Fiscal 2011
Annual Report
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Dear Fellow Shareholders,
It is my pleasure to be writing my fourth letter to you. When I reflect on the past three and a half years at STERIS, I am pleased with the
progress our people have made becoming more Customer focused, developing innovative products, and evolving into a leaner organization
focused on quality, delivery and efficiency. Our people have accomplished much in the face of healthcare reform, macro challenges in the
economy, and the SYSTEM 1® transition.
At the beginning of fiscal 2011, we predicted that most of our primary markets would improve to more normalized growth levels, but that
our profitability may be negatively impacted by the SYSTEM 1 transition. At the highest level, the year’s performance turned out about as
we expected, although some of the drivers were different than we anticipated.
Adjusted revenue growth of 4% for fiscal 2011 was driven by 5% adjusted growth in our Healthcare business. Throughout the year, our
surgical products generated double digit growth, as healthcare providers invested in their revenue-generating procedural spaces. We saw
continued success with our newer surgical products including LED lights, next generation surgical tables, and our integrated OR platform.
In addition, recently released infection prevention capital equipment products such as V-PRO™ gas sterilizers and Vision™ washer-
disinfectors performed well. We also shipped our first SYSTEM 1E™ units during the year. Our Healthcare consumables business, excluding
S20 Sterilant for SYSTEM 1, showed continued strength this year, particularly our Prolystica™ Ultra-Concentrate chemistries.
Our Isomedix segment had a very strong year, with revenue growth of 8% and continued improvement of operating income leverage, which
is the result of the capacity expansions we have invested in over the last several years.
Our Life Sciences business has made tremendous profitability progress the past three years, and fiscal 2011 was no exception. We
successfully grew consumables 8% for the year, on top of double digit growth last year. Capital equipment sales continued to be slow as
a result of consolidations in the pharmaceutical manufacturing market, but we believe we may have finally seen the bottom.
Turning to the SYSTEM 1 transition, we began shipping SYSTEM 1E units later in the fiscal year than expected, which shifted the majority
of the SYSTEM 1 transition from fiscal 2011 into fiscal 2012. In addition, the FDA extended the time period for transitioning away from
SYSTEM 1 by six months, which moved the deadline to February 2, 2012. As a result, we are not as far along in the transition of Customers
in the United States from SYSTEM 1 as we had originally anticipated.
While the transition has been a lot of work, and more remains to be done, we have made substantial progress over the past 18 months.
The SYSTEM 1E unit was cleared by FDA and we are now selling it. We have the optional chemical indicator cleared, and our Customers
have additional time to make the transition. We are actively working with our Customers in the United States to transition from SYSTEM 1
and to provide SYSTEM 1E units as quickly as possible.
Shifting to our profitability for fiscal 2011, we had a good year given the marketplace dynamics we were facing. In particular, we continued
to see declines in SYSTEM 1 consumable revenue during the year and have also experienced a considerable shift in the mix of our products
towards capital equipment, which tend to have lower gross margins. Even in the face of these trends, we improved our adjusted operating
income by 4% and delivered adjusted earnings per diluted share of $2.19.
While the build-up of SYSTEM 1E inventory has impacted our working capital needs, our balance sheet and cash generation capabilities
remain strong, ending the year with a total debt-to-capital ratio of 21%. We increased our dividend during fiscal 2011 to $0.15 per quarter;
representing the fifth year in a row of double digit percentage increases in our dividend payment. And we were active in the market, buying
back close to a million shares for just under $30 million.
Opportunities
We have spent much time talking to you about the SYSTEM 1 transition. We also want to remind you of the other opportunities your
Company has in the coming years.
We have several initiatives underway in the Healthcare segment focused on helping our Customers enhance their perioperative
performance. We plan to do this by helping them improve efficiencies in the two primary areas in the perioperative loop – the operating
room and the sterile processing department (where surgical instruments are reprocessed in between surgeries). Our goal is to make
everything work more effectively together so that our Customers can keep surgeries on schedule and be more efficient.
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Across the business, we are utilizing new products to build tiered product offerings for our Customers to choose from, with correlating
feature/function and cost/benefit. And we are making growth investments beyond our internal research and development efforts. In fiscal
2011, we made additional investments of approximately $17 million in VTS Medical Systems, our partner for integrated operating room
products, and we now own just under 50% of that joint venture.
