Zoll Medical (ZOLL) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2012.

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to              .

Commission File Number 0-20225

ZOLL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts	04-2711626
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
269 Mill Road, Chelmsford, MA	01824-4105
(Address of principal executive offices)	(Zip Code)

(978) 421-9655

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:

Class	Outstanding at January 24, 2012
Common Stock, $0.01 par value	22,205,091

ZOLL MEDICAL CORPORATION

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (unaudited) January 1, 2012 and October 2, 2011		3
	Condensed Consolidated Statements of Income (unaudited) Three Months Ended January 1, 2012 and January 2, 2011		4
	Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended January 1, 2012 and January 2, 2011		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		27
ITEM 4.	Controls and Procedures		28
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings		28
ITEM 1A.	Risk Factors		28
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
ITEM 5.	Other Information		29
ITEM 6.	Exhibits		29
Signatures			30

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. ZOLL Medical Corporation (the “Company,” “we,” “our,” or “us”) makes such forward-looking statements under the provisions of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of certain known and unknown risk factors. Readers should pay particular attention to the risk factors described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2011 filed with the Securities and Exchange Commission (the “SEC”) on November 23, 2011 and Part II, Item 1A of this Quarterly Report on Form 10-Q. Readers should also carefully review the risk factors described in the other documents that we file from time to time with the SEC. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “sees,” “future,” “may,” “will,” “would,”, “can,” “could,” “estimates,” “plans,” “target,” “goal,” “project,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The Company assumes no obligation to update forward-looking statements or update the reasons why actual results, performances or achievements could differ materially from those provided in the forward-looking statements, except as required by law.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(000’s omitted, except per share data)

(Unaudited)

	January 1, 2012			October 2, 2011
Assets
Current assets:
Cash and cash equivalents	$	74,185		$	74,161
Marketable securities		3,743			1,318
Accounts receivable, less allowances of $10,880 and $10,269 at January 1, 2012 and October 2, 2011, respectively		101,487			118,691
Inventories:
Raw materials		23,710			22,509
Work-in-process		5,815			6,211
Finished goods		27,149			23,218
		56,674			51,938
Prepaid expenses and other current assets		26,666			25,971
Total current assets		262,755			272,079
Property and equipment at cost:
Land, building and improvements		13,987			3,294
Machinery and equipment		85,254			83,748
Rental equipment		63,446			57,973
Construction in progress		16,696			18,280
Tooling		20,889			20,656
Furniture and fixtures		5,444			5,401
Leasehold improvements		7,923			7,845
		213,639			197,197
Less accumulated depreciation and amortization		120,360			115,815
Net property and equipment		93,279			81,382
Investments		1,310			1,310
Notes receivable		2,019			2,201
Goodwill		79,086			79,086
Intangibles and other assets, net		37,956			38,425
	$	476,405		$	474,483
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	21,895		$	24,153
Deferred revenue		20,602			21,808
Accrued expenses and other liabilities		33,951			36,326
Total current liabilities		76,448			82,287
Non-Current liabilities:
Other long-term liabilities		30,038			30,087
Total liabilities		106,486			112,374
Commitments and contingencies (Notes 8 and 14)
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 1,000 shares, none issued or outstanding		—			—
Common stock, $0.01 par value, authorized 38,000 shares, 22,054 and 22,080 issued and outstanding at January 1, 2012 and October 2, 2011, respectively		221			221
Capital in excess of par value		191,276			189,780
Accumulated other comprehensive loss		(6,653	)		(7,357	)
Retained earnings		185,075			179,465
Total stockholders’ equity		369,919			362,109
	$	476,405		$	474,483

See notes to unaudited condensed consolidated financial statements.

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ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(000’s omitted, except per share data)

(Unaudited)

	Three Months Ended
	January 1, 2012		January 2, 2011
Product sales	$	101,422	$	90,857
Rental revenue		32,326		22,305
Total revenue		133,748		113,162
Cost of products sold		47,655		45,927
Cost of rental revenue		7,628		5,885
Total cost of revenue		55,283		51,812
Gross profit		78,465		61,350
Expenses:
Selling and marketing		42,472		34,782
General and administrative		14,428		10,372
Research and development		10,963		10,838
Total expenses		67,863		55,992
Income from operations		10,602		5,358
Investment and other income (expense), net		113		264
Income before income taxes		10,715		5,622
Provision for income taxes		4,088		1,719
Net income	$	6,627	$	3,903
Basic earnings per common share	$	0.30	$	0.18
Weighted average common shares outstanding		22,071		21,585
Diluted earnings per common and common equivalent share	$	0.29	$	0.18
Weighted average common and common equivalent shares outstanding		22,728		22,180

See notes to unaudited condensed consolidated financial statements.

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ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(Unaudited)

	Three Months Ended
	January 1, 2012			January 2, 2011
OPERATING ACTIVITIES:
Net income	$	6,627		$	3,903
Charges not affecting cash:
Depreciation and amortization		6,936			6,621
Stock-based compensation expense		1,241			1,047
Changes in current assets and liabilities:
Accounts receivable		17,286			3,580
Inventories		(4,183	)		(2,306	)
Prepaid expenses and other current assets		(707	)		(723	)
Accounts payable and accrued expenses		(5,714	)		2,541
Cash provided by operating activities		21,486			14,663
INVESTING ACTIVITIES:
Sales of marketable securities		—			1,541
Purchase of marketable securities		(2,425	)		—
Additions to property and equipment		(17,294	)		(7,842	)
Payment of contingent consideration related to prior years’ acquisitions		(25	)		(25	)
Other assets, net		(888	)		(21	)
Cash used for investing activities		(20,632	)		(6,347	)
FINANCING ACTIVITIES:
Exercise of stock options		39			1,840
Stock option tax benefit		453			—
Repurchase of common shares		(1,254	)		—
Cash (used for) provided by financing activities		(762	)		1,840
Effect of exchange rates on cash and cash equivalents		(68	)		165
Net increase in cash and cash equivalents		24			10,321
Cash and cash equivalents at beginning of period		74,161			59,058
Cash and cash equivalents at end of period	$	74,185		$	69,379
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes	$	1,294		$	761

See notes to unaudited condensed consolidated financial statements.

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ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for returns, bad debts and the estimated lives of fixed assets. Actual results may differ from these estimates. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The information contained in the interim financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended October 2, 2011 included in its Annual Report on Form 10-K filed with the SEC on November 23, 2011. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation with no impact on net income or earnings per share.

The Company’s fiscal year ends on the Sunday closest to September 30. Fiscal 2012 and 2011 each have 52 weeks. Fiscal 2012 will end on September 30, 2012.

2. Segment and Geographic Information

Segment information: The Company operates in a single business segment: the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. In order to make operating and strategic decisions, the Company’s chief executive officer (the “chief operating decision maker”) evaluates revenue performance based on the worldwide revenues of four customer/product categories, but, due to shared infrastructures, profitability is based on an enterprise-wide measure. These customer/product categories consist of (1) the sale of resuscitation devices, temperature management products, accessories and disposable electrodes to the North American hospital market, including the military marketplace, (2) the sale of resuscitation devices, accessories, disposable electrodes and data collection management software to the North American pre-hospital market, (3) the sale of resuscitation devices, accessories, disposable electrodes, temperature management products and data collection management software to the International market, and (4) the rental of wearable resuscitation devices (LifeVest^®) in the North American and International markets.

Net sales by customer/product categories were as follows:

	Three Months Ended
(000’s omitted)	January 1, 2012		January 2, 2011
Hospital Market—North America	$	34,161	$	30,616
Pre-hospital Market—North America		34,108		27,393
International Market—excluding North America		33,153		32,848
LifeVest—North America and International		32,326		22,305
	$	133,748	$	113,162

The Company reports assets on a consolidated basis to the chief operating decision maker.

Geographic information: Net sales by major geographical area, determined on the basis of destination of the goods, were as follows:

	Three Months Ended
(000’s omitted)	January 1, 2012		January 2, 2011
United States	$	92,795	$	75,579
Foreign		40,953		37,583
	$	133,748	$	113,162

No individual foreign country represented 10% or more of the Company’s revenues or assets for the three months ended January 1, 2012 or January 2, 2011.

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In each of the three months ended January 1, 2012 and January 2, 2011, no single customer represented over 10% of the Company’s consolidated total revenue.

