STERIS Corp. STE reported first-quarter fiscal 2016 adjusted earnings per share (EPS) of 62 cents, 3.3% ahead of the Zacks Consensus Estimate and up 14.8% from the year-ago quarter. The year-over-year improvement was primarily driven by solid growth in the top line and an improvement on the margin front.
However, STERIS' reported net income dropped 0.8% or 2.4% year over year, respectively, to $24.3 million or 40 cents per share in the quarter.
Revenues in Detail
Revenues improved 6.6% year over year (up 7% at constant exchange rate or CER) to $439.9 million, closely beating the Zacks Consensus Estimate of $439 million. The year-over-year upside was driven by growth observed in STERIS’ Healthcare and Isomedix segments, partially offset by a decline in the Life Sciences segment.
Revenue growth of 4% came from acquisitions, 4% from volume and 1% from price; partially offset by a 2% decline owing to foreign currency fluctuations.
Segments in Detail
Revenues from the Healthcare segment climbed 8.8% year over year to $329.3 million in the reported quarter. Healthcare service revenue growth of 20%, owing to the acquisition of Integrated Medical Systems International (IMS) and solid growth in the company’s core service business, primarily contributed to the segment’s improvement. Additionally, 3% revenue growth in Healthcare consumable and 1% revenue growth in capital equipment also contributed to the upside.
Revenues from Life Sciences dropped 3.1% to $56.8 million in the reported quarter, hit by a 20% decline in capital equipment revenues. However, 6% growth in consumables and 3% growth in service revenues partially neutralized this revenue decline.
STERIS Isomedix Services revenue improved 4.9% to $53.7 million in the quarter, driven by increased demand from the company’s core medical device customers.
Margins
Adjusted gross margin improved 40 basis points (bps) year over year to 41.9% in the first quarter, driven by favorable foreign currency fluctuations and improved productivity, partially offset by an unfavorable product mix.
STERIS witnessed a 6.2% year-over-year increase in adjusted selling, general, and administrative expenses to $109.2 million. On the other hand, research and development expenses spiked 10.9% to $13.8 million, owing to higher expenses related to the development of surgical products and accessories. Nevertheless, adjusted operating margin expanded 30 bps year over year to 13.9%, on a higher gross margin.
Financial Details
STERIS exited the quarter with cash and cash equivalents of $196.2 million, compared with $167.7 million at the end of fiscal 2015. The company had long-term debt of $686.2 million at the end of the first quarter, compared with $621.1 million at fiscal 2015-end.
In the reported quarter, the company generated $41.2 million in cash flow from operations, down 11.2% year over year. Capital expenditure was $23.5 million resulting in free cash flow of $17.7 million, compared with $23.1 million a year ago. The free cash flow decline was a result of the cash impact of acquisition-related expenses.
Along with its first quarter earnings release, STERIS called for an increase in its quarterly dividend by two cents to 25 cents per common share, representing the tenth consecutive year of dividend hike. The raised dividend is payable on Sep 22, 2015 to shareholders of record at the close of business on Aug 25.
Acquisitions
During the reported quarter, STERIS made two important acquisitions. In mid-June, the company acquired Black Diamond Video to expand its OR business at a faster pace at the current or an even lower cost base. More recently, STERIS bought General Econopak (“GEPCO”), to bolster its consumable product range.
Guidance
STERIS has raised its top-line guidance for fiscal 2016. The company now expects revenue growth in the range of 6–7% for the fiscal, up from the earlier guidance of 5–6%.
However the company has kept its fiscal 2016 adjusted EPS forecast unchanged in the band of $3.15–$3.30.
Our Take
STERIS is off to a strong start for fiscal 2016 with the first-quarter results successfully exceeding the Zacks Consensus Estimate on both lines. The company’s raised top-line guidance for fiscal 2016 also buoys optimism, which primarily reflects positive synergy from the Black Diamond and GEPCO buyouts. Black Diamond and GEPCO are expected to ramp up growth of STERIS’ Healthcare and Life Science segments, respectively, and bring in incremental revenues at these two segments in the quarters ahead.
Further, STERIS’ recently raised dividend bolsters our confidence in the stock, which is reflective of the higher profits that the company has earned recently. We believe this practice of STERIS to reward shareholders with consecutive dividend hikes may attract more investors toward the stock, going ahead. Currently, we look forward to the proposed combination of STERIS with Synergy Health, pending as of Sep 24, 2015, which will allow the combined company to acquire a greater share in the international market.
The stock currently retains a Zacks Rank #2 (Buy).
Stocks to Consider
Some other top-ranked stocks in the med/dental-supply industry are Merit Medical Systems, Inc. MMSI, CR Bard Inc. BCR and Laboratory Corp. of America Holdings LH. All the three stocks hold a Zacks Rank #2.
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