Hill-Rom Holdings, Inc. HRC reported better-than-expected third-quarter fiscal 2015 adjusted earnings per share (EPS) of 62 cents, up 5.1% from the year-ago quarter. Adjusted EPS also surpassed the Zacks Consensus Estimate by a penny.
Solid revenue growth in the quarter was primarily responsible for the year-over-year earnings improvement. However, incremental incentive compensation expense adversely affected adjusted earnings by 8 cents. Excluding this expense, adjusted EPS grew 22% year over year.
Including one-time items, the company reported third-quarter fiscal 2015 net EPS of 33 cents, down 26.7% from the year-ago equivalent of 45 cents.
Revenues increased 19.3% year over year to $474.5 million (up 26.2% at Constant Exchange Rate or CER) and steered ahead of the Zacks Consensus Estimate of $453 million. The upside was driven by solid contribution from the Trumpf Medical acquisition and strong capital revenue growth in North America. Excluding the benefit of Trumpf, the company reported 11% growth at CER, driven primarily by 25% growth in the North America capital business.
Domestic revenues jumped 21% to $308 million while revenues outside the U.S. surged 36% to $167 million, both gaining from the Trumpf acquisition.
Reportable Segments
North America revenues increased 20% year over year at CER to $252.4 million. While North America capital sales increased 25% at CER, rental revenues improved 9% (up 15% excluding the impact of the previously exited third party reimbursed home care rental business).
The Surgical and Respiratory Care segment grew 94% (up 3% organically) year over year at CER to $119.7 million. Hill-Rom’s International business remained flat year over year at CER at $102 million. Overall, capital revenue was flat while rental revenues declined 2% at CER in this segment.
Margin
Reported gross margin in the third quarter was 44.2%, down 290 basis points (bps) year over year with a 25.9% increase in total cost of revenue. Adjusted gross margin was 44.7%, down 210 bps year over year. Excluding Trumpf, adjusted gross margin declined approximately 130 bps.
Adjusted operating margin, on the other hand, declined 100 bps to 11.5% on account of an increase of 13.3% in adjusted selling and administrative expenses and 32.4% in research and development expenses.
Outlook
Hill-Rom has revised its fiscal 2015 guidance. The company now expects reported revenue growth in the range of 12–13%, up from the previous range of 10–11%. This revised projection takes into consideration mid single-digit organic growth at CER (compared to low-to-mid single-digit growth previously) and negative currency impact of approximately 6% (same as earlier guidance).
Additionally, fiscal 2015 adjusted earnings per share are now expected in the range of $2.51–$2.54, narrower compared to the earlier estimated range of $2.50–$2.54.
Hill-Rom also provided its earnings and revenue estimation for the fourth quarter of fiscal 2015. The company expects reported revenue growth of 1–3% taking into consideration low single-digit organic growth at CER and approximately 5% of negative currency impact. Fourth quarter adjusted earnings per share are projected within 76–79 cents.
Our Take
Hill-Rom ended third-quarter fiscal 2015 on a promising note, outshining the Zacks Consensus Estimate on both the top and bottom-line front. The company’s raised revenue guidance for fiscal 2015 should also bolster investors’ confidence in the stock.
However, the gloomy margin scenario at Hill-Rom is a tad disappointing, and reflects the high cost burden the company is suffering primarily owing to its Trumpf acquisition. A lower pricing environment and higher depreciation expense from certain rental investments are also responsible for the margin deterioration. Nevertheless, we are relieved to note that the company is trying all means to considerably drive margin across its portfolio in the near term.
Per management, the Welch Allyn acquisition (expected to close by Sep 2015), will be accretive to Hill-Rom’s margin profile by 200 bps. Despite tepid business overseas, the company is positive on its growth prospects in the International segment in fiscal 2016 and beyond, based on its ongoing restructuring initiatives in Europe and its diversified portfolio therein. This buoys our optimism regarding the stock.
The stock currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some top-ranked stocks in the broader medical sector are Abaxis, Inc. ABAX, Hospira Inc. HSP and NuVasive, Inc. NUVA. All the three stocks carry a Zacks Rank #1 (Strong Buy).
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