We also have significant opportunities for growth outside North America. Revenues in Asia Pacific and Latin America, though relatively
small, continue to grow at double digit rates. At the beginning of fiscal 2012, we completed the acquisition of Sercon Industries, a privately
held sterilizer company based in Brazil, for $30 million. The acquisition of Sercon will allow us to compete more effectively in the growing
Latin American market by adding regional manufacturing, strengthening our local distribution network, and adding a line of sterilizers
designed specifically for that market.
As we continue to work through a challenging macro environment on the capital side of our Life Sciences segment, largely as a result of
consolidation within Big Pharma companies, we will work to expand our consumable offerings while continuing to improve our margins
through the introduction of new products and operational efficiencies.
Isomedix has been expanding capacity selectively over the last several years to meet specific Customer demand in areas such as the
Southwestern United States. In fiscal 2012 we will work on expanding gamma operations in the Northeastern United States as well.
As we enter the final year of our existing restructuring plans, we are well underway with our consolidation and expansion plans in the United
States and Europe. In the United States, our Northeast Ohio campus has been expanded to accommodate the remaining operations from
our Erie, Pennsylvania facility. This project includes a state-of-the-art Customer Solutions Center including multiple operating rooms and
a sterile processing department to showcase our products and services. In our European Healthcare operation, we are consolidating four
locations into two to create a Customer showroom and factory for our European capital equipment. While the completion of these two
projects requires investments in fiscal 2012, we will largely see the benefits in fiscal 2013 and beyond.
We look forward to the opportunities ahead of us in fiscal 2012. While we must execute a successful transition from SYSTEM 1, we plan to
deliver growth in revenue and earnings for the year.
I am grateful for the hard work and dedication of our people, who have demonstrated their collective strength as we improve our business.
I also want to thank the Board of Directors for their guidance, and welcome David B. Lewis, who joined the Board last July.
On behalf of everyone at STERIS, we thank our fellow shareholders for another year of continued support.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
June 2011
(Adjusted revenues, operating income and earnings per share exclude the impact of the SYSTEM 1 Rebate Program, the proposed SYSTEM 1 class action
litigation settlement and restructuring expenses. Please refer to the accompanying Fiscal 2011 Form 10-K for a complete reconciliation of adjusted results to
GAAP results and precautions regarding risk factors and forward looking statements.)
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United States Securities and Exchange Commission
Washington, D. C. 20549
___________________________________________________________________
FORM 10-K
Annual Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended March 31, 2011
OR
Transition Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-14643
STERIS Corporation
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
34-1482024
(IRS Employer Identification No.)
5960 Heisley Road,
Mentor, Ohio
(Address of principal executive offices)
44060-1834
(Zip Code)
440-354-2600
(Registrant’s telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
Common Shares, without par value
Name of Exchange on Which Registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of
such stock as of September 30, 2010: $1,782,749,207
The number of Common Shares outstanding as of May 20, 2011: 59,219,570
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2011 Annual Meeting – Part III
Table of Contents
Item 1
Business
Part I
Page
Introduction
Information Related to Business Segments
Information with Respect to Our Business in General
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Executive Officers of the Registrant
Part II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Introduction
Financial Measures
Revenues-Defined
General Company Overview and Outlook
Matters Affecting Comparability
Non-GAAP Financial Measures
Results of Operations
Liquidity and Capital Resources
Capital Expenditures
Contractual and Commercial Commitments
Critical Accounting Policies, Estimates, and Assumptions
Recently Issued Accounting Standards Impacting the Company
Inflation
Forward-Looking Statements
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Foreign Currency Risk
Commodity Risk
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedule
Signatures
Part IV
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PART I
Throughout this Annual Report, STERIS Corporation and its subsidiaries together are called “STERIS,” “the Company,”
“we,” “us,” or “our,” unless otherwise noted. References in this Annual Report to a particular “year” or “year-end” mean our
fiscal year, which ends on March 31. For example, fiscal year 2011 ended on March 31, 2011.
ITEM 1.
