Our Business
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:

• 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, which includes the sales of disposables and fees for the use of our equipment, accounted for approximately 82.4% and 82.7% of our total revenues for the three months ended June 30, 2012 and July 2, 2011, respectively.

In April 2012, we announced two acquisitions that will provide us with a commercial presence in all aspects of the whole blood collection market, a market in which historically we have not meaningfully participated. We entered into a definitive agreement to acquire the business assets of the blood collection, filtration and processing product lines of Pall Corporation (Pall) for $550 million. We completed this transaction on August 1, 2012 and paid all but $15 million of the purchase price, utilizing $475 million of loans and the remainder from cash on hand. The blood processing systems and equipment acquired are for use in transfusion medicine and include Pall's manufacturing facilities in Covina, California; Tijuana, Mexico; Ascoli, Italy and a portion of Pall's assets in Fajardo, Puerto Rico. Approximately 1,300 employees transferred to Haemonetics. Upon Pall's transfer of certain media assets to us, likely by 2016, we will make the final $15 million payment. We also entered into a definitive agreement to acquire the business assets of Hemerus Medical, LLC (Hemerus), a Minnesota-based company that develops innovative technologies for the collection of whole blood, and processing and storage of blood components. Under the terms of the agreement, we paid $1 million and we will pay up to $26 million contingent upon on certain regulatory approvals. Additionally, royalty payments on Hemerus products will apply for the next 10 years or until a maximum cumulative royalty amount of $15 million have been made. We expect the Hemerus acquisition to close in the second quarter of fiscal 2013

Financial Summary
                                         Three Months Ended
                                       June 30,       July 2,     % Increase/
(in thousands, except per share data)    2012          2011        (Decrease)
Net revenues                          $ 176,475     $ 170,569           3.5  %
Gross profit                          $  90,113     $  88,748           1.5  %
% of net revenues                          51.1 %        52.0 %
Operating expenses                    $  77,034     $  64,840          18.8  %
Operating income                      $  13,079     $  23,908         (45.3 )%
% of net revenues                           7.4 %        14.0 %
Other income (expense), net           $     336     $    (215 )      (256.3 )%
Income before taxes                   $  13,415     $  23,693         (43.4 )%
Provision for income tax              $   3,628     $   6,746         (46.2 )%
% of pre-tax income                        27.0 %        28.5 %
Net income                            $   9,787     $  16,947         (42.2 )%
% of net revenues                           5.5 %         9.9 %
Earnings per share-diluted            $    0.38     $    0.65         (41.5 )%

Net revenues increased 3.5% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Without the effects of foreign exchange, net revenues increased 2.4% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. This increase reflects strong revenue growth from our hospital products, particularly surgical disposables, and increased equipment sales, offset by lower revenues in Japan. Fiscal 2012 revenue benefited from purchases by the Japanese Red Cross ("JRC") in March 2012 to avoid future supply disruptions in anticipation of an internal business system conversion, negatively impacting the three months ended June 30, 2012.
Gross profit amounts increased 1.5% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Without the effects of foreign exchange, gross profit decreased 1.6% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Our gross profit margin decreased by 90 basis points for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. The decrease was primarily due to higher costs associated with additional capacity of our Salt Lake City facility and inventory write-offs of defective contract-manufactured product.
Operating expenses increased 18.8% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. Without the effects of foreign exchange, operating expenses increased 16.6% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. Higher operating expenses include $5.9 million of acquisition and integration related expenses, higher variable compensation, increased funding of growth initiatives in emerging markets and increased technology and infrastructure costs. Operating income decreased 45.3% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. Without the effects of foreign exchange, operating income decreased 50.7% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012 due to the negative impact of the JRC ordering pattern on the gross profit and increased operating expenses notably related to acquisition and integration. Net income decreased 42.2% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. Without the effects of foreign exchange, net income decreased 48.1% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. The decrease in net income was attributable to the decline in operating income described above.

