of accumulated other comprehensive income in its entirety in the period, and the income statement line item affected by the reclassification. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance during the three months ended June 29, 2013.


3. ACQUISITIONS

Hemerus Acquisition

On April 30, 2013 we completed the acquisition of certain assets of Hemerus LLC ("Hemerus"), a Minnesota based company that develops innovative technologies for the collection of whole blood and processing and storage of blood components. Hemerus has received U.S Food and Drug Administration (FDA) approval for SOLX® whole blood collection system for eight hour storage of whole blood prior to processing. Hemerus previously received Conformité Européenne or CE Mark in the European Union to market SOLX as the world's first 56-day red blood cell storage solution. We paid $24.1 million cash and will pay an additional $3.0 million upon a further FDA approval of the SOLX solution for 24 hour storage of whole blood prior to processing. We will also pay up to $14.0 million based on future sales of SOLX-based products through fiscal 2024.


6


We acquired Hemerus to complement the portfolio of whole blood collection, filtration and processing product lines we recently acquired and to bring greater efficiency and productivity to whole blood collection and processing. Hemerus manufactures and sells manual blood collection systems and filters and has operations in North America. Expected revenue from the sale of SOLX will be reported within the blood center disposables product line.

The assets acquired from Hemerus were recorded at fair value at the date of acquisition. The allocation of purchase price is preliminary, and subject to change based primarily on finalization of the valuation of the acquired intangible assets.

The preliminary purchase price allocation is as follows:
Asset class
 
Amounts Recognized as of December 28, 2013
Acquired technology
 
$
22,800

Trade name
 
1,900

Customer relationship
 
600

Goodwill
 
6,425

Fair value of net assets acquired
 
$
31,725


The preliminary fair value of the acquired assets is reflected in the consolidated balance sheets.

The purchase price allocation was revised from the preliminary allocation as of September 28, 2013 as follows: intangible assets increased by $4.9 million, which included trade names and customer relationships for the amounts presented, goodwill decreased by $3.9 million and contingent consideration as of the acquisition date increased by $1.0 million. Goodwill represents the excess of the purchase price over the fair value of the net assets. Goodwill of $6.4 million primarily represents future economic benefits expected to arise from the work force and synergies expected to be gained from the integration of SOLX into our whole blood products. Prior to the acquisition, we had not conducted any business with Hemerus.

Contingent consideration

As described above, we will pay the sellers of Hemerus assets up to $14.0 million based on future sales of SOLX. We recognized a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We will revalue this liability each reporting period and record necessary changes in the fair value in our consolidated statements of operations. As of December 28, 2013, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay related to future SOLX sales is $14.0 million. Additionally we will pay $3.0 million upon FDA approval of the SOLX solution for 24 hour storage of whole blood prior to processing.

Contingent consideration liabilities are measured at fair value using projected revenues, discount rates, probabilities of payment and projected payment dates. This Level 3 fair value measurement was performed using a probability-weighted discounted cash flow over a ten year period.

Increases or decreases in the fair value of our contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or likelihood of earning revenue. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans.


4. EARNINGS PER SHARE (“EPS”)
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. The common stock weighted average number of shares has been retroactively adjusted for the stock split that occurred on November 30, 2012.

7


 
 
Three Months Ended
 (In thousands, except per share amounts)
 
December 28,
2013
 
December 29,
2012
Basic EPS
 
 
 
 
Net income
 
$
16,290

 
$
9,904

Weighted average shares
 
51,730

 
51,707

Basic income per share
 
$
0.31

 
$
0.19

Diluted EPS
 
 
 
 
Net income
 
$
16,290

 
$
9,904

Basic weighted average shares
 
51,730

 
51,707

Net effect of common stock equivalents
 
781

 
899

Diluted weighted average shares
 
52,511

 
52,606

Diluted income per share
 
$
0.31

 
$
0.19


 
 
Nine Months Ended
(In thousands, except per share amounts)
 
December 28,
2013
 
December 29,
2012
Basic EPS
 
 
 
 
Net income
 
$
24,964

 
$
26,239

Weighted average shares
 
51,485

 
51,364

Basic income per share
 
$
0.48

 
$
0.51

Diluted EPS
 
 
 
 
Net income
 
$
24,964

 
$
26,239

Basic weighted average shares
 
51,485

 
51,364

Net effect of common stock equivalents
 
815

 
900

Diluted weighted average shares
 
52,300

 
52,264

Diluted income per share
 
$
0.48

 
$
0.50


Weighted average shares outstanding, assuming dilution, excludes the impact of 1.3 million and 0.9 million shares for the three and nine months ended December 28, 2013 respectively and 0.7 million and 0.4 million for the three and nine months ended December 29, 2012, respectively, because these securities were anti-dilutive during the noted periods.

5. STOCK-BASED COMPENSATION
Stock-based compensation expense of $9.7 million and $7.9 million were recognized for the nine months ended December 28, 2013 and December 29, 2012, respectively. The related income tax benefit recognized was $3.2 million and $2.5 million for the nine months ended December 28, 2013 and December 29, 2012, respectively.

During the three months ended September 28, 2013 we granted a “target” number of 300,000 market stock units to 13 senior executives.  Holders of market stock units are eligible to receive a share of Haemonetics’ stock for each market stock unit based on the performance of the stock through March 31, 2017.  If our stock is below a minimum threshold price of $50 per share during the relevant measurement period, the holders receive no market share units. If the stock achieves certain price levels, the holders are eligible to receive up to three times the “target” amount of market share units. As a result, we may issue up to 900,000 shares at a stock price of $85 per share or higher in connection with these grants. We determined the fair value of the target number of market stock units was $37.42 utilizing a Monte Carlo simulation model based on an expected term of 3.7 years, a risk free rate of 0.9%, volatility of 20% and no dividends.  The fair value of these awards totaling $11.2 million will be expensed evenly over the 3.7 year period through the cliff-vesting date of March 31, 2017.



8


The weighted average fair value for our options granted was $10.17 and $9.76 for the nine months ended December 28, 2013 and December 29, 2012, respectively. The assumptions utilized for estimating the fair value of option grants during the periods presented are as follows:
 
 
Nine Months Ended
 
 
December 28,
2013
 
December 29,
2012
Stock Options Black-Scholes assumptions (weighted average):
 
 
 
 
Volatility
 
22.79
%
 
26.94
%
Expected life (years)
 
4.9

 
5.0

Risk-free interest rate
 
1.30
%
 
0.72
%
Dividend yield
 
%
 
%
During the nine months ended December 28, 2013 and December 29, 2012, there were 156,224 and 150,763 shares, respectively, purchased under the Employee Stock Purchase Plan at an average price of $32.77 and $27.47 per share, respectively.

