Steris Corp. (STE) reported second-quarter fiscal 2015 adjusted earnings of 68 cents per share, up 23.6% from the year-ago level of 55 cents. The year-over-year improvement was primarily driven by the solid double-digit top-line growth . Adjusted earnings also beat the Zacks Consensus Estimate of 62 cents by 9.7%.

Steris' reported earnings per share (EPS) rose 4% year over year to reach 52 cents in the reported quarter.

Following the earnings release, Steris' share price rose 1.9% to eventually close at $63.64 yesterday.

Steris Corporation - Earnings Surprise | FindTheBest

Revenues in Detail

Revenues improved 20.6% year over year to $462.7 million, also beating the Zacks Consensus Estimate of $450 million by 2.75%. The year-over-year growth was driven by the IMS and Eschmann acquisitions as well as strong organic growth in Steris' Healthcare and Isomedix segments. Organic growth in the quarter was 6%.

Foreign currency had a neutral impact, while pricing had a 1% positive impact on top-line growth.

Segments in Detail

Revenues from the Healthcare segment climbed 26.6% year over year to $351.2 million in the reported quarter, with organic revenue growth of 8%. Growth in the top line was driven by 13% increase in consumable revenues and 65% improvement in service revenues, owing to healthy organic growth and the acquisition of IMS. Also, a 9% increase in capital equipment revenues with growth in both infection prevention and surgical solutions contributed to this segment's sales growth.

Revenues from Life Sciences rose 1.3% to $59.1 million in the reported quarter. The 14% increase in consumable revenues and 4% growth in service revenues were partially offset by a 15% decline in capital equipment revenues.

STERIS Isomedix Services revenues grossed $51.9 million in the quarter, up 9.4% year over year.

Margins

Adjusted gross profit increased 25.3% year over year to $193.7 million in the reported quarter. Consequently, adjusted gross margin expanded 160 basis points (bps) year over year to 41.9% in the second quarter. The gross margin improvement came on the back of favorable product mix pricing, productivity and foreign currency gains, partially offset by higher material costs and inflation.

Steris witnessed a 29.9% year-over-year increase in adjusted selling, general, and administrative expenses to $111.7 million. On the other hand, research and development expenses declined 3.9% to $13 million in the quarter. Adjusted operating margin expanded 60 bps year over year to 14.9%, owing to higher gross margins.

Financial Details

Steris exited the second quarter of fiscal 2015 with cash and cash equivalents of $147.4 million compared with $152.8 million at the end of 2014. The company had long-term debt of $620 million at quarter-end.

During the reported quarter, the company generated $104.9 million in cash flow from operations, up from the year-ago equivalent of $80 million. Capital expenditure incurred by the company was $35.7 million resulting in a free cash flow of $69.2 million for the quarter, compared with $32.9 million a year ago. The increase in free cash flow was primarily due to the impact of working capital improvements and lower capital expenditures.

On Oct 13, 2014, Steris had proposed to buy UK-based outsourced sterilization services provider Synergy Health plc (SYR.L) for $1.9 billion in cash and stock. Post-acquisition, both Steris and Synergy will merge to form subsidiaries of UK-based “New Steris”, which is expected to generate annual revenues of approximately $2.6 billion with employee strength of 14,000. The acquisition is expected to be over by Mar 31, 2015.

Guidance

Steris reiterated its revenue outlook for fiscal 2015. The company continues to expect revenue growth in the range of 15–17%. However, adjusted EPS for the fiscal is now projected in the range of $2.86–$2.91 per share, up from the earlier guidance of $2.78–$2.91 per share. The current Zacks Consensus Estimate for revenues is pegged at $1.88 billion while the same for EPS stands at $2.90 (close to the higher end of the guided range).

Our Take

Steris delivered promising second-quarter fiscal 2015 financial results with both earnings and revenues exceeding the Zacks Consensus Estimate. With the Synergy acquisition, the newly formed company is expected to acquire a greater share in the international market. Moreover, with this transaction, management aims at targeting the mostly untapped yet lucrative emerging markets, despite the company having experienced a slowdown in its business in the Asian and Latin American markets in the reported quarter.

The stock currently retains a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other well-performing stocks in the med/dental-supply industry that are worth a look include AmerisourceBergen Corporation (ABC), CR Bard Inc. (BCR) and Bio-Reference Laboratories Inc. (BRLI). All the three stocks carry the same Zacks Rank #2.

Read the Full Research Report on BCR
Read the Full Research Report on ABC
Read the Full Research Report on STE
Read the Full Research Report on BRLI


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