Hill-Rom (HRC) Beats Earnings & Revenue Estimates in Q2
Zacks Equity Research
Updated
Hill-Rom Holdings, Inc. HRC reported second-quarter fiscal 2017 adjusted earnings per share (EPS) of 88 cents, up 23.9% from the year-ago quarter. Not only did adjusted earnings surpass the Zacks Consensus Estimate of 79 cents, the figure also exceeded the company’s projected range of 77-79 cents.
Along with a strong top-line beat, continued gross margin expansion, disciplined cost management and a tax benefit of 6 cents per share cumulatively drove the year-over-year earnings improvement.
Including one-time adjustments, Hill-Rom’s net income in the fiscal second quarter was $34.4 million or 51 cents per share compared with the year-ago net income of $22.3 million or 33 cents.
Revenue Details
Revenues in the second quarter of fiscal 2017 increased 7.3% year over year to $678.9 million (increased 8.0% at Constant Exchange Rate or CER). It also outpaced the Zacks Consensus Estimate of $654 million. Revenue growth was driven by the momentum in the company’s core business, the acquisition of Mortara and value from newly-introduced products like Connex, Spot Monitor, Spot Vision Screener, RetinaVue and Integrated Table Motion. The improved international performance in Europe, the Middle East and Latin America also contributed to revenue growth in the second quarter.
Hill-Rom Holdings Inc Price, Consensus and EPS Surprise
Geographically, U.S. revenues grew 6% to $464 million while revenues outside the U.S. increased 11.0% (up 14% CER%) to $215 million. Core revenue growth was 7% at CER, exceeding the company’s guided range of 4-5%.
Reportable Segments
In the fiscal second quarter, Patient Support Systems revenues increased 3% year over year (up 3.8% at CER) to $362.9 million. However, the segment’s domestic revenues rose 1.8%, reflecting 4% growth in U.S. core revenues on mid-single digit growth in bed systems, all of which was partially offset by a decline in rental revenues. This segment saw international growth of 9%, as barring Asia Pacific the company saw strong growth across all other international regions.
Revenues at the Front Line Care segment, which includes both Welch Allyn and Respiratory Care, increased 13.9% to $211 million (increased 14.5% at CER). The performance was driven by gains in the thermometry business and vital signs portfolio, international growth and introduction of new products.
The Surgical Solutions segment revenues increased 10.4% (up 12.4% at CER) to $105 million. Growth was backed by continued strength of the surgical positioning products in the Integrated Table Motion system. Growth was also driven by 13% revenue rise in domestic market. International revenues were up 12%, driven by double-digit growth in Europe, Latin America and the Middle East.
Margins
Reported gross margin in the fiscal second quarter was 47.8%, down 30 basis points (bps) year over year on account of a 7.9% increase in total cost of revenue. Adjusted gross margin grew 10 bps to 48.0% on the back of the company’s consistent initiative with portfolio diversification and on benefits from cost and sourcing efficiencies. Adjusted operating margin improved 110 bps to 15.0% owing to higher gross margin and SG&A leverage.
Outlook
Hill-Rom provided its third-quarter 2017 financial outlook and raised its fiscal 2017 adjusted earnings per diluted share and cash flow guidance.
Considering Mortara revenues of approximately $30 million, Hill-Rom expects revenue growth of 5.0-6.0% on a reported basis (or 6.0-7.0% at CER) in the fiscal third quarter. Excluding Mortara and the impact of completed or potential divestitures from both the periods, Hill-Rom's core revenues are expected to increase 4.0-5.0% at CER. Hill-Rom also expects adjusted EPS in the range of 89 cents to 91 cents.
For the full year, Hill-Rom still expects revenue growth of 3.5–4.0% on a reported basis (or up 4.5–5.0% at CER). Excluding Mortara and the impact of completed and potential divestitures (with 2016 annual revenues of approximately $75 million) from both the periods, Hill-Rom's core revenues are still expected to increase 3.5–4.0% at CER. In addition, the company expects adjusted earnings of $3.82–$3.88 per share (earlier $3.74-$3.82) and maintains operating cash flow guidance at the previous range of $330–$340 million.
Our Take
Hill-Rom posted impressive results in the second quarter of fiscal 2017, with earnings and revenues exceeding the Zacks Consensus Estimate. The company saw a solid year-over-year increase in revenues on strong international growth.
Hill-Rom is currently aiming to gain traction in the untapped international market on successful execution, courtesy of its efficient international team and organizational realignment. The performance has also improved across all the three segments.
However, the company has faced difficulties in the Asia-Pacific region of late. Also, foreign exchange remains a headwind.
Zacks Rank & Other Key Picks
Hill-Rom currently has a Zacks Rank #2 (Buy). Other top-ranked medical stocks are Hologic, Inc. HOLX, Heska Corporation HSKA and Progenics Pharmaceuticals, Inc. PGNX. Hologic, Heska and Progenics Pharmaceuticals sport a Zacks Rank 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hologic gained 32.82% in the last one year, in comparison to the S&P 500’s 14.53%. The company has a stellar four-quarter average earnings surprise of over 4.16%.
Heska surged over 263.75% in the last one year, in comparison to the S&P 500. It has a four-quarter average earnings surprise of 291.54%.
Progenics Pharmaceuticals gained 45.14% in the past one year, better than the S&P 500 mark. It has a four-quarter average earnings surprise of 8.45%.
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