6. PRODUCT WARRANTIES
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.
 
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
Warranty accrual as of the beginning of the period
 
$
673

 
$
796

Warranty provision
 
1,214

 
884

Warranty spending
 
(1,178
)
 
(1,076
)
Warranty accrual as of the end of the period
 
$
709

 
$
604


7. 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.
(In thousands)
 
December 28, 2013
 
March 30, 2013
Raw materials
 
$
80,438

 
$
70,716

Work-in-process
 
6,595

 
7,829

Finished goods
 
122,298

 
105,239

 
 
$
209,331

 
$
183,784


8. DERIVATIVES AND FAIR VALUE MEASUREMENTS
We manufacture, market and sell our products globally. For the nine months ended December 28, 2013, approximately 46.3% of our sales were 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, Australian Dollar, Canadian Dollar and the Mexican Peso. This does not eliminate the impact of the volatility of foreign exchange rates, but because we generally

9


enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation.

Designated Foreign Currency Hedge Contracts

All of our designated foreign currency hedge contracts as of December 28, 2013 and March 30, 2013 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 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 $155.9 million as of December 28, 2013 and $133.3 million as of March 30, 2013.

During the nine months ended December 28, 2013, a $5.0 million gain related to foreign exchange hedge contracts, net of tax, was 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 $2.0 million, net of tax, for the nine months ended December 29, 2012. At December 28, 2013, gains of $4.8 million, net of tax, may be reclassified to earnings within the next twelve months. All currency cash flow hedges outstanding as of December 28, 2013 mature within twelve months.

Non-designated Foreign Currency Contracts

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 $72.6 million as of December 28, 2013 and $65.6 million as of March 30, 2013.
Interest Rate Swaps

On August 1, 2012, we entered into a credit agreement which provided for a $475.0 million term loan (“Credit Agreement”). Under the terms of this Credit Agreement, we may borrow at a spread to an index, including the LIBOR index of 1-month, 3-months, 6-months, etc. From the date of the Credit Agreement, we have chosen to borrow against the 1-month USD-LIBOR-BBA rounded up, if necessary, to the nearest 1/16th of 1% (“Adjusted LIBOR”). The terms of the Credit Agreement also allow us to borrow in multiple tranches. At the end of three months ended December 28, 2013 we had three tranches outstanding, each based on Adjusted LIBOR.

Accordingly, our earnings and cash flows are exposed to interest rate risk from changes in Adjusted LIBOR. Part of our interest rate risk management strategy includes the use of interest rate swaps to mitigate our exposure to changes in variable interest rates. Our objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. If the interest rate swap qualifies for hedge accounting, we formally document our hedge relationships (including identifying the hedged instrument and hedged item) at hedge inception. On a quarterly basis, we assess whether the interest rate swaps are highly effective in offsetting changes in the cash flow of the hedged item. We do not hold or issue interest rate swaps for trading purposes. We manage the credit risk of the counterparties by dealing only with institutions that we consider financially sound and consider the risk of non-performance to be remote.
On December 21, 2012, we entered into two interest rate swap agreements ("The Swaps"), whereby we receive Adjusted LIBOR and pay an average fixed rate of 0.68% on a total notional amount of $250.0 million of debt. The Swaps mature on August 1, 2017. We designated The Swaps as cash flow hedges of variable interest rate risk associated with $250.0 million of indebtedness. For the nine months ended December 28, 2013, a gain of $0.2 million, net of tax, was recorded in Accumulated Other Comprehensive Income to recognize the effective portion of the fair value of interest rate swaps that qualify as cash flow hedges.



10


Fair Value of Derivative Instruments
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 statements of income and comprehensive income for the nine months ended December 28, 2013.

Derivative Instruments
 
Amount of
Gain/(Loss)
Recognized
in AOCI
(Effective Portion)
 
Amount of Gain/(Loss) Reclassified
from AOCI into
Earnings
(Effective Portion)
 
Location in
Consolidated Statements of
Income and Comprehensive Income
 
Amount of Gain/(Loss)
Excluded from
Effectiveness
Testing (*)
 
Location in
Consolidated Statements of
Income and Comprehensive Income
(In thousands)
 
 
 
 
 
 
 
 
 
 
Designated foreign currency hedge contracts, net of tax
 
$
5,034

 
$
7,114

 
Net revenues, COGS, and SG&A
 
$
48

 
Interest and other expense, net
Non-designated foreign currency hedge contracts
 


 


 
 
 
(169
)
 
Interest and other expense, net
Designated interest rate swaps, net of tax
 
$
249

 
$
(891
)
 
Interest and other expense, net
 
$

 
 
(*)   We exclude the difference between the spot rate and hedge forward rate from our effectiveness testing.

We did not have fair value hedges or net investment hedges outstanding as of December 28, 2013 or March 30, 2013.

As of December 28, 2013, the amount recognized as deferred tax for designated foreign currency was $0.4 million and the amount recognized as deferred tax for interest rate swap hedges was $0.4 million.

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, current interest rate curves, interest rate volatilities, 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 December 28, 2013, 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 December 28, 2013 by type of contract and whether it is a qualifying hedge under ASC Topic 815.
(In thousands)
 
Location in
Balance Sheet
 
December 28, 2013
 
March 30, 2013
Derivative Assets:
 
 
 
 
 
 
Designated foreign currency hedge contracts
 
Other current assets
 
$
4,826

 
$
7,030

Designated interest rate swaps
 
Other current assets
 
1,194

 

 
 
 
 
$
6,020

 
$
7,030

Derivative Liabilities:
 
 
 
 
 
 
Designated foreign currency hedge contracts
 
Other current liabilities
 
$
1,153

 
$
954

Designated interest rate swaps
 
Other current liabilities
 

 
671

 
 
 
 
$
1,153

 
$
1,625

Other Fair Value Measurements
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 nine months ended December 28, 2013, we applied the requirements

11


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:
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.
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 classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
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 28, 2013:
(In thousands)
 
Quoted Market
Prices for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
 
Money market funds
 
$
129,015

 
$

 
$

 
$
129,015

Designated foreign currency hedge contracts
 

 
4,826

 

 
4,826

Designated interest rate swap
 

 
1,194

 

 
1,194

 
 
$
129,015

 
$
6,020

 
$

 
$
135,035

Liabilities
 
 
 
 
 
 
 
 
Designated foreign currency hedge contracts
 
$

 
$
1,153

 
$

 
$
1,153

Contingent consideration
 

 

 
8,783

 
8,783

 
 
$

 
$
1,153

 
$
8,783

 
$
9,936

A description of the methods used to determine the fair value of the Level 3 liabilities is included within Note 3, Acquisitions. The table below provides a reconciliation of the beginning and ending Level 3 liabilities for the quarter ended December 28, 2013.
(In thousands)
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
 
Contingent consideration as of acquisition date
 
7,600

Fair value adjustment
 
567

Contingent consideration interest expense
 
616

Ending balance
 
$
8,783



12


Other Fair Value Disclosures
The Term Loan which is carried at amortized cost and accounts receivable and accounts payable approximate fair value.