BUSINESS
INTRODUCTION
STERIS Corporation is a leading provider of infection prevention and surgical products and services, focused primarily on
healthcare, pharmaceutical and research. Our mission is to provide a healthier today and a safer tomorrow through
knowledgeable people and innovative infection prevention, decontamination and health science technologies, products and
services. We offer our Customers a unique mix of innovative capital equipment products, such as sterilizers and surgical tables;
consumable products, such as detergents and skin care products; and services, including equipment installation and
maintenance; and microbial reduction of medical devices and other products.
We were founded as Innovative Medical Technologies in Ohio in 1985, and renamed STERIS Corporation in 1987.
However, some of our businesses that have been acquired and integrated into STERIS, notably American Sterilizer Company,
have much longer operating histories. With global headquarters in Mentor, Ohio, we have approximately 5,000 employees
worldwide and operate in more than 60 countries. We have a direct sales force of approximately 500 and a service organization
of approximately 1,080 who work diligently to meet the increasingly complex needs of our Customers.
We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. “Corporate
and other,” which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with
being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of
Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement
benefit costs.
In our largest segment, Healthcare, we are focused on assisting our Customers in enhancing their perioperative
performance. We provide support directly to the operating room, as well as to the sterile processing functions where
instruments are reprocessed between surgeries and gastrointestinal procedures. Our integrated offering of equipment,
consumables and services used throughout healthcare facilities enables Customers to reduce costs and improve outcomes.
Our second largest segment, Life Sciences, primarily serves pharmaceutical manufacturers and research organizations by
providing decontamination and sterilization technologies, products and services that help support the safety and effectiveness of
the products they produce.
STERIS Isomedix Services (“Isomedix”) provides ethylene oxide and/or irradiation services on a contract basis through
18 facilities in North America, where we process medical devices and other products as designated by our Customers'
specifications prior to their delivery to the end user.
Many factors are driving an increased awareness of the importance of infection control throughout the world. In the United
States, hospitals are increasingly not reimbursed for the impacts of hospital acquired patient infections and infection is
increasingly a reported quality measure that may impact reimbursement as well as provide patients with information that can
help shape their decisions about where to receive care. On a more global basis, recent threats such as H1N1 virus, Avian Bird
Flu, and the rise in drug-resistant strains of bacterial diseases have raised awareness of the need for enhanced safety. We are
positioned to help address these concerns in traditional and non-traditional settings with our combination of capital equipment,
consumables and services.
INFORMATION RELATED TO BUSINESS SEGMENTS
Our chief operating decision maker is our President and Chief Executive Officer (“CEO”). The CEO is responsible for
performance assessment and resource allocation. The CEO regularly receives discrete financial information about each
reportable segment. The CEO uses this information to assess performance and allocate resources. The accounting policies of
the reportable segments are the same as those described in note 1 to the Consolidated Financial Statements titled, “Nature of
Operations and Summary of Significant Accounting Policies,” of this Annual Report. Segment performance information for
fiscal years 2011, 2010, and 2009 is presented in note 12 to our Consolidated Financial Statements titled, “Business Segment
Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” (“MD&A”), of this Annual Report.
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HEALTHCARE SEGMENT
Description of Business. Our Healthcare segment manufactures and sells infrastructure capital equipment, accessory,
consumable, information support and service solutions to healthcare providers, including acute care hospitals and surgery and
gastrointestinal centers. These solutions aid our Customers in improving the safety, quality, productivity, and utility
consumption of their surgical, sterile processing, gastrointestinal, and emergency environments.
Products Offered. These capital equipment, accessory and consumable solutions include:
•
Steam, vaporized hydrogen peroxide and ethylene oxide (“EO”) sterilizers, as well as liquid chemical sterilant
processing systems, that allow Customers to meet rigorous standards and regulations and assist in the safe and
effective re-use of medical equipment and devices.
• Automated washer/disinfector systems that clean and disinfect a wide range of items from rolling instrument carts and
other large healthcare equipment to small surgical instruments.
• General and specialty surgical tables, surgical and examination lights, equipment management systems, operating
room storage cabinets, warming cabinets, scrub sinks, and other complementary products and accessories for use in
hospitals and other ambulatory surgery sites.
• Connectivity solutions such as operating room (“OR”) integration , workflow, patient tracking and instrument
management that allow for high quality transfer of information and images throughout the hospital and between
hospitals throughout the world. These solutions aid in improving the productivity and quality of Customers' inpatient
and outpatient surgical departments and sterile processing functions.