3. Comprehensive Income

The Company computes comprehensive income (loss) in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 220,Comprehensive Income. FASB ASC 220 establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements. Other comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities, unrealized gains and losses on derivative instruments and foreign currency translation. Total comprehensive income (loss) for the three months ended January 1, 2012 and January 2, 2011, respectively, was as follows:

	Three Months Ended
(000’s omitted)	January 1, 2012			January 2, 2011
Net income	$	6,627		$	3,903
Unrealized loss on available-for-sale securities		(7	)		(6	)
Unrealized gain on derivative instruments		229			10
Foreign currency translation adjustment		482			280
Total comprehensive income	$	7,331		$	4,187

4. Stock Option Plans

At January 1, 2012, the Company had two active stock-based compensation plans under which stock-based grants may be issued and one other stock-based compensation plan under which grants are no longer being made. No further grants are being made under the Company’s 1996 Non-Employee Directors’ Stock Option Plan (“1996 Plan”), but option grants remain outstanding under this plan. The Company’s active plans are the Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”) and the Amended and Restated 2006 Non-Employee Director Stock Option Plan (“2006 Plan”).

On November 16, 2010, the Board of Directors adopted certain amendments to the 2001 Plan and 2006 Plan. With respect to the 2001 Plan, the Board adopted, subject to stockholder approval, an amendment that increased by 920,000 shares (for a total of 4,170,000 shares) the shares of Common Stock available for issuance under the 2001 Plan. With respect to the 2006 Plan, the Board adopted, subject to stockholder approval, an amendment that increased by 35,000 shares (for a total of 192,500 shares) the shares of Common Stock available for issuance under the 2006 Plan. The amendments to both the 2001 Plan and the 2006 Plan were approved by the stockholders at the 2011 annual meeting held on February 10, 2011. The amendments to both Plans also generally prohibit a repricing through cancellation and re-grants or cancellation of stock options in exchange for cash.

Stock options outstanding under the 1996 Plan, the 2001 Plan, and the 2006 Plan generally vest over a four-year period and have exercise prices equal to the fair market value of the Common Stock at the date of grant. All options have a 10-year contractual term. All options issued under the 2001 Plan and 2006 Plan must have an exercise price no less than fair market value on the date of grant. Restricted Common Stock grants made under the 2001 Plan and the 2006 Plan will generally vest over a four-year period.

In accordance with FASB ASC 718,Compensation—Stock Compensation, the Company is required to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Stock-based compensation charges totaled approximately $1.2 million and $1.0 million during the three months ended January 1, 2012 and January 2, 2011, respectively. The effect of recording stock-based compensation by line item for the three months ended January 1, 2012 and January 2, 2011 was as follows:

	Three Months Ended
(000’s omitted)	January 1, 2012		January 2, 2011
Cost of revenue	$	124	$	97
Selling and marketing expense		228		214
General and administrative expense		781		638
Research and development expense		108		98
Total stock-based compensation	$	1,241	$	1,047

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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants issued during the three months ended January 1, 2012 and January 2, 2011:

	Three Months Ended January 1, 2012			Three Months Ended January 2, 2011
Dividend yield		0	%		0	%
Expected volatility		49.3	%		44.3	%
Risk-free interest rate		0.93	%		1.49	%
Expected lives (years)		5.00			5.00

The weighted-average, grant-date fair value of options granted (estimated using the Black-Scholes option-pricing model) was $16.28 and $12.18 for the three months ended January 1, 2012 and January 2, 2011, respectively. During the three months ended January 1, 2012 and January 2, 2011, the Company issued 2,389 and 110,706 shares of Common Stock pursuant to exercised options for proceeds of approximately $39,000 and $1.8 million, respectively. Total intrinsic value of options exercised for the three months ended January 1, 2012 and January 2, 2011 was approximately $81,000 and $1.9 million, respectively. It is the Company’s policy to issue new shares upon the exercise of options.

The following table summarizes the status of outstanding stock options as of January 1, 2012, as well as changes during the three months ended January 1, 2012:

	Shares			Weighted- Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term in Years		Aggregate Intrinsic Value ($000’s)
Outstanding at October 2, 2011		1,917,818		$	22.48
Granted		169,000			37.67
Exercised		(2,389	)		16.46
Forfeited		—			—
Outstanding at January 1, 2012		2,084,429		$	23.72		6.67	$	82,256
Exercisable at January 1, 2012		1,286,726		$	20.35		5.49	$	55,110

The following table summarizes the status of unvested restricted stock awards as of January 1, 2012, as well as changes during the three months ended January 1, 2012:

	Shares			Weighted- Average Fair Value
Unvested at October 2, 2011		67,857		$	39.56
Granted		84,000			37.67
Vested		—			—
Forfeited		(476	)		27.01
Unvested at January 1, 2012		151,381		$	38.55

At January 1, 2012, there was approximately $13.5 million of unrecognized compensation cost related to non-vested stock option and restricted stock awards, which the Company expects to recognize over a weighted-average period of 3.1 years.

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5. Equity

Earnings per Share

The shares used for calculating basic earnings per share of Common Stock were the weighted average shares of Common Stock outstanding during the period, and the shares used for calculating diluted earnings per share of Common Stock were the weighted average shares of Common Stock outstanding during the period plus the dilutive effect of stock options and unvested restricted stock.

	Three Months Ended
(000’s omitted)	January 1, 2012		January 2, 2011
Average shares outstanding for basic earnings per share		22,071		21,585
Dilutive effect of stock options and unvested restricted stock		657		595
Average shares outstanding for diluted earnings per share		22,728		22,180

Average shares outstanding for diluted earnings per share for the three months ended January 1, 2012 and January 2, 2011 does not include options to purchase 205,500 and 487,050 shares of Common Stock, respectively, as their effect would have been antidilutive.

Stock Repurchase Program

On November 15, 2011, our Board of Directors authorized a stock repurchase program of up to $50 million. The total number of shares repurchased pursuant to this program during the three months ended January 1, 2012 and January 2, 2011 was as follows:

	Three Months Ended
(000’s omitted)	January 1, 2012		January 2, 2011
Number of shares of common stock repurchased		28		—
Total cost of repurchase	$	1,254	$	—

Additionally, our stock incentive plans permit the withholding of Common Stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the three months ended January 1, 2012 and January 2, 2011, we did not acquire any shares as a result of such withholdings.

6. Derivative Instruments and Hedging Activities

The Company operates globally, and its earnings and cash flows are exposed to market risk from changes in currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The program is operated pursuant to documented corporate risk management policies. The Company does not enter into any derivative transactions for speculative purposes. The Company recognizes all derivative financial instruments in the condensed consolidated financial statements at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

Designated Foreign Currency Contracts

The Company sometimes uses foreign currency forward contracts to manage its currency transaction exposures from forecasted foreign currency denominated sales to its subsidiaries. These foreign currency forward contracts are designated as cash flow hedges under FASB ASC 815. Therefore, the effective portion of the gain or loss is reported as a component of other comprehensive income and will be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the derivative’s change in fair value is recognized currently through earnings regardless of whether the instrument is designated as a hedge. At January 1, 2012, the Company had two foreign currency forward contracts designated as hedging instruments outstanding, each of which matures in less than twelve months, to exchange the Euro for U.S. Dollars totaling approximately $5.5 million.

Net recognized gains/(losses) from foreign currency forward contracts totaled approximately $167,000 and $4,000 during the three months ended January 1, 2012 and January 2, 2011, respectively, and are included in the condensed consolidated statements of income. The net settlement amounts of the outstanding contracts recorded in “accumulated other

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comprehensive income” to recognize the effective portion of the fair value of the contracts at January 1, 2012 and October 2, 2011 were unrealized gains/(losses) of approximately $311,000 and $82,000, respectively. The net settlement of these outstanding contracts will be reclassified to earnings within the next twelve months.

