STERIS Corporation Announces Fiscal 2010 Second Quarter Results

November 3, 2009 7:00 AM EST

    --  Second Quarter Earnings Per Share Increases 13% to $0.54
    --  Company Increases Earnings Per Share Outlook for Fiscal 2010
    --  Board of Directors Approves Special Dividend of $2.00 Per Share

MENTOR, Ohio--(BUSINESS WIRE)-- STERIS Corporation (NYSE: STE) today announced financial results for its fiscal 2010 second quarter ended September 30, 2009. Fiscal 2010 second quarter revenues were $314.2 million compared with $323.1 million in the second quarter of fiscal 2009, a decline of 3%. On a constant currency basis, revenues decreased 2%. Operating income increased 7% to $50.1 million, or 15.9% of revenues, compared with $47.0 million, or 14.5% of revenues in the second quarter of fiscal 2009. Fiscal 2010 second quarter net income was $32.1 million, or $0.54 per diluted share, compared with net income of $28.8 million, or $0.48 per diluted share, in the second quarter of fiscal 2009.

"We are pleased with the quarterly improvements in our business, in particular revenue from our healthcare capital equipment products," said Walt Rosebrough, President and Chief Executive Officer of STERIS. "As we anticipated, our year-over-year revenue decline improved this quarter, and our expectation is that this trend will continue for the remainder of our fiscal year. We have also benefited from favorable foreign currency exchange rates and lower raw material costs so far this year, and we have continued to improve efficiencies. These trends combined to expand our operating margins even in the face of lower revenue. As a result, we are increasing our full year earnings guidance while maintaining our expectations for revenue."

Segment Results

Healthcare revenues in the quarter were $223.0 million compared with $227.8 million in the second quarter of fiscal 2009, a decline of 2%. Strength in consumable revenues was offset by declines in capital equipment and service revenues. Backlog levels at quarter end were $129.9 million, an increase of 5% compared with the same time last year. Operating income was $36.4 million, an increase of 11% compared with the prior year period, driven by efficiency initiatives, lower raw material costs and favorable foreign currency exchange rates.

Life Sciences second quarter revenues were $54.4 million compared with $57.2 million in the second quarter of fiscal 2009, a decline of 5%. Double digit growth in consumable revenues was more than offset by declines in capital equipment and service revenues. Backlog levels at quarter end were $46.5 million, a decline of 5% compared with the prior year period. Life Sciences operating income was $8.5 million, an increase of 37% compared with the prior year period, driven primarily by improved operating efficiencies.

Fiscal 2010 second quarter revenues for Isomedix Services were $34.7 million compared with $37.0 million in the same period last year, a decline of 6%. Revenues were affected by the previously disclosed sale of two facilities during fiscal 2009. Operating income was $7.4 million in the quarter compared with $10.2 million in the second quarter of last year. Operating income in the second quarter of fiscal 2009 included the impact of a facility sale, which added $2.1 million to operating income.

Cash Flow

Net cash provided by operations for the first half of fiscal 2010 was $92.4 million, compared with net cash provided by operations of $68.7 million in the same period last year. Free cash flow (see note 1) for the first half of fiscal 2010 was $74.4 million, compared with free cash flow of $57.3 million in the prior year period. The growth in free cash flow was driven by lower working capital requirements.

Dividend Announcement

The Company also announced today that STERIS's Board of Directors has authorized a regular quarterly dividend in the amount of $0.11 per common share. In addition, the Board of Directors has authorized a special dividend of $2.00 per common share to be paid with the regular quarterly dividend. The combined dividend is payable December 22, 2009 to shareholders of record at the close of business on November 24, 2009.

"The decision by our Board of Directors to return cash to our shareholders through a special dividend is a reflection of our current cash position, free cash flow generation and the confidence we have in the Company's future," said Rosebrough. "STERIS's strong balance sheet allows us to make this distribution without hindering our ability to pursue growth alternatives."

Outlook

Based upon first half results and current anticipated trends, the Company is updating its outlook for the full fiscal year. The Company's expectations for revenue are unchanged at flat to down mid-single digits from fiscal 2009 levels. The Company is increasing its expected range for earnings per diluted share, and currently anticipates approximately $1.90 to $2.05 for the full fiscal year, compared with prior guidance of $1.80 to $2.00. This outlook reflects certain key assumptions, some of which are listed below:

    --  Healthcare revenues are anticipated to be flat to down mid-single
        digits, including the previously announced impact of reduced revenues
        from SYSTEM 1, which is now anticipated to reduce revenues by
        approximately $20 million in fiscal 2010.
    --  Life Sciences revenues are anticipated to be flat.
    --  Isomedix revenues are anticipated to decline in the mid-single digits.
    --  The Company has assumed the average forward exchange rates for the U.S.
        dollar and key international currencies as of September 30, 2009. These
        rates reflect a weakening of the U.S. dollar, creating a headwind for
        earnings in the second half of the fiscal year.
    --  The Company anticipates no raw material cost increases during the second
        half of the fiscal year.
    --  EBIT as a percent of revenue is now anticipated to be approximately 15%.
    --  The anticipated effective tax rate is approximately 35%.

