Updated 3:09 p.m.
Consumables. That’s one thing that helped STERIS Corp. (NYSE: STE) make up some of the revenue ground lost to troubles over the company’s System 1 sterilizer and other uncertainties in fiscal 2010.
The Mentor, Ohio, healthcare technology maker continued its quest for operating efficiency in the year ended March 30, leading to higher profits for the year. However, like so many other companies dealing with market uncertainties, revenues fell for the company that makes decontamination and infection-protection equipment, among other technologies, for hospitals, healthcare facilities and pharmaceutical companies.
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“We entered fiscal 2010 with more uncertainty than we had seen in the last several years,” Walt Rosebrough, STERIS’ president and chief executive, told securities analysts during a Thursday morning conference call. “This was the result of the economic environment in the United States, including our customers’ lack of access to capital, the new administration’s healthcare reform proposal and our System 1 regulatory matters.
“As we close our 2010 fiscal year and start our 2011, we have greater clarity on many of these matters, and I’m very pleased at our performance in that challenging 2010 fiscal year,” Rosebrough said.
Revenues for fiscal 2010 fell 3 percent to $1.26 billion compared with $1.3 billion in fiscal 2009. But they could have fallen more.
“We completed fiscal 2010 with total revenues down only 3 percent and a strong capital backlog,” Rosebrough said. That’s partly because in addition to making capital equipment like medical instrument washers and sterilizers, STERIS also makes the detergents, sterilants and other chemicals and supplies that keep the equipment running.
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“Focusing on a few highlights for the year, one was clearly the performance of our consumables franchise across the business,” he said. “Healthcare consumables grew 7 percent for year, led by growth in new products, such as Prolystica Ultra Concentrate, as well as an increase due to the H1N1 virus pandemic. On the Life Science side, consumables grew 13 percent, again, impacted by H1N1.”
The company also had “pockets” of capital equipment strength, such as “new product lines like Vision washers, V-Pro sterilizers and LED lights,” Rosebrough said.
Net income was $128.5 million, or $2.16 a diluted share, for the year ended March 31. That was up 16 percent from $110.7 million, or $1.86 per diluted share in fiscal 2009. Both years included restructuring charges: $4.8 million in fiscal 2010 and $6.1 million in fiscal 2009.
Flush with cost-cutting success and some fortuitous moves in foreign currency and raw materials rates, STERIS in early November raised its earnings-per-share forecast for fiscal 2010 to between $1.90 to $2.05 and gave shareholders a special $2-a-share dividend. A month later, the Food and Drug Administration (FDA) issued a safety alert about the company’s System 1 chemical sterilizer.
The FDA alert brought to a head a disagreement STERIS had with the regulator, which had decided the company’s System 1 was a “violating device” because the company had changed it significantly from its 1988 market clearance.
STERIS pulled its earnings and revenue guidance in February because of the financial uncertainty caused by the alert and how the company would manage it. At the time, sales of System 1 supplies and service accounted for 10 percent of the company’s revenue, even though it no longer sold the system itself.
STERIS has since received market approval from the FDA for a new generation of chemical sterilization system — System 1E. The company could pay up to $100 million in customer rebates to provide for an orderly market removal of System 1s. Analysts are concerned the higher cost of making System 1E — and the fact that STERIS is “giving our customers a good deal as we enter this business,” in Rosebrough’s words — would narrow the company’s profit margins.
Rosebrough also made passing references to his company’s plans to expand its headquarters, building a “customer solutions center” (pdf) to connect three buildings on its Mentor campus and transferring there most of the 240 research and development, equipment planning and design, customer service, training and finance jobs from an Erie, Pennsylvania, facility it is closing.
STERIS estimated the cost of the expansion at more than $11 million in letters to the City of Mentor. The company is getting city and state tax incentives for the expansion, which it has said it will announce in detail on May 11.
STERIS expects earnings per diluted share in the range of $2.00 to $2.30 and revenue growth of about 5 percent in fiscal year 2012. Investors disliked some of what they heard Thursday, pushing down STERIS shares by more than 3 percent to $33.10 in late-afternoon trading on the New York Stock Exchange.
