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CareFusion: Flat Earnings, Maintained View

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CareFusion Corporation posted flat adjusted earnings per share of 54 cents for the second quarter of fiscal 2014 compared with the same quarter a year ago and were in line with the Zacks Consensus Estimate. However, adjusted net earnings fell 4.1% to $116 million from $121 million a year ago.

On a reported basis, earnings per share declined 6.25% or 45 cents per share from 48 cents and net earnings slipped 10.2% to $97 million from $108 million in the second quarter of fiscal 2013.

Revenues in the quarter rose 1.4% (both in reported and constant currency) to $922 million, topping the Zacks Consensus Estimate of $912 million. The increase was driven by rise in Procedural Solutions revenues.

Adjusted operating expenses inched up 2.1% to $288 million from $282 million a year ago, due to the medical device excise tax. Consequently, adjusted operating income fell 4.2% to $181 million from $189 million a year ago while adjusted operating margin ebbed 120 basis points (bps) to 19.6% from 20.8% a year ago.

Segment Results

Revenues from Medical Systems slid 2.5% to $587 million as strong performance in the infusion systems business was offset by weakness in the respiratory technologies and the impact of a product line transition in dispensing technologies businesses. Segment profit ebbed 11.4% to $109 million from $123 million in the prior-year quarter as revenue mix negatively affected segment margins. Adjusted segment profit dipped 7.5% to $124 million from $134 million in the year-ago quarter.

Revenues from Procedural Solutions rose 9.1% $335 million, driven by double-digit revenue increases in both the infection prevention and specialty disposables businesses. However, segment profit fell 10.4% to $43 million. However, on an adjusted basis, segment profit grew 3.6% to $57 million from $55 million in the prior-year quarter.

Share Repurchase

CareFusion’s board of directors approved a two-year $750 million share repurchase program, after completing their previous $500 million authorization in June last year. Under the present authorization, the company repurchased 4.8 million shares for $186 million in the fiscal second quarter, bringing total repurchase of 9.8 million for $375 million for the first half of fiscal 2014.

Financial Position

CareFusion had cash and cash equivalents of $1.3 billion as of Dec 31, 2013, down marginally from $1.8 billion as of Jun 30, 2013. Total debt was almost flat at $1.46 billion as of Dec 31, 2013 compared with $1.45 million as of Jun 30, 2013. As a result, debt to capitalization ratio rose marginally by 20 bps to 21.4% from 21.2% as of Jun 30, 2013.

In the first half of fiscal 2014, cash flow from operating activities rose 15.6% to $297.0 million from $257.0 million in the same period of 2012. Capital expenditure declined 7.5% to $37 million from $40 million in the same period of fiscal 2013.

Fiscal 2014 Guidance Reiterated

CareFusion reiterated its revenues and earnings guidance for fiscal 2014. The company expects revenues to grow between 4 and 7% and organic revenues to rise between 1 and 4%, both on a constant currency basis, for the year.

CareFusion expects revenue growth in the range of 1 to 4% in the Medical Systems segment driven by strong performance of infusion systems business, and 2 to 4% (13-15% including acquisitions) in the Procedural Solutions segment based on strong growth in all businesses.

Adjusted earnings are also expected to lie in the previously guided range of $2.30 to $2.40 per share. The current Zacks Consensus Estimate of $2.34 lies within the guided range.

Our Take

CareFusion is a global corporation serving the health care industry with products and services that help hospitals measurably improve the safety and quality of care. Its products are considered among top-spending priorities of healthcare providers given the pressing need for implementing infusion or dispensing technologies.

However, the transition of product line to Pyxis ES platform is hampering CareFusions’ Medical Systems businesses. The company continues to see margin compression due to the medical device tax and unfavorable revenue mix.

Currently, CareFusion retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry include NuVasive, Inc. (NUVA - Free Report) , Baxter International Inc. (BAX - Free Report) , and Covidien plc . NuVasive carries a Zacks Rank #1 (Strong Buy), while both Baxter and Covidien carry a Zacks Rank #2 (Buy).

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