The following table presents the effect of the Company’s derivative instruments designated as hedging instruments on the condensed consolidated statements of income as of January 1, 2012 (in thousands):

Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in AOCI (Effective Portion)		Amount of Gain (Loss) Reclassed from AOCI into Earnings (Effective Portion)		Location in Statement of Income	Amount of Gain (Loss) Recognized in Earnings on Ineffective Portion and Amount Excluded from Effectiveness Testing		Location in Statement of Income
Three months Ended January 1, 2012
Foreign currency forward contracts	$	229	$	167	Investment and other income (expense), net	$	—
	$	229	$	167		$	—

The following table presents the effect of the Company’s derivative instruments designated as hedging instruments on the condensed consolidated statements of income as of January 2, 2011 (in thousands):

Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in AOCI (Effective Portion)		Amount of Gain (Loss) Reclassed from AOCI into Earnings (Effective Portion)		Location in Statement of Income	Amount of Gain (Loss) Recognized in Earnings on Ineffective Portion and Amount Excluded from Effectiveness Testing		Location in Statement of Income
Three months Ended January 2, 2011
Foreign currency forward contracts	$	10	$	—	Investment and other income (expense), net	$	—
	$	10	$	—		$	—

The following table presents the fair value of the Company’s derivative instruments designated as a hedging instruments on the condensed consolidated balance sheet as of January 1, 2012 (in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value
Current assets
Foreign currency contracts	Prepaid expenses and other current assets	$	311
Total current assets		$	311

The following table presents the fair value of the Company’s derivative instruments designated as a hedging instruments on the condensed consolidated balance sheet as of October 2, 2011 (in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value
Current assets
Foreign currency forward contracts	Prepaid expenses and other current assets	$	82
Total current assets		$	82

Non-Designated Foreign Currency Contracts

The Company also at times uses foreign currency forward contracts to manage its currency transaction exposures with intercompany receivables denominated in foreign currencies. These foreign currency forward contracts are not designated as cash flow, fair value or net investment hedges under FASB ASC 815, and therefore, are marked to market with changes in fair value recorded to earnings. These derivative instruments do not subject the Company’s earnings or cash flows to material risk since gains and losses on those derivatives generally offset losses and gains on the assets and liabilities being hedged.

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The Company did not have any foreign currency forward contracts not designated as hedging instruments outstanding at January 1, 2012 or October 2, 2011.

The following table presents the pretax impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings during the three months ended January 1, 2012 and January 2, 2011:

(000’s omitted)	Location of Gain (Loss) Recognized in Income	For the three months ended January 1, 2012		For the three months ended January 2, 2011
Foreign currency contracts	Investment and other income (loss), net	$	—	$	224

7. Product Warranties

The Company typically offers one-year or five-year product warranties for most of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs, and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.

Product warranty activity for the three months ended January 1, 2012 and January 2, 2011 is as follows:

(000’s omitted)	Beginning  Balance		Accruals for Warranties Issued  During the Period		Decrease to Pre-existing  Warranties			Ending Balance
Three Months Ended January 1, 2012	$	4,901	$	785	$	(738	)	$	4,948
Three Months Ended January 2, 2011	$	4,304	$	395	$	(396	)	$	4,303

8. Acquisitions

In October 2011, the Company purchased the building where we manufacture the LifeVest product in Pittsburgh, Pennsylvania for approximately $10.8 million.

Contingent Consideration for Prior Period Acquisitions

The terms of the October 2010 acquisition of the assets of Road Safety International, Inc. (“Road Safety”) provided for consideration to be paid in the form of possible annual earn-out payments based on revenues through calendar 2012. If both earn-outs are achieved, total consideration (including liabilities assumed) could approximate $550,000. The contingent consideration is recorded in “accrued expenses and other liabilities” and “other long-term liabilities” on the Company’s condensed, consolidated balance sheet and no adjustments have been made to this accrual since it was originally recorded. For calendar 2011, Road Safety earned the 2011 earn-out and was paid $250,000 in cash during the second quarter of the Company’s fiscal 2012.

The terms of the April 2006 acquisition of the assets of Lifecor, Inc. (“Lifecor”) provided for possible annual earn-out payments based upon revenue growth through fiscal 2010. The form of earn-out payments was at the discretion of the Company and could be made in the form of cash, Company stock, or a combination of the two. The earn-out payments for fiscal 2009 and 2010 were calculated as 100% of qualifying revenues earned in the current fiscal year in excess of the greater of the prior fiscal year qualifying revenues or $30 million. For fiscal 2010, approximately $26.3 million was paid in the second quarter of fiscal 2011 in the form of cash to the former stockholders of Lifecor. The fiscal 2010 earn-out payment was the final annual earn-out payment for the Lifecor acquisition.

The terms of the March 2004 acquisition of the assets of Infusion Dynamics, Inc. (“Infusion Dynamics”) also provided for possible annual earn-out payments based upon revenue growth through fiscal 2013. Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. Annual earn-out payments to former stockholders of Infusion Dynamics, in the form of cash, were approximately $25,000 for both fiscal 2011 and fiscal 2010. Approximately $25,000 was accrued at the end of fiscal 2011 for payment to the former shareholders of Infusion Dynamics and was paid in cash during the first quarter of fiscal 2012.

9. Inventory

The Company’s inventory is valued at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead. Inventory on hand may exceed future demand either because the product is outdated or obsolete, or because the amount on hand is in excess of future needs. The total value of inventories that

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are determined to be obsolete based on criteria such as customer demand and changing technologies are reserved. Excess inventory amounts are estimated by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At January 1, 2012, the Company’s inventory was recorded at net realizable value requiring reserves of $5.9 million, or 9% of the $62.6 million gross inventories. At October 2, 2011, the Company’s inventory was recorded at net realizable value requiring reserves of $6.6 million, or 11% of the $58.5 million gross inventories.

10. Goodwill, Intangibles and Other Assets

The changes in the carrying amount of goodwill for the three months ended January 1, 2012 were as follows:

(000’s omitted)
Balance as of October 2, 2011	$	79,086
Goodwill acquired during the year		—
Balance as of January 1, 2012	$	79,086

The changes in the carrying amount of goodwill for the three months ended January 2, 2011 were as follows:

(000’s omitted)
Balance as of October 3, 2010	$	79,048
Goodwill acquired during the year		12
Balance as of January 2, 2011	$	79,060

In accordance with ASC 350,Intangibles-Goodwill and Other,goodwill and intangible assets with indefinite lives are tested for impairment on an annual basis as of the end of the Company’s fiscal fourth quarter and between annual tests if indicators of potential impairment exist. No triggering events occurred or circumstances existed during the quarter ended January 1, 2012 to reassess these assets for impairment prior to the annual test.

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Intangibles and other assets consist of:

			January 1, 2012				October 2, 2011
(000’s omitted)	Weighted Average Life		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Prepaid license fees		15 years	$	13,214	$	5,619	$	12,931	$	5,416
Patents and developed technology		11 years		38,413		17,915		38,008		17,068
Customer-related intangibles		10 years		5,038		2,697		5,035		2,572
Intangible assets not subject to amortization		—		1,620		—		1,620		—
Other assets		—		11,623		5,721		11,192		5,305
			$	69,908	$	31,952	$	68,786	$	30,361

Amortization of intangibles for the three months ended January 1, 2012 and January 2, 2011 was approximately $1.6 million and $1.4 million, respectively, and is included in the condensed consolidated statements of income.

11. Other Long-Term Liabilities

Other long-term liabilities consist of:

(000’s omitted)	January 1, 2012		October 2, 2011
Accrued warranty expense, long-term	$	3,360	$	3,197
Deferred revenue, long-term		5,521		5,711
Deferred tax liabilities		16,651		16,651
Unrecognized tax benefits		2,502		2,502
Deferred lease incentives, long-term		1,806		1,837
Other miscellaneous liabilities		198		189
Total other long-term liabilities	$	30,038	$	30,087

12. Income Taxes

The effective tax rate for the three months ended January 1, 2012 and January 2, 2011 was 38% and 31%, respectively.

As of January 1, 2012 and October 2, 2011, the Company had approximately $2.9 million of uncertain tax positions, of which $2.2 million, if recognized, could impact the effective tax rate. $780,000 of the uncertain tax positions are expected to reverse in fiscal 2012. Of the $780,000 reduction, approximately $450,000 is expected to reduce a deferred tax asset. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense in the condensed consolidated statements of income. The Company had $248,000 and $218,000 of accrued interest and penalties in income taxes payable as of January 1, 2012 and October 2, 2011, respectively.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal and most state and foreign income tax matters through fiscal 2007. The acquired losses from the business acquired from Revivant Corporation in fiscal 2005 for tax years 2003 and 2004 remain open to examination by the IRS to the extent losses are claimed in open years.

13. Fair Value Measurements

FASB ASC 820, “Fair Value Measurements,” requires that financial assets and liabilities be re-measured and reported at fair value at each reporting period-end date, and that non-financial assets and liabilities are re-measured and reported at fair value at least annually (on a recurring basis).

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

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The Company applies the following fair-value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives and most U.S. Government and agency securities).

Level 2—Quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

• Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently);

• Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and

• Inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (examples include certain securities and derivatives).

Level 3—Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.

