STERIS Corporation announces the purchase of two privately owned businesses: Spectrum Surgical Instruments Corp. and Total Repair Express, leading providers of surgical instrument repair services and instrument care products to hospitals and surgery centers in the United States. These two businesses will be integrated into STERIS's Healthcare segment as part of the company's specialty services business, which provides a variety of niche services to customers, including space decontamination solutions, chamber cleanings and instrument repairs.
"As we continue to expand our customer solutions, entering the surgical instrument repair business through these acquisitions will enhance our existing presence in hospital sterile processing and surgical departments," says Walt Rosebrough, president and CEO of STERIS Corporation. "These bolt-on acquisitions will give STERIS one of the largest surgical instrument repair businesses in the United States, and we are excited about the opportunity to leverage our existing customer relationships to grow these businesses throughout the country."
As hospitals face increasing pressure to reduce costs and increase procedure productivity, they are seeking solutions that will not only deliver tangible cost savings but will also allow them to focus their internal resources on patient care. As a result, the market for outsourced surgical instrument repair has emerged as an opportunity for healthcare facilities to more efficiently manage their operating costs. The surgical instrument repair industry is fragmented with many local and regional competitors as well as that done by hospitals themselves. The amount of business outsourced today is estimated to be over $500 million in the U.S., growing in the mid- to high-single digits.
Spectrum is headquartered in Ohio, and TRE is headquartered in New Jersey. Their core business is the repair of a wide variety of surgical instruments and other hospital equipment both on-site at hospital premises and at central repair facilities. The primary services offered include inspection, cleaning, lubrication and repair of reusable surgical instruments such as forceps, retractors and scissors. Typical contracts involve regular servicing of instruments in the surgical suite of hospitals, and may involve daily or weekly interaction with hospital sterile processing center personnel at client facilities. By contrast, STERIS's current service business is primarily focused on the installation, maintenance and repair of the company's capital equipment in healthcare facilities.
STERIS acquired Spectrum and TRE for approximately $110 million, including contingent consideration. In calendar 2012, the combined businesses are anticipated to generate revenue of approximately $72 million and operating income of approximately $7 million. After adjusting for depreciation and amortization, shareholder expenses and other non-recurring items, adjusted operating income for the combined businesses is anticipated to be approximately $11 million for the same period. STERIS anticipates that one of the acquisitions will qualify for a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code, and the other acquisition is structured as an asset purchase, both of which allow goodwill and intangibles to be fully deductible for tax purposes. Adjusting for the present value of the anticipated tax benefits, the purchase price is effectively reduced to approximately $93 million. After consideration of this benefit, the price equates to roughly one times revenue and approximately eight times adjusted operating income for calendar 2012.
On both a U.S. GAAP and adjusted basis, the acquisitions are anticipated to be approximately neutral to diluted earnings per share in fiscal 2013 and accretive in fiscal 2014 and beyond. The transactions closed on Oct. 16, 2012 and were financed through borrowings under STERIS's credit facility.