Hill-Rom Q2 Earnings Beat Market Estimates

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May 09, 2015

Hill-Rom Holdings Inc. (HRC, Financial) recently revealed its second quarter results for fiscal 2015 with both revenues and earnings topping the consensus estimates. The company reported 6.6% year-over-year growth in adjusted EPS to $0.64 a share, beating the consensus estimate of $0.60 a share. Moreover, the company’s net EPS, including one-time items, also climbed significantly from a loss of $0.06 a share during the prior-year quarter to a profit of $0.45 a share in Q2 2015. Following the results, Hill-Rom shares climbed to an intra-day high of $50.69 before sliding to a low of $49.83 in after-hours trading owing primarily to a lower-than-expected guidance for fiscal 2015.

Trumpf Medical Acquisition Spurs Revenues

Hill-Rom saw robust 14% year-over-year (21% at Constant Exchange Rate) growth in revenues to $475 million for Q2 2015, beating the consensus estimate of $472 million. The company attributed its performance to solid growth of capital revenues from North America as well as the strong contribution from the recently acquired Trumpf Medical. However, Hill-Rom saw a decline in gross margins for the quarter. The company logged gross margin of 45.1% for the second quarter, down 369 basis points compared to the prior-year quarter, while adjusted gross margin stood at 45.4%, down 170 bps year-over-year.

While revenues from the domestic market climbed 13% year-over-year to $297 million, international revenues grew a whopping 36% to $178 million, with both segments benefiting from the acquisition of Trumpf. On a constant currency basis, revenues from North America climbed 10.8% year-over-year to $246.9 million. While capital sales in the region grew 16% year-over-year, rental revenues slipped 2% compared to the year-ago quarter. Concurrently, Hill-Rom’s Surgical and Respiratory Care division saw a solid 98% year-over-year growth at constant currency to $120 million on the back of organic growth as well as the acquisition of Trumpf Medical. However, the division saw a mere 1% year-over-year organic growth owing to tougher comparison to new product launches during the prior-year quarter, particularly the Allen Advance Spine Table and MetaNeb.

On the other hand, the company’s international business declined 0.1% year-over-year on a constant currency basis to $107.9 million, with strength in Europe and Asia Pacific being offset by weakness in South America and the Middle East. While overall rental revenues grew 2% at constant currency in the segment, capital revenue remained flat compared to the prior-year quarter.

Fiscal 2015 Outlook

Following the results, Hill-Rom, which competes with businesses such as Stryker Corporation (SYK, Financial), Getinge AB and Kinetic Concepts Inc. (KCI, Financial) in the Medical Instruments and Supplies market, also announced an update to its guidance for Q3 2015 and the full fiscal 2015. The company expects revenues to grow at 13%-15% year-over-year during the third quarter, with negative foreign currency headwinds chopping off at least 8% from overall revenues. However, adjusted EPS for the quarter is projected to be in the $0.58-$0.61 a share range. Consensus estimates foresee EPS of $60 a share on revenues of around $461 million for Hill-Rom for Q3 2015.

However, Hill-Rom lowered its revenue expectation for the full-fiscal 2015 from the earlier expectation of 11%-12% growth in revenues to the new range of 10%-11%. The revised guidance takes into consideration an expected 6% negative impact of foreign currency headwinds compared to the earlier expectation of a 4% negative impact. However, adjusted EPS for the full fiscal was revised to $2.50-$2.54 a share, up from the previous guidance of $2.44-$2.50 a share. Consensus estimates peg Hill-Rom’s full fiscal adjusted EPS at $2.48 a share on revenues of $1.88 billion.

Final Thoughts

Hill-Rom reported strong second quarter results for fiscal 2015, with both revenues and estimates surpassing the consensus estimate while also growing significantly on a year-over-year basis. The company saw growth in both the domestic and international markets, benefiting from the acquisition of Trumpf Medical. However, negative foreign currency headwinds ate into a considerable chunk of Hill-Rom’s Q2 revenues. Further, after six consecutive quarters of over 5% organic growth at its Surgical and Respiratory Care division, the company’s 1% growth in Q2 2015 was a letdown. At the same time, investors will also be disappointed by the lower-than-expected guidance for fiscal 2015, although the guidance for Q3 is in line with expectations. Although experts are looking at an average annual earnings growth rate of 12.49% for Hill-Rom over the next five years, the Hill-Rom stock currently carries a ‘hold’ guidance. Investors would do well to wait out the next quarter to see how the company delivers on its guidance.