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STERIS (STE) Misses on Q4 Earnings, Higher Tax a Concern

Zacks Equity Research

STERIS plc STE reported fourth-quarter fiscal 2016 adjusted earnings per share (EPS) of 90 cents, down 8.2% year over year. The adjusted EPS figure also missed the Zacks Consensus Estimate by 10.9%.

Despite witnessing `strong operating results, STERIS’ adjusted EPS declined year over year on account of an increase in share count and higher adjusted effective tax rate. Geographic income mix and discrete item adjustments, which outweighed the tax benefit from the legacy Steris’ combination with Synergy Health, primarily drove the tax rate.

However, STERIS' reported net income improved 39.4% on a year-over-year basis to $57.7 million in the quarter.

For full-year fiscal 2016, Steris reported adjusted EPS of $3.39, up 11.8% year over year. However, adjusted EPS figure missed the Zacks Consesnus Estimate by 3.7%.

Revenues in Detail

STERIS plc generated revenues of $690.3 million, up a solid 38% year over year.  The top line however missed with the Zacks Consensus Estimate of $701 million. The year-over-year revenue upside was primarily attributable to the acquisition of Synergy Health, Black Diamond Video and GEPCO in addition to solid organic revenue growth.

Revenue growth declined 1% owing to foreign currency fluctuations of 6%. Constant currency organic revenue growth was 5%, driven by volume as price was neutral during the quarter.

For full-year fiscal 2016, the company generated revenues of $2.24 billion; up 21% year over year. The full-year fiscal top line figure missed the Zacks Consensus Estimate of $2.25 billion.

Beginning from the third fiscal quarter, the combined STERIS has been operating across four segments: Healthcare Products, Healthcare Specialty Services, Applied Sterilization Technologies and Life Sciences.

Revenues from the Healthcare Products segment climbed 5% year over year to $335.1 million in the reported quarter. Consumable revenue growth of 25% and service revenue growth of 6% primarily drove this segment’s growth in the fiscal fourth quarter. However, capital equipment revenue declined 6% owing to soft shipments in the international market. Healthcare Products backlog increased 22% year over year to $119.4 million.

Revenues from the Healthcare Specialty Services segment improved 141.8% to $157.9 million, on account of 10% organic revenue growth and the addition of Synergy Health. On the other hand, revenues from Applied Sterilization Technologies segment grew 113.5% to $110.4 million, driven by the addition of Synergy Health and increased demand from the segment`s core medical device customers.

Lastly,revenues from the Life Sciences segment improved 31% to $85.5 million in the quarter, primarily driven by consumable revenue growth of 51%, partly due to the acquisition of GEPCO and partially because of the mid-teens growth in organic consumable revenues. Moreover, 34% service revenue growth and 8% capital equipment revenue growth contributed to the improvement in the segment. Life Sciences organic revenues were up 11% in the quarter. Life Sciences backlog remained flat at $45.3 million.

Margins

Adjusted gross margin contracted 320 basis points (bps) year over year to 39.3% in the reported quarter, primarily due to additional costs related to the Synergy Health acquisition, which partially offset the effects of favorable currency translations, the suspension of the Medical Device Excise Tax and lower material costs.

STERIS witnessed a 14.6% year-over-year increase in selling, general and administrative expenses to $150.1 million. On the other hand, research and development expenses inched up 1% to $14.3 million. Consequently, adjusted operating margin expanded 100 bps on a year-over-year basis to 17.4%, on the back of higher adjusted operating income.

Financial Details

STERIS exited fiscal 2016 with cash and cash equivalents of $248.8 million, compared with $167.7 million at the end of fiscal 2015. The company had long-term debt of $1.57 billion at the end of the fiscal, compared with $0.6 billion at the end of the previous fiscal.

In fiscal 2016, the company generated $254.7 million in cash flow from operations, up 3.5 % year over year. Capital expenditure was $126.4 million resulting in free cash flow of $129.1 million, compared with $161.6 million a year ago. Despite the decline in the free cash flow, the figure exceeded management’s expectation.

Guidance

STERIS has provided its financial guidance for fiscal 2017. The company expects to witness revenue growth in the range of 25--26%, including 7% organic revenue growth. The current Zacks Consensus Estimate for fiscal 2016 revenues is pegged at $2.76 billion.

The company also maintains fiscal 2017 adjusted EPS projection in the band of $3.85–$4.00. The current Zacks Consensus Estimate is pegged at $3.92, within the company-provided guidance.

Our Take

STERIS ended fiscal 2016 on a disappointing note, with its fourth-quarter results missing the Zacks Consensus Estimate on both the fronts. However, the company’s segmental performance buoys optimism with growth witnessed across all four segments. Moreover, even in the face of currency and market headwinds in overseas, STERIS’ business grew both organically and through strategic acquisitions in the quarter.The encouraging guidance for fiscal 2017 also buoys optimism.

Although the company witnessed an improvement in overall cash balance reserve, the deterioration in cash flow raises concern. Since low cash flow restricts a company’s investment strategy. Further higher effective tax rate continued to be a pressing issue in the quarter, which in turn hurt the company’s bottom line.

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

Stocks to Consider

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

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