9. INCOME TAXES

We conduct business globally and as a result report our results of operations in a number of foreign jurisdictions in addition to the United States.  Our reported tax rate is lower than the federal statutory rate in all reported periods as the income tax rates in the foreign jurisdictions are generally lower. 

The reported tax rates for the three and nine months ended December 28, 2013 were a benefit of 8.5% and an expense of 6.3%, as compared to an expense of 25.0% and 25.5% for the three and nine months ended December 29, 2012, respectively. Our reported tax rates are lower than the prior fiscal year periods due to lower income in the United States and the release of certain previously established reserves in connection with the closure of certain tax statutes. Income in the United States is lower than the prior fiscal year periods due to significant restructuring and other costs associated with our transformation activities and a deduction available associated with certain intercompany financing to our subsidiary in Italy. We recorded a tax benefit for the three months ended December 28, 2013 as the benefits from the release of previously established reserves and the intercompany financing with Italy were recorded during this period.
 

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.

11. SEGMENT INFORMATION
Segment Definition Criteria

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 categories.

Enterprise-Wide Disclosures about Product and Services

We have four global product families: plasma, blood center, hospital, and software solutions.
Our products include whole blood disposables, equipment devices and the related disposables used with these devices. Disposables include part of 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. 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 as well as disposables for manual whole blood collection. Hospital consists of surgical disposables (principally the Cell Saver® autologous blood recovery system 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 during and after surgery). Software solutions include information technology platforms that assist blood centers, plasma centers, and hospitals to more effectively manage regulatory compliance and operational efficiency.

13


Revenues from External Customers:
 
 
Three Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
Disposable revenues
 
 
 
 
Plasma disposables
 
$
76,698

 
$
68,102

Blood center disposables
 
 
 
 
Platelet
 
43,447

 
45,139

Red cell
 
9,869

 
11,752

Whole blood
 
47,342

 
54,894

 
 
100,658

 
111,785

Hospital disposables
 
 
 
 
Surgical
 
16,807

 
18,900

OrthoPAT
 
6,392

 
7,090

Diagnostics
 
8,565

 
6,761

 
 
31,764

 
32,751

Total disposables revenue
 
209,120

 
212,638

 
 
 
 
 
Software solutions
 
17,603

 
16,008

Equipment & other
 
15,397

 
18,749

Net revenues
 
$
242,120

 
$
247,395


 
 
 
 
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
Disposable revenues
 
 
 
 
Plasma disposables
 
$
217,768

 
$
200,657

Blood center disposables
 
 
 
 
Platelet
 
117,778

 
125,579

Red cell
 
30,098

 
35,738

Whole blood
 
145,879

 
83,514

 
 
293,755

 
244,831

Hospital disposables
 
 
 
 
Surgical
 
49,247

 
55,965

OrthoPAT
 
18,973

 
22,276

Diagnostics
 
24,144

 
20,196

 
 
92,364

 
98,437

Total disposables revenue
 
603,887

 
543,925

 
 
 
 
 
Software solutions
 
51,469

 
51,354

Equipment & other
 
42,062

 
46,769

Net revenues
 
$
697,418

 
$
642,048



12. RESTRUCTURING

On an ongoing basis, we review the global economy, the healthcare industry, and the markets in which we compete. From these reviews we identify opportunities to improve efficiencies, enhance commercial capabilities, better align our resources and offer

14


customers better comprehensive solutions. In order to realize these opportunities, from time to time, we undertake restructuring and other initiatives to transform our business.

On May 1, 2013 we announced that our Board of Directors has approved a plan to pursue identified Value Creation & Capture (“VCC”) opportunities. These include: (i) investment in product line extensions, next generation products and growth platforms; (ii) enhancement of commercial execution capabilities by implementing go-to-market and other strategies to enable global profitable revenue growth; and (iii) transformation of the manufacturing network to best support these commercial strategies while optimizing expense levels. Collectively, these are opportunities to position us for optimal growth and increased competitiveness.

Transformation of the manufacturing network will take place through fiscal 2016, and will involve (i) discontinuing manufacturing activities at our Braintree, Massachusetts and Ascoli-Piceno, Italy locations, (ii) creating a technology center of excellence for product development close to our current Corporate Headquarters, (iii) expansion of our current facility in Tijuana, Mexico, (iv) engaging Sanmina Corporation as a contract manufacturer to produce certain medical equipment, and (v) building a new manufacturing facility in Penang, Malaysia closer to our customers in Asia.

For the nine months ended December 28, 2013, we incurred $40.8 million of restructuring and restructuring related charges of which approximately $16.0 million has been paid to date and approximately $14.4 million is payable within the next twelve months. The substantial majority of restructuring expenses have been included as a component of selling, general and administrative expense in the accompanying consolidated statements of income and comprehensive income.

The following summarizes the restructuring activity for the nine months ended December 28, 2013 and December 29, 2012:
 
Nine Months Ended December 28, 2013
(In thousands)
 
 Restructuring Accrual Balance at March 30, 2013
 
 Restructuring Costs Incurred
 
Less Payments
 
Less Non-Cash Adjustments
 
Restructuring Accrual Balance at December 28, 2013
Severance and other employee costs
 
$
3,089

 
$
28,189

 
$
(9,690
)
 
$

 
$
21,588

Other costs
 
173

 
9,905

 
(9,566
)
 

 
512

Accelerated depreciation
 

 
1,757

 

 
(1,757
)
 

Asset write-down
 

 
915

 

 
(915
)
 

 Total
 
$
3,262

 
$
40,766

 
$
(19,256
)
 
$
(2,672
)
 
$
22,100


 
 
Nine Months Ended December 29, 2012
(in thousands)
 
Restructuring Accrual Balance at March 31, 2012
 
 Restructuring Costs Incurred
 
Less Payments
 
Less Non-Cash Adjustments
 
Restructuring Accrual Balance at December 29, 2012
Severance and other employee costs
 
$
1,461

 
$
4,807

 
$
(3,682
)
 
$

 
$
2,586

Other costs
 
533

 
418

 
(741
)
 

 
210

 Total
 
$
1,994

 
$
5,225

 
$
(4,423
)
 
$

 
$
2,796


We are deploying significant financial resources for these activities.  Many of the activities necessary to complete the VCC initiatives include severance and other costs which qualify as restructuring expenses under ASC 420, Exit or Disposal Cost Obligations.  We anticipate we will incur approximately $71.0 million in severance, asset write-offs and other restructuring charges as well as other “Transformation Costs” related to VCC initiatives in fiscal 2014.  The majority of these costs relates to the discontinuation of manufacturing activities in Braintree, Massachusetts and Ascoli-Piceno, Italy, and will be incurred in the current fiscal year.

