Post the combination of Synergy Health and the legacy STERIS Corp., STERIS plcSTE reported third-quarter fiscal 2016 adjusted earnings per share (EPS) of 98 cents, 4.3% ahead of the Zacks Consensus Estimate. Adjusted EPS also improved 24.1% from the year-ago quarter's equivalent figure of 79 cents, that had been generated by the legacy STERIS.
The year-over-year improvement was primarily driven by an improved operating performance and a lower effective tax rate. The addition of Synergy Health also significantly contributed to this adjusted earnings growth.
However, STERIS' reported net income dropped 58.7% or 47.5% respectively, on a year-over-year basis, to $20 million or 26 cents per share in the quarter.
Revenues in Detail
In its first quarter of consolidated results combining the legacy STERIS and Synergy Health, STERIS plc generated revenues of $618.7 million, up a solid 31% year over year (up 7% at constant exchange rate or CER). The top line was almost on par with the Zacks Consensus Estimate of $619 million. The year-over-year revenue upside was primarily attributable to the acquisition of Synergy Health and solid organic revenue growth at the company.
Revenue growth of 6% came from volume and 1% from pricing; partially offset by a 1% decline owing to foreign currency fluctuations.
Segments in Detail
Beginning from the third fiscal quarter, the combined STERIS is now reporting its operations in four segments: Healthcare Products, Healthcare Specialty Services, Applied Sterilization Technologies and Life Sciences.
Revenues from the Healthcare Products segment climbed 10.3% year over year to $317.1 million in the reported quarter, driven by solid organic revenue growth of 5%, in addition to the acquisition of Synergy Health. Consumable revenue growth of 15%, capital equipment revenue growth of 12% and service revenue growth of 3% also contributed to the segment's improvement. Healthcare Products backlog increased 5% year over year to $144.6 million.
Revenues from the Healthcare Specialty Servicessegment improved 95.4% to $128.3 million, on account of 4% organic revenue growth and the addition of Synergy Health. On the other hand, revenues from Applied Sterilization Technologies segment grew 77% to $90.2 million, driven by the addition of Synergy Health and increased demand from the company's core medical device customers.
Lastly, revenues from the Life Sciences segment improved 22% to $82.7 million in the quarter, primarily driven by consumable revenue growth of 45%, partly due to the acquisition of GEPCO and partly due to growth in organic consumable revenues. Moreover, 13% service revenue growth and 8% capital equipment revenue growth also contributed to the segment's upside. Life Sciences organic revenues were up 9% in the quarter. Life Sciences backlog increased 4% to $45.4 million.
Adjusted gross margin contracted 240 basis points (bps) year over year to 39.3% in the reported quarter, driven by additional costs related to the Synergy Health acquisition and a negative mix, which was partially neutralized by favorable currency and pricing.
STERIS witnessed a 44.9% year-over-year increase in selling, general and administrative expenses to $177.3 million. On the other hand, research and development expenses dropped 1.5% to $14.3 million. Consequently, adjusted operating margin expanded 130 bps on a year-over-year basis to 17.4%, on the back of lower adjusted operating expense.
STERIS exited the reported quarter with cash and cash equivalents of $231.4 million, compared with $162.2 million at the end of second-quarter fiscal 2016. The company had long-term debt of $1.64 billion at the end of the fiscal third quarter, compared with $829.8 million at the end of the previous quarter.
In the reported quarter, the company generated $104.6 million in cash flow from operations, down 36.7% year over year. Capital expenditure was $82.2 million resulting in free cash flow of $22.9 million, compared with $109.3 million a year ago. The free cash flow decline was a result of the cash impact of the Synergy Health takeover and some other acquisition-related expenses.
STERIS has reaffirmed its financial guidance for fiscal 2016, in line with its preliminary outlook published in Dec 2015. The company continues to expect revenue growth in the range of 21-22%. The current Zacks Consensus Estimate for fiscal 2016 revenues is pegged at $2.256 billion.
The company also continues to expect fiscal 2016 adjusted EPS in the band of $3.48-$3.55. The current Zacks Consensus Estimate is pegged at $3.51, within the company-provided guidance range.
In the first complete quarter post the Synergy Health combination, STERIS delivered an impressive performance. While the bottom line comfortably exceeded the Zacks Consensus Estimate, the top line met the same. Despite this, the company's unchanged financial guidance for fiscal 2016 keeps us on the sidelines in terms of outlook. Nevertheless, the company's segmental performance is encouraging, with growth witnessed across all four segments.
Moreover, we are encouraged to notice the progress that STERIS has achieved in the integration of Synergy Health. Apart from introducing and finalizing four new reporting segments with effect from the reported quarter, management has also made some vital senior leadership changes in a bid to restructure the combined business.
Currently, the company is on track to achieve its target of $5 million in cost savings for fiscal 2016. Moving ahead, management expects this number to grow to about $40 million in annualized run rate savings over the next two years. We believe this acquisition will expand STERIS' share in the international market over the long run.
STERIS currently has a Zacks Rank #2 (Buy).
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