The Company uses the market approach technique to value its assets and liabilities that are measured at fair value on a recurring basis. The Company’s financial assets and liabilities carried at fair value are primarily composed of marketable securities and derivative contracts used to hedge the Company’s currency risk. For Level 1 inputs, the Company used quoted market prices for financial instruments that have active markets. The financial instruments for which Level 1 inputs were used are money market funds and U.S. government agency and Treasury securities. For Level 2 inputs, the Company used quoted market prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The financial instruments for which Level 2 inputs are used were corporate obligations, all of which have counterparties with high credit ratings, and foreign currency contracts.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of January 1, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

(000’s omitted)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	8,017	$	8,017	$	—	$	—
Available for sale securities (1)		3,743		3,100		643		—
Foreign currency forward contracts (2)		311		—		311		—
Total	$	12,071	$	11,117	$	954	$	—

(000’s omitted)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Foreign currency forward contracts (2)	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

(1) Included in marketable securities in the accompanying condensed consolidated balance sheet.

(2) Included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

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The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of October 2, 2011, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

(000’s omitted)	Total		Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable  Inputs (Level 3)
Assets:
Cash equivalents	$	10,447	$	10,447	$	—	$	—
Available for sale securities (1)		1,318		—		1,318		—
Foreign currency forward contracts (2)		82		—		82		—
Total	$	11,847	$	10,447	$	1,400	$	—

(000’s omitted)	Total		Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable  Inputs (Level 3)
Liabilities:
Foreign currency forward contracts (2)	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

(1) Included in marketable securities in the accompanying condensed consolidated balance sheet.

(2) Included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

The Company held cost method investments of $1.3 million at January 1, 2012 and October 2, 2011, respectively. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of the investment. The Company has a policy in place to review its investments on a regular basis to evaluate the carrying value of the investments in these companies. If the Company believes that the carrying value of an investment is in excess of estimated fair value, it is the Company’s policy to record an impairment charge to adjust the carrying value to estimated fair value, if the impairment is deemed other-than-temporary.

14. Legal Proceedings

On June 18, 2010, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Boston, MA, alleging that fifteen patents owned by the Philips entities are infringed by certain of our defibrillators and associated products and seeking monetary and equitable remedies for infringement. The plaintiffs filed an amended complaint on October 13, 2010. On July 12, 2010, we filed a lawsuit against Philips Electronics North America Corporation in U.S. District Court, Boston, MA, alleging that five of our patents are infringed by certain of their defibrillators and associated products and seeking monetary and equitable remedies for infringement. The two cases have been consolidated through the pre-trial phase and bifurcated into an initial liability phase and a later damages phase. Discovery has commenced in the liability phase.

On January 5, 2012, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Seattle, WA, alleging that six additional patents owned by the Philips entities are infringed by certain of our other defibrillator products and seeking monetary and equitable remedies for infringement.

The Company is, from time to time, involved in the normal course of its business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, it believes that none of the currently pending matters will have an outcome material to its financial condition or business.

15. Cash Equivalents and Marketable Securities

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Substantially all cash and cash equivalents are invested in U.S. Treasury Bills and other U.S. government agency securities. The Company accounts for marketable securities in accordance with FASB ASC 320,Investments—Debt and Equity Securities. All marketable securities must be classified as one of the following: held-to-maturity, available-for-sale, or trading. The Company classifies its marketable securities as available-for-sale and, as such, carries the investments at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income (loss). The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income.

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As of January 1, 2012, available-for-sale securities consisted of the following:

(000’s omitted)	Cost		Accrued Interest		Gross Unrealized				Estimated Fair Value
					Gains		Losses
Money-market funds	$	17	$	—	$	—	$	—	$	17
U.S. government agency and Treasury securities		11,100		—		—		—		11,100
Corporate obligations		635		8		—		—		643
	$	11,752	$	8	$	—	$	—	$	11,760

As of October 2, 2011, available-for-sale securities consisted of the following:

(000’s omitted)	Cost		Accrued  Interest		Gross Unrealized				Estimated  Fair Value
					Gains		Losses
Money-market funds	$	47	$	—	$	—	$	—	$	47
U.S. government agency and Treasury securities		10,400		—		—		—		10,400
Corporate obligations		1,302		9		7		—		1,318
	$	11,749	$	9	$	7	$	—	$	11,765

The contractual maturities of these investments as of January 1, 2012 were as follows:

(000’s omitted)	Cost		Fair Value
Within 1 year	$	11,752	$	11,760
After 1 year through 5 years		—		—
After 5 years through 10 years		—		—
After 10 years		—		—
	$	11,752	$	11,760

The contractual maturities of these investments as of October 2, 2011 were as follows:

(000’s omitted)	Cost		Fair Value
Within 1 year	$	11,749	$	11,765
After 1 year through 5 years		—		—
After 5 years through 10 years		—		—
After 10 years		—		—
	$	11,749	$	11,765

The Company’s available-for-sale securities were included in the following captions in the condensed consolidated balance sheets:

(000’s omitted)	January 1, 2012		October 2, 2011
Cash and cash equivalents	$	8,017	$	10,447
Marketable securities		3,743		1,318
	$	11,760	$	11,765

Gross realized gains and losses on available-for-sale securities for the three months ended January 1, 2012 and January 2, 2011, included in“Investment and other income (expense), net”on the condensed consolidated income statements, were as follows:

(000’s omitted)	For Three Months Ended January 1, 2012		For Three Months Ended January 2, 2011
Gross realized gains	$	—	$	—
Gross realized losses		—		—
Total, net	$	—	$	—

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16. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements:

In December 2010, the FASB issued ASC update No. 2010-28, Intangibles-Goodwill and Other (Topic 350),When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts a consensus of the FASB Emerging Issues Task Force (ASC 2010-28). This amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The qualitative factors that an entity should consider when evaluating whether it is more likely than not that a goodwill impairment exists are consistent with the existing guidance for determining whether an impairment exists between annual tests. The adoption of this update did not have a material impact on the Company’s financial statements. This update was effective for fiscal periods beginning after December 15, 2010.

In December 2010, the FASB issued ASC update No. 2010-29,Business Combinations (Topic 805), Disclosure of Supplementary Pro forma Information for Business Combinations a consensus of the FASB Emerging Issues Task Force (ASC 2010-29). This amendment clarifies the periods for which pro forma financial information is presented. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The adoption of this update did not have a material impact on the Company’s financial statements. This update was effective for fiscal periods beginning after December 15, 2010.

Recently Issued Accounting Pronouncements:

In September 2011, the FASB issued ASC update No. 2011-08,Intangibles—Goodwill and Other (Topic 350), Testing Goodwill for Impairment, which gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the steps necessary under current rules. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its condensed consolidated financial statements.

In June 2011, the FASB issued ASC update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (ASC 2011-05). The amendments in this ASC require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASC 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASC 2011-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011, with early adoption permitted. The Company is currently evaluating the impact of adopting ASC 2011-05 on its consolidated financial statements.

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

We are committed to developing technologies that help advance emergency care and save lives, while increasing clinical and operational efficiencies. With products for defibrillation and monitoring, circulation and CPR feedback, data management, fluid resuscitation, and therapeutic temperature management, we provide a comprehensive set of technologies which help clinicians, EMS and fire professionals, and lay rescuers treat victims needing resuscitation and critical care.

We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements as of January 1, 2012 and for the three months then ended and the notes thereto.

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Our sales for the three months ended January 1, 2012 increased 18% to $133.7 million, as compared to the same period in the prior year. The increase in sales was driven primarily by the LifeVest and the North American core defibrillator businesses. LifeVest revenue grew 45% in the three months ended January 1, 2012 compared to the same period in fiscal 2011. In December 2011, Centers for Medicare & Medicaid Services (CMS) reaffirmed the existing Local Coverage Determination for coverage for the LifeVest, which also garnered strong support from the clinical and professional societies. We believe our core North American hospital business, particularly with respect to professional defibrillator equipment, benefitted from market share gains and pent up demand. Revenues from the North American core hospital business, excluding U.S. military, grew 38% in the three months ended January 1, 2012 to $30.5 million, compared to revenues of $22.1 million from this business in the prior-year quarter. Sales to the U.S. military decreased approximately $4.9 million, or 57%, to $3.7 million for the three months ended January 1, 2012, compared to sales of $8.6 million in the same period in the prior year, as business with the U.S. military can be subject to irregular and unpredictable ordering patterns. Our gross margin reflected an improvement in product mix, lower factory costs, and improved North American capital equipment related pricing.