In addition, we also incur costs that do not constitute restructuring under ASC 420, Exit or Disposal Cost Obligations which we refer to as "Transformation Costs". These costs consist primarily of expenditures directly related to our transformation activities including program management, integration and product line transfer teams, infrastructure related costs, accelerated depreciation and asset disposals. 


15


The table below presents transformation and restructuring costs recorded in cost of goods sold, research and development, selling, general and administrative expenses and interest and other expense in our statement of income and comprehensive income for the periods presented. The majority of expenses recorded as Transformation Costs in the prior year relate to the integration of Pall's transfusion medicine business, which was purchased for $535.1 million in August 2012. Transformation Costs in the current year are associated with our VCC initiatives as well as completion of the integration of Pall’s transfusion medicine business. We anticipate that we will incur approximately $82.0 million in total restructuring and transformation expenses related to VCC initiatives and completion of whole blood integration activities in fiscal 2014 of which $72 million is payable in cash.

Transformation costs
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
December 28, 2013
 
December 29,
2012
 
December 28, 2013
 
December 29,
2012
Integration and other costs
 
$
6,306

 
$
22,138

 
$
26,389

 
$
49,963

Accelerated depreciation
 
653

 

 
1,938

 

Asset disposal
 
36

 

 
796

 

Total
 
$
6,995

 
$
22,138

 
$
29,123

 
$
49,963



Restructuring costs
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
December 28, 2013
 
December 29,
2012
 
December 28, 2013
 
December 29,
2012
Severance and other employee costs
 
$
5,348

 
$
2,737

 
$
28,189

 
$
4,807

Other costs
 
4,588

 
209

 
9,905

 
418

Accelerated depreciation
 
569

 

 
1,757

 

Asset disposal
 

 

 
915

 

Total
 
$
10,505

 
$
2,946

 
$
40,766

 
$
5,225

 
 
 
 
 
 
 
 
 
Total restructuring and transformation
 
$
17,500

 
$
25,084

 
$
69,889

 
$
55,188


13. CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS
For costs incurred related to the development of software to be sold, leased, or otherwise marketed, we apply the provisions of ASC Topic 985-20, Software - Costs of Software to be Sold, Leased or Marketed, 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.
We capitalized $3.4 million and $4.7 million in software development costs for ongoing initiatives during the nine months ended December 28, 2013 and December 29, 2012, respectively. At December 28, 2013 and March 30, 2013, we have a total of $23.4 million and $20.0 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. We review these assets for impairment annually.


16



14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following is a roll-forward of the components of Accumulated Other Comprehensive Income, net of tax, for the nine months ended December 28, 2013:

(In thousands)
 
Foreign currency
 
Defined benefit plans
 
Net Unrealized Gain/loss on Derivatives
 
Total
 
 
 
 
 
 
 
 
 
Balance as of March 30, 2013
 
$
4,133

 
$
(5,073
)
 
$
6,373

 
$
5,433

Other comprehensive income before reclassifications
 
438

 

 
5,283

 
5,721

Amounts reclassified from Accumulated Other Comprehensive Income
 

 

 
(6,223
)
 
(6,223
)
Net current period other comprehensive income
 
438

 

 
(940
)
 
(502
)
Balance as of December 28, 2013
 
$
4,571

 
$
(5,073
)
 
$
5,433

 
$
4,931


The details about the amount reclassified from Accumulated other comprehensive income for the nine months ended December 28, 2013 are as follows:
(In thousands)
 
Amounts Reclassified from Other Comprehensive Income
 
Affected Line in the
Statement of Income
Derivative instruments reclassified to income statement
 
 
 
 
Realized net gain on derivatives
 
$
6,610

 
Revenue, cost of goods sold, income/(expense)
Income tax effect
 
(387
)
 
Provision for income taxes
Net of taxes
 
$
6,223

 
 


17


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with both our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and our annual consolidated financial statements, notes thereto and the MD&A contained in our fiscal year 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2013. The following discussion may contain forward-looking statements and should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Information.”

Our Business

Haemonetics is a global healthcare company dedicated to providing innovative blood management solutions to our customers. Our comprehensive portfolio of integrated devices, information management, and consulting services offers blood management solutions for each facet of the blood supply chain, helping improve clinical outcomes and reduce costs for blood and plasma collectors, hospitals, and patients around the world. Our products and services help prevent a transfusion to a patient who does not need one and provide the right blood product, at the right time, in the right dose to the patient who does.

Blood and its components (plasma, platelets, and red cells) have many vital and frequently life-saving clinical applications. Plasma is used for patients with major blood loss and is manufactured into pharmaceuticals to treat a variety of illnesses and hereditary disorders such as hemophilia. Red cells treat trauma patients or patients undergoing surgery with high blood loss, such as open heart surgery or organ transplant. Platelets treat cancer patients undergoing chemotherapy. Blood is essential to a modern healthcare system.

Recent developments

Value Creation and Capture Initiatives
On April 29, 2013, we committed to a plan to pursue identified Value Creation and Capture ("VCC") opportunities. These opportunities include investment in product line extensions and next generation products, enhancement of commercial capabilities and a transformation of our manufacturing network. The transformation of our manufacturing network will take place over the next three fiscal years and includes changes to the current manufacturing footprint and supply chain structure (the "Network Plan"). To implement the Network Plan, we will (i) cease manufacturing activities at our Braintree, Massachusetts and Ascoli-Piceno, Italy locations, (ii) create a technology center of excellence for product development close to our current Corporate Headquarters, (iii) expand our current facility in Tijuana, Mexico, (iv) engage Sanmina Corporation, a contract manufacturer to produce certain medical equipment, and (v) build a new manufacturing facility in Penang, Malaysia closer to our customer base in that region. See liquidity and capital resources discussion of this MD&A for further discussion of the costs of these activities.

Changes in Blood Management

Blood management is an approach to optimizing the care of patients that may need a transfusion that includes a wide range of practices and protocols which influence the need for, and use of, blood products in hospitals. As previously disclosed, adoption of blood management practices by hospitals, particularly in the United States, is gaining momentum. Blood management efforts can reduce the demand for red cells, which in turn can reduce the demand for our red cell and whole blood collection products. We believe the decline in U.S. blood center collections will be approximately 8% to 10% annually for our present fiscal year 2014 and next year fiscal 2015.

