Hill-Rom (HRC) Beats Q1 Earnings and Revenues, Margins Up

Hill-Rom Holdings, Inc. HRC reported first-quarter fiscal 2018 adjusted earnings per share (EPS) of 92 cents, reflecting a 21.7% increase from the year-ago quarter. Adjusted earnings surpassed the Zacks Consensus Estimate by 15% and were well above the company’s projected range of 77-79 cents.

The strong bottom-line performance was backed by solid core revenue growth, continued margin expansion, strategic investments to drive growth and a 6-cent benefit related to U.S. tax reform. This marked the 10th consecutive quarter of double-digit earnings growth for the company.

Revenue Details

Revenues in the first quarter increased 4.6% year over year to $669.7 million (up 3% at CER). The top line also exceeded the Zacks Consensus Estimate of $659 million on momentum in core business, Mortara acquisition and value added from new products.

Geographically, U.S. revenues grew 2% to $453 million while revenues outside the United States increased 13% (up 7% at CER) to $217 million. Core revenue growth was 2% at CER.

Segmental Performance

In the first quarter, Patient Support Systems revenues dropped 0.2% year over year (down 1.9% at CER) to $334.4 million. The segment’s domestic revenues declined 2%. However, after adjusting for divestitures, U.S. core revenues increased nominally from the prior year.

Revenues at the Front Line Care segment, which includes Welch Allyn, Respiratory Care and Mortara, increased 11.3% to $224.6 million (up 9.8% at CER). Apart from gains from Mortara, the performance was driven by contributions from new products, strong growth of thermometry and blood pressure monitoring devices plus double-digit growth at respiratory care business.

The Surgical Solutions segment revenues increased 10.3% (up 5.8% at CER) to $110.7 million on 10% international growth, driven by strong momentum in the Middle East and Europe. U.S. revenues increased 2% despite the negative hurricane impact. The growth was backed by record placement of Integrated Table Motion and contribution from products like the iLED7 and the new TS 3000 Mobile Operating Table.

Margins

Reported gross margin in the fiscal first quarter was 47.7%, up 20 bps year over year. Despite 4.6% increase in cost of revenue, the company witnessed gross margin expansion on account of a 4.6% increase in revenues. Adjusted gross margin grew 20 bps to 47.7% on the back of the company’s consistent initiative with portfolio diversification, benefits from cost and sourcing efficiencies, product launches and gains from Mortara. Adjusted operating margin improved 10 bps to 14.7%.

Outlook

In view of a promising first quarter performance, Hill-Rom has raised its fiscal 2018 guidance and has also provided the second quarter estimates.

For the full year, the company continues to expect revenue growth of 3-4% on a reported basis (up 2% to 3% at CER). Excluding foreign currency, Mortara, divestitures and other non-strategic assets, the company continues to expect core revenue growth of 3%. Hill-Rom expects adjusted earnings per share in the range of $4.22-$4.30. The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $4.38 on revenues of $2.84 billion.

For the second quarter, Hill-Rom expects revenue growth of around 4% on a reported basis (or approximately 2% at CER). Core revenues are expected to increase 2% year over year. The company expects adjusted earnings per share of $1-$1.02. The Zacks Consensus Estimate for second-quarter earnings stands at $1 on revenues of $704.1 million.

Our Take

Hill-Rom exited the fiscal first quarter on a strong note with earnings and revenues beating the Zacks Consensus Estimate. The company saw a solid year-over-year increase in revenues on strong international growth. The company is also focusing on product innovation through research and development. Hill-Rom has updated its 2020 long-range financial objectives and outlook. The company expects a positive impact on adjusted effective tax rate. Hill-Rom now expects to drive adjusted earnings by 12-14% on a compound annual basis through 2020 from the previous guidance of 10-12%.

However, a decline in revenues at the Patient Support Systems segment is quite disappointing. Also, foreign exchange remains a concern.

Zacks Rank & Key Picks

Hill-Rom has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader medical sector are ResMed RMD, PerkinElmer PKI and Accuray ARAY. All the three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ResMed posted second-quarter fiscal 2018 adjusted earnings of $1, up 36.9% from the prior-year quarter. Revenues in the quarter increased 13.4% year over year (up 11% at constant exchange rate or CER) to $601.3 million.

PerkinElmer reported fourth-quarter 2017 adjusted earnings of 97 cents. Adjusted revenues of approximately $641.6 million surpassed the year-ago quarter’s $567 million.

Accuray reported a loss of 6 cents per share in the second quarter of fiscal 2018, 5 cents narrower than the year-ago figure. Total revenues in the second quarter increased 15% year over year to $100.3 million.

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