Steris Corp.’s Q2 net rises despite falling sales

Steris Corp. reported net income of $32.1 million for the second quarter of fiscal 2010, an 11 percent increase, despite Q2 sales falling 4 percent to $314 million.

Press release

STERIS Corporation Announces Fiscal 2010 Second Quarter Results

• 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.”