Blood management practices have also increased the utilization of tranexamic acid. Tranexamic acid is used to treat and prevent post-operative bleeding in orthopedic surgeries, particularly hip and knee replacements. The use of this low cost, generic drug has expanded rapidly in an environment of greater blood management focus. We have been monitoring this trend and believe tranexamic acid is used in at least 30% of total hip and knee replacements in the United States and that broader adoption is likely. This expanded adoption of tranexamic acid is contributing to the aforementioned reduced demand for red cells and is reducing the demand for orthopedic cell salvage.

Products

Our medical device systems provide both automated and manual 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

18


systems include devices and single-use; proprietary disposable sets (“disposables”) some of which only operate 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 manual blood collection and filtration systems enable the manual collection of all blood components while detecting bacteria, thus reducing the risks of infection through transfusion.

We place devices with some of our customers which remain our property. The customer has the right to use these for a period of time as long as certain conditions are met, 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 includes the sales of manual collection and filtration systems, device disposables and fees for the use of our equipment, which accounted for approximately 86.6% and 84.7% of our total revenues for the nine months ended December 28, 2013 and December 29, 2012, respectively.

Financial Summary
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
Net revenues
 
$
242,120

 
$
247,395

 
(2.1
)%
 
$
697,418

 
$
642,048

 
8.6
 %
Gross profit
 
$
121,629

 
$
113,115

 
7.5
 %
 
$
352,924

 
$
304,990

 
15.7
 %
% of net revenues
 
50.2
 %
 
45.7
%
 
 
 
50.6
%
 
47.5
%
 
 
Operating expenses
 
$
103,769

 
$
97,368

 
6.6
 %
 
$
318,243

 
$
266,261

 
19.5
 %
Operating income
 
$
17,860

 
$
15,747

 
13.4
 %
 
$
34,681

 
$
38,729

 
(10.5
)%
% of net revenues
 
7.4
 %
 
6.4
%
 
 
 
5.0
%
 
6.0
%
 
 
Interest and other expense, net
 
$
(2,852
)
 
$
(2,542
)
 
12.2
 %
 
$
(8,035
)
 
$
(3,518
)
 
128.4
 %
Income before taxes
 
$
15,008

 
$
13,205

 
13.7
 %
 
$
26,646

 
$
35,211

 
(24.3
)%
Income tax (benefit)/expense
 
$
(1,282
)
 
$
3,301

 
(138.8
)%
 
$
1,682

 
$
8,972

 
(81.3
)%
% of pre-tax income
 
(8.5
)%
 
25.0
%
 
 
 
6.3
%
 
25.5
%
 
 
Net income
 
$
16,290

 
$
9,904

 
64.5
 %
 
$
24,964

 
$
26,239

 
(4.9
)%
% of net revenues
 
6.7
 %
 
4.0
%
 
 
 
3.6
%
 
4.1
%
 
 
Earnings per share-diluted
 
$
0.31

 
$
0.19

 
63.2
 %
 
$
0.48

 
$
0.50

 
(4.0
)%
Net revenues decreased 2.1% and increased 8.6% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, net revenues decreased 0.3% and increased 10.4% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Revenue increased due to a full period of sales from the whole blood business acquired August 1, 2012 as compared to five months of sales in the prior year, as well as growth in our plasma and diagnostics disposable products. These increases were partially offset by declines across other product lines for the three and nine months ended December 28, 2013.
Operating income increased 13.4% and decreased 10.5% for the three and nine months ended December 28, 2013, respectively as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, operating income increased 33.1% and 2.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Operating income increased for the three months ended December 28, 2013 due primarily to improved gross margin performance.
Operating income decreased for the nine months ended December 28, 2013 as increases in gross profit were more than offset by higher restructuring and transformation expenses and other operating expense growth associated with the whole blood acquisition. Restructuring and transformation expenses were $17.5 million and $69.9 million for the three and nine months ended December 28, 2013, as compared to $25.1 million and $55.2 million for the comparative prior year periods.

19


Restructuring and transformation expenses in fiscal 2014 are primarily associated with VCC initiatives, and in fiscal 2013 were primarily associated with the acquisition and integration of the whole blood business.

Net income increased 64.5% and decreased 4.9% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effects of foreign exchange, net income increased 71.6% and decreased 1.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. The net income changes are attributable to the changes described in operating income above, and the recognition of a tax benefit in the three months ended December 28, 2013.

RESULTS OF OPERATIONS
International Operations and the Impact of Foreign Exchange
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
United States
 
$
126,752

 
$
125,362

 
1.1
 %
 
$
374,559

 
$
324,755

 
15.3
%
International
 
115,368

 
122,033

 
(5.5
)%
 
322,859

 
317,293

 
1.8
%
Net revenues
 
$
242,120

 
$
247,395

 
(2.1
)%
 
$
697,418

 
$
642,048

 
8.6
%
Our principal operations are in the U.S., Europe, Japan and other parts of Asia. Our products are marketed in approximately 100 countries around the world through a combination of our direct sales force, independent distributors and agents.
Our revenues generated outside the U.S. approximated 46.3% of total net revenues for the nine months ended December 28, 2013. International sales are generally conducted in local currencies, primarily the Japanese Yen, the Euro and Australian Dollar. Our revenues are impacted by changes in the value of the Yen, the Euro and the Australian Dollar relative to the U.S. Dollar.
Changes in foreign exchange rates contributed to a reduction in operating income of approximately 20% and 12% for the three and nine months ended December 28, 2013, respectively.  The primary reason is the relative weakness in the Japanese Yen to the US Dollar.  We expect this relative weakness to continue to negatively impact operating income for the balance of fiscal 2014 and into fiscal 2015, as we have placed foreign currency hedges for those periods.
Please see section entitled “Foreign Exchange” in this discussion for a more complete explanation of how foreign currency affects our business and our strategy for managing this exposure.
Net Revenues by Product Type
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
Disposables
 
$
209,120

 
$
212,638

 
(1.7
)%
 
$
603,887

 
$
543,925

 
11.0
 %
Software solutions
 
17,603

 
16,008

 
10.0
 %
 
51,469

 
51,354

 
0.2
 %
Equipment & other
 
15,397

 
18,749

 
(17.9
)%
 
42,062

 
46,769

 
(10.1
)%
Net revenues
 
$
242,120

 
$
247,395

 
(2.1
)%
 
$
697,418

 
$
642,048

 
8.6
 %










20






Disposable Revenues by Product Type
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
Plasma disposables
 
$
76,698

 
$
68,102

 
12.6
 %
 
$
217,768

 
$
200,657

 
8.5
 %
Blood center disposables
 
 
 