• Cleaning chemistries and sterility assurance products used in instrument cleaning and decontamination systems.
• Cleansing products, including hard surface disinfectants and skin care and hand hygiene solutions, for use by care-
givers and patients throughout healthcare institutions.
Significant brand names for these products include SYSTEM 1®, SYSTEM 1E™, Amsco®, Hamo®, Reliance®, Cmax®,
Harmony®, Kindest Kare®, Alcare®, Verify®, and Cal Stat®.
Services Offered. Our Healthcare segment provides various preventive maintenance programs and repair services to support
the effective operation of capital equipment over its lifetime. We offer these corrective and preventive service solutions to
Customers who have internal clinical/biomedical engineering departments and Customers who rely on us to provide those
services. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We also
offer comprehensive sterilization and Surgical management consulting services allowing healthcare facilities to achieve safety,
quality, and productivity improvements in the perioperative loop that flows between and among surgical suites and the central
sterile department. More recently, we have begun to utilize remote equipment monitoring technology to improve Customers’
equipment uptime and by servicing equipment during off-peak hours. Additionally, our Healthcare segment provides other
support services such as construction and facility planning, engineering support, device testing, Customer education, hand
hygiene process excellence, asset management/planning, and the sale of replacement parts. Finally, we also provide information
management and decision support solutions to operating room and central sterilization managers to help in managing these
environments and identifying opportunities to improve performance.
Customer Concentration. Our Healthcare segment sells capital equipment, consumables, and services to Customers in the
United States and many other countries throughout the world. For the year ended March 31, 2011, no Customer represented
more than 10% of the Healthcare segment's total revenues and the loss of any single Customer is not expected to have a
material impact on the segment's results of operations or cash flows.
Competition. We compete with a number of large companies that have significant product portfolios and global reach, as well
as a number of small companies with very limited product offerings and operations in one or a limited number of countries. On
a product basis, competitors include Getinge, Johnson & Johnson, 3M, Belimed, Berchtold, Cantel Medical, Ecolab, Go Jo,
Kimberly-Clark, Skytron, and Stryker.
LIFE SCIENCES SEGMENT
Description of Business. Our Life Sciences segment manufactures and sells a broad range of capital equipment, formulated
cleaning chemistries, and service solutions to pharmaceutical companies, and private and public research facilities around the
globe.
Products Offered. These capital equipment and formulated cleaning chemistries include:
•
Sterilizers used in the manufacture of pharmaceuticals and biopharmaceuticals as well as sterilizers for equipment and
instruments used in research studies, mitigating the risk of contamination.
• Washer/disinfectors that decontaminate various large and small materials and components in pharmaceutical and
industrial manufacturing processes and in research labs, such as glassware, vessels, equipment parts, drums, hoses,
and animal cages.
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• High-purity water equipment, which generates water for injection and pure steam.
• Vaporized Hydrogen Peroxide (“VHP”®) generators used to decontaminate many high value spaces, from small
•
isolators to large pharmaceutical processing and laboratory animal rooms.
Formulated cleaning chemistries that are used to prevent biological and chemical contamination and to monitor
sterilization and decontamination processes, including products used to clean components used in manufacturing,
decontaminate systems, and disinfect or sterilize hard surfaces.
Significant brand names for these products include Amsco®, Reliance®, Finn-Aqua®, VHP®, and the CIP® Products.
Services Offered. Our Life Sciences segment offers various preventive maintenance programs and repair services to support
the effective operation of capital equipment over its lifetime. Field service personnel install, maintain, upgrade, repair, and
troubleshoot equipment throughout the world. We utilize remote equipment monitoring technology to improve Customers’
equipment uptime. We also offer consulting services and technical support to architecture and engineering firms and laboratory
planners. Our services deliver expertise in decontamination and infection control technologies and processes to end users. Our
service personnel also provide higher-end validation services in support of our pharmaceutical Customers.
Customer Concentration. Our Life Sciences segment sells capital equipment, consumables, and services to Customers in the
United States and many other countries throughout the world. For the year ended March 31, 2011, no Customer represented
more than 10% of the Life Sciences segment’s total revenues and the loss of any single Customer is not expected to have a
material impact on the segment’s results of operations or cash flows.