Three Months Ended January 1, 2012 Compared To Three Months Ended January 2, 2011

Sales

Net sales and rental revenue by customer/product categories were as follows:

(000’s omitted)	January 1,  2012		January 2,  2011		% Change
Devices and Accessories to the Hospital Market-North America	$	34,161	$	30,616		12	%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		34,108		27,393		25	%
Devices, Accessories, and Data Management Software to the International Market		33,153		32,848		1	%
LifeVest to the North America and International Markets		32,326		22,305		45	%
Total Revenue	$	133,748	$	113,162		18	%

Our sales to the North American hospital market increased approximately 12% to $34.2 million, compared to the same period a year ago. The increase was primarily due to increased volume in professional defibrillator sales, which was partially offset by a decrease in sales to the U.S. military.

Our sales to the North American pre-hospital market increased approximately 25% to $34.1 million for the three months ended January 1, 2012, compared to the same quarter in the prior year. The increase in North American pre-hospital market sales was primarily the result of increased volume in professional defibrillator sales.

International sales increased approximately $0.3 million, or 1%, during the three months ended January 1, 2012, in comparison to the prior-year period. The flat growth was primarily the result of weakness in our direct European subsidiaries and in Latin America, which was offset by more positive performance with our distributor channels in Europe and Asia.

Total rental revenue of the LifeVest product increased 45% to $32.3 million in the first quarter of fiscal 2012 compared to $22.3 million in the same period of the prior year. This increase was the result of increased acceptance of the LifeVest product in both the U.S. and in Germany. The growth was slightly lower than our historical growth rates, which we attributed to the disruption caused by the issuance in August 2001 of draft revisions with respect to Medicare reimbursement of the LifeVest. These revisions have since been rescinded.

Total sales of our Temperature Management products to all of our markets increased 28%, to $7.5 million in the first quarter of fiscal 2012 from $5.9 million in the first quarter of fiscal 2011. This growth was driven by approximately equal increases in sales volumes in both the International and North American market.

Total sales of the AutoPulse^® product to all of our markets decreased 17% during the three months ended January 1, 2012, compared to the three months ended January 2, 2011. Total AutoPulse sales were approximately $4.0 million in the first quarter of fiscal 2012 in comparison to $4.8 million in the prior-year quarter. We believe increased competition has hurt our sales and will require us to refocus our sales force efforts. Refocusing our selling efforts will also help us take advantage of future publications of results from our CIRC trial.

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Gross Margins

Cost of sales consists primarily of material, direct labor, overhead, and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposables. These products are primarily sold to the hospital, pre-hospital and International markets. We rent the LifeVest product and sell our data collection software mainly to the pre-hospital market.

Gross margin for the three months ended January 1, 2012 increased to 59%, as compared to 54% during the same period in the prior year. This increase primarily reflected an improvement in product mix, lower factory costs, and improved North American capital equipment related pricing. Other factors, including foreign exchange rate fluctuations, affecting the change in gross margin each individually represented less than one percentage point of our change in overall gross margin. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuations and overall market conditions.

Backlog

Backlog increased to approximately $24 million at January 1, 2012, compared to approximately $13 million at January 2, 2011. Backlog was approximately $30 million at October 2, 2011. Typically, we expect our backlog to decrease sequentially during the first and second quarters, remain flat during the third quarter, and increase during the fourth quarter due to the purchasing practices of our customers. We believe the maintenance of a modest backlog helps to improve our efficiency, lower our costs and improve our profitability as we believe it reduces the likelihood that we will be required to incur substantial additional costs at the end of the quarter. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Costs and Expenses

Operating expenses for the three months ended January 1, 2012 and January 2, 2011 were as follows:

(000’s omitted)	January 1,  2012		% of Sales			January 2,  2011		% of Sales			Change  %
Selling and marketing	$	42,472		32	%	$	34,782		31	%		22	%
General and administrative		14,428		11	%		10,372		9	%		39	%
Research and development		10,963		8	%		10,838		10	%		1	%
Total expenses	$	67,863		51	%	$	55,992		49	%		21	%

As a percentage of sales, selling and marketing expenses for the three months ended January 1, 2012 increased 1% to 32% compared to 31% for the three months ended January 2, 2011. The increased dollar spending for the three months ended January 1, 2012, compared to the three months ended January 2, 2011, primarily reflected increased expenses for LifeVest sales force compensation and other costs, and to a lesser extent, our core International and North American capital equipment sales force costs, in each case primarily driven by the growth of their respective businesses.

As a percentage of sales, general and administrative expenses increased 2% during the three months ended January 1, 2012, compared to the three months ended January 2, 2011. The increased dollar spending during the three months ended January 1, 2012 primarily reflected increased salaries and fringe benefits, particularly in support of the LifeVest business.

As a percentage of sales, research and development expenses for the three months ended January 1, 2012 decreased approximately 2% to 8% compared to 10% for the three months ended January 2, 2011. The research and development dollar spending remained relatively flat for the three months ended January 1, 2012 compared to the three months ended January 2, 2011. A decline in spending associated with the completion of the CIRC trial was offset by increased spending for newer products such as the X Series^®, LifeVest and Temperature Management products.

Investment and Other Income (Expense), Net

Investment and other income (expense), net includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (expense), net totaled approximately $113,000 and $264,000 for the three months ended January 1, 2012 and January 2, 2011, respectively. The fluctuations within investment and other income (expense) are primarily the result of marking our foreign denominated intercompany receivables to market at the end of the quarter.

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Income Taxes

Our effective tax rate for the three months ended January 1, 2012 and January 2, 2011 was 38% and 31%, respectively. The difference between the effective rates is primarily due to the impact the U.S. research and development tax credit had on the respective periods. Our 2012 effective rate includes just one quarter of a full year’s credit in the annual rate calculation due to the expiration of the U.S. research and development credit on December 31, 2011. Our 2011 effective rate not only reflected a full year’s research and development credit, but it also included the impact of the retroactive extension of the credit back to January 1, 2010, when the credit had previously expired. This retroactive reinstatement occurred in our first quarter of 2011, resulting in a total of seven quarters of credits benefitting the 2011 effective tax rate.

As of January 1, 2012 and October 2, 2011, we had approximately $2.9 million of uncertain tax positions, of which $2.2 million, if recognized, could impact the effective tax rate. $780,000 of the uncertain tax positions are expected to reverse in fiscal 2012. Of the $780,000 reduction, approximately $450,000 is expected to reduce a deferred tax asset. We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statement of income. We had $248,000 and $218,000 of accrued interest and penalties in income tax payables as of January 1, 2012 and October 2, 2011, respectively.

We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2007. The acquired losses from the business acquired from Revivant Corporation in fiscal 2005 for tax years 2003 and 2004 remain open to examination by the IRS to the extent losses are claimed in open years.

Liquidity and Capital Resources

We believe that our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at January 1, 2012 totaled $77.9 million compared with $75.5 million at October 2, 2011. We continue to have no long-term debt. We used $10.8 million in October 2011 to purchase the building where we manufacture our LifeVest product in Pittsburgh, Pennsylvania. Additionally, in November 2011, we announced a stock repurchase program of up to $50 million, which was authorized by our Board of Directors. Repurchases will take place on the open market or in privately negotiated transactions from time to time based on market and other conditions. The timing and number of any shares repurchased will be determined by the Company’s management, based on their evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan. The repurchase program may be modified, suspended or discontinued at any time. The repurchase program will be funded using the Company’s available cash and cash equivalents, borrowings available under its current line of credit, and supplementary borrowings if necessary. During the quarter ended January 1, 2012, we repurchased 27,546 shares for approximately $1.3 million.

As we have previously stated, we have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.

Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our unsecured line of credit of up to $12 million, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to acquisitions made in prior periods.

We may also need to use these funds in the future for potential acquisitions.

Sources and Uses of Cash

To assist with the discussion, the following table presents our abbreviated cash flows for the three months ended January 1, 2012 and January 2, 2011:

(000’s omitted)	Three months ended  January 1, 2012			Three months ended  January 2, 2011
Net income	$	6,627		$	3,903
Changes not affecting cash		8,177			7,668
Changes in assets and liabilities		6,682			3,092
Cash provided by operating activities		21,486			14,663
Cash used for investing activities		(20,632	)		(6,347	)

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(000’s omitted)	Three months ended  January 1, 2012			Three months ended  January 2, 2011
Cash (used for) provided by financing activities		(762	)		1,840
Effect of foreign exchange rates on cash		(68	)		165
Net change in cash and cash equivalents		24			10,321
Cash and cash equivalents - beginning of period		74,161			59,058
Cash and cash equivalents - end of period	$	74,185		$	69,379

Operating Activities

Cash provided by operating activities of $21.5 million for the three months ended January 1, 2012 increased approximately $6.8 million compared to cash provided by operating activities for the three months ended January 2, 2011 of $14.7 million. This increase was primarily attributable to higher collections of accounts receivable, as well as higher net income.

