Haemonetics Corporation ( HAE - Analyst Report ) reported net income of $17.8 million or earnings per share (“EPS”) of 69 cents for the fourth quarter of fiscal 2012, down 14% year over year. After taking into account certain one-time items, adjusted EPS came in at 80 cents, lagging behind the Zacks Consensus Estimate of 83 cents and the year-ago quarter’s adjusted EPS of 85 cents. For the fiscal, adjusted EPS dropped 7% to $3.04 and were short of the Zacks Consensus Estimate of $3.07. Quality related issues had a negative impact of 10 cents and 41 cents on the company’s bottom line during the quarter and the fiscal year, respectively.

For the fourth quarter, revenues increased 10% year over year (8% at constant exchange rates or CER) to $186.7 million, higher than the Zacks Consensus Estimate of $184 million. Revenues from the domestic and international market increased 9% to $87.5 million and 10.5% to $99.2 million, respectively. For the full year, revenues increased 8% to $727.8 million (up 6% at CER), surpassing the Zacks Consensus Estimate of $723 million.

Acquisitions

With the fourth-quarter results, Haemonetics announced two acquisitions that would strengthen its foothold in the whole blood collection business. The company plans to acquire the blood collection, filtration and processing product lines of Pall Corporation ( PLL - Analyst Report ) for $551 million. The asset transfer, which will add 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 other acquisition announced by Haemonetics is that of Minnesota-based Hemerus Medical, a developer of technologies for the collection of whole blood, and processing and storage of blood components. Hemerus has submitted a New Drug Application to the US Food and Drug Administration for its Solx whole blood collection system with approval anticipated in calendar year 2012. Haemonetics will pay up to $27 millionin several stages, depending upon successful regulatory approvals of Solx and also a royalty on future sales of Solx based products.Both the acquisitions are expected to close during the second quarter of fiscal 2013.

Revenue Details

Haemonetics earns about 80% of its revenues from the sale of disposables – plasma, blood center and hospital disposables. Revenues from plasma and blood bank disposables recorded robust growth of 12.5% (to $61.9 million) and 9.2% (to $56.4 million), respectively. Sales of hospital disposables recovered with a 2.7% rise to $30.8 million. The company had expected this business to return to the growth curve by the fourth quarter.

The rest of the revenue was derived from software solutions and equipment, which recorded respective sales of $19.3 million (up 9.2% year over year) and $17.2 million (up 17.3%).

Maintaining the momentum from the last quarter, Plasma revenues recorded robust growth in the North American market. While the company had been adversely affected by a change in collection practices in Japan, the reported quarter recorded strong growth as the Japanese Red Cross ("JRC") increased their inventories of disposables in anticipation of a system conversion. Haemonetics is setting a target of mid single-digit growth in plasma revenues in fiscal 2013.

Within blood center disposables, revenues from platelets increased 12.6% ($44.1 million) while red cell disposables slipped 1.5% to $12.4 million due to a strong quarter in 2011. Platelet revenues benefited from strong sales in emerging markets along with the JRC system conversion.

OrthoPAT recorded an 8.3% drop in revenues in the reported quarter to $8.4 million as it continued to pay for the voluntary recall of pre-2002 devices. However, revenues from Surgical disposables and Diagnostics increased 1.8% to $17.3 million and 26.7% to $6.1 million, respectively. While the former benefited from the launch of the Cell Saver Elite, growth of the Diagnostics business resulted from the company's Impact initiative that benefited the TEG Thrombelastograph Hemostasis Analyzer business. During the reported quarter, TEGdisposables sales increased 127% in China.

Margin Trends

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% higher selling, general and administrative expenses at $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 the quality issues associated with the HS Core disposable in Europe.

Outlook

Haemonetics provided its outlook for fiscal 2013. The company expects organic revenue growth of 4−6% with adjusted EPS in a band of $3.30−$3.40, lower than the current Zacks Consensus Estimate of $3.49. The company expects to report gross margin in the neighborhood of 52−53% with adjusted operating income of $117−$119 million. Besides, free cash flow is expected to be around $85 million. The two acquisitions, excluding one-time costs, are expected to have a neutral impact on the bottom line in fiscal 2013 and accretive in fiscal 2014 and beyond.

Recommendation

Low global penetration and positive demand dynamics provide an encouraging long-term thesis for investing in the blood processing and supply chain management industry. We are encouraged by the recent acquisitions of the company that should further strengthen its foothold in the whole blood collection market.

Although Haemonetics was adversely affected by quality issues in the reported quarter as well as the fiscal year, the situation is gradually improving. We are currently Neutral on Haemonetics. In the short term, the stock retains a Zacks #3 Rank (Hold).