Competition. Our Life Sciences segment operates in highly regulated environments where the most intense competition
results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. In
recent years, our pharmaceutical Customer base has also undergone consolidation and reduced capital spending, resulting in
fewer project opportunities. We compete for pharmaceutical, research and industrial Customers with a number of large
companies that have significant product portfolios and global reach, as well as a number of small companies with very limited
product offerings and operations in one or a limited number of countries. Competitors include Belimed, Ecolab, Fedegari,
Getinge, MECO, Stilmas, and Techniplast.
STERIS ISOMEDIX SERVICES SEGMENT
Description of Business. Our Isomedix segment operates through a network of 18 facilities located in North America. We sell
a comprehensive array of contract materials processing services using gamma irradiation (“Gamma”) and ethylene oxide
(“EO”) technologies. We offer microbial reduction services based on Customer specifications to companies that supply
products to the healthcare, industrial, and consumer product industries.
Services Offered. We use Gamma and EO technologies to process a wide range of products at our facilities. Gamma, using
radioisotope (cobalt-60), is an irradiation process. EO is a gaseous process. Our locations are in major population centers and
core distribution corridors throughout North America, primarily in the Northeast, Midwest, Southwest, and southern California.
We adapt to increasing imports and changes in manufacturing points-of-origin by monitoring trends in supply chain
management. Demographics partially drive this segment’s growth. The aging population and rising life expectancy increase the
demand for medical procedures, which increases the consumption of medical devices and surgical kits. Our technical services
group supports Customers in all phases of product development, materials testing, and process validation.
Customer Concentration. Our Isomedix segment operates in North America. The segment’s services are offered to
Customers throughout the footprint of our network. For the year ended March 31, 2011, no Customer represented more than
10% of the segment’s revenues. Because of a largely fixed cost structure, the loss of a single Customer could have a material
impact on the segment’s results of operations or cash flows but would not be expected to have a material impact on STERIS.
Competition. Isomedix operates in a highly regulated industry and competes in North America with Sterigenics International,
Inc., other smaller contract sterilization companies and manufacturers that sterilize products in-house.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Sources and Availability of Raw Materials. We purchase raw materials, sub-assemblies, components, and other supplies
needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials and
supplies used in our operations include stainless steel, organic chemicals, fuel, and plastic components. These raw materials and
supplies are available from several suppliers and in sufficient quantities that we do not currently expect any significant sourcing
problems in fiscal 2012. We have longer-term supply contracts for certain materials, such as radioisotope (cobalt-60) used by
the Isomedix segment, for which there are few suppliers.
Intellectual Property. We protect our technology and products by, among other means, obtaining United States and foreign
patents. There can be no assurance, however, that any patent will provide adequate protection for the technology, system,
product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive.
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We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our
competitive position.
As of March 31, 2011, we held 279 United States patents and 643 foreign patents and had 79 United States patents and 301
foreign patents pending. Patents for individual products extend for varying periods according to the date of filing or grant and
legal term of patents in various countries where a patent is obtained. The actual protection a patent provides, which can vary
from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in
each country.
Our products are sold around the world under various brand names and trademarks. We consider our brand names and
trademarks to be valuable in the marketing of our products. As of March 31, 2011, we had a total of 966 trademark registrations
in the United States and in various foreign countries.
Research and Development. Research and development is an important factor in our long-term strategy. For the years ended
March 31, 2011, 2010, and 2009, research and development expenses were $34.3 million, $34.0 million, and $32.8 million,
respectively. We incurred these expenses primarily for the research and development of commercial products.
New products are a key element of our success. In the operating room, our new Harmony LED Lighting and Visualization
System brought surgical lighting, high definition images and surgeon comfort to a new level. Our V-PRO 1 low temperature
sterilizers and the Reliance Vision Single-chamber Washers improve efficiencies in the sterile processing department by
increasing the number and volume of instruments that can be reprocessed. Another recent introduction is the 5085 SRT Surgical
Table, the first sliding, rotating and transporting table to be released in the United States as a single-driver transport device for
the operating suite. The table is designed to enhance both patient and staff safety by reducing the transfer risk before and after
surgery. Finally, the recent introduction of the SYSTