Hill-Rom (HRC) Q1 Earnings Meet, Revenues Lag Estimates
Zacks Equity Research
Updated
Hill-Rom Holdings, Inc. (HRC) reported first-quarter fiscal 2017 adjusted earnings per share (EPS) of 75 cents, up 10.3% from the year-ago quarter. Though adjusted earnings were in line with the Zacks Consensus Estimate, the figure marked the lower end of the company’s projected range of 75–77 cents.
In spite of a sluggish top-line performance, continued gross margin expansion and disciplined cost management cumulatively drove the year-over-year earnings improvement.
Including one-time adjustments, Hill-Rom’s net income in the fiscal first quarter was $23.5 million or 36 cents per share compared with the year-ago net income of $4.3 million or 7 cents.
Hill-Rom Holdings Inc Price, Consensus and EPS Surprise
Revenues in the first quarter of fiscal 2017 decreased 3.6% year over year to $637.4 million (down 2.7% at Constant Exchange Rate or CER). It also missed the Zacks Consensus Estimate of $651 million. The downside can be attributed to a 4.1% decline in product sales and service revenues to $541.9 million, marginally offset by flat year-over-year rental revenues of $95.5 million.
Geographically, U.S. revenues grew 1% to $448 million while revenues outside the U.S. declined 12.9% (down 10.3%) to $190 million.
Revenues were affected by the unfavorable timing of certain international and U.S. distributor orders and lower revenue from businesses that the company recently divested or plans to sell.
Reportable Segments
In the fiscal first quarter, North America Patient Support Systems revenues dropped 1.9% year over year (down 1.1% at CER) to $335.2 million. However, the segment’s domestic revenues of $248 million rose 3%, reflecting stable customer demand. Despite a difficult comparison, the improvement in revenues was driven by a large customer order from last year and lower revenues from divested businesses.
Revenues at the Front Line Care segment, which includes both Welch Allyn and Respiratory Care, declined 8.4% to $202.8 million (down 8% at CER). The performance was impacted by the timing of certain international and U.S. distributor orders.
On a positive note, the Surgical Solutions segment revenues inched up 1.1% (up 3.2% at CER) to $100.4 million. Growth was driven by double-digit rise in key markets such as Europe and the U.S., where Hill-Rom continues to gain traction with its Integrated Table Motion and surgical positioning products driving robust revenue growth.
Margins
Reported gross margin in the fiscal first quarter was 47.5%, up 351 basis points (bps) year over year on account of a 9.6% decrease in total cost of revenue. Adjusted gross margin grew 40 bps to 47.5%. Adjusted operating margin improved 140 bps to 14.6% owing to higher gross margin and disciplined cost management.
Outlook
Hill-Rom provided its second quarter 2017 financial outlook and reaffirmed its 2017 full-year adjusted earnings per diluted share and cash flow guidance.
Not considering any impact of the impending Mortara Instrument acquisition, Hill-Rom expects revenue growth of 2–3% on a reported basis (or 3–4% at CER) in the fiscal second quarter. Excluding the impact of completed or potential divestitures from both the periods, Hill-Rom's core revenues are expected to increase 4–5% at CER. Hill-Rom also expects adjusted EPS in the range of 77 cents to 79 cents.
For the full year, Hill-Rom still expects revenue growth of 1% on a reported basis (or up 2% at CER). Excluding the impact of completed and potential divestitures (with 2016 annual revenue of approximately $75 million) from both the periods, Hill-Rom's core revenues are expected to increase 3–4% at CER. In addition, the company continues to expect adjusted earnings of $3.74–$3.82 per share and operating cash flowof $330–$340 million.
Our Take
Hill-Rom posted unimpressive results for the first quarter of fiscal 2017. The company’s outcome on a year-over-year basis failed to make a mark as well. Revenue growth was affected by the timing of certain international and U.S. distributor orders and lower revenue from businesses the company recent divested. The company also posted weak numbers across most of its segments.
On a positive note, we are impressed with the company’s encouraging top-and-bottom-line guidance for the second quarter of fiscal 2017. Geographically, the company posted strong growth in the U.S. Hill-Rom has also delivered strong gross margin this quarter.
Zacks Rank & Other Key Picks
Hill-Rom currently has a Zacks Rank #2 (Buy). Other favorablyranked medical stocks are OraSure Technologies, Inc. OSUR, Cardiovascular Systems CSII and Neogen Corp. NEOG. OraSure sports a Zacks Rank 1 (Strong Buy) while Cardiovascular Systems carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
OraSure Technologies gained 58.3% in the last one year in comparison to the S&P 500’s 18.3%. The company has a stellar four-quarter average earnings surprise of over 100%.
Cardiovascular Systems surged over 100% in the last one year in comparison to the S&P 500. It has a four-quarter average earnings surprise of 67.8%.
Neogen gained 24.6% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth of 16.7% for the next five years compared to the industry average of 15.2%.
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