RESULTS OF OPERATIONS
Net Revenues by Geography
                  Three Months Ended
                June 30,      July 2,      % Increase/
(in thousands)    2012          2011       (Decrease)
United States  $   87,907    $  86,395          1.8 %
International      88,568       84,174          5.2 %
Net revenues   $  176,475    $ 170,569          3.5 %

International Operations and the Impact of Foreign Exchange Our principal operations are in the U.S., Europe, Japan and other parts of Asia. Our products are marketed in more than 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 50% and 49.3% of total net revenues for the three months ended June 30, 2012 and July 2, 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.
Net Revenues by Product Type
Three Months Ended

                    June 30,      July 2,      % Increase/
(in thousands)        2012          2011       (Decrease)
Disposables        $  145,488    $ 141,048         3.1  %
Software solutions     17,304       18,160        (4.7 )%
Equipment & other      13,683       11,361        20.4  %
Net revenues       $  176,475    $ 170,569         3.5  %

Disposable Revenues by Product Type

                             Three Months Ended
                           June 30,      July 2,      % Increase/
(in thousands)               2012          2011       (Decrease)
Plasma disposables        $   63,878    $  62,759         1.8  %
Blood center disposables
Platelet                      37,242       37,310        (0.2 )%
Red cell                      12,068       11,868         1.7  %
                          $   49,310    $  49,178         0.3  %
Hospital disposables
Surgical                      18,260       15,742        16.0  %
OrthoPAT                       7,541        7,754        (2.7 )%
Diagnostics                    6,499        5,615        15.7  %
                          $   32,300    $  29,111        11.0  %
Total disposables revenue $  145,488    $ 141,048         3.1  %

Disposables
Disposables revenue increased 3.1% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, disposables revenue increased 1.8% for the three months ended June 30, 2012 as compared to the same period of fiscal 2012, driven primarily by increases in our hospitals business as discussed below.

Plasma
Plasma disposables revenue increased 1.8% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, plasma revenue increased 1.6% for the three months ended June 30, 2012, compared to the same three month period of fiscal 2012, primarily due to higher revenue from commercial fractionation customers in North America, where increased collections more than offset price reductions included in contract renewals completed in fiscal 2012. The negative impact to plasma revenue from the JRC ordering pattern described above was $1.0 million. Blood Center
Blood center consists of disposables used to collect platelets and red cells. Platelet disposables revenue decreased 0.2% for the three months ended June 30, 2012, compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, platelet disposable revenue decreased 2.1% for the three months ended June 30, 2012, compared to the same three month period of fiscal 2012 primarily due to the negative impact of the JRC ordering pattern described above. The negative impact to platelet revenues from this timing matter was $2.5 million.
Red cell disposables revenue increased 1.7% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, red cell disposables revenue increased 1.6% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012, due to increased account penetration at existing customers for red cells in North America.

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 increased 16.0% for the three months ended June 30, 2012, as compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, surgical disposables revenue increased 11.7% for the three months ended June 30, 2012 due to higher sales in North America and Europe associated with the positive impact of the Cell Saver Elite, our next generation surgical device released during fiscal 2012. Surgical disposable sales also increased in our emerging markets, principally in Russia and China.
Revenues from our OrthoPAT disposables decreased 2.7% for the three months ended June 30, 2012 as compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, OrthoPAT disposables revenue decreased by 4.5% for the three months ended June 30, 2012 due to lower sales in North America, primarily due to order timing. We expect OrthoPAT disposable sales growth over the balance of fiscal 2013, as sales volume has recently started to grow following declines in fiscal 2012 associated with the voluntary recall of our OrthoPAT devices initiated during the three months ended July 2, 2011. Diagnostics product revenue consists principally of the consumable supplies used with the TEG analyzer. Revenues from our diagnostics products increased 15.7% for the three months ended June 30, 2012 compared to the same three month period of 2012. Without the effect of foreign exchange, diagnostics product revenues increased by 13.0% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. The revenue increase is due to continued adoption of our TEG analyzer globally, principally in North America and China. TEG disposable sales in China increased by 70% compared to fiscal 2012 or approximately half of the total TEG disposables growth in the period. We expect TEG disposable growth rates to increase over fiscal 2013 due to recent strength in TEG equipment sales.
Software Solutions
Our software solutions revenues include sales of our information technology software platforms and consulting services. Software revenues decreased 4.7% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, software revenues decreased 3.4% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. In the three months ended July 2, 2011 Plasma software revenues were uniquely strong as they included $1.7 million of project revenues. We continue to see growth in blood center and hospital software. 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 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 20.4% for the three months

ended June 30, 2012 compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, equipment and other revenues increased 19.7% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012, primarily driven by higher surgical equipment sales across our end markets served globally and a cell processing equipment sale to the US Government.
Gross Profit
Three Months Ended

