The investor drubbing sustained by Hill-Rom Holdings Inc. last week stemmed not so much from the acquisition it announced as from the gloomy outlook in the North American hospital market.
The Batesville-based maker of hospital beds saw its shares lose 16 percent of their value Thursday and Friday after it announced a deal to acquire Michigan-based Aspen Surgical Products for $400 million. Aspen has about $120 million in annual revenue and is expected to add 2 cents per share to Hill-Rom’s earnings in the next quarter.
Hill-Rom CEO John Greisch stated the rationale for the deal this way: “Importantly, Aspen provides Hill-Rom with a recurring consumable revenue stream to help mitigate the cyclicality of our capital businesses.”
Translation? Hill-Rom’s main business of selling expensive equipment to hospital is tanking. Badly. And without an end in sight.
Revenue from what Hill-Rom calls its North American Acute Market fell 5 percent in the second quarter, to $226 million, from a year earlier. North American Acute sales accounted for 56 percent of Hill-Rom’s revenue.
Even more concerning, orders are down and the backlog of orders Hill-Rom has from North American hospitals is down 20 percent.
“With tightened capital budgets and in many cases, delays in decision-making around capital appropriation, we are not expecting the environment in North America to improve for the foreseeable future,” Greisch told investors during a July 26 conference call. He added, “And while it is premature to provide guidance for next year, it is difficult to foresee a substantial improvement in the macroeconomic and health care environments currently influencing our customers' capital spending.”
Why are hospitals pulling back? Ongoing high joblessness continues to lead patients to delay major medical procedures. Also, the June 28 U.S. Supreme Court decision that allowed states to not expand insurance coverage through their Medicaid coverage has hospitals in some states even more wary.
“The 5 percent year-over-year decline in North American revenues in the June quarter shows the readiness of hospitals to postpone capital purchases amid sluggish in-patient activity in the U.S.,” bond analysts at Standard & Poor’s Ratings Services wrote July 27.
Overall Hill-Rom second-quarter profit surged 15 percent, to $34.8 million, from $30.2 million in the same quarter a year ago. The figures exclude special charges. Revenue rose 6 percent to $406.5 million.