STERIS Plc :STE-US: Earnings Analysis: Q2, 2017 By the Numbers : November 3, 2016

STERIS Plc reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of STERIS Plc – Stryker Corporation, Invacare Corporation, Thermo Fisher Scientific Inc., Owens & Minor, Inc., Ecolab Inc., CONMED Corporation, Johnson & Johnson and 3M Company (SYK-US, IVC-US, TMO-US, OMI-US, ECL-US, CNMD-US, JNJ-US and MMM-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 646.42 million, Net Earnings of USD 40.42 million.
  • Gross margins narrowed from 42.79% to 41.10% compared to the same period last year, operating (EBITDA) margins now 10.77% from 14.31%.
  • Year-on-year change in operating cash flow of 166.70% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-09-30 2015-12-31 2016-03-31 2016-06-30 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 489.9 618.69 690.28 638.38 646.42
Revenue Growth (%YOY) 5.87 30.73 37.6 45.12 31.95
Earnings (mil) 8.69 20.05 57.74 48.4 40.42
Earnings Growth (%YOY) -71.98 -47.42 39.47 99.25 365.25
Net Margin (%) 1.77 3.24 8.36 7.58 6.25
EPS 0.14 0.26 0.67 0.56 0.47
Return on Equity (%) 3.17 3.93 7.66 6.36 5.34
Return on Assets (%) 1.55 2.09 4.32 3.64 3.08

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Market Share Versus Profits

Revenues History
Earnings History

STE-US‘s change in revenue this period compared to the same period last year of 31.95% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that STE-US is holding onto its market share. Also, for comparison purposes, revenues changed by 1.26% and earnings by -16.50% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 41.10% to 42.79% for the same period last year, while operating margins (EBITDA margins) went from 10.77% to 14.31% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

STE-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 82.51 days from 86.26 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

STE-US‘s change in operating cash flow of 166.70% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 9.46% to 10.77% and (2) one-time items. The company’s pretax margins are now 9.12% compared to 3.23% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

STERIS Plc engages in the manufacture of surgical and other medical supplies. It operates through the following segments: Healthcare Products, Healthcare Specialty Services, Life Sciences and Applied Sterilization Technologies. The Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including capital equipment and related maintenance and installation services, as well as consumables. The Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, instrument and scope repairs, and linen management. The Life Sciences segment offers capital equipment and consumable products, and equipment maintenance and specialty services for pharmaceutical manufacturers and research facilities. The Applied Sterilization Technologies segment offers a contract sterilization and laboratory services for medical device and pharmaceutical Customers and others. The company was founded on October 9, 2014 and is headquartered in Leicester, United Kingdom.

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