For the full fiscal year 2010, free cash flow (see note 1) is anticipated to be approximately $125 million and capital expenditures are anticipated to be approximately $50 million.

Conference Call

In conjunction with this release, STERIS Corporation management will host a conference call today at 10:00 a.m. Eastern time. The conference call can be heard live over the Internet at www.steris-ir.com or via phone by dialing 1-800-369-8428 in the United States and Canada, and 1-773-799-3378 internationally, then referencing the password "STERIS".

For those unable to listen to the conference call live, a replay will be available from 12:00 p.m. Eastern time on November 3, 2009, until 5:00 p.m. Eastern time on November 17, 2009, either over the Internet at www.steris-ir.com or via phone by calling 1-866-487-7528 in the United States and Canada, and 1-203-369-1648 internationally.

About STERIS

The mission of STERIS Corporation is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products and services. The Company has approximately 5,000 dedicated employees around the world working together to supply a broad array of solutions by offering a combination of equipment, consumables and services to healthcare, pharmaceutical, industrial and government Customers. The Company is listed on the New York Stock Exchange under the symbol STE. For more information, visit www.steris.com.

(1) Free cash flow is a non-GAAP number used by the Company as a measure to gauge its ability to fund future growth opportunities, repurchase common shares, and pay cash dividends. Free cash flow is defined as cash flows from operating activities less purchases of property, plant, equipment and intangibles, net, plus proceeds from the sale of property, plant, equipment and intangibles. STERIS's calculation of free cash flow may vary from other companies.

This news release, and the conference call referenced here, may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "outlook," "potential," "confidence," "improve," "optimistic," "comfortable," "trend", and "seeks," or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws or government regulations or the application or interpretation thereof. Other risk factors are described in the Company's Form 10-K and other securities filings. Many of these important factors are outside STERIS's control. No assurances can be provided as to any outcome from litigation, regulatory action, administrative proceedings, government investigations, warning letters, cost reductions, business strategies, level of share repurchases or dividends, earnings and revenue trends, expense reduction or other future financial results. Unless legally required, the Company does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or the Company's business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, regulations, regulatory actions, including without limitation previously disclosed FDA warning letters and government investigations, certifications or other requirements or standards may delay or prevent new product introductions, affect the production and marketing of existing products, or otherwise affect Company performance, results, or value, (d) the potential of international unrest or effects of fluctuations in currencies, tax assessments or rates, raw material costs, benefit or retirement plan costs, or other regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company's products and services, (f) the possibility that anticipated cost savings or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with the matters described in this release, and the conference call referenced here, may adversely impact Company performance, results, or value, (g) the effect of the credit crisis on our ability, as well as the ability of our customers and suppliers, to adequately access the credit markets when needed, and (h) those risks described in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 30, 2009, under Item 1A, "Risk Factors."

STERIS Corporation

Consolidated Condensed Statements of Income

(In thousands, except per share data)

                             Three Months Ended         Six Months Ended

                             September 30,              September 30,

                             2009         2008          2009         2008

                             (Unaudited)  (Unaudited)   (Unaudited)  (Unaudited)

 Revenues                    $ 314,229    $ 323,127     $ 597,772    $ 634,692

 Cost of revenues              181,574      190,764       340,281      371,828

 Gross profit                  132,655      132,363       257,491      262,864

 Operating expenses:

 Selling, general, and         74,516       77,290        149,121      164,638
 administrative

 Research and development      8,189        8,068         15,769       16,347

 Restructuring expense         (115)        37            (327)        (129)

 Total operating expenses      82,590       85,395        164,563      180,856

 Income from operations        50,065       46,968        92,928       82,008

 Non-operating expense, net    2,852        1,978         5,718        3,363

 Income tax expense            15,129       16,196        29,584       24,351

 Net income                  $ 32,084     $ 28,794      $ 57,626     $ 54,294

 Earnings per common share
 (EPS) data:

 Basic                       $ 0.55       $ 0.49        $ 0.98       $ 0.92

 Diluted                     $ 0.54       $ 0.48        $ 0.97       $ 0.90

 Cash dividends declared per $ 0.11       $ 0.08        $ 0.22       $ 0.14
 common share outstanding

 Weighted average number of
 common shares outstanding
 used in EPS computation:

 Basic number of common        58,654       59,312        58,585       59,003
 shares outstanding

