Hill-Rom Holdings, Inc.HRC reported first-quarter fiscal 2016 adjusted earnings per share (EPS) of 68 cents, up 38.8% from the year-ago quarter. Adjusted EPS also surpassed the Zacks Consensus Estimate by 11.5% as well as the company's expectation of 60-62 cents.
A significant improvement in Hill-Rom's first quarter adjusted operating income, driven by the addition of the higher margin Welch Allyn business; a great start with the company's cost synergy program and continued focus on leveraging its cost structure cumulatively drove the year-over-year earnings improvement.
Including one-time adjustments, Hill-Rom's reported net income in the first quarter was $4.8 million or 7 cents per share, reflecting a year-over-year decline of 60.3% or 66.7%, respectively.
Revenues in the fiscal first quarter increased 42.2% year over year to $661.2 million (up 47% at Constant Exchange Rate or CER) and comfortably exceeded the Zacks Consensus Estimate of $659 million. The upside was primarily driven by strong growth in North America and the Welch Allyn acquisition.
Excluding the benefit of the acquisitions, the company reported 3% growth at CER, driven primarily by continued double-digit growth in North America. Domestic revenues jumped 56% to $443 million while revenues outside the U.S. surged 34% at CER to $218 million.
In the first quarter, North America revenues increased 11% year over year to $249 million. While North America capital sales rose 11% at CER, rental revenues improved 12% year over year. Record capital order growth of 25% drove capital sales growth while incremental volume as well as improved margins boosted rental growth.
The Surgical and Respiratory Care segment dropped 5% (flat at CER) year over year to $121 million. The flat revenue outcome was due to growth at Aspen and continued growth in the U.S. Trumpf business being offset by declines in Latin America and the Middle East.
Hill-Rom's International business dropped 17% (down 9% at CER) year over year to $94 million. While Hill-Rom continued to generate strong double-digit growth in the Asia Pacific region, significant headwinds in Latin America and the Middle East drove lower-than-expected results.
Welch Allyn business generated revenues of $198 million for the quarter, which, on a pro forma basis grew 7% at CER, driven primarily by strong sales in the U.S. where pro forma growth was 11% .
Reported gross margin in the first quarter was 44%, up 100 basis points (bps) year over year despite a 40% increase in total cost of revenue. Adjusted gross margin grew 280 bps to 47.1%, on account of the Welch Allyn addition and its accretive gross margin profile. Year-over-year adjusted capital gross margin increased 400 bps to 46.5%, driven by the addition of Welch Allyn and a favorable geographic mix. Rental gross margin however dropped 60 bps to 50.7%.
Adjusted operating margin also improved 430 bps to 13.2% owing to a higher gross margin and SG&A leverage, offset slightly by increased R&D spending as a percentage of sales. On the other hand, selling and administrative expenses increased 54.1%, while 42.6% in research and development expenses.
Hill-Rom has retained its fiscal 2016 revenue guidance. The company continues to expect revenue in the range of $2.66-$2.70 billion leading to low-to-mid single-digit organic growth at CER and 3-5% growth from Welch Allyn at CER. However, negative currency impact on revenues is expected to be 2-3% compared to the earlier projected range of 1-2% for the period. The current Zacks Consensus Estimate for revenues is pegged at $2.69 billion.
However, the company has raised its fiscal 2016 adjusted earnings per share expectation to the range of $3.24-$3.30, up from the prior guided $3.08-$3.14. The current Zacks Consensus Estimate is pegged at $2.97.
Hill-Rom has also provided its earnings and revenue projection for the second quarter of fiscal 2016. The company expects reported revenues between $645-$655 million implying low-to-mid single-digit organic growth at CER and approximately 1-2% of negative currency impact. Second quarter adjusted earnings per share are projected within 68-70 cents. The current Zacks Consensus Estimate for revenues and EPS are pegged at $662 million and 61 cents respectively.
Hill-Rom ended first-quarter fiscal 2016 on a promising note, outshining the Zacks Consensus Estimate on both the top and bottom-line front. The company is duly reaping the benefits of the Welch Allyn acquisition as is evident from this business' contribution to revenues as well as gross margin growth in the reported quarter. The company's raised EPS guidance for fiscal 2016 further bolsters our confidence in the stock.
However, Hill-Rom's International business continues to be challenging, primarily on account of weaknesses in the Middle East and Latin America. The company has reduced its full year revenue expectations for its International segment citing no near-term respite from such weaknesses. The flat results in the surgical business also disappoint us. However, management remains optimistic about Hill-Rom's ability to accelerate growth in its surgical franchise by leveraging its overall channel strength and increasing investments in innovation.
We are encouraged to note that the mix of strong revenues at Welch Allyn and Hill-Rom's North America PSS business, together with weaker performance in its lower margin International segment, raised the company's overall margins. The company's recent achievements in cost synergy savings also buoy our optimism regarding the stock.
The stock currently carries a Zacks Rank #3 (Hold).
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