Investing Activities

Cash used for investing activities during three months ended January 1, 2012 increased by approximately $14.3 million compared to cash used in investing activities during the three months ended January 2, 2011. This increase is primarily attributable to the purchase in October 2011 of the LifeVest building in Pittsburgh, Pennsylvania for approximately $10.8 million. This increase also was the result of more additions to fixed assets and less cash having been generated from sales of marketable securities during the three months ended January 1, 2012 as compared to the same period in the prior year. These increases were partially offset by fewer additions to other assets during the three months ended January 1, 2012 compared to the three months ended January 2, 2011.

Financing Activities

Cash (used for) provided by financing activities during the three months ended January 1, 2012 decreased compared to the three months ended January 2, 2011. The reduction is primarily due to the repurchase of approximately $1.3 million of company stock, during the three months ended January 1, 2012, pursuant to our stock repurchase program, as well as a lower number of stock options being exercised during the three months ended January 1, 2012, as compared to the same period last year.

Investments

In October 2010, we acquired the assets and assumed certain liabilities of Road Safety International, Inc. (“Road Safety”). The Road Safety product is installed in an ambulance or fire vehicle and provides real-time feedback via audible alerts in situations such as speeding or hard cornering to help the driver avert an accident. The Road Safety product encourages a safer ambulance environment during patient treatment, records vehicle operating data for analysis, and can also be used to help reduce vehicle maintenance costs. The acquisition provides for consideration to be paid in the form of possible annual earn-out payments based on revenues for calendar 2011 and 2012. The earn-out for 2011 of $250,000 was paid in cash during the Company’s second quarter of fiscal 2012. If both earn-outs are achieved, total consideration (including liabilities assumed) could approximate $550,000.

Debt Instruments and Related Covenants

We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis, up to $12 million. This line of credit bears interest at the rate of LIBOR plus 2%. No borrowings were outstanding on this line during fiscal 2011 or fiscal 2012 to date. There are no covenants related to this line of credit.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and one minimum purchase commitment contract for critical raw material components. For liquidity purposes, we generally choose to lease our facilities instead of purchasing them. There were no material changes to amounts owed under contractual obligations during three months ended January 1, 2012.

We lease certain office and manufacturing space under operating leases. Our office leases are subject to adjustments based on actual floor space occupied. The leases also require payment of real estate taxes and operating costs. In addition to the office leases, we lease automobiles for business use by a portion of the sales force.

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Our executive headquarters and defibrillator and fluid resuscitation manufacturing operations are located in Chelmsford, Massachusetts. We entered into a new 10-year lease for our Chelmsford facility on December 29, 2010 which commenced on June 30, 2011 and expires on June 30, 2021. The new lease agreement includes an option to renew the lease for two successive periods of five years each. We will continue to pay a pro-rata amount of the landlord’s real estate tax and operating expenses based upon square footage.

Purchase obligations include all legally binding contracts that are non-cancelable. Purchase orders represent authorizations to purchase rather than binding agreements. Purchase obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based upon our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain provisions allowing for cancellation without significant penalty.

Contractual obligations that are contingent upon future performance and growth of sales are the additional earn-out payments for the assets of Infusion Dynamics, through fiscal 2013, and the assets of Road Safety, through calendar 2012.

Hedging Activities

At times, we use forward contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of forecasted sales to subsidiaries denominated in foreign currencies as well as intercompany accounts receivable denominated in foreign currencies.

As of January 1, 2012 we had two foreign currency forward contracts designated as cash flow hedges in the amount of approximately $5.5 million, each of which matures in less than twelve months. The net settlement amount of these contracts on January 1, 2012 was an unrealized gain of approximately $311,000, which is included within “Accumulated other comprehensive income” on our condensed consolidated balance sheet. We had a net realized gain of approximately $167,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 1, 2012, which was included in earnings within “Product sales” in the condensed consolidated statement of income. As of January 2, 2011 we had three foreign currency forward contracts designated as cash flow hedges in the amount of approximately $8 million, all maturing in less than twelve months. The net settlement amount of these contracts on January 2, 2011 was an unrealized gain of approximately $10,000, which is included within “Accumulated other comprehensive income” on our condensed consolidated balance sheet. We had a net realized gain of approximately $4,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 2, 2011, which was included in earnings within “Investment and other income (expense), net” in the condensed consolidated statement of income.

We did not have any foreign currency forward contracts not designated as hedging instruments outstanding at January 1, 2012 or at October 2, 2011. We had net realized gains from foreign currency forward contracts not designated as hedging instruments of $199,000 during the quarter ended January 2, 2011 which are included in “Investment and other income (expenses), net” in the condensed consolidated statement of income. Any gains or losses on the fair value of the derivative contract would be largely offset by the losses and gains on the underlying transactions. These offsetting gains and losses are not reflected above.

Legal and Regulatory Affairs

On June 18, 2010, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Boston, MA, alleging that fifteen patents owned by the Philips entities are infringed by certain of our defibrillators and associated products and seeking monetary and equitable remedies for infringement. The plaintiffs filed an amended complaint on October 13, 2010. On July 12, 2010, we filed a lawsuit against Philips Electronics North America Corporation in U.S. District Court, Boston, MA, alleging that five of our patents are infringed by certain of their defibrillators and associated products and seeking monetary and equitable remedies for infringement. The two cases have been consolidated through the pre-trial phase and bifurcated into an initial liability phase and a later damages phase. Discovery has commenced in the liability phase.

On January 5, 2012, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Seattle, WA, alleging that six additional patents owned by the Philips entities are infringed by certain of our other defibrillator products and seeking monetary and equitable remedies for infringement.

We received a warning letter from the FDA, dated April 22, 2011, addressing certain aspects of battery life claims on our AED Plus product. We have provided the FDA with additional data and action plans, which are ongoing, concerning battery life claims. The FDA has reviewed the material and has indicated that our response appears to be adequate, pending re-inspection, to ensure that all actions have been implemented. We have always complied with warning letters we have received in the past, and we intend to address this warning letter to the full satisfaction of the FDA.

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We are, from time to time, involved in the normal course of our business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although we are unable to quantify the exact financial impact of any of these matters, we believe that none of the currently pending matters will have an outcome material to our financial condition or business.

Critical Accounting Estimates

Our management strives to report our financial results in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require us to use technical terminology. We follow accounting principles generally accepted in the United States in preparing our consolidated financial statements. These principles require us to make certain estimates of matters that are inherently uncertain and to make difficult and subjective judgments that affect our financial position and results of operations. Our most critical accounting policies include revenue recognition, and our most critical accounting estimates include accounts receivable reserves, warranty reserves, inventory reserves, fair value measurements, the valuation of goodwill and other long-lived assets, income taxes and stock-based compensation. Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies, which include revenue recognition and those that require significant estimates and judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions, and how they are applied in preparation of the financial statements.

Revenue Recognition

Revenues from sales of cardiac resuscitation and temperature management therapy devices, disposable electrodes, catheters and accessories are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk have passed to the customer, the fee is fixed or determinable, and collection is considered probable. Circumstances that generally preclude the immediate recognition of revenue include shipping terms of FOB destination or uncertainties surrounding product acceptance. In these instances, revenue is deferred until adequate documentation is obtained to ensure that these criteria have been fulfilled. Similarly, revenues from the sales of our products to distributors fall under the same guidelines. For all significant orders placed by our distributors, we require an approved purchase order, we perform a credit review, and we ensure that the terms on the purchase order or contract are proper and do not include any contingencies which preclude revenue recognition. We do not typically offer any special right of return, stock rotation or price protection to our distributors or end customers. For sales in which payment extends beyond a twelve month period, we generally recognize revenue at its net present value using an imputed rate of interest based on our experience of successful collection on these terms without concession.

Our sales to customers often include a device, disposables and other accessories. For the vast majority of our shipments, all deliverables are shipped together. However, in cases some elements of a multiple element arrangement are not delivered as of a reporting date. In September 2009, the FASB amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and include some software elements. We adopted this new guidance prospectively during the first quarter of 2010. Under the historical accounting guidance, FASB ASC 605-25,Multiple Element Arrangements, we deferred the fair value of the undelivered elements and only recognized the revenue related to the delivered elements if we had established fair value for the undelivered elements. If we had not established fair value for any undelivered elements, the entire order was deferred. Under the new guidance of ASU No. 2009-13,Multiple-Deliverable Revenue Arrangements, fair value as the measurement criteria is replaced with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. For multi-element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable separately and is the price actually charged for that deliverable. Our process for determining an ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Revenues are recorded net of estimated returns.