                   June 30,      July 2,      % Increase/
(in thousands)       2012          2011       (Decrease)
Gross profit      $  90,113     $ 88,748           1.5 %
% of net revenues      51.1 %       52.0 %

Gross profit amounts increased 1.5% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, gross profit was effectively unchanged for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. Our gross profit margin decreased by 90 basis points for the three months ending June 30, 2012. compared to the same three month period of fiscal 2012. The decrease in gross profit margin was due primarily to inventory write-offs of defective contract-manufactured product and higher costs associated with our Salt Lake City, Utah plasma disposable facility which became operational subsequent to the first quarter of fiscal 2012. Product mix and pricing drove modest declines in gross profit margin and plasma disposable pricing reductions associated with our commercial fractionation customer in North America described above.

The decline in gross margin was partially offset by reduced equipment depreciation expense as a result of a change in estimated useful lives implemented during the three months ended June 30, 2012. The effect of this change in estimate will reduce fiscal year 2013 depreciation expense by $4.5 million or increase income net of tax by $3.3 million.

Operating Expenses
                                       Three Months Ended
                                     June 30,      July 2,      % Increase/
(in thousands)                         2012          2011       (Decrease)
Research and development            $   9,409     $  8,609           9.3 %
% of net revenues                         5.3 %        5.0 %
Selling, general and administrative $  67,625     $ 56,231          20.3 %
% of net revenues                        38.3 %       33.0 %
Total operating expenses            $  77,034     $ 64,840          18.8 %
% of net revenues                        43.7 %       38.0 %

Research and Development
Research and development expenses increased 9.3% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, research and development expense increased 10.4% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. These increases were primarily related to the general increase in development programs in support of long-term product plans Selling, General and Administrative
During the three months ended June 30, 2012, selling, general and administrative expenses increased 20.3% compared to the same three month period of fiscal 2012. Without the effect of foreign exchange, selling, general and administrative expense increased 17.6% for the three months ended June 30, 2012 compared to the same three month period of fiscal 2012. The increase includes $5.9 million of acquisition and integration related expenses associated with the Pall transfusion medicine business acquisition. The remainder of the increase was due primarily to higher variable compensation of $2.4 million and $2.1 million of planned investments in emerging markets and information technology and other infrastructure costs to support anticipated organic and acquisition revenue growth.

Other Income, Net
Other income, net, increased for the three months ended June 30, 2012 as
compared to the same three month period of fiscal 2012, primarily due to lower
foreign exchange transaction losses on foreign currency denominated assets.
Income Taxes
                           Three Months Ended
                          June 30,      July 2,     % Increase/
                            2012         2011       (Decrease)
Reported income tax rate    27.0 %        28.5 %       (1.5 )%

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 reported tax rate for the three months ended June 30, 2012 is lower than the three months ended July 2, 2011 due to higher research and development tax credits.

Liquidity and Capital Resources
The following table contains certain key performance indicators we believe
depict our liquidity and cash flow position:
                                              June 30,     March 31,
(dollars in thousands)                          2012         2012
Cash & cash equivalents                      $ 236,047    $  228,861
Working capital                              $ 418,281    $  396,385
Current ratio                                      4.4           4.0
Net cash position (1)                        $ 230,988    $  225,090
Days sales outstanding (DSO)                        65            66
Disposable finished goods inventory turnover       5.4           5.7

(1) Net cash 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, option exercises and loans. We believe these sources are sufficient to fund our cash requirements over the next twelve months, which are primarily capital expenditures, share repurchase and investments including acquisitions.