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Steris (STE) Misses on Q2 Earnings and Sales, Cuts View

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Steris Plc (STE - Free Report) reported second-quarter fiscal 2017 adjusted earnings per share (EPS) of 89 cents, up 7.2% year over year. The adjusted EPS figure however missed the Zacks Consensus Estimate by a penny.

Double-digit revenue growth and a lower-than-expected effective tax rate primarily drove the upside in earnings.

Steris’ reported net income surged 364.3% on a year-over-year basis to $40.4 million in the quarter.

STERIS PLC Price, Consensus and EPS Surprise

 

STERIS PLC Price, Consensus and EPS Surprise | STERIS PLC Quote

Revenues in Details

Steris generated revenues of $646.4 million, up a solid 31.9% year over year on growth across all four segments. The top line however missed the Zacks Consensus Estimate of $668 million.

Revenues declined 10 basis points (bps) owing to foreign currency fluctuations. Constant currency organic revenue growth was 3% primarily driven by volume as price made a nominal contribution of 20 bps.

Post the Synergy Health acquisition, the company has been operating through 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 $304.8 million in the reported quarter. Organic revenues were flat in the quarter, mainly due to a decline in capital equipment shipments. Consumable revenue growth of 15% and service revenue growth of 3% largely drove this segment’s results in the fiscal second quarter.However, capital equipment revenues declined 1% in the quarter, with record high levels of backlog at the end of the quarter.

Revenues from the Healthcare Specialty Services segment improved 102.2% to $142.8 million, on account of 4% organic revenue growth and the addition of Synergy Health.On the other hand, revenues from Applied Sterilization Technologies surged107.1% to $115.6 million, driven by synergies from Synergy Health and solid organic revenue growth of 3%.

Lastly, revenues from the Life Sciences segment improved 15% to $81.5 million in the quarter, primarily on the back of consumable revenue growth of 16%. Additionally, the improvement was supported by the acquisition of GEPCO and solid high single-digit revenue growth. Moreover, 20% service revenue growth and 6% capital equipment revenue growth contributed to the results.

Margins

Adjusted gross margin contracted 438 bps year over year to 38.3% in the reported quarter, mainly due to additional costs related to the Synergy Health acquisition, which outweighed the favorable effects of currency translations, the suspension of the Medical Device Excise Tax as well as improvement from pricing and productivity.

Steris witnessed a 5.1% year-over-year decrease in selling, general and administrative expenses to $151.9 million. However, research and development expenses rose 2.5% to $14.6 million. Adjusted operating margin expanded 615 bps on a year-over-year basis to 10.7% on the back of higher revenue growth in comparison to the rise in operating expenses.

Financial Details

Steris exited second-quarter fiscal 2017 with cash and cash equivalents of $254.3 million compared with $248.8 million in the prior-year quarter. The company had long-term debt of $1.50 billion at the end of the second quarter, compared with $1.56 billion in the prior-year quarter.

The company generated $182.5 million in cash flow from operations on a year-to-date basis, up 129.8% from the year-ago comparable period. Capital expenditures totaled $73.8 million resulting in free cash flow of $108.8 million, compared with $39.5 million a year ago.

Guidance

Steris has lowered its revenue guidance for fiscal 2017. The company currently expects to witness revenue growth in the range of 19–20%, compared with the previous guidance of 22–23%.

The company however maintained its fiscal 2017 adjusted EPS projection in the band of $3.85–$4.00. The current Zacks Consensus Estimate is $3.90, within the company’s guided range.

Our Take

Steris ended second-quarter fiscal 2017 on a dismal note, with earnings and revenues missing the Zacks Consensus Estimate. The company’s lowered revenue guidance for fiscal 2017 hints at a gloomy operating scenario in the days ahead. However, the solid segmental performance buoys optimism. Moreover, even in the face of currency and market headwinds, Steris’ business grew both organically and through strategic acquisitions in the quarter.

Further, growth in free cash flow reserve is indicative of the strong cash balance reserve the company currently holds.

Zacks Rank & Stocks to Consider

Steris currently has a Zacks Rank #4 (Sell). Better-ranked medical stocks are GW Pharmaceuticals plc (GWPH - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 61% year to date compared to the S&P 500’s 2.2% over the same period. The company has a four-quarter positive average earnings surprise of 41.6%.

Baxter international rallied 24.9% in the past one year, comparing favorably with the S&P 500’s -0.5%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 165.3% gain in the past one year, above the S&P 500’s 2.4%. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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