We license software under non-cancelable license agreements and provide services including training, installation, consulting and maintenance, which consists of product support services, and unspecified upgrade rights (collectively, post-contract customer support, “PCS”). Revenue from the sale of software is recognized in accordance with FASB ASC 985-605,Software—Revenue Recognition. License fee revenues are recognized when a non-cancelable license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product

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acceptance, the fees are fixed or determinable, and collection is considered probable. Revenues from maintenance agreements and upgrade rights are recognized ratably over the period of service. Revenue for services, such as software deployment and consulting, is recognized when the service is performed. Our software arrangements contain multiple elements, which include software products, services and PCS. Generally, we do not sell computer hardware products with our software products. We will occasionally facilitate the hardware purchase by providing information to the customer such as where to purchase the equipment. We generally do not have vendor-specific objective evidence of fair value for our software products. We do, however, have vendor-specific objective evidence of fair value for items such as consulting and technical services, deployment and PCS based upon the price charged when such items are sold separately. Accordingly, for transactions where vendor-specific objective evidence exists for undelivered elements but not for delivered elements, we use the residual method. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

We do not typically ship any of our software products to distributors or resellers. Our software products are sold by our sales force directly to the end user. We may sell software to system integrators who provide complete solutions to end users on a contract basis.

On September 28, 2009, we entered into a “state of readiness” contract awarded by the U.S. government to supply defibrillators on short notice. Based upon the award, we expect to receive two types of payments from the U.S. government. The first payment of approximately $4 million, which was received during the first half of fiscal 2010 and is carried within “Deferred revenue” on our balance sheet as a liability under government contracts, is to reimburse us for the cost to acquire inventories required to meet potentially short-notice delivery schedules. We also receive payments from the U.S. government to compensate us for managing the purchase, build, storage and inventory rotation process. This payment will also compensate us for making future production capacity available. The portion of this payment associated with the purchase and build aspects of the contract will be recognized on a proportional performance basis. The contract has a one-year term with up to an additional four one-year extensions. The U.S. Government extended the contract for a third year in September 2011. Under this contract, the U.S. Government has two options to acquire defibrillators. The U.S. Government may buy on a replenishment basis, which means we will record a sale under our normal U.S. Government price list and maintain our “state of readiness”, or the U.S. Government may buy on a non-replenishment basis, which will generally allow us to obtain normal margins but will reduce our future obligations under this arrangement.

For those markets for which we sell separately priced extended warranties, revenue is deferred and recognized over the applicable warranty period, based upon the estimated selling price of such extended warranties.

We also generate rental revenue from our LifeVest product. Doctors prescribe the LifeVest equipment for use by their patients. The patients then rent the LifeVest product from us for use over a prescribed period of time, typically between two to three months. The patients are generally covered by health plan contracts, which typically contract with a third party payor that agrees to pay based on fixed or allowable reimbursement rates. Third-party payors are entities such as insurance companies, governmental agencies, health maintenance organizations or other managed-care providers. The rental income is recognized ratably over the rental period.

Allowance for Doubtful Accounts / Sales Returns and Allowances / Trade-In Allowances

We maintain an allowance for doubtful accounts for estimated losses, for which related provisions are included in bad-debt expense, resulting from the inability of our customers to make required payments. Specifically identified reserves are charged to selling and marketing expenses. Provisions for general reserves are charged to general and administrative expenses. We determine the adequacy of this allowance by regularly reviewing the aging of our accounts receivable and evaluating individual customer receivables, considering customers’ financial condition, historical experience, communications with the customers, credit history and current economic conditions. We also maintain an estimated reserve for potential future product returns and discounts given related to trade-ins and to current period product sales, which is recorded as a reduction of revenue. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included in the accounts receivable allowance amounts on our balance sheet.

As of January 1, 2012, our accounts receivable balance of $101.5 million is reported net of allowances of $10.9 million. We believe our reported allowances at January 1, 2012 are adequate. If the financial conditions of our customers were to deteriorate, however, resulting in their inability to make payments, we might need to record additional allowances, resulting in additional expenses being recorded for the period in which such determination would be made.

Although we are not typically contractually obligated to provide trade-in allowances under existing sales contracts, we may offer such allowances when negotiating new sales arrangements. When pricing sales transactions, we contemplate both cash consideration and the net realizable value of any used equipment to be traded in. The trade-in allowance value stated in a sales order may differ from the estimated net realizable value of the underlying equipment. Any excess in the trade-in allowance over the estimated net realizable value of the used equipment represents additional sales discount.

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We account for product sales transactions by recording as revenue the total of the cash consideration and the estimated net realizable value of the trade-in equipment less a normal profit margin. Any difference between the estimated net realizable value of the used equipment and the trade-in allowance granted is recorded as a reduction to revenue at the time of the sale.

Used ZOLL equipment is recorded at the lower of cost or market. We regularly review our reserves to ensure that the balance sheet value associated with our trade-in equipment is fairly stated.

If the trade-in equipment is a competitor’s product, we will usually resell the product to a third-party distributor who specializes in the sale of used medical equipment, without any refurbishment. We typically do not recognize a profit upon the resale of a competitor’s used equipment, although as a result of the inherent nature of the estimation process, we could recognize either a nominal gain or loss.

Warranty Reserves

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time, usually one year for pre-hospital and international customers and five years for hospital customers. Revenue is deferred for pre-hospital customers who receive warranties beyond one year. Such revenue is then recognized over the period of extended warranty. We provide for the estimated cost of product warranties at the time product is shipped and revenue is recognized. The costs that we estimate include material, labor, and shipping. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We believe that our recorded liability of $4.9 million at January 1, 2012 is adequate to cover future costs for the servicing of our products sold through that date and under warranty. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventory

We value our inventories at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead.

Inventory on hand may exceed future demand either because the product is outdated or obsolete, or because the amount on hand is in excess of future needs. We provide for the total value of inventories that we determine to be obsolete based on criteria such as customer demand and changing technologies. We estimate excess inventory amounts by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At January 1, 2012, our inventory was recorded at net realizable value requiring reserves of $5.9 million, or 9% of our $62.6 million gross inventories. At October 2, 2011, the Company’s inventory was recorded at net realizable value requiring reserves of $6.6 million, or 11% of the $58.5 million gross inventories.

Fair Value Measurements

During the first quarter of fiscal 2009, we adopted FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This accounting standard does not require any new fair value measurements. We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We elected to defer implementation of FASB ASC 820 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until fiscal 2010. The implementation of FASB ASC 820 as it relates to non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis did not have a material impact on our financial statements. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

During the first quarter of 2009, we adopted FASB ASC 825, Financial Instruments, which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. We have not elected the fair value option for any eligible financial instruments.

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Refer to Note 13, “Fair Value Measurements,” to the condensed consolidated financial statements in this Form 10-Q for additional information.

Goodwill

At January 1, 2012, we had approximately $79 million in goodwill, primarily resulting from our acquisitions of the assets of Lifecor Corporation (approximately $45 million), Revivant, Inc. (approximately $22 million), certain assets of BIO-key International, Inc. (approximately $5 million), the assets of Infusion Dynamics, Inc. (approximately $4 million), and the assets of Alsius Corporation (approximately $3 million). We test our goodwill for impairment annually at the end of our fiscal fourth quarter by comparing the fair value of our reporting units to the carrying value of those reporting units. Additionally, we periodically review our goodwill for impairment whenever events or changes in circumstances indicate that a potential impairment has occurred.

For our 2011 fiscal year-end annual impairment assessment, we identified four reporting units which have goodwill allocated to them and are ultimately aggregated up to our single reportable segment. Fair value is determined based on the income approach, which is an estimate of the discounted future cash flows expected from the reporting units. We considered the use of the market approach and the cost approach, but we concluded that these methods were not appropriate for valuing our reporting units due to the lack of relevant and available market comparisons. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting units’ expected long-term operating cash performance. The key variables that drive the fair value of our reporting units are estimated revenue growth rates, expense levels and discount rate assumptions. The projected cash flows use internally-developed revenue and expense forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include terminal value margin rates, future capital expenditures and changes in future working capital requirements. We also compare our overall fair value to our market capitalization. While there are inherent uncertainties related to the assumptions used and to our application of these assumptions to this analysis, we believe that the income approach provides a reasonable estimate of the fair value of our reporting units. The foregoing assumptions were consistent with our long-term performance. However, these assumptions could deviate materially from actual results.

