STERIS Corporation Announces Fiscal 2011 Second Quarter Results

  • Operating margin expansion continues
  • Full year outlook updated

MENTOR, Ohio--(BUSINESS WIRE)-- STERIS Corporation (NYSE: STE) today announced financial results for its fiscal 2011 second quarter ended September 30, 2010. Fiscal 2011 second quarter revenues were $312.4 million compared with $314.2 million in the second quarter of fiscal 2010, a decrease of 1%. Operating profit increased 10% to $54.9 million, or 17.6% of revenues, compared with $50.1 million, or 15.9% of revenues in the second quarter of fiscal 2010. Fiscal 2011 second quarter net income was $35.7 million, or $0.59 per diluted share, compared with net income of $32.1 million, or $0.54 per diluted share in the second quarter of fiscal 2010. Fiscal 2011 second quarter net income was impacted by the $110 million liability recorded in the first quarter for the SYSTEM 1 Rebate Program, which favorably impacted the Company’s tax rate, resulting in a benefit of $0.04 per diluted share during the quarter. Please see the attached schedules for more information, including comparisons excluding the impact of the SYSTEM 1 Rebate Program.

“During the second quarter, we continued to expand our operating margins, despite a slight decline in revenue,” said Walt Rosebrough, President and Chief Executive Officer of STERIS. “Given the strength in our surgical and Isomedix businesses and our expectations for the SYSTEM 1E transition, our revenue expectations are unchanged for the full year. In addition, we are raising the low end of our previous earnings per share guidance, resulting in a revised outlook of $2.15 to $2.30 per diluted share.”

Segment Results

Healthcare revenues in the quarter declined 1% to $220.1 million compared with $223.0 million in the second quarter of fiscal 2010. Service revenue declined 2% while consumable revenue declined 6% due to reductions in S20 volumes and lower H1N1 product sales as compared to the prior year. Capital equipment revenue grew 2%, reflecting growth in surgical products somewhat offset by a decline in our infection prevention products. Operating income increased 5% to $38.1 million compared with $36.4 million in last year’s second quarter driven by continued operating efficiencies.

Life Sciences second quarter revenues were $53.5 million compared with $54.4 million in the second quarter of fiscal 2010, a decrease of 2%. Modest growth in consumables was not enough to offset a decline in both capital equipment and service revenues. Life Sciences operating income was $9.4 million, an increase of 10% compared with the prior year second quarter.

Fiscal 2011 second quarter revenues for Isomedix Services were $38.0 million compared with $34.7 million in the same period last year, an increase of 9%. Revenue benefitted from increased volumes from core medical device Customers. Operating income was $10.0 million in the quarter compared with $7.4 million in the second quarter of last year.

First Half Results

Fiscal 2011 first half results are impacted by a $110 million liability recorded in the first quarter for the SYSTEM 1 Rebate Program. Of the $110 million pre-tax amount recorded, $102 million is attributable to the Customer Rebate portion of the Program and was recorded as a reduction of revenues, and $8 million is attributable to the disposal of the SYSTEM 1 units to be returned and was recorded as an increase in cost of revenues. As a result, first half revenues were $501.4 million compared with $597.8 million in the first half of fiscal 2010. In addition, the company reported a net loss of $9.5 million, or ($0.16) per diluted share, compared with net income of $57.6 million, or $0.97 per diluted share, in the same period last year. Please refer to the attached schedules for additional information, including the Company’s financial results excluding the impact of the SYSTEM 1 Rebate Program.

Cash Flow

Net cash provided by operations for the first half of fiscal 2011 was $56.3 million, compared with $92.4 million in the same period last year. Free cash flow (see note 1) for the first half of fiscal 2011 was $29.3 million, compared with $74.4 million in the prior year period. The decline in free cash flow was driven by increased working capital requirements, primarily associated with increased inventory for SYSTEM 1E, and higher capital spending levels.

During the quarter, the Company repurchased 534,000 shares of its common stock at an average price of $30.32 per common share for a total amount of $16.2 million. Approximately $188 million remains under the current share repurchase authorization.

Dividend Announcement

The Company also announced today that STERIS’s Board of Directors has authorized a quarterly dividend of $0.15 per common share. The dividend is payable December 22, 2010 to shareholders of record at the close of business on November 24, 2010.

