STERIS (STE) Q2 Earnings Miss & Revenues Beat, Margins Up

STERIS plc (NYSE:STE) reported second-quarter fiscal 2018 adjusted earnings per share (EPS) of 94 cents, up 5.6% from the year-ago quarter. However, earnings missed the Zacks Consensus Estimate of 95 cents.

On a reported basis, EPS came in at 75 cents, up 59.6% year over year.

Revenues in Detail

STERIS generated revenues of $634.2 million, down 1.9% year over year. Meanwhile, the top line beat the Zacks Consensus Estimate of $630 million. The year-over-year decline was a result of sales loss owing to divested businesses. Organic revenue growth at constant currency was 4% year over year, primarily driven by balanced growth in two of the four segments.

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

Revenues from the Healthcare Products segment declined 2% year over year to $302.1 million in the reported quarter. This was largely due to an 8% decline in capital equipment revenues and a 1% decrease in consumable revenues as a result of divestitures, which in turn were partially offset by an 8% increase in service revenues.

STERIS PLC Price, Consensus and EPS Surprise

Revenues from the Healthcare Specialty Services segment declined 15.7% to $116.1 million on a reported basis due to linen divestitures. However, organic revenues grew 10%, reflecting growth at IMS North America.

Revenues from Applied Sterilization Technologies rose 5% to $126.5 million while organic revenues grew 5% on the back of increased demand from the segment`s core medical device customers.

Revenues from the Life Sciences segment grew 10% to $89.5 million in the quarter on 13% growth in Service revenues, 8% increase in consumable revenues and 9% rise in capital equipment revenues. On an organic basis, revenues increased 9% year over year.

Margins

Adjusted gross margin improved 360 basis points (bps) year over year to 42.2% in the reported quarter on account of synergies from divested low-margin businesses, improvement in operational efficiencies, a favorable product mix and pricing.

STERIS witnessed a 6.3% year-over-year decline in selling, general and administrative expenses to $153.4 million. Research and development expenses fell 4.8% to $13.9 million. Accordingly, adjusted operating margin expanded 490 bps on a year-over-year basis to 15.7% in the reported quarter.

Financial Details

STERIS exited second-quarter fiscal 2018 with cash and cash equivalents of $295.6 million compared with $294.8 million at the end of first-quarter fiscal 2018. The company had a long-term debt of $1.45 billion at the end of second-quarter fiscal 2018 compared with $1.49 billion at the end of first-quarter fiscal 2018.

Year to date, the company generated $217.4 million in cash flow from operations, up 15.3% from the year-ago period. Free cash flow in this period was $144 million compared with $119.4 million in the prior-year period.

2018 Guidance

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

Our Take

STERIS exited second-quarter fiscal 2018 on a mixed note. The year-over-year decline in revenues is a disappointment. On the positive side, organic growth performance was strong across three of the segments. Further, growth in free cash flow reserve is indicative of the company’s strong cash balance. The company has also made certain divestments and organizational changes, which are expected to better align with its operations.

Zacks Rank & Other Key Picks

STERIS has a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader medical sector are PetMed Express, Inc. (NASDAQ:PETS) , Luminex Corporation (NASDAQ:LMNX) and Intuitive Surgical, Inc. (NASDAQ:ISRG) . Notably, PetMed and Luminex sport a Zacks Rank #1 (Strong Buy), while Intuitive Surgical carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported earnings per share of 43 cents in the second quarter of fiscal 2018, up 79.2% from the year-ago quarter’s 24 cents. Also, gross margin expanded 548 bps year over year to 35.2% in the reported quarter.

Luminex reported adjusted earnings per share of 19 cents in the third quarter of 2017, up 216.7% year over year. The company’s revenues in the quarter increased almost 4.1% year over year to $74.1 million.

Intuitive Surgical posted adjusted earnings of $2.77 per share in the third quarter of 2017, up 34.5% on a year-over-year basis. Also, revenues increased 18% year over year to $806.1 million.

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