 
 
 
 
 
 
 
 
 
Platelet
 
43,447

 
45,139

 
(3.7
)%
 
117,778

 
125,579

 
(6.2
)%
Red cell
 
9,869

 
11,752

 
(16.0
)%
 
30,098

 
35,738

 
(15.8
)%
Whole blood
 
47,342

 
54,894

 
(13.8
)%
 
145,879

 
83,514

 
74.7
 %
 
 
100,658

 
111,785

 
(10.0
)%
 
293,755

 
244,831

 
20.0
 %
Hospital disposables
 
 
 
 
 
 
 
 
 
 
 
 
Surgical
 
16,807

 
18,900

 
(11.1
)%
 
49,247

 
55,965

 
(12.0
)%
OrthoPAT
 
6,392

 
7,090

 
(9.8
)%
 
18,973

 
22,276

 
(14.8
)%
Diagnostics
 
8,565

 
6,761

 
26.7
 %
 
24,144

 
20,196

 
19.5
 %
 
 
31,764

 
32,751

 
(3.0
)%
 
92,364

 
98,437

 
(6.2
)%
Total disposables revenue
 
$
209,120

 
$
212,638

 
(1.7
)%
 
$
603,887

 
$
543,925

 
11.0
 %

Disposables
Disposables revenue decreased 1.7% and increased 11.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, disposables revenue was essentially unchanged and increased 13.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, driven primarily by revenue from the whole blood acquisition and growth in plasma and diagnostics.
Plasma
Plasma disposables revenue increased 12.6% and 8.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, plasma revenue increased 14.4% and 10.5% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. Plasma revenue increased due to higher volumes in the United States and the transition to a direct sales model in Australia and New Zealand. We recently completed multi-year extensions to our agreements with certain commercial plasma customers. Approximately 80% of our current commercial plasma revenues are under agreement through the third quarter of fiscal 2019 with these contract extensions.
Blood Center
Blood center consists of disposables used to collect platelets, red cells and whole blood.
Platelet disposables revenue decreased 3.7% and 6.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, platelet disposable revenue decreased 0.1% and 2.4% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due primarily to lower revenues in Canada and lower revenues in emerging markets associated with order timing and reductions of distributor inventory levels over the first half of fiscal 2014. In the most recent quarter platelet revenue in distribution markets returned to growth.

Sales to U.S. blood centers represent over 70% of our total red cell and whole blood disposable revenue.  The demand for these disposable products in the U.S. has recently declined due to a rapid decline in demand for blood products associated with actions taken by hospitals to improve blood management techniques and protocols.  We believe the decline in U.S. blood center

21


collections will be approximately 8% to 10% per year for fiscal 2014 and fiscal 2015, and accordingly will continue to negatively impact red cell and whole blood revenue during these periods.

Additionally, in response to this trend, our U.S. blood center customers are taking actions to improve efficiencies and reduce operating costs, including consolidation amongst blood centers, formation of purchasing affiliations, and focusing on direct supplier costs via vendor consolidation and other means.  Large U.S. blood collector groups are currently pursuing single source contracts for whole blood collection products which will require reductions in average selling prices in order to retain or increase U.S. market share. In the three months ended December 28, 2013, we entered into a multi-year agreement to supply the HemeXcel Purchasing Alliance LLC with certain whole blood collection components on an exclusive basis during the calendar years 2014-2016. The agreement is not expected to have a material impact on fiscal 2014 revenue or earnings, but will negatively impact fiscal 2015 gross margins based on reductions in average selling prices as anticipated. Another major U.S. whole blood tender remains in process and is expected to be awarded early in calendar 2014. Price reductions will be required to be awarded this tender. If we are not awarded this tender, it will result in a reduction in whole blood revenue in fiscal 2015.

Red cell disposables revenue decreased 16.0% and 15.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, red cell disposables revenue decreased 15.7% and 15.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due to a combination of competitive challenges and reductions in blood collections in the U.S. as discussed above. Additionally, favorable order timing in the three months ended March 30, 2013 had a negative impact on sales in the first three months of fiscal 2014.

Whole blood revenue decreased 13.8% and increased 74.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, whole blood revenue decreased 13.5% and increased 73.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Revenue for the three months ended December 28, 2013 decreased due to the reductions in the U.S. collection market noted above and the impact of a previously announced loss of a European tender. Revenue for the nine months ended December 28, 2013 increased due to a full period of sales from the whole blood business acquired August 1, 2012 as compared to five months of sales in the prior year period, partially offset by the negative impact of the U.S. collection market and European tender loss noted.
Hospital
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 decreased 11.1% and 12.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, surgical disposables revenue decreased 7.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, due to the return to the market of a competitor with aggressive pricing whose operations were limited by a natural disaster in the prior year, and by a reduction in demand for surgical procedures.
Revenues from our OrthoPAT disposables decreased 9.8% and 14.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased 7.6% and 11.9% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, as better blood management has reduced orthopedic blood loss and demand for OrthoPAT disposables. Recent trends in blood management particularly the adoption of tranexamic acid to treat and prevent orthopedic post-operative blood loss have lessened hospital use of OrthoPAT disposables.
Diagnostics product revenue consists principally of the consumable reagents used with the TEG analyzer. Revenues from our diagnostics products increased 26.7% and 19.5% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, diagnostics product revenues increased 24.3% and 18.3% for the three and nine months ended December 28, 2013, respectively, as compared to the same period of fiscal 2013. The revenue increase is due to continued adoption of our TEG analyzer, principally in the U.S. and China.
Software Solutions
Our software solutions revenues include sales of our information technology software platforms and consulting services. Software revenues increased 10.0% and 0.2% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, software revenues increased 9.2% and decreased 0.3% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Software revenue was essentially flat in the nine months ended December 28, 2013, as increases in hospital software revenue were offset by lower hosting fees associated with a large commercial plasma customer.

22


Equipment & Other
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 services 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 decreased 17.9% and 10.1% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, equipment and other revenues decreased 13.6% and 7.8% for the three and nine months ended December 28, 2013, respectively, as compared to the same period of fiscal 2013. The decline in revenue for the nine months ended December 28, 2013 is due primarily to benefits in the prior year from a competitor whose operations were limited by a natural disaster and the successful launch of the Cell Saver Elite. The decline in revenue for the three months ended December 28, 2013 also included the impact of equipment order timing in Japan.

