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Hill-Rom (HRC) Q2 Earnings Beat, Revenue Lag Estimates

Hill-Rom Holdings, Inc. HRC reported second-quarter fiscal 2016 adjusted earnings per share (EPS) of 71 cents, up 10.9% from the year-ago quarter. Adjusted EPS also beat the Zacks Consensus Estimate by a penny as well as the company’s expectation of 68–70 cents.

A double-digit improvement in Hill-Rom’s second-quarter adjusted operating income, revenues and a significant growth in adjusted operating margin cumulatively drove the year-over-year earnings improvement.

Including one-time adjustments, Hill-Rom’s net income in the second quarter was $22.3 million or 33 cents per share, reflecting a year-over-year decline of 14.6% or 26.7%, respectively.

Revenue Details

Revenues in the fiscal second quarter increased 33% year over year to $632.6 million (up 35% at Constant Exchange Rate or CER) but missed the Zacks Consensus Estimate of $651 million. The upside was primarily driven by strong growth in North America and the Welch Allyn acquisition.

Excluding the benefits from the Welch Allyn acquisition, the company’s revenue growth was flat in the reported quarter, as strong growth in Hill-Rom’s U.S. business was offset by sales decline in overseas. Including Welch Allyn, domestic revenues jumped 48% to $438 million while revenues outside the U.S. surged 13% at CER to $195 million.

Reportable Segments

In the second quarter, North America revenues increased 9% year over year to $270 million. While North America product sales and service rose 11% at CER to $193 million, rental revenues improved 6% year over year to $76 million. Moreover, product sales and service orders grew 18% while backlog at this segment increased 24%. . 

Revenues at the Front Line Care segment, which includes both Welch Allyn and Respiratory Care, grossed $185 million. Revenues improved 7% at Welch Allyn, driven by 11% sales growth in the U.S.

The Surgical Solutions segment revenues dropped 4% (down 3% at CER) to $95 million. Within this segment, U.S. sales growth of 8% was offset by international decline of 21%, with particular weakness observed in the Middle East and Latin America.

Hill-Rom’s International business sales deteriorated 22% (down 21% at CER) year over year to $82 million. Similar to the first-quarter results, significant headwinds in Latin America and the Middle East primarily led to the sales decline.


Reported gross margin in the second quarter was 48.1%, up 300 basis points (bps) year over year despite a 26% increase in total cost of revenue. Adjusted gross margin grew 250 bps to 47.9%, on account of the Welch Allyn addition as well as organic improvements. Year-over-year product sales and service gross margin increased 360 bps to 47%, driven by the addition of Welch Allyn, favorable sales mix and improved operational efficiencies. Rental gross margin however dropped 40 bps to 52.5%.

Adjusted operating margin improved 230 bps to 13.9% owing to higher gross margin and SG&A leverage. On the other hand, selling and administrative expenses increased 54.5%, while research and development expenses rose 39.7%.


Hill-Rom updated its fiscal 2016 revenue guidance. The company now expects revenue in the range of $2.64–$2.67 billion, compared to the earlier guidance range of $2.66–$2.70 billion; hinting at low-to-mid single-digit organic growth at CER on account of expected overseas sales decline. However, negative currency impact on revenues is still expected to be 2–3% for the fiscal. The current Zacks Consensus Estimate for revenues is pegged at $2.66 billion.

On the bottom-line front, the company revised its fiscal 2016 adjusted earnings per share expectation to the range of $3.26–$3.30, compared with the prior guidance of $3.24–$3.30. The current Zacks Consensus Estimate is pegged at $3.28.

Hill-Rom also provided its earnings and revenue projection for the third quarter of fiscal 2016. The company expects reported revenues between $640–$650 million, implying low-single-digit organic growth at CER and approximately 1% of negative currency impact. Third-quarter adjusted earnings per share are projected within 75–77 cents. The current Zacks Consensus Estimate for revenues and EPS are pegged at $648 million and 76 cents, respectively.

Our Take

Hill-Rom ended second-quarter fiscal 2016 on a mixed note with the bottom line surpassing the Zacks Consensus Estimate and top line missing the mark. On the brighter side, 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 double-digit revenue growth in the emerging markets of Asia-Pacific also encourages us.

The company’s narrowed guidance for fiscal 2016 keeps us on the sidelines. Moreover, Hill-Rom’s International business continues to be challenging, primarily on account of weaknesses in the Middle East and Latin America. The company has slashed its full-year revenue expectations for its international segment citing no near-term respite from such weaknesses. Moreover, the ongoing capital crunch in the Middle East, Brazil and Mexico largely hit the international surgical business, which is not expected to improve anytime soon.  

The company currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked medical stocks are Baxter International Inc. BAX, SurModics, Inc. SRDX and Boston Scientific Corporation BSX. While Baxter and SurModics sport a Zacks Rank #1 (Strong Buy), Boston Scientific carries a Zacks Rank #2 (Buy).

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