STERIS Corp. STE reported second-quarter fiscal 2016 adjusted earnings per share (EPS) of 83 cents, 9.2% ahead of the Zacks Consensus Estimate and up 22.1% 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 72% or 73.1% respectively on a year-over-year basis to $8.7 million or 14 cents per share in the quarter.
Revenues in Detail
Revenues improved 5.9% year over year (up 8% at constant exchange rate or CER) to $490 million, but closely missed the Zacks Consensus Estimate of $491 million. The year-over-year revenue upside was broad-based driven by growth observed across STERIS’ three segments.
Revenue growth of 2% came from acquisitions and 8% from volume; partially offset by a 2% decline owing to foreign currency fluctuations.
Segments in Detail
Revenues from the Healthcare segment climbed 3.2% year over year to $362.3 million in the reported quarter. Healthcare service revenue growth of 4%, Healthcare consumable revenue growth of 2% and capital equipment revenue growth of 3% contributed to the segment’s improvement. Healthcare backlog increased 16% year over year to $136 million.
Revenues from Life Sciences improved 20.1% to $71 million in the reported quarter. Consumable revenue growth of 32%, reflecting the recent acquisition of GEPCO, primarily contributed to this segment’s revenue growth. Capital equipment revenue growth of 25% and service revenue growth of 3% also contributed to the upside.
STERIS Isomedix Services revenue improved 7.7% to $55.8 million in the quarter, driven by higher volumes from the segment’s core medical device customers.
Margins
Adjusted gross margin improved 80 basis points (bps) year over year to 42.7% in the second quarter, driven by favorable foreign currency exchange rates, lower material costs and improved productivity.
STERIS witnessed a 3.2% year-over-year increase in adjusted selling, general, and administrative expenses to $115.3 million. On the other hand, research and development expenses spiked 9.6% to $14.3 million, owing to higher expenses related to the development of procedural products and accessories. Nevertheless, adjusted operating margin expanded 130 bps year over year to 16.2%, on a higher gross margin.
Financial Details
STERIS exited the reported quarter with cash and cash equivalents of $162.2 million, compared with $196.2 million at the end of first-quarter fiscal 2016. The company had long-term debt of $829.8 million at the end of the fiscal second quarter, compared with $686.2 million at the end of the previous quarter.
In the reported quarter, the company generated $79.5 million in cash flow from operations, down 24.2% year over year. Capital expenditure was $39.9 million resulting in free cash flow of $39.6 million, compared with $69.2 million a year ago. The free cash flow decline was a result of the cash impact of acquisition-related expenses.
Guidance
STERIS has reaffirmed its top-line guidance for fiscal 2016. The company continues to expect revenue growth in the range of 6–7%. The current Zacks Consensus Estimate for fiscal 2016 revenues is pegged at $1.977 billion.
The company also continues to expect fiscal 2016 adjusted EPS in the band of $3.15–$3.30. The current Zacks Consensus Estimate is pegged at $3.24, within the company-provided guidance range.
Our Take
Following an impressive fiscal first-quarter outcome, STERIS ended the second quarter of fiscal 2016 on a mixed note. While the bottom line comfortably exceeded the Zacks Consensus Estimate, the top line failed to meet the same. The company’s unchanged financial guidance for fiscal 2016 also keeps us on the sidelines. However, the company’s segmental performance was impressive, with growth witnessed across all three segments.
Geographically too, STERIS observed a mixed scenario. While the U.S. market delivered double-digit growth, challenges were observed in the markets of Europe, Asia-Pacific and Latin America.
Nevertheless, the substantial improvement on the company’s profitability front is encouraging. Currently, we look forward to the proposed combination of STERIS and Synergy Health, which management expects to close on Nov 2, 2015. This buyout will allow the combined company to acquire a greater share in the international market.
STERIS currently retains a Zacks Rank #3 (Hold).
Stocks to Consider
Some top-ranked stocks in the med/dental-supply industry are Antares Pharma Inc. ATRS, Align Technology Inc. ALGN and Invacare Corporation IVC. While Antares Pharma sports a Zacks Rank #1 (Strong Buy), Align and Invacare hold a Zacks Rank #2 (Buy).
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