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Steris (STE) Q3 Dismal: Earnings Miss Estimates, View Cut

Zacks Equity Research

Steris Plc STE reported third-quarter fiscal 2017 adjusted earnings per share (EPS) of 98 cents, in line with the year-ago quarter. The adjusted EPS figure, however, missed the Zacks Consensus Estimate by 5.8%.

The company reported net loss of 6 cents per share against net income of 26 cents in the year-ago quarter.  

Revenues in Details

Steris generated revenues of $646.8 million, up 5% year over year. The top line, however, missed the Zacks Consensus Estimate of $681 million.

STERIS PLC Price, Consensus and EPS Surprise

 

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

Foreign currency fluctuations adversely impacted the quarter's revenues by 170 basis points (bps). Constant currency organic revenue growth (excluding acquisitions and divestitures) was 3% primarily driven by volume, offset by 40 bps impact from unfavorable price.

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 2% year over year to $323.4 million in the reported quarter. Organic revenues were up 4% at CER, mainly on mid-single digit growth across capital equipment, consumables (up 7% at CER) and service revenues (up 4%).

Revenues from the Healthcare Specialty Services segment improved 3% to $133.5 million both on reported and adjusted CER basis. This reflects a 4% revenue growth at IMS and mid-teens revenue growth from the legacy Synergy CSD outsourcing business in Europe, offset by lower growth from legacy Synergy Linen and Sterilmed businesses.

On the other hand, revenues from Applied Sterilization Technologies improved 22.4% to $110.4 million, driven by synergies from Synergy Health and solid organic revenue growth of 6% at CER.

Lastly, revenues from the Life Sciences segment declined 5% to $78.3 million in the quarter, as 4% growth in consumable revenues and 8% increase in service revenues were more than offset by the lumpy capital equipment shipments, which were down 29% in the quarter. On a constant currency organic basis revenues declined 6% year over year. 

Margins

Adjusted gross margin improved 80 bps year over year to 40.1% in the reported quarter, favorably impacted by a 140 bps improvement from divestitures, 60 bps improvement due to foreign currency, 30 bps from the suspension of the medical device excise tax, and 10 bps from other items, offset by a 160 bps impact of the accounting policy changes related to Synergy Health business inclusion.

Steris witnessed a 10.5% year-over-year decrease in selling, general and administrative expenses to $158.8 million. However, research and development expenses rose 1.8% to $14.6 million. Adjusted operating margin expanded 551 bps on a year-over-year basis to 13% in the reported quarter.

Financial Details

Steris exited the fiscal third quarter with cash and cash equivalents of $264.9 million compared with $254.3 million in the prior-year quarter. The company had long-term debt of $1.51 billion at the end of the quarter, compared with $1.50 billion at the prior-quarter end.

The company generated $289.4 million in cash flow from operations on a year-to-date basis, up 176.7% from the year-ago period. Capital expenditures totaled $112.2 million resulting in free cash flow of $181.9 million, compared with $22.9 million a year ago.

Guidance

Reflecting a lower-than-expected third-quarter performance, Steris lowered its revenue guidance for fiscal 2017. The company currently expects to witness revenue growth of 17%, compared with the previous guidance of 19–20%.

The company has also lowered its fiscal 2017 adjusted EPS projection to the band of $3.70–$3.76 from earlier range of $3.85–$4.00.

Our Take

Steris ended the third-quarter fiscal 2017 on a dismal note, with earnings and revenues both missing the Zacks Consensus Estimate. The company’s lowered revenue and earnings guidance for fiscal 2017 hints at a gloomy operating scenario in the days ahead. However, organic growth performance was strong across most of the segments. 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 #3 (Hold). Better-ranked medical stocks include Glaukos Corporation GKOS, Cardiovascular Systems CSII and Neogen Corp. NEOG. Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Glaukos gained over 100% in the last one year in comparison to the S&P 500’s gain of only 23.8%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year in comparison to the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 32.7% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth of 16.7% for the next five years compared to the industry average of 15.2%.

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