 Diluted number of common      59,418       60,376        59,201       60,012
 shares outstanding

STERIS Corporation

Consolidated Condensed Balance Sheets

(In thousands)

                                     September 30,  March 31,

                                     2009           2009

Assets                               (Unaudited)

Current assets:

Cash and cash equivalents            $ 223,758      $ 154,180

Accounts receivable, net               214,359        238,438

Inventories, net                       128,147        130,218

Other current assets                   27,187         30,294

Total Current Assets                   593,451        553,130

Property, plant, and equipment, net    349,045        350,996

Goodwill and intangible assets, net    312,521        305,189

Other assets                           8,219          7,624

Total Assets                         $ 1,263,236    $ 1,216,939

Liabilities and Equity

Current liabilities:

Accounts payable                     $ 56,828       $ 68,573

Other current liabilities              121,472        133,453

Total Current Liabilities              178,300        202,026

Long-term debt                         210,000        210,000

Other liabilities                      74,162         87,177

Equity                                 800,774        717,736

Total Liabilities and Equity         $ 1,263,236    $ 1,216,939

STERIS Corporation

Segment Data

(In thousands)

                            Three Months Ended        Six Months Ended

                            September 30,             September 30,

                            2009         2008         2009         2008

                            (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)

 Segment Revenues:

 Healthcare                 $ 223,006    $ 227,836    $ 423,610    $ 451,901

 Life Sciences                54,401       57,151       100,517      105,190

 STERIS Isomedix Services     34,735       36,971       70,142       73,834

 Total Reportable Segments    312,142      321,958      594,269      630,925

 Corporate and Other          2,087        1,169        3,503        3,767

 Total Segment Revenues     $ 314,229    $ 323,127    $ 597,772    $ 634,692

 Segment Operating Income
 (Loss):

 Healthcare                 $ 36,366     $ 32,698     $ 68,469     $ 61,928

 Life Sciences                8,540        6,228        13,319       7,275

 STERIS Isomedix Services     7,401        10,211       15,740       18,398

 Total Reportable Segments    52,307       49,137       97,528       87,601

 Corporate and Other          (2,242)      (2,169)      (4,600)      (5,593)

 Total Segment Operating    $ 50,065     $ 46,968     $ 92,928     $ 82,008
 Income

STERIS Corporation

Consolidated Condensed Statements of Cash Flows

(In thousands)

                                                       Six Months Ended

                                                       September 30,

                                                       2009         2008

                                                       (Unaudited)  (Unaudited)

 Operating Activities:

 Net income                                            $ 57,626     $ 54,294

 Non-cash items                                          32,945       34,607

 Changes in operating assets and liabilities             1,837        (20,210)

 Net cash provided by operating activities               92,408       68,691

 Investing Activities:

 Purchases of property, plant, equipment, and            (18,543)     (20,872)
 intangibles, net

 Proceeds from sale of property, plant, equipment and    509          9,506
 intangibles

 Net cash used in investing activities                   (18,034)     (11,366)

 Financing Activities:

 Proceeds from the issuance of long-term obligations     -            150,000

 Payments under credit facilities, net                   -            (79,180)

 Deferred financing fees and debt issuance costs         -            (476)

 Repurchases of common shares                            (289)        (50,210)

 Cash dividends paid to common shareholders              (12,894)     (8,275)

 Tax benefit from stock options exercised                463          8,732

 Stock options and other equity transactions, net        2,102        32,956

 Net cash (used in) provided by financing activities     (10,618)     53,547

 Effect of exchange rate changes on cash and cash        5,822        (2,521)
 equivalents

 Increase in cash and cash equivalents                   69,578       108,351

 Cash and cash equivalents at beginning of period        154,180      51,868

 Cash and cash equivalents at end of period            $ 223,758    $ 160,219

STERIS Corporation

Non-GAAP Disclosures (Unaudited)

(In thousands, except per share data)

The following table presents financial measures which are considered to be
"non-GAAP financial measures" under Securities Exchange Commissions rules.
Free cash flow is defined by the Company as cash flows from operating
activities less purchases of property, plant, equipment and intangibles, net
(capital expenditures) plus proceeds from the sale of property, plant,
equipment and intangibles. The Company uses free cash flow as a measure to
gauge its ability to fund future growth opportunities, repurchase common
shares, and pay cash dividends. STERIS's calculation of free cash flow may
vary from other companies.

