STERIS (STE) Beats On Q1 Earnings & Revenues, Margins Up

STERIS Plc (NYSE:STE) reported first-quarter fiscal 2018 adjusted earnings per share (EPS) of 85 cents, up 7.6% from the year-ago quarter. This adjusted EPS figure also surpassed the Zacks Consensus Estimate of 80 cents.

On a reported basis, the quarter’s EPS came in at 68 cents, up 21.4% year over year.

Revenues in Detail

STERIS generated revenues of $608 million, down 4.8% year over year. However, the top line beat the Zacks Consensus Estimate of $596 million. The year-over-year decline was a result of foreign currency fluctuations as well as divested businesses. Organic revenue growth at constant currency was 6% year over year, primarily driven by balanced growth in all segments.

The company operates through four segments: Healthcare Products, Healthcare Specialty Services, Applied Sterilization Technologies and Life Sciences.

Revenues from the Healthcare Products segment inched up 2% year over year to $289.1 million in the reported quarter. This was driven by 7% growth in service revenue and a 2% increase in capital equipment revenue, which in turn were partially offset by a 1% dip in Consumables due to divestitures.

Revenues from the Healthcare Specialty Services segment plunged 25.4% to $113.4 million on a reported basis due to divestitures. However, organic revenues grew 11%, reflecting growth at IMS North America and CSD outsourcing business in Europe.

On the other hand, revenues from Applied Sterilization Technologies rose 2% to $124.5 million and organic revenue growth was 6%, on the back of an increased volume from the segment`s core medical device customers.

Lastly, revenues from the Life Sciences segment dropped 1% to $80.9 million in the quarter as 5% growth in Service revenue and 2% increase in consumable revenues were more than offset by a 12% decrease in capital equipment revenues. On an organic basis, revenues nudged up 1% year over year.

Margins

Adjusted gross margin improved 410 basis points (bps) year over year to 42.3% in the reported quarter. This expansion was on account of the positive impact of divested low-margin businesses,improvements in operational efficiencies, a favorable foreign currency, plus cost synergies and pricing.

STERIS witnessed a 2.6% year-over-year rise in selling, general and administrative expenses to $155.8 million. Research and development expenses fell 2.8% to $14 million. Adjusted operating margin expanded 265 bps on a year-over-year basis to 14.2% in the reported quarter.

Financial Details

STERIS exited the first-quarter fiscal 2018 with cash and cash equivalents of $294.8 million compared with $282.9 million at the end of fiscal 2017. The company had a long-term debt of $1.49 billion at the end of first-quarter fiscal 2018 compared with $1.48 billion at the end of fiscal 2017.

The company generated $80.7 million in cash flow from operations in first quarter, up 0.5% from the year-ago period. Free cash flow for this period was $44.2 million compared with $49.5 million in the prior-year time frame.

2018 Guidance

STERIS continues to expect 4–5% of organic revenue growth on constant-currency basis in fiscal 2018 from the prior fiscal year. Adjusted EPS is expected in the range of $3.96–$4.09 per share.

Our Take

STERIS posted better-than-expected first-quarter fiscal 2018 with both earnings and revenues beating the Zacks Consensus Estimate. However, the year-over-year decline in revenues is a disappointment. On a positive note, organic growth performance was strong across all the segments. Further, growth in free cash flow reserve is indicative of the company’s strong cash balance. Recently, the company has made a couple of organizational changes, expected to better align with its operations.

Zacks Rank & Key Picks

STERIS currently has a Zacks Rank #2 (Buy). A few other top-ranked medical stocks are Edwards Lifesciences Corp. (NYSE:EW) , INSYS Therapeutics, Inc. (NASDAQ:INSY) and Align Technology, Inc. (NASDAQ:ALGN) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences’ second-quarter 2017 adjusted earnings improved a stupendous 42.1% year over year, primarily driven by strong sales growth at the company’s transcatheter heart valves business. The stock has gained around 5.9% surprise over the last three months.

INSYS Therapeutics’ gross profit margin was 91% in the second quarter of 2017, flat year over year.

Align Technology’s second quarter 2017 adjusted EPS of 85 cents were up a substantial 37.1% year over year. Revenues grew 32.3% year over year to $356.5 million. The stock has surged roughly 25.9% over the last three months.

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