STERIS Corporation Announces Fiscal 2010 Second Quarter Results

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 administrative			74,516			77,290				149,121			164,638
	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 common share outstanding		$	0.11		$	0.08			$	0.22		$	0.14
	Weighted average number of common shares outstanding used in EPS computation:
	Basic number of common shares outstanding			58,654			59,312				58,585			59,003
	Diluted number of common shares outstanding			59,418			60,376				59,201			60,012

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 Income		$	50,065		$	46,968		$	92,928		$	82,008

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 intangibles, net			(18,543)			(20,872)
	Proceeds from sale of property, plant, equipment and intangibles			509			9,506
	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 equivalents			5,822			(2,521)
	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, and intangibles, net			(18,543)			(20,872)			(50,000)
Proceeds from the sale of property, plant, equipment, and intangibles			509			9,506			-
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 Recurring				190,840			195,083			191,448			192,814			189,904			187,712			761,878
	Total Revenues					$	283,543		$	314,229		$	311,565		$	323,127		$	319,467		$	344,366		$	1,298,525
	United States Revenues					$	223,806		$	238,292		$	241,219		$	245,139		$	250,355		$	256,774		$	993,487
	United States Revenues as a % of Total						79%			76%			77%			76%			78%			75%			77%
	International Revenues					$	59,737		$	75,937		$	70,346		$	77,988		$	69,112		$	87,592		$	305,038
	International Revenues as % of Total						21%			24%			23%			24%			22%			25%			23%
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 Recurring				123,767			123,269			123,150			121,260			120,956			119,048			484,414
		Total Healthcare Revenues				$	200,604		$	223,006		$	224,065		$	227,836		$	230,177		$	249,185		$	931,263
		Operating Profit/(Loss)					32,102			36,366			29,230			32,698			32,406			38,267			132,601
	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 Recurring				30,250			35,027			29,318			33,171			32,495			32,505			127,489
		Total Life Sciences Revenues				$	46,116		$	54,401		$	48,039		$	57,151		$	52,787		$	58,724		$	216,701
		Operating Profit/(Loss)					4,779			8,540			1,047			6,228			7,151			3,987			18,413
	Isomedix Services
		Revenues				$	35,407		$	34,735		$	36,863		$	36,971		$	34,642		$	34,169		$	142,645
		Operating Profit (Loss)					8,339			7,401			8,187			10,211			8,453			7,912			34,763
	Corporate and Other
		Revenues				$	1,416		$	2,087		$	2,598		$	1,169		$	1,861		$	2,288		$	7,916
		Operating Profit (Loss)					(2,358)			(2,242)			(3,424)			(2,169)			(2,192)			(2,547)			(10,332)
Other Data						Q1			Q2			Q1			Q2			Q3			Q4			Total
		Healthcare Backlog				$	132,391		$	129,937		$	113,856		$	124,135		$	133,863		$	119,790		$	119,790
		Life Sciences Backlog					46,257			46,492			49,776			48,712			50,170			45,231			45,231
		Total Backlog				$	178,648		$	176,429		$	163,632		$	172,847		$	184,033		$	165,021		$	165,021
		Free Cash Flow				$	24,440		$	49,934		$	18,119		$	39,206		$	32,276		$	56,235		$	145,836
		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.