                                            Six Months Ended          Outlook

                                            September 30,             Fiscal

                                            2009         2008         2010

                                            (Unaudited)  (Unaudited)

Calculation of Free Cash Flow:

Cash flows from operating activities        $ 92,408     $ 68,691     $ 175,000

Purchases of property, plant, equipment,      (18,543)     (20,872)     (50,000)
and intangibles, net

Proceeds from the sale of property, plant,    509          9,506        -
equipment, and intangibles

Free Cash Flow                              $ 74,374     $ 57,325     $ 125,000

STERIS Corporation

Supplemental Financial Data (Unaudited)

Second Quarter Fiscal 2010

As of September 30, 2009

                FY 2010                FY 2009

                Q1         Q2          Q1         Q2         Q3         Q4         Total

Total Company
Revenues

  Capital       $ 92,703   $ 119,146   $ 120,117  $ 130,313  $ 129,563  $ 156,654  $ 536,647

  Consumables     80,797     79,989      75,465     73,543     73,745     72,129     294,882

  Service         110,043    115,094     115,983    119,271    116,159    115,583    466,996

   Total          190,840    195,083     191,448    192,814    189,904    187,712    761,878
   Recurring

 Total          $ 283,543  $ 314,229   $ 311,565  $ 323,127  $ 319,467  $ 344,366  $ 1,298,525
 Revenues

 United States  $ 223,806  $ 238,292   $ 241,219  $ 245,139  $ 250,355  $ 256,774  $ 993,487
 Revenues

 United States
 Revenues as a    79%        76%         77%        76%        78%        75%        77%
 % of Total

 International  $ 59,737   $ 75,937    $ 70,346   $ 77,988   $ 69,112   $ 87,592   $ 305,038
 Revenues

 International
 Revenues as %    21%        24%         23%        24%        22%        25%        23%
 of Total

Segment Data    Q1         Q2          Q1         Q2         Q3         Q4         Total

 Healthcare

  Revenues

   Capital      $ 76,837   $ 99,737    $ 100,915  $ 106,576  $ 109,221  $ 130,137  $ 446,849

   Consumables    66,731     64,038      62,684     59,990     60,217     57,851     240,742

   Service        57,036     59,231      60,466     61,270     60,739     61,197     243,672

   Total          123,767    123,269     123,150    121,260    120,956    119,048    484,414
   Recurring

  Total
  Healthcare    $ 200,604  $ 223,006   $ 224,065  $ 227,836  $ 230,177  $ 249,185  $ 931,263
  Revenues

  Operating
  Profit/         32,102     36,366      29,230     32,698     32,406     38,267     132,601
  (Loss)

 Life Sciences

  Revenues

   Capital      $ 15,866   $ 19,374    $ 18,721   $ 23,980   $ 20,292   $ 26,219   $ 89,212

   Consumables    14,066     15,951      12,783     13,552     13,528     14,278     54,141

   Service        16,184     19,076      16,535     19,619     18,967     18,227     73,348

   Total          30,250     35,027      29,318     33,171     32,495     32,505     127,489
   Recurring

  Total Life
  Sciences      $ 46,116   $ 54,401    $ 48,039   $ 57,151   $ 52,787   $ 58,724   $ 216,701
  Revenues

  Operating
  Profit/         4,779      8,540       1,047      6,228      7,151      3,987      18,413
  (Loss)

 Isomedix
 Services

  Revenues      $ 35,407   $ 34,735    $ 36,863   $ 36,971   $ 34,642   $ 34,169   $ 142,645

  Operating
  Profit          8,339      7,401       8,187      10,211     8,453      7,912      34,763
  (Loss)

 Corporate and
 Other

  Revenues      $ 1,416    $ 2,087     $ 2,598    $ 1,169    $ 1,861    $ 2,288    $ 7,916

  Operating
  Profit          (2,358)    (2,242)     (3,424)    (2,169)    (2,192)    (2,547)    (10,332)
  (Loss)

Other Data      Q1         Q2          Q1         Q2         Q3         Q4         Total

  Healthcare    $ 132,391  $ 129,937   $ 113,856  $ 124,135  $ 133,863  $ 119,790  $ 119,790
  Backlog

  Life
  Sciences        46,257     46,492      49,776     48,712     50,170     45,231     45,231
  Backlog

  Total         $ 178,648  $ 176,429   $ 163,632  $ 172,847  $ 184,033  $ 165,021  $ 165,021
  Backlog

  Free Cash     $ 24,440   $ 49,934    $ 18,119   $ 39,206   $ 32,276   $ 56,235   $ 145,836
  Flow

  Net Debt      $ 33,928   $ (13,758)  $ 129,222  $ 90,581   $ 104,250  $ 55,820   $ 55,820

This supplemental data is consistent with publicly disclosed information
provided in quarterly conference calls, earnings releases and SEC filings, and
is subject to all definitions, precautions and limitations contained in those
disclosures. Please see the Company's most recent Form 10-Q for definitions (and
reconciliation where appropriate) of backlog, free cash flow and net debt.

    Source: STERIS Corporation

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