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Hill-Rom Holdings, Inc. (HRC - Free Report) reported third-quarter fiscal 2017 adjusted earnings per share (EPS) of 91 cents, up 12.3% from the year-ago quarter. Adjusted earnings surpassed the Zacks Consensus Estimate by a penny and were at the high end of the company’s projected range of 89–91cents.

Including one-time adjustments, Hill-Rom’s net income in the fiscal third quarter was $6.0 million or 9 cents per share compared with $45.3 million or 68 cents, respectively.

Revenue Details

Revenues in the third quarter of fiscal 2017 increased 5.1% year over year to $689.1 million (up 6% at CER). However, it missed the Zacks Consensus Estimate of $696 million. Revenue growth was driven by the momentum in core business, the acquisition of Mortara and value from newly-introduced products. In line with this, the company unveiled Hill-Rom Envella Air Fluidized Therapy Bed and Hill-Rom 900 Accella bed system. Also, the company has entered the digital health space through the introduction of Monarch Airway Clearance System.

Geographically, U.S. revenues grew 4% to $471 million while revenues outside the U.S. increased 7% (up 10% CER) to $218 million. Core revenue growth was 4% at CER, in line with the company’s guided range of 4–5%.

Hill-Rom Holdings Inc Price, Consensus and EPS Surprise

 

Hill-Rom Holdings Inc Price, Consensus and EPS Surprise | Hill-Rom Holdings Inc Quote

Reportable Segments

In the fiscal third quarter, Patient Support Systems revenues decreased 1.7% year over year (down 1.1% at CER) to $354.7 million. The segment’s domestic revenues declined 1.4% due to the impact of the WatchChild and Architectural Products divestitures and lower rental revenues. U.S. core revenues increased 2% excluding divestitures while product revenues increased 4%. This was partially offset by a decline in rental revenues. Product revenues include bed and patient handling systems and the clinical workflow solutions business. International revenues increased 2% on a core basis, driven by improving trends in the Middle East, Latin America and Canada.

Revenues at the Front Line Care segment, which includes both Welch Allyn, Respiratory Care and Mortara, increased 18% to $227 million (increased 19% at CER).The performance was driven by gains in new products, double-digit growth in vital signs monitoring and benefits from leveraging on Hill-Rom's commercial infrastructure in international markets

The Surgical Solutions segment revenues increased 6% (up 7% at CER) to $107 million. The upside was backed by international growth of 15%, gains from products like the Integrated Table Motion system, iLED7 and new TS 3000 Mobile Operating Table as well as growth from surgical positioning equipment and Aspen medical.

Margins

Reported gross margin in the fiscal third quarter was 48%, down 10 basis points (bps) year over year on account of a 5.3% increase in total cost of revenue. Adjusted gross margin grew 20 bps to 48.3% on the back of the company’s consistent initiative with portfolio diversification, on benefits from cost and sourcing efficiencies, new product launches and the accretive gains from Mortara. Adjusted operating margin improved 90 bps to 16.1% owing to SG&A leverage.

Outlook

Hill-Rom provided its fourth-quarter 2017 financial outlook and updated its fiscal 2017 adjusted earnings per diluted share and cash flow guidance.

Considering Mortara revenues of approximately $30 million, Hill-Rom expects revenue growth of 3.0–4.0% on a reported basis and at CER in the fiscal fourth quarter. Excluding Mortara and the impact of completed or potential divestitures from both the periods, Hill-Rom's core revenues are expected to rise around 3% at CER. Hill-Rom also expects adjusted EPS per share in the range of $1.26 to $1.30. The Zacks Consensus Estimate for fiscal fourth quarter earnings per share is pegged at $1.27.

For the full year, Hill-Rom expects revenue growth of around 3% (earlier it was 3.5% to 4%) on a reported basis (or approximately 4% at CER). Excluding Mortara and the impact of completed and potential divestitures (with 2016 annual revenues of approximately $75 million) from both the periods, Hill-Rom's core revenues are expected to increase around 3% (earlier it was 3.5% to 4%) at CER.  In addition, the company expects adjusted earnings per share of $3.80–$3.84 (earlier $3.82–$3.88) and maintains operating cash flow guidance at the range of $330–$340 million. The Zacks Consensus Estimate for full-year earnings per share is pegged at $3.84. The Zacks Consensus Estimate for full-year revenues stands at $2.76 billion.

Our Take

Hill-Rom exited the third quarter of fiscal 2017 on a mixed note with earnings exceeding the Zacks Consensus Estimate and revenues missing the same. The company saw a solid year-over-year increase in revenues on strong international growth. Hill-Rom is currently aiming to gain traction in the untapped international market on successful execution, courtesy of its efficient international team and organizational realignment. The company is putting efforts in product innovation through research and development. Also, its launches slated for the fourth quarter are encouraging. With regard to this, the commercial launch of its Centrella Med-Surg platform is worth a mention.

However, decline in revenues at the Patient Support Systems segment is quite disappointing. Also, foreign exchange remains a headwind.

Zacks Rank & Key Picks

Hill-Rom currently has a Zacks Rank #3 (Hold). A few better-ranked medical stocks are Mesa Laboratories, Inc. (MLAB - Free Report) , INSYS Therapeutics, Inc. (INSY - Free Report) and Align Technology, Inc. (ALGN - Free Report) . Notably, INSYS Therapeutics and Align Technology sport a Zacks Rank #1 (Strong Buy), while Mesa Laboratories carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

INSYS Therapeutics has a long-term expected earnings growth rate of 20%. The stock has gained around 4.7% over the last three months.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has added roughly 24.7% over the last three months.

Mesa Laboratories has a positive earnings surprise of 2.8% for the last four quarters. The stock has added roughly 19.4% over the last six months.

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