Gross Profit
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
Gross profit
 
$
121,629

 
$
113,115

 
7.5
%
 
$
352,924

 
$
304,990

 
15.7
%
% of net revenues
 
50.2
%
 
45.7
%
 
 

 
50.6
%
 
47.5
%
 
 

Gross profit increased 7.5% and 15.7% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. Without the effect of foreign exchange, gross profit increased 10.4% and 18.2% for the three and nine months ended December 28, 2013, as compared to the same periods of fiscal 2013. The gross profit margin increased by 450 and 310 basis points for the three and nine months ended December 28, 2013 respectively as compared to the same three month periods of fiscal 2013. The increase in gross profit margin in both the three and nine months ended December 28, 2013 is primarily driven by lower whole blood related inventory charges. In the prior fiscal year we recorded inventory reserves associated with the removal of certain whole blood collection sets from inventory based on a quality matter detected in the third quarter of fiscal 2013. We also recorded significant inventory step-up charges in the prior year related to acquired whole blood inventory. Improvements to reported gross margin excluding the inventory adjustments noted also included the positive impact of customer mix within whole blood and plasma disposable sales during the three months ended December 28, 2013 and improvements in manufacturing efficiencies for the nine months ended December 28, 2013.
The aforementioned reductions in average selling prices in the North America whole blood market will negatively impact fiscal 2015 gross margins.
Operating Expenses
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
 
December 28,
2013
 
December 29,
2012
 
% Increase/
(Decrease)
Research and development
 
$
14,209

 
$
10,588

 
34.2
%
 
$
40,364

 
$
30,823

 
31.0
%
% of net revenues
 
5.9
%
 
4.3
%
 
 

 
5.8
%
 
4.8
%
 
 
Selling, general and administrative
 
$
89,560

 
$
86,780

 
3.2
%
 
$
277,879

 
$
235,438

 
18.0
%
% of net revenues
 
37.0
%
 
35.1
%
 
 

 
39.8
%
 
36.7
%
 
 
Total operating expenses
 
$
103,769

 
$
97,368

 
6.6
%
 
$
318,243

 
$
266,261

 
19.5
%
% of net revenues
 
42.9
%
 
39.4
%
 
 

 
45.6
%
 
41.5
%
 
 

Research and Development
Research and development expenses increased 34.2% and 31.0% for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013. The nine months ended December 28, 2013 includes a $3.6 million in-process research and development charge related to the acquisition of certain technology and manufacturing rights to be used in a next generation device. Other increases are primarily due to additional staff and program spending related to the Hemerus and whole blood acquisitions, new research initiatives and development programs.


23


Selling, General and Administrative
During the three and nine months ended December 28, 2013, respectively, selling, general and administrative expenses increased 3.2% and 18.0% as compared to the same periods of fiscal 2013. The increase for the three months ended December 28, 2013 was due primarily to increases in selling expenses in emerging markets. The increase for the nine months ended December 28, 2013 is primarily related to a $23.0 million increase in restructuring and transformation costs due to VCC initiatives. We also incurred incremental costs of approximately $14.0 million associated with operating the whole blood business for nine months as compared to five months in the prior year, of which approximately $6.1 million is amortization of acquired intangible assets.

Interest and Other Expense, Net
Interest and other expense, net, increased for the three and nine months ended December 28, 2013, respectively, as compared to the same periods of fiscal 2013, primarily due to interest expense from our term loan established in connection with the whole blood acquisition. The effective interest rate on total debt outstanding for the nine months ended December 28, 2013 is approximately 2.0%.
Income Taxes
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
Reported income tax rate
 
(8.5
)%
 
25.0
%
 
6.3
%
 
25.5
%
 

We conduct business globally and as a result report our results of operations in a number of foreign jurisdictions in addition to the United States.  Our reported tax rate is lower than the federal statutory rate in all periods as the income tax rates in the foreign jurisdictions are generally lower.

The reported tax rates for the three and nine months ended December 28, 2013 were a benefit of 8.5% and expense of 6.3% provision. Our reported tax rates are lower than the prior fiscal year periods due to lower income in the United States and the release of certain previously established reserves in connection with the closure of certain tax statutes. Income in the United States is lower than the prior fiscal year periods due to significant restructuring and other costs associated with our transformation activities and a deduction available associated with certain intercompany financing to our subsidiary in Italy. We recorded a tax benefit for the three months ended December 28, 2013 as the benefits from the release of previously established reserves and the intercompany financing with Italy were recorded during this period.




24


Liquidity and Capital Resources
The following table contains certain key performance indicators we believe depict our liquidity and cash flow position:
(Dollars in thousands)
 
December 28,
2013
 
March 30,
2013
Cash & cash equivalents
 
$
177,846

 
$
179,120

Working capital
 
$
414,324

 
$
416,866

Current ratio
 
3.2

 
3.3

Net debt (1)
 
$
(269,382
)
 
$
(300,974
)
Days sales outstanding (DSO)
 
56

 
62

Disposable finished goods inventory turnover
 
4.4

 
4.0


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

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 payments associated with VCC initiatives, acquisition and integration activities, capital expenditure, planned principal payments under the Credit Agreement, share repurchases under programs authorized by the Board of Directors at its discretion from time to time and other investments.

VCC initiatives

We expect to record approximately $100.0 million of cash restructuring and transformation costs and capital expenditures during fiscal 2014 in connection with VCC initiatives and completion of the whole blood integration as presented below. 

(In millions)
 
 Total
Manufacturing network optimization
 
$
43.0

Commercial excellence initiatives
 
8.0

Productivity and operational initiatives
 
10.0

Completion of whole blood integration
 
11.0

Network transformation capital
 
28.0

Total
 
$
100.0


Through the nine months ended December 28, 2013, we paid approximately $45 million of cash restructuring, transformation costs and capital expenditures related to these initiatives. These costs consist principally of severance and other employee related costs, product line transfer costs including relocation and validation, as well as redundant overhead and inefficiencies during the transfer period. The management and execution will require a dedicated team of program managers, engineers, regulatory and quality professionals, the cost of which is included in these estimates. Network transformation capital will be used to expand our existing Tijuana, Mexico facility and construct a new facility in Penang, Malaysia.

Debt

In connection with the acquisition of the whole blood business, we entered into a credit agreement ("Credit Agreement") with certain lenders (together, “Lenders”) which provided for a $475.0 million Term Loan and a $50.0 million revolving loan (the “Revolving Credit Facility”), and together with the Term Loan, (the “Credit Facilities”). The Credit Facilities have a term of five years and mature on August 1, 2017. Interest is based on the Adjusted LIBOR plus a range of 1.125% to 1.500% depending on achievement of leverage ratios and customary credit terms which include financial and negative covenants. As of December 28, 2013 all $50.0 million of the Revolving Credit Facility was available and we were in compliance with the financial covenants including Consolidated Total Leverage Ratio and Consolidated Interest Coverage Ratio.






