CareFusion Corporation (CFN - Analyst Report) reported adjusted earnings of 50 cents per share in first-quarter fiscal 2015, which beat the Zacks Consensus Estimate by couple of cents. Earnings per share (EPS) jumped 13.6% on a year-over-year basis driven by strong revenue growth.

Carefusion Corporation - Earnings Surprise | FindTheBest

CareFusion is currently in the process of being acquired by Becton, Dickinson (BDX - Analyst Report) for $58.00 per share in cash and stock, or a total of approximately $12.2 billion. The deal, revealed by the companies on Oct 5, 2014, is expected to close by mid-2015. As a result of the proposed merger, CareFusion suspended its current share buyback programs.

Quarter Details

Revenues came in at $922 million, exceeding the Zacks Consensus Estimate of $914 million. Revenues increased 11.1% year over year, riding on synergies from the Vital Signs acquisition, continued momentum in the Dispensing Technologies business line and gains from the Procedural Solutions segment.

Revenues from Medical Systems improved 1% to $528 million, led by strong performance in the Dispensing Technologies business line.

Revenues from Procedural Solutions rose 29% $394 million, driven by contributions from the Vital Signs and Sendal acquisitions. Organic growth at this segment was driven by continued strength in the company’s clinically differentiated product lines.

Adjusted gross margin fell 120 basis points (bps) year over year to 49.8% owing to unfavorable product mix associated with the acquisitions of Vital Signs and Sendal and the cost of installation of additional resources in the Dispensing Technologies business line. The decline was partly offset by improvements in the Infusion Systems business line and an increase in volume in the Dispensing Technologies business line.

Adjusted operating expenses increased 5% year over year to $295 million primarily on the back of higher selling, general and administrative (SG&A) expenses related to the Vital Signs acquisition.

However, adjusted operating margin expanded 90 bps on a year over year basis to 18%.

CareFusion had cash and cash equivalents of $1.7 billion as of Sep 30, 2014, lower than $2.3 billion as of Jun 30, 2014. Total debt (including current portion) declined to $2 billion from $2.4 billion as of Jun 30, 2014.

In the first-quarter fiscal 2015, cash flow from operating activities totaled $68 million.

Fiscal 2015 Guidance

For fiscal 2015, CareFusion maintains revenue growth projection between 5% and 7% over fiscal 2014 on a constant currency basis. The Zacks Consensus Estimate for the same is currently pegged at $4.1 billion.

The company now expects adjusted earnings to increase in the range of $2.80–$2.95 per share, higher than the earlier band of $2.60–$2.75 per share. The current Zacks Consensus Estimate of $2.68 lies below the guided range.

Our Take

We are impressed with CareFusion’s earnings and revenue beat, both of which increased on a year-over-year basis as well. The company started the fiscal year with continued strength across the Procedural Solutions segment, Dispensing Technologies and Infusion Systems.

Moreover, we expect CareFusion to realize major synergies from the proposed merger with Becton, Dickinson. The merger has the potential to increase the combined entity’s geographical reach and also expand international sales of CareFusion.

However, we note that CareFusion sees margin compression due to the unfavorable product mix and lower margin acquisitions of Vital Signs and Sendal. The company also faces stiff competition from Baxter International (BAX - Analyst Report), CR Bard (BCR - Analyst Report) and ICU Medical (ICUI), which remains a major headwind.

Currently, CareFusion carries a Zacks Rank #3 (Hold).

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