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STERIS (STE) Beats on Q1 Earnings, Lowers FY17 Sales View

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STERIS plc STE reported first-quarter fiscal 2017 adjusted earnings per share (EPS) of 79 cents, up 27.4% year over year. The adjusted EPS figure beat the Zacks Consensus Estimate by a penny.

Double-digit revenue growth and a lower-than-expected effective tax rate primarily drove the year-over-year improvement in earnings.

STERIS' reported net income surged a solid 99.3% on a year-over-year basis to $48.4 million in the quarter.

 

Revenues in Detail

STERIS plc generated revenues of $638.4 million, up a solid 45.1% year over year.  The top line however missed the Zacks Consensus Estimate of $644 million. The year-over-year upside observed in the top line can be attributed to growth in all four segments of STERIS.

Revenue growth declined 40 basis points (bps) owing to foreign currency fluctuations. Constant currency organic revenue growth was 6%, primarily driven by volume as price was only slightly favourable during the quarter.

Post the Synergy Health acquisition, the combined STERIS has been operating across four segments: Healthcare Products, Healthcare Specialty Services, Applied Sterilization Technologies and Life Sciences.

STERIS PLC Price, Consensus and EPS Surprise

STERIS PLC Price, Consensus and EPS Surprise | STERIS PLC Quote

Revenues from the Healthcare Products segment climbed 8% year over year to $281.3 million in the reported quarter on the back of 3% organic revenue growth and contributions from acquisitions. Consumable revenue growth of 20% and service revenue growth of 4% largely drove this segment’s growth in the fiscal first quarter. However, capital equipment revenue was flat while Healthcare Products backlog increased 24% year over year to $149 million.

Revenues from the Healthcare Specialty Services segment improved 131.5% to $157.9 million, on account of 5% organic revenue growth and the addition of Synergy Health. On the other hand, revenues from Applied Sterilization Technologies segment grew 117.1% to $116.6 million, driven by the addition of Synergy Health and solid organic revenue growth of 7%.

Lastly, revenues from the Life Sciences segment improved 43% to $81.2 million in the quarter, primarily on the back of consumable revenue growth of 62%. Additionally it improved partly due to the acquisition of GEPCO and partially because of the mid-teens growth in organic consumable revenues. Moreover, 20% service revenue growth and 43% capital equipment revenue growth also contributed to the improvement in the segment.

Margins

Adjusted gross margin contracted 370 bps year over year to 38.2% in the reported quarter, mainly due to additional costs related to the Synergy Health acquisition, which outweighed the favorable effects of currency translations, the suspension of the Medical Device Excise Tax as well as improvement from pricing and productivity.

STERIS witnessed a 19.8% year-over-year increase in selling, general and administrative expenses to $151.9 million. Research and development expenses rose 4.8% to $14.4 million. Adjusted operating margin expanded 100 bps on a year-over-year basis to 15.9% on the back of higher revenue growth compared to a rise in operating expenses.

Financial Details

STERIS exited first-quarter fiscal 2017 with cash and cash equivalents of $248.8 million. The company had long-term debt of $1.56 billion at the end of the first quarter, compared with $1.57 billion at the end of fiscal 2016.

In the reported quarter, the company generated $80.3 million in cash flow from operations, up 95.2% year over year. Capital expenditure was $4.5 million resulting in free cash flow of $49.5 million, compared with $17.7 million a year ago.

Guidance

STERIS has lowered its revenue guidance for fiscal 2017. The company currently expects to witness revenue growth in the range of 22–23%, including 6% organic revenue growth;  compared with the previous guidance of 25--26%, including 7% organic revenue growth. The current Zacks Consensus Estimate for fiscal 2017 revenues stands at $2.79 billion.

The company however maintained its fiscal 2017 adjusted EPS projection in the band of $3.85–$4.00. The current Zacks Consensus Estimate is $3.92, within the company-provided guidance.

Our Take

STERIS started off fiscal 2017 on a mixed note, with its first-quarter earnings beating the Zacks Consensus Estimate but revenues missing the same. The company’s lowered revenue guidance for fiscal 2017 is disappointing. However, the company’s segmental performance buoys optimism with strong growth observed across all four segments. Moreover, even in the face of currency and market headwinds overseas, STERIS’ business grew both organically and through strategic acquisitions in the quarter.

Further the strong growth witnessed in STERIS’ free cash flow reserve is indicative of the strong cash balance reserve the company currently holds. Further lower effective tax rate played a crucial role in improving the company’s bottom line

STERIS currently has a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked medical stocks worth a look are IDEXX Laboratories, Inc. IDXX, Masimo Corporation MASI and Natus Medical Inc. BABY.  All these stocks sport a Zacks Rank #1 (Strong Buy).

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