CareFusion Corporation (CFN) posted a robust 43.6% rise adjusted earnings per share to 79 cents for the fourth quarter of fiscal 2014 ended Jun 30 from 55 cents in the year-ago quarter. With this, earnings per share steered past the Zacks Consensus Estimate by 6 cents. Adjusted net earnings upped 35.5% to $164 million from $121 million in the fourth quarter of fiscal 2013.
For full year 2014, CareFusion's adjusted earnings per share rose 11.3% to $2.36 from $2.12 a year ago and beat the Zacks Consensus Estimate by 5 cents. Adjusted net earnings escalated 5.9% to $503 million from $475 million in fiscal 2013.
Revenues in the quarter rose 24.3% (both in reported and constant currency) to $1,122 million, exceeding the Zacks Consensus Estimate of $1,043 million, thanks to the double-digit growth in revenues in both the company’s reportable segments. Revenues for the fiscal year rose 8.2% to $3,842 million.
Expenses and Margins
Adjusted gross profit swelled 17.8% to $550 million but adjusted gross margin fell 270 basis points (bps) to 49.0% in the quarter from 51.7% in the fiscal 2013-fourth quarter. The fall in gross margin is attributable to lower margin acquisitions of Vital Signs and Sendal, additional resources deployed for installing the Pyxis ES platform and product mix due to higher than expected Infusion capital placements.
Adjusted operating expenses rose 16.9% to $325 million due to higher selling, general and administrative (SG&A) expenses on the back of acquired SG&A related to Vital Signs and incentive compensation plan.
Adjusted operating earnings went up 20.1% to $227 million from $189 million but adjusted operating margin decreased 70 bps to 20.2% due to Infusion capital revenue mix, additional installation resources for product line transition in dispensing and the incentive compensation plan.
For the full fiscal year, adjusted gross profit inched up 3.8% to $1,921 million while adjusted gross margin went down 210 bps to 50.0%. Adjusted operating earnings rose marginally by about 1% to $746 million but adjusted operating margin fell 140 bps to 19.4%.
Revenues from Medical Systems escalated 20.3% to $712 million due to solid Infusion business sales (up 40% growth over the prior year) and strong sales Dispensing and Respiratory businesses (up 7% and 6% percent, respectively). Adjusted segment earnings rose 16.2% to $158 million driven by record quarter for Infusion business and increased installations from Dispensing.
For the fiscal year, revenues from the segment edged up 2.8% to $2,394 million. Adjusted segment earnings fell 6.0% to $490 million due to longer than expected installation cycles in the Dispensing business during the first half of the year and product revenue mix.
Revenues from Procedural Solutions rose 31.8% $410 million, driven by contributions from the Vital Signs and Sendal acquisitions, as well as continued growth from clinically differentiated products in specialty disposables, and PleurX drainage products and the ChloraPrep and MaxPlus brands within Infection Prevention business line. Adjusted segment earnings grew 30.2% to $69 million driven by organic growth across all product lines and strong performance from the acquired Vital Signs and Sendal businesses.
Revenues from the segment grew 18.6% to $1,448 million for the year led by growth across all business lines and contributions from the Vital Signs acquisition. Adjusted segment earnings grew 17.4% to $256 million.
CareFusion’s board of directors approved a new two-year, $750 million share repurchase program on top of its previous $750 million program announced in the fiscal third quarter. The new program will be initiated when the previous repurchase authorization is completed. In fiscal 2014, CareFusion repurchased 14.6 million shares for roughly $577 million.
CareFusion had cash and cash equivalents of $2,303 million as of Jun 30, 2014, up 28.1% from $1,798 million as of Jun 30, 2013. Total debt increased 69.0% to $2,444 million as of Jun 30, 2014 compared with $1,446 million as of Jun 30, 2013. Debt-to-capitalization ratio increased 10 percentage points to 31.2% from 21.2% as of Jun 30, 2013.
In fiscal 2014, cash flow from operating activities rose 11.7% to $685 million from $613 million in fiscal 2013. Capital expenditure (net) inched up 4.8% to $88 million from $84 million in fiscal 2013.
Fiscal 2015 and 3-Year Guidance
For fiscal 2015, CareFusion expects revenues to grow between 5 and 7% over fiscal 2014 on a constant currency basis. The company also expects adjusted earnings in the range of $2.60 to $2.75 per share. The current Zacks Consensus Estimate of $2.69 lies within the guided range.
CareFusion also provided three-year guidance till fiscal 2017. The company expects mid-single-digit revenue growth, adjusted operating margins of greater than 23%, and a compound annual growth rate of 10–12% for adjusted earnings per share for the period. CareFusion also plans to invest at least 50% of its free cash flow through tuck-in acquisitions and share repurchases during the period.
We appreciate CareFusion’s impressive rise in fiscal fourth quarter earnings and the estimate beats at both the earnings and revenue fronts. We also praise the company’s capability to provide a long-term outlook, which clearly indicates its confidence in the businesses.
However, we note that CareFusion sees margin compression due to the unfavorable product mix, lower margin acquisitions of Vital Signs and Sendal and the transition of product line to the Pyxis ES platform.
Currently, CareFusion retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry include OraSure Technologies, Inc. (OSUR), Medtronic, Inc. (MDT), and Symmetry Medical, Inc. (SMA). OraSure Technologies sports a Zacks Rank #1 (Strong Buy), while both Medtronic and Symmetry Medical retain a Zacks Rank #2 (Buy).
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