Our 2011 annual goodwill impairment testing did not identify any reporting units whose carrying values exceeded implied fair values. We believe that none of our reporting units has a material amount of goodwill that is at risk of failing future impairment tests. For each of the reporting units, the level of excess fair value over the carrying value exceeded 25% at the end of our 2011 fiscal year. The determination of fair value requires significant judgment on the part of management about future revenues, expenses and other assumptions that contribute to the net cash flows of the reporting units. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in impairment tests, these estimates are uncertain by nature and can vary from actual results.

As of January 1, 2012, no events occurred or circumstances changed that might indicate that the fair value of any of our reporting units with goodwill is less than its book value.

Long-Lived Assets

We periodically review the carrying amount of our long-lived assets, including property and equipment, and intangible assets, to assess potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The determination includes evaluation of factors such as current market value, business climate and future cash flows expected to result from the use of the related assets. Fair value is determined based on an estimate of the undiscounted cash flows in assessing potential impairment and to record an impairment loss based on fair value in the period when it is determined that the carrying amount of the asset may not be recoverable. This process requires judgment on the part of management.

Income Taxes

We use the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on our income tax provision and net income in the period in which the determination is made.

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We adopted the provisions of FASB ASC 740,Income Taxes, on October 1, 2007. The provision contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. This provision also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure and transition.

Stock-Based Compensation

In accordance with FASB ASC Topic 718,Compensation—Stock Compensation, we measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize cost over the requisite service period. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have cash equivalents and marketable securities that primarily consist of money market accounts and fixed-rate, asset-backed corporate securities. The majority of these investments have maturities within one to five years. We believe that our exposure to interest rate risk is minimal due to the term and type of our investments and that the fluctuations in interest rates would not have a material adverse effect on our results of operations.

We have international subsidiaries in Canada, the United Kingdom, the Netherlands, France, Germany, Austria, Australia, New Zealand, China and Singapore. These subsidiaries transact business in their functional or local currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition.

At times, we use foreign currency forward contracts to manage our currency transaction exposures from forecasted foreign currency denominated sales to our subsidiaries. These foreign currency forward contracts are designated as cash flow hedges under FASB ASC 815, Derivatives and Hedging.Therefore the effective portion of the gain or loss is reported as a component of other comprehensive income and will be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the derivative’s change in fair value is recognized currently through earnings regardless of whether the instrument is designated as a hedge. At January 1, 2012, we had two foreign currency forward contracts outstanding designated as hedging instruments, each of which matures in less than twelve months, to exchange the Euro for U.S. Dollars totaling approximately $5.5 million. A sensitivity analysis of a change in the fair value of the derivative foreign exchange contracts outstanding at January 1, 2012 indicates that, if the U.S. dollar weakened by 10% against the different foreign currencies, the fair value of these contracts would decrease by approximately $518,000 resulting in a total loss on the contracts of approximately $207,000. Conversely, if the U.S. dollar strengthened by 10% against the different foreign currencies, the fair value of these contracts would increase by approximately $471,000 resulting in a total gain on the contracts of approximately $782,000. Any gains and losses on the fair value of the derivative contracts would be largely offset by losses and gains on the underlying transactions. These offsetting gains and losses are not reflected in the analysis below.

We also at times use foreign currency forward contracts not designated as hedging instruments to manage our currency transaction exposures. These derivative instruments are marked-to-market with changes in fair value recorded to earnings. These derivative instruments do not subject our earnings or cash flows to material risk since gains and losses on those derivatives generally offset losses and gains on the assets and liabilities being hedged. We did not have any foreign currency forward contracts not designated as hedging instruments outstanding at January 1, 2012.

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Cash Flow Hedges

Exchange Rate Sensitivity: January 1, 2012

(Amounts in $)

	Expected Maturity Dates												Total		Unrealized gain
	2012		2013		2014		2015		2016		Thereafter
Forward Exchange Agreements (Receive $/Pay Euro) Contract Amount	$	5,502,000											$	5,502,000	$	311,000
Average Contract Exchange Rate		1.3754		—		—		—		—		—

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of January 1, 2012, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended January 1, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On June 18, 2010, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Boston, MA, alleging that fifteen patents owned by the Philips entities are infringed by certain of our defibrillators and associated products and seeking monetary and equitable remedies for infringement. The plaintiffs filed an amended complaint on October 13, 2010. On July 12, 2010, we filed a lawsuit against Philips Electronics North America Corporation in U.S. District Court, Boston, MA, alleging that five of our patents are infringed by certain of their defibrillators and associated products and seeking monetary and equitable remedies for infringement. The two cases have been consolidated through the pre-trial phase and bifurcated into an initial liability phase and a later damages phase. Discovery has commenced in the liability phase.

On January 5, 2012, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Seattle, WA, alleging that six additional patents owned by the Philips entities are infringed by certain of our other defibrillator products and seeking monetary and equitable remedies for infringement.

We are, from time to time, involved in the normal course of our business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although we are unable to quantify the exact financial impact of any of these matters, we believe that none of the currently pending matters will have an outcome material to our financial condition or business.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors previously disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended October 2, 2011, which was filed with the SEC on November 23, 2011, except that we have modified the following risk factor:

Patients May Not Be Able to Obtain Appropriate Insurance Coverage for Our LifeVest Product.

The ability of patients to obtain appropriate insurance coverage for our LifeVest product from government and third-party payors is critical to the success of the product. The availability of insurance coverage affects which products physicians may prescribe. Implementation of healthcare reforms in the United States and abroad may limit the price of, or the level at which, insurance is provided for our LifeVest product and adversely affect both our pricing flexibility and the demand for the product. Hospitals or physicians may respond to such pressures by substituting other therapies for our LifeVest product.

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Further legislative or administrative reforms to the U.S. or international reimbursement systems that significantly reduce or deny insurance coverage for our LifeVest product, or adverse decisions regarding coverage or reimbursement issues relating to our LifeVest product by administrators of such systems, would have an adverse impact on sales of our LifeVest product. This in turn could have an adverse effect on our financial condition and results of operations.

In particular, reimbursement for the LifeVest product by Medicare, Medicaid and other third party payors is governed by the Durable Medical Equipment Regulations and is subject to audit. These payors may limit coverage or reduce reimbursement rates with little notice, which may have an adverse impact on sales of our LifeVest product.

On August 4, 2011, Durable Medical Equipment Regional Carriers issued for comment draft revisions to local coverage determinations with respect to Medicare reimbursement for AEDs and wearable defibrillators, including our LifeVest product. The draft revisions would have limited the indications for Medicare reimbursement for the LifeVest product. On December 15, 2011, CMS reaffirmed the current coverage policy across all indications for the LifeVest product.

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

(c) Issuer Purchases of Equity Securities.

The following table provides information for the quarter ended January 1, 2012 regarding shares of Common Stock repurchased by the Company pursuant to our up to $50 million stock repurchase program authorized by the Board of Directors in November 2011. During the quarter ended January 1, 2012, there were no shares of Common Stock transferred by employees to the Company to satisfy the tax withholding obligations of such employees in connection with the vesting of restricted Common Stock under the Company’s 2001 Plan.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 3, 2011 – October 30, 2011		—	$	—		—	$	50,000,000
October 31, 2011 – November 27, 2011		—	$	—		—	$	50,000,000
November 28, 2011 – January 1, 2012		27,546	$	45.52		28	$	48,746,097
Total		27,546	$	45.52		28

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Exhibit
10.1	Form of Restricted Stock Award under Amended and Restated 2006 Non-Employee Director Stock Options Plan. (1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101	The following materials from the Form 10-Q for the quarter ended January 1, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements (Unaudited).

(1) Filed herewith.

(2) Furnished herewith.

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES

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

	ZOLL MEDICAL CORPORATION
Date: February 2, 2012	By:	/s/    RICHARD A. PACKER
		Richard A. Packer,
		Chief Executive Officer
		(Principal Executive Officer)

Date: February 2, 2012	By:	/S/    A. ERNEST WHITON
		A. Ernest Whiton,
		Vice President of Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Exhibit
10.1	Form of Restricted Stock Award under Amended and Restated 2006 Non-Employee Director Stock Option Plan. (1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101	The following materials from the Form 10-Q for the quarter ended January 1, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements (Unaudited).

(1) Filed herewith.

(2) Furnished herewith.

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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