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Hill-Rom (HRC) Tops Q4 Earnings, Overseas Hurdles Remain

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Hill-Rom Holdings, Inc. (HRC - Free Report) ended fiscal 2016 on a positive note with fourth-quarter adjusted earnings per share (EPS) of $1.18, up 33.7% from the year-ago quarter. Adjusted earnings also surpassed the Zacks Consensus Estimate by 4.4% as well as the company’s expectation of $1.12–$1.14.

Diversified revenue growth, 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 fourth quarter was $51.7 million or 77 cents per share, as against the year-ago loss of $9.6 million or 16 cents per share.

Adjusted earnings for fiscal 2016 came in at $3.38 per share, up 28% from the year-ago period.

HILL-ROM HLDGS Price, Consensus and EPS Surprise

HILL-ROM HLDGS Price, Consensus and EPS Surprise | HILL-ROM HLDGS Quote

Revenue Details

Revenues in fourth-quarter fiscal 2016 increased 23% year over year to $706 million (up 24% at Constant Exchange Rate or CER) and also exceeded the Zacks Consensus Estimate of $701 million. On a pro forma constant currency basis, revenue growth was 1%, which exhibited the inclusion of Welch Allyn in both the fourth quarters of fiscal 2016 and fiscal 2015. The upside was primarily driven by 28.1% growth in product sales and service revenue, marginally offset by a 2.4% decline in rental revenue.

Geographically, U.S. revenue surged 29% (up 5% on a pro forma basis) to $497 million, while revenues outside the U.S. increased 10% (down 8%) to $209 million owing to the addition of Welch Allyn.

Reportable Segments

In the fiscal fourth quarter, North America Patient Support Systems revenues increased 5% year over year (up 5% at CER) to $290 million. Higher margin platforms, including Clinical Workflow Solutions, services, and patient handling portfolio enhancing diversification, improving revenue visibility through more recurring revenue streams, all contributed to growth in this segment.

Revenues at the Front Line Care segment, which includes both Welch Allyn and Respiratory Care, totaled $212 million, up 6% at pro forma constant currency basis. This performance reflects strong growth in the U.S. across key product areas such as physical assessment and vital signs monitoring as well as from key products like RetinaVue and Spot Vision Screener.

Surgical Solutions segment revenues decreased 6% (down 5% at CER) to $112 million. Weakness witnessed in the Middle East and a very difficult comparison in the year-ago U.S. Surgical business caused this decline.

Hill-Rom’s International business sales declined 12% (down 11% at CER) year over year to $92 million. Similar to the first three quarters' results of this fiscal year, significant macroeconomic headwinds primarily led to the sales decline despite improved performance in the Asia Pacific.

Margin

Reported gross margin in the fiscal fourth quarter was 49.1%, up 438 basis points (bps) year over year despite a 13.3% increase in total cost of revenue. Adjusted gross margin grew 260 bps to 49.2%, driven by an improvement in the organic Hill-Rom business, the addition of Welch Allyn and benefits from cost and sourcing efficiencies. Adjusted operating margin improved 400 bps to 18.6% owing to higher gross margin and SG&A leverage.

Outlook

Hill-Rom provided its fiscal 2017 revenue guidance. The company expects revenue to be in the range of $330−$340 million, reflecting 3% growth (reported and CER).

On the bottom-line front, the company projects fiscal 2017 adjusted EPS in the range of $3.74−$3.82.

Hill-Rom also provided its earnings and revenue projection for first-quarter fiscal 2017. The company expects revenues to be flat on both a reported and constant currency basis. First-quarter adjusted EPS is projected in the band of 75–77 cents.

Our Take

Hill-Rom ended fiscal 2016 on a promising note with its fourth-quarter numbers squarely beating the Zacks Consensus Estimate. The company’s outcome on a year-over-year basis was also impressive. On the profitability front, Hill-Rom delivered the highest gross margin this year. Geographically, the company posted strong growth in both the Asia-Pacific and the U.S.

We also remain impressed with the company’s solid top-and-bottom-line guidance for fiscal 2017.

However, Hill-Rom’s consistent poor performance in the International front keeps us on the sidelines, as it has failed to overcome the challenges prevailing in the Middle East and Latin America.

Zacks Rank & Other Key Picks

Hill-Rom currently carries a Zacks Rank #3 (Hold). Better-ranked medical stocks are GW Pharmaceuticals plc (GWPH - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) . GW Pharmaceuticals and Baxter sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

GW Pharmaceuticals surged 65.8% year to date compared to the S&P 500’s 2.0% over the same period. The company has a four-quarter positive average earnings surprise of 41.6%.

Baxter international rallied 25.1% in the past one year, as against the S&P 500’s 0.7% decline. The company has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 151.3% gain in the past one year, as against the S&P 500’s 0.7% decline. The company has a trailing four-quarter average positive earnings surprise of 28.7%.

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