STERIS (STE) Q2 Earnings Surpass Estimates, Margins Down

STERIS plc STE reported second-quarter fiscal 2022 adjusted earnings per share (EPS) of $1.99, up 34.5% from the year-ago figure. The metric surpassed the Zacks Consensus Estimate by 8.7%.

The adjustment excludes the impact of certain non-recurring charges like amortization of acquired intangible assets, acquisition and integration-related charges, and amortization of property step up to fair value.

The company’s GAAP EPS was 69 cents compared with the year-ago EPS of $1.23, reflecting a decline of 78.3% year over year.

Revenues in Detail

Revenues of $1.19 billion improved 58.3% year over year in the quarter. Further, the metric exceeded the Zacks Consensus Estimate by 3.1%. The year-over-year uptick was led by robust sales across three of the company’s reporting segments.

Organic revenues at constant currency or CER rose 12% year over year in the fiscal second quarter.

Quarter in Detail

The company operates through four segments — Healthcare, Applied Sterilization Technologies, Life Sciences and Dental.

Revenues at Healthcare rose 58% year over year to $744.1 million (up 10% on a CER organic basis) on a 120% increase in consumable revenues, a 25% rise in service revenues and a 54% improvement in capital equipment revenues.

Revenues at Applied Sterilization Technologies improved 21% to $204.9 million (up 19% at CER organic basis). CER organic revenues growth was driven by increased demand from medical device customers during the quarter.

STERIS plc Price, Consensus and EPS Surprise

STERIS plc Price, Consensus and EPS Surprise

STERIS plc price-consensus-eps-surprise-chart | STERIS plc Quote

Revenues at the Life Sciences segment rose 14% to $132.3 million (up 7% at CER organic basis) on 17% growth in capital equipment revenues and a 19% rise in service revenues and an 11% increase in consumable revenues.

The Dental segment reported revenues of $115.6 million.

Margins

Gross profit in the reported quarter was $480.3 million, up 45.5% from the prior-year quarter’s adjusted gross profit (excluding costs and benefits of revenues for restructuring). Gross margin contracted 352 basis points (bps) year over year to 40.1% in the reported quarter.

STERIS witnessed a 99.6% year-over-year surge in selling, general and administrative expenses to $344.8 million. Research and development expenses rose 16.7% to $18.8 million. Adjusted operating expenses of $363.6 million escalated 92.6% year over year.

Accordingly, adjusted operating profit totaled $116.7 million, reflecting a 17.3% fall from the prior-year quarter. Adjusted operating margin contracted 892 bps to 9.8%.

Financial Details

STERIS exited second-quarter fiscal 2022 with cash and cash equivalents of $383.5 million compared with $220.5 million at the end of first-quarter fiscal 2021.

Cumulative net cash flow from operating activities at the end of second-quarter fiscal 2022 was $268.8 million compared with $296.1 million a year ago.

The company’s free cash flow at the end of the fiscal second quarter was $135.8 million compared with $185.6 million in the year-ago period.

The company approved a quarterly interim dividend of 43 cents per share to shareholders.

Further, the company has a five-year annualized dividend growth rate of 9.18%.

Guidance

STERIS has reinstated its financial guidance for fiscal 2022.

The company expects constant currency organic revenue growth in the range of 10-11%. The Zacks Consensus Estimate for the same is pegged at $4.60 billion.

Adjusted earnings per diluted share are anticipated in the band of $7.60-$7.85. The Zacks Consensus Estimate for the metric is pegged at $7.70.

Our Take

STERIS exited second-quarter fiscal 2022 on a bullish note with better-than-expected results. The year-over-year growth in revenues and earnings looks encouraging. Solid revenue growth across three of its reporting segments amid the post-pandemic recovery contributed to the top line. Elevated demand from medical device customers drove CER organic revenues growth in the Applied Sterilization Technologies segment. Ongoing integration efforts for Cantel Medical buoy optimism for the stock. Further, the bullish fiscal 2022 guidance is indicative that this growth momentum will continue.

However, escalating operating costs and contraction in operating margin during the quarter are concerning. The year-over-year decline in free cash flow given anticipated costs associated with the Cantel Medical acquisition and higher capital spending year-over-year does not bode well either.

Zacks Rank and Key Picks

STERIS currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical space that have announced quarterly results are Medpace Holdings, Inc. MEDP, Thermo Fisher Scientific Inc. TMO and West Pharmaceutical Services, Inc. WST.

Medpace, currently carrying a Zacks Rank #1 (Strong Buy), reported third-quarter 2021 adjusted EPS of $1.29, surpassing the Zacks Consensus Estimate by 20.6%. Revenues of $295.57 million beat the Zacks Consensus Estimate by 1.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Thermo Fisher Scientific reported third-quarter 2021 adjusted EPS of $5.76, which surpassed the Zacks Consensus Estimate by 23.3%. Revenues of $9.33 billion outpaced the Zacks Consensus Estimate by 12%. It currently carries a Zacks Rank #1.

West Pharmaceutical Services, carrying a Zacks Rank #2 (Buy), reported third-quarter 2021 adjusted EPS of $2.06, which beat the Zacks Consensus Estimate by 13.2%. Revenues of $706.5 million outpaced the consensus mark by 3.2%.

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