Outlook

Based upon current trends, the Company’s expectations for fiscal 2011 revenue growth of approximately 5% are unchanged. Earnings per diluted share are now anticipated to be in the range of $2.15 to $2.30, compared with prior expectations of $2.00 to $2.30 for the full fiscal year. This outlook reflects certain key assumptions, some of which are listed below:

  • Healthcare revenue growth is expected to be in the mid-single digits.
  • Life Sciences revenue is expected to decline in the low-single digits.
  • Isomedix revenue growth is expected to be in the mid-to-high single digits.
  • Excludes the reduction of revenue, operating income and tax rate related to the previously announced SYSTEM 1 Rebate Program.
  • The Company has assumed the average forward exchange rates for the U.S. dollar and key international currencies as of September 30, 2010.
  • The Company has assumed raw material costs will be approximately flat year over year.
  • Excludes restructuring expenses from the Company’s ongoing efficiency efforts.
  • EBIT as a percent of revenue is anticipated to be approximately 16.5%.
  • The anticipated effective tax rate is approximately 36%.

For the full fiscal year 2011, free cash flow (see note 1) is currently anticipated to be in the range of $125 to $135 million and capital expenditures are currently anticipated to be in the range of $70 to $80 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, 2010, until 5:00 p.m. Eastern time on November 17, 2010, either over the Internet at www.steris-ir.com or via phone by calling 1-800-879-6722 in the United States and Canada, and 1-402-220-4751 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 referenced conference call may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry or products 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, government regulations, labeling or product approvals, 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, consent decree, rebate program, transition, cost reductions, business strategies, earnings and revenue trends, expense reduction or other future financial results. Reference to the consent decree, transition, rebate program, or products are summaries only and do not alter or modify the specific terms of the decree, program or product clearance or literature. 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 rebate program, transition plan, or other 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, certifications, regulations, regulatory actions, including without limitation those relating to the previously disclosed FDA warning letters, government investigations, the December 3, 2009 or February 22, 2010 FDA notices, the April 20, 2010 consent decree and related transition plan and rebate program, the SYSTEM 1E device, Reliance EPS System, or other requirements or standards, may delay, limit or prevent new product introductions or 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 growth, cost savings, rebate assumptions, new product acceptance or approvals, including without limitation, SYSTEM 1E and accessories thereto, 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 or the operation of the Company's business, may adversely impact Company performance, results, or value, (g) the effect of the contraction in credit availability, 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, 2010 and the form 10-Q for the quarter ended June 30, 2010.

STERIS Corporation
Consolidated Condensed Statements of Operations
(In thousands, except per share data)
         
Three Months Ended Six Months Ended
September 30, September 30,
2010 2009 2010 2009
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 312,425 $ 314,229 $ 603,718 $ 597,772
SYSTEM 1 Rebate Program   -   -   (102,313)   -
Revenues, net 312,425 314,229 501,405 597,772
Cost of revenues 177,370 181,574 340,593 340,281
Cost of revenues - SYSTEM 1 Rebate Program   -   -   7,691   -
Gross profit 135,055 132,655 153,121 257,491
 
Operating expenses:
Selling, general, and administrative 71,999 74,516 144,116 149,121
Research and development 8,043 8,189 16,652 15,769
Restructuring expense   105   (115)   446   (327)
Total operating expenses   80,147   82,590   161,214   164,563
 
Income (Loss) income from operations 54,908 50,065 (8,093) 92,928
Non-operating expense, net 2,808 2,852 5,653 5,718
Income tax expense   16,389   15,129   (4,247)   29,584
Net (loss) income $ 35,711 $ 32,084 $ (9,499) $ 57,626
 
Earnings per common share (EPS) data:
Basic $ 0.60 $ 0.55 $ (0.16) $ 0.98
Diluted $ 0.59 $ 0.54 $ (0.16) $ 0.97
 
Cash dividends declared per common share outstanding $ 0.15 $ 0.11 $ 0.26 $ 0.22
 

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

Basic number of common shares outstanding 59,356 58,654 59,377 58,585
Diluted number of common shares outstanding 60,049 59,242 59,377 59,042
 
 
STERIS Corporation
Consolidated Condensed Balance Sheets
(In thousands)
September 30, March 31,
2010 2010
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 217,403 $ 214,971
Accounts receivable, net 201,758 214,940
Inventories, net 144,933 121,135
Other current assets   63,515   25,411
Total Current Assets 627,609 576,457
 
Property, plant, and equipment, net 348,137 346,858
Goodwill and intangible assets, net 308,749 305,311
Other assets   9,911   9,776
Total Assets $ 1,294,406 $ 1,238,402
 
Liabilities and Equity
Current liabilities:
Accounts payable $ 65,492 $ 66,035
Accrued SYSTEM 1 Rebate Program 109,956 -
Other current liabilities   106,724   131,094
Total Current Liabilities 282,172 197,129
 
Long-term debt 210,000 210,000
Other liabilities 71,782 76,779
Equity   730,452   754,494
Total Liabilities and Equity $ 1,294,406 $ 1,238,402
 
STERIS Corporation
Income Reconciliation
(In thousands, except per share data)
 
 

The following table presents financial measures which are considered to be "non-GAAP financial measures" under Securities Exchange Commission rules. The Company has referred to results of operations excluding the SYSTEM 1 Rebate Program and related disposal costs to provide meaningful comparative analysis between the periods.

 
  Three months ended September 30, 2010   Six months ended September 30, 2010

Results of
Operations,
excluding Rebate
Program

 

Impact of
SYSTEM 1 Rebate
Program

  As reported

Results of
Operations,
excluding Rebate
Program

 

Impact of
SYSTEM 1 Rebate
Program

  As reported
(Unaudited) (Unaudited)
 
Revenues $ 312,425 $ - $ 312,425 $ 603,718 $ (102,313) $ 501,405
Cost of revenues   177,370   -   177,370   340,593   7,691   348,284
Gross profit 135,055 - 135,055 263,125 (110,004) 153,121
Operating expenses   80,147   -   80,147   161,214   -   161,214
Income (loss) from operations 54,908 - 54,908 101,911 (110,004) (8,093)
Non-operating expenses, net   2,808   -   2,808   5,653   -   5,653
Income (loss) before income taxes 52,100 - 52,100 96,258 (110,004) (13,746)
Income tax (benefit) expense   19,093   (2,704)   16,389   35,413   (39,660)   (4,247)
Net income (loss) $ 33,007 $ 2,704 $ 35,711 $ 60,845 $ (70,344) $ (9,499)
 
Net income (loss) per common share:
 
Basic $ 0.56 $ 0.04 $ 0.60 $ 1.02 $ (1.18) $ (0.16)
Diluted $ 0.55 $ 0.04 $ 0.59 $ 1.01 $ (1.17) $ (0.16)
 

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

Basic 59,356 59,356 59,377 59,377
Diluted 60,049 60,049 60,153 59,377
 
Effective income tax rate 36.6 % 31.5 % 36.8 % 30.9 %
 
STERIS Corporation
Segment Data & Income Analysis
(In thousands)
      Three Months Ended   Six Months Ended
September 30, September 30,
2010   2009 2010   2009
(Unaudited)   (Unaudited) (Unaudited)   (Unaudited)
Segment Revenues:
 
Healthcare $ 220,114 $ 223,006 $ 426,193 $ 423,610
SYSTEM 1 Rebate Program   -     -   (102,313)     -
Healthcare, net 220,114 223,006 323,880 423,610
Life Sciences 53,513 54,401 100,127 100,517
STERIS Isomedix Services   37,964     34,735   75,640     70,142
Total Reportable Segments 311,591 312,142 499,647 594,269
Corporate and Other   834     2,087   1,758     3,503
Total Segment Revenues $ 312,425   $ 314,229 $ 501,405   $ 597,772
 

The following table presents financial measures which are considered to be "non-GAAP financial measures" under Securities Exchange Commission rules. The Company has referred to results of operations excluding the SYSTEM 1 Rebate Program and related disposal costs to provide meaningful comparative analysis between the periods.

 
  Three Months Ended September 30,
2010   2009
(Unaudited)   (Unaudited)
   
Segment Operating (Loss) Income Excluding SYSTEM 1 Rebate program: As Reported  

SYSTEM 1
Rebate Program

  Total

Total As
Reported

 
 
Healthcare $ 38,063 $ - $ 38,063 $ 36,366
Life Sciences 9,435 -

 

9,435 8,540
STERIS Isomedix Services   10,024     -  

 

10,024   7,401
Total Reportable Segments 57,522 -

 

57,522 52,307
Corporate and Other   (2,614)     -  

 

(2,614)   (2,242)
Total Operating (Loss) Income $ 54,908   $ -   $ 54,908 $ 50,065
 
 
Six Months Ended September 30,
2010   2009
(Unaudited) (Unaudited)
 
Segment Operating (Loss) Income Excluding SYSTEM 1 Rebate program: As Reported  

SYSTEM 1
Rebate Program

  Total

Total As
Reported

 
Healthcare $ (39,849) $ (110,004) $ 70,155 $ 68,469
Life Sciences 15,730 -

 

15,730 13,319
STERIS Isomedix Services   20,608     -  

 

20,608   15,740
Total Reportable Segments (3,511) (110,004)

 

106,493 97,528
Corporate and Other   (4,582)     -  

 

(4,582)   (4,600)
Total Operating (Loss) Income $ (8,093)   $ (110,004)   $ 101,911 $ 92,928
 
