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We have reaffirmed our Neutral recommendation on Haemonetics Corporation (HAE - Analyst Report) following its third-quarter 2012 results.

Although quality related issues continue to remain an overhang for Haemonetics, it seems that the worst may be over for this specialized device maker. The company reported a strong third quarter with revenues and adjusted EPS sailing past the Zacks Consensus Estimate.

Accordingly, the company expects to report 2012 revenue growth at the top of the guidance. The recovery plan is on track and the situation should improve further by the end of the fiscal.

Within Hospital disposables, OrthoPAT revenues continue to be negatively impacted by the voluntary recall of pre-2002 devices. The company is currently working on a recovery plan and approximately half of the fleet has been recalled. Although OrthoPAT revenue is down by 14% year to date, the slide is expected to moderate in the fourth quarter and return to growth in fiscal 2013.

Haemonetics derives more than 40% of its disposable revenues from Plasma. This business has been facing headwinds over the past few quarters due to a change in collection practices in Japan. However, with the completion of one year of this episode, the situation improved during the reported quarter.

Collection volumes in the commercial plasma business in the US remained robust in the third quarter. The company also made a commendable progress with respect to contract extensions as 75% of this business is covered through the third quarter of fiscal 2017 and 90% through the third quarter of fiscal 2015.

Meanwhile, Haemonetics remains focused on blood management solutions in order to provide better services to customers. The company’s web-based blood management portal, IMPACT Online, has witnessed greater acceptance among customers. During the quarter, the company added 11 new IMPACT accounts, resulting in a total of 237.

IMPACT selling with blood center customers led to 12% growth in red cell disposables revenue (in IMPACT accounts) compared with a 2% drop in non-IMPACT accounts. We expect increasing penetration of IMPACT accounts should result in higher sales of Diagnostics revenues.

However, the uncertain economic scenario continues to pose a challenge for Haemonetics. Although the company is confident that with gradual recovery in the economy, IMPACT sales will gain traction, any hiccup in the recovery process will hamper the growth prospects in turn.

Moreover, till the corrective process is complete margins will continue to remain under pressure. The competitive landscape is tough with the presence of players such as Baxter (BAX - Analyst Report) and Medtronic (MDT - Analyst Report), among others.

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

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