25



Cash Flows
 
 
Nine Months Ended
(In thousands)
 
December 28,
2013
 
December 29,
2012
 
Increase/
(Decrease)
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
88,053

 
$
57,532

 
$
30,521

Investing activities
 
(75,022
)
 
(584,539
)
 
509,517

Financing activities
 
(14,668
)
 
491,038

 
(505,706
)
Effect of exchange rate changes on cash and cash equivalents (1)
 
363

 
289

 
74

Net increase (decrease) in cash and cash equivalents
 
$
(1,274
)
 
$
(35,680
)
 
$
34,406


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

Cash Flow Overview:

Operating Activities:

Net cash provided by operating activities increased by $30.5 million during the nine months ended December 28, 2013 as compared to the nine months ended December 29, 2012 primarily due to higher cash receipts associated with strong collections which more than offset increased expenditures for inventory. Additionally, initial investments in accounts receivable of approximately $20 million were required in the first nine months of fiscal 2013 as existing accounts receivable was not acquired in the whole blood acquisition, negatively impacting net cash provided by operating activities in the prior year.

Investing Activities:

Net cash used in investing activities decreased by $509.5 million during the nine months ended December 28, 2013 as compared to the nine months ended December 29, 2012 due primarily to the $535.1 million paid for the whole blood acquisition in the prior year, of which $475 million was funded by term loan borrowings discussed above. The nine months ended December 28, 2013 includes $23.1 million paid for the acquisition of Hemerus Medical LLC.

Financing Activities:

Net cash provided by financing activities decreased by $505.7 million during the nine months ended December 28, 2013, as compared to the nine months ended December 29, 2012 due primarily to the $475 million term loan borrowed in fiscal 2013 to finance the whole blood acquisition of which $29 million has been repaid.
 
Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to our large number of customers and their diversity across many geographic areas. A portion of our trade accounts receivable outside the United States, however, include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.

We have not incurred significant losses on government receivables. We continually evaluate all government receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries' healthcare systems deteriorate such that their ability to make payments is uncertain, allowances may be required in future periods.

Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. Historically, we believe we have been able to mitigate the effects of inflation by improving our manufacturing and purchasing efficiencies, by increasing employee productivity, and by adjusting the selling prices of products. We continue to monitor inflation pressures

26


generally and raw materials indices that may affect our procurement and production costs. Increases in the price of petroleum derivatives could result in corresponding increases in our costs to procure plastic raw materials.
Foreign Exchange
During the nine months ended December 28, 2013, approximately 46.3% of our sales were generated outside the U.S., generally in foreign currencies, yet our reporting currency is the U.S. Dollar. We also incur certain manufacturing, marketing and selling costs in international markets in local currency. Our primary foreign currency exposures relate to sales denominated in the Euro, the Japanese Yen and Australian Dollar. We also have foreign currency exposure related to manufacturing and other operational costs denominated in Swiss Francs, British Pounds, Canadian Dollars and Mexican Pesos. The Yen, Euro and Australian Dollar sales exposure is partially mitigated by costs and expenses for foreign operations and sourcing products denominated in foreign currencies. Since our foreign currency denominated Yen, Euro and Australian Dollar sales exceed the foreign currency denominated costs, whenever the U.S. Dollar strengthens relative to the Yen, Euro or Australian Dollar, there is an adverse effect on our results of operations and, conversely, whenever the U.S. Dollar weakens relative to the Yen, Euro or Australian Dollar, there is a positive effect on our results of operations. For the Swiss Franc, the British Pound, the Canadian Dollar and Mexican Peso our primary cash flows relate to product costs or costs and expenses of local operations. Whenever the U.S. Dollar strengthens relative to these foreign currencies, there is a positive effect on our results of operations. Conversely, whenever the U.S. Dollar weakens relative to these currencies, there is an adverse effect on our results of operations.
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 forward foreign currency 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, Australian Dollar, the Canadian Dollar and Mexican Peso. 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.
These contracts are designated as cash flow hedges and are intended to lock in the expected cash flows of forecasted foreign currency denominated sales and costs at the available spot rate. Actual spot rate gains and losses on these contracts are recorded in sales and costs, at the same time the underlying transactions being hedged are recorded. The final impact of currency fluctuations on the results of operations is dependent on the local currency amounts hedged and the actual local currency results.
Presented below are the spot rates for our Euro, Japanese Yen, Canadian Dollar, British Pound, and Swiss Franc cash flow hedges that settled during fiscal years 2011, 2012, 2013, 2014 and 2015 or are presently outstanding. These hedges cover our long foreign currency positions that result from our sales designated in Euro and the Japanese Yen. These hedges also include our short positions associated with costs incurred in Canadian Dollars, British Pounds, and Swiss Francs. The table also shows how the strengthening or weakening of the spot rates associated with those hedge contracts versus the spot rates in the contracts that settled in the prior comparable period affects our results favorably or unfavorably. The table assumes a consistent notional amount for hedge contracts in each period presented.

27


 
First
Quarter
 
Favorable /
(Unfavorable)
 
Second
Quarter
 
Favorable /
(Unfavorable)
 
Third
Quarter
 
Favorable /
(Unfavorable)
 
Fourth
Quarter
 
Favorable /
(Unfavorable)
Euro - Hedge Spot Rate (US$ per Euro)
 
 

 
 

 
 

 
 

 
 

 
 

FY11
1.36

 
(13
)%
 
1.41

 
(5
)%
 
1.43

 
8
 %
 
1.35

 
5
 %
FY12
1.24

 
(9
)%
 
1.30

 
(8
)%
 
1.36

 
(5
)%
 
1.37

 
1
 %
FY13
1.43

 
15
 %
 
1.42

 
9
 %
 
1.36

 
 %
 
1.32

 
(4
)%
FY14
1.27


(11
)%

1.25


(12
)%

1.29


(5
)%

1.33


1
 %
FY15
1.31

 
3
 %
 
1.34

 
7
 %
 
1.35

 
5
 %
 
 
 
 
Japanese Yen - Hedge Spot Rate (JPY per US$)
 
 

 
 

 
 

 
 

 
 

FY11
98.17

 
7
 %
 
94.91

 
10
 %
 
89.13

 
8
 %
 
89.78

 
4
 %
FY12
88.99

 
9
 %
 
85.65

 
10
 %
 
81.73

 
8
 %
 
82.45

 
8
 %
FY13
79.40

 
11
 %
 
76.65

 
11
 %
 
77.58

 
5
 %
 
78.69

 
5
 %
FY14
79.85


(1
)%

79.68


(4
)%

84.32


(9
)%

93.92


(19
)%
FY15
97.16

 
(22
)%
 
98.18

 
(23
)%
 
101.09

 
(20