STERIS Corporation
Consolidated Condensed Statements of Cash Flows
(In thousands)
    Six Months Ended
September 30,
2010   2009
(Unaudited) (Unaudited)
Operating Activities:
Net (loss) income $ (9,499) $ 57,626
Non-cash items (7,629) 32,945
Change in Accrued SYSTEM 1 Rebate Program 109,956 -
Changes in operating assets and liabilities   (36,471)   1,837
Net cash provided by operating activities 56,357 92,408
 
Investing Activities:
Purchases of property, plant, equipment, and intangibles, net (27,242) (18,543)
Proceeds from sale of property, plant, equipment and intangibles   192   509
Net cash used in investing activities (27,050) (18,034)
 
Financing Activities:
Repurchases of common shares (16,627) (289)
Cash dividends paid to common shareholders (15,459) (12,894)
Stock option and other equity transactions, net 3,290 2,102
Tax benefit from stock options exercised   786   463
Net cash used in financing activities (28,010) (10,618)
Effect of exchange rate changes on cash and cash equivalents   1,135   5,822
Increase in cash and cash equivalents 2,432 69,578
Cash and cash equivalents at beginning of period   214,971   154,180
Cash and cash equivalents at end of period $ 217,403 $ 223,758
 

The following table presents a financial measure which is considered to be "non-GAAP financial measures" under Securities Exchange Commission 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
September 30,
2010   2009
Calculation of Free Cash Flow: (Unaudited) (Unaudited)
 
 
Cash flows from operating activities $ 56,357 $ 92,408
Purchases of property, plant, equipment, and intangibles, net (27,242) (18,543)
Proceeds from the sale of property, plant, equipment, and intangibles   192   509
Free Cash Flow $ 29,307 $ 74,374
 
STERIS Corporation
Unaudited Supplemental Financial Data - Excluding SYSTEM 1 Rebate Program
Second Quarter Fiscal 2011
As of September 30, 2010
          FY 2011   FY 2011   FY 2010   FY 2010
          Q2 YTD Q2 YTD
Total Company Revenues
Capital $ 120,308 $ 223,560 $ 119,146 $ 211,849
Consumables 76,784 153,117 79,989 160,786
Service   115,333   227,041   115,094   225,137
Total Recurring   192,117   380,158   195,083   385,923
Total Revenues $ 312,425   603,718 $ 314,229 $ 597,772
United States Revenues $ 237,953 464,041 $ 238,292 $ 462,098
United States Revenues as a % of Total 76% 77% 76% 77%
International Revenues $ 74,472 $ 139,677 $ 75,937 $ 135,674
  International Revenues as % of Total   24%   23%   24%   23%
                 
Segment Data Q2 YTD Q2 YTD
Healthcare
Revenues
Capital $ 101,580 $ 190,918 $ 99,737 $ 176,574
Consumables 60,443 120,925 64,038 130,769
Service   58,091   114,350   59,231   116,267
Total Recurring   118,534   235,275   123,269   247,036
Total Healthcare Revenues $ 220,114 $ 426,193 $ 223,006 $ 423,610
Operating Income (Loss)   38,063   70,155   36,366   68,469
Life Sciences
Revenues
Capital $ 18,728 $ 32,642 $ 19,374 $ 35,240
Consumables 16,341 32,192 15,951 30,017
Service   18,444   35,293   19,076   35,260
Total Recurring   34,785   67,485   35,027   65,277
Total Life Sciences Revenues $ 53,513 $ 100,127 $ 54,401 $ 100,517
Operating Income (Loss)   9,435   15,730   8,540   13,319
 
Isomedix Services
Revenues $ 37,964 $ 75,640 $ 34,735 $ 70,142
Operating Income (Loss)   10,024   20,608   7,401   15,740
 
Corporate and Other
Revenues $ 834 $ 1,758 $ 2,087 $ 3,503
    Operating Income (Loss)   (2,614)   (4,582)   (2,242)   (4,600)
                 
Other Data Q2 YTD Q2 YTD
Healthcare Backlog $ 154,273 n/a $ 129,937 n/a
Life Sciences Backlog   37,952   n/a   46,492   n/a
Total Backlog $ 192,225 n/a $ 176,429 n/a
 
Free Cash Flow $ 12,021 $ 29,307 $ 49,934 $ 74,374
    Net Debt $ (7,403) $ (7,403) $ (13,758) $ (13,758)
 
 
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 10-K for definitions (and reconciliation where appropriate) of backlog, free cash flow and net debt.



CONTACT:

STERIS Corporation
Julie Winter, Director, Investor Relations, 440-392-7245

KEYWORDS:   United States  North America  Ohio

INDUSTRY KEYWORDS:   Health  Hospitals  Medical Devices  Pharmaceutical  Medical Supplies  General Health

MEDIA:

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