CareFusion Corporation (CFN) reported adjusted earnings of 99 cents per share in second-quarter fiscal 2015, which cruised past the Zacks Consensus Estimate by 19 cents. Earnings per share (EPS) surged nearly 83.3% on a year-over-year basis driven by strong revenue growth.
Merger Update
CareFusion, which is currently in the process of being acquired by Becton, Dickinson and Company (BDX), expects the transaction to close by Mar 31. Accordingly, the company expects this to be its last reported quarter as an independent entity, before its merger with Becton, Dickinson.
The deal, which was revealed by the companies on Oct 5, 2014, received approval from CareFusion stockholders at a special meeting held on Jan 21 this year. The companies also received clearance from U.S. antitrust authorities in Nov 2014, leaving antitrust approval in the European Union as the primary remaining closing condition.
As a result of the proposed merger, CareFusion has suspended its current share buyback programs.
Quarter Details
Second-quarter revenues came in at $1.07 billion, exceeding the Zacks Consensus Estimate of $1.01 billion. Revenues increased 16% year over year (18% at constant currency) driven by strong growth across all business lines and synergies from the Vital Signs acquisition.
Revenues from Medical Systems increased 10% to $645 million, led by strong performance across all three business lines. Notably, offerings from the Dispensing Technologies and Infusion Systems business lines continued to gain momentum with the U.S. hospitals during the quarter. In addition, capital equipment sales also improved in all major sales regions outside the U.S.
Revenues from Procedural Solutions rose 26.6% $424 million, driven by contributions from all three business lines as well as the addition of Vital Signs products to the company’s Specialty Disposables portfolio. Organic growth at this segment was driven by continued strength in the company’s clinically differentiated product lines.
CareFusion delivered strong performance in international markets, with double-digit revenue growth in Europe, Asia, Canada and Latin America, led by infusion capital sales, clinically differentiated products and contributions from the Vital Signs acquisition.
Adjusted gross margin fell 90 basis points (bps) year over year to 50% owing to unfavorable product mix associated with the acquisitions of Vital Signs and installation costs for capital equipment. The decline was partly offset by gross margin improvements in the Infusion Systems business line.
Adjusted operating expenses increased 7.3% year over year to $309 million primarily on the back of higher selling, general and administrative (SG&A) expenses related to the Vital Signs acquisition and an increase in the accrual for incentive compensation.
However, adjusted operating margin expanded 180 bps on a year-over-year basis to 21.4%.
As of Dec 31, 2014, CareFusion had cash and cash equivalents of $1.8 billion, higher than $1.7 billion as of Sep 30, 2014. Meanwhile, total debt (including current portion) remained flat at $2 billion.
In the first six months of fiscal 2015, cash flow from operating activities totaled $206 million.
Our Take
We are impressed with CareFusion’s earnings and revenue beat, both of which increased on a year-over-year basis as well. The company continues to demonstrate strength across its Medical Systems and Procedural Solutions segments.
During the quarter, CareFusion executed contracts for its Pyxis dispensing technologies and Alaris infusion systems which should drive growth in the Medical Systems segment, in our view.
Moreover, we expect CareFusion to realize major synergies from the proposed merger with Becton, Dickinson. The merger has the potential to enhance the combined entity’s geographical reach and also drive international sales of CareFusion.
However, we note that CareFusion apprehends margin compression owing to the unfavorable product mix and lower margin acquisition of Vital Signs. The company also faces intense competition from other larger medical devices companies which remains a major headwind.
Currently, CareFusion carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical products industry include Abaxis (ABAX) and ICU Medical (ICUI). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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