HAE Haemonetics Corp

We reiterate our Neutral recommendation on Haemonetics (HAE) subsequent to its fourth quarter fiscal 2012 results. The company’s revenues during the fourth quarter surpassed the Zacks Consensus Estimate though earnings per share lagged the forecast.

We are encouraged to note that Plasma, which accounted for 44% of disposables revenues during the fiscal year, is now on the path to recovery after a dismal patch. The upsurge was largely due to the improvement in the plasma business in Japan after declining in the first half. Besides, the Japanese Red Cross purchased $1 million of plasma in March, one month ahead of plan, in anticipation of a planned system conversion. Additionally, collection volumes in the commercial plasma business in the US were robust over the last two quarters. The company also made commendable progress with respect to contract extensions as 75% of this business is covered through the third quarter of fiscal 2017 and 98% through the third quarter of fiscal 2015.

With the proposed acquisition of the transfusion medicine business of Pall Corporation (PLL) for $551 million, Haemonetics will be able to enter the $1.2 billion whole blood collection market. Manual whole blood collection accounts for the vast majority of the nearly 60 million red blood cells collection procedures performed annually worldwide. The asset transfer, adding 1,300 employees to Haemonetics, will involve Pall's manufacturing facilities in Covina, California; Tijuana, Mexico; Ascoli, Italy and a portion of Pall's assets in Fajardo, Puerto Rico. The business generated approximately $210 million in annual revenues spread across Americas ($136 million), Europe ($52 million) and Asia ($22 million) and commanded 15% of global unit market share.

Haemonetics remains focused on blood management solutions in order to provide better services to its customers. The company’s web-based blood management portal, IMPACT Online, has thereby witnessed greater acceptance among customers. Revenues from Diagnostics (consisting principally of TEG Thrombelastograph Hemostasis Analyzer) increased, driven by better penetration of IMPACT accounts in North America and significant growth in China. The company installed 230 TEG devices in the second half of the fiscal year and increased the installed base by 18% in the full year. This trend is expected to continue in the forthcoming quarters.

Despite the growing top line, the company’s bottom line was affected by a challenging margin scenario. Gross margin (adjusted) declined by 70 basis points (bps) year over year to 50.8% during the quarter. Despite a 12.9% drop in research and development expenses to $7.7 million, a 24.8% rise in selling, general and administrative expenses to $60 million led to a 350 bps decline in the adjusted operating margin to 14.5%. Margins continued to remain under pressure due to the recall of OrthoPAT devices and quality issues associated with the HS Core disposable in Europe.

Our recommendation is backed by a Zacks #3 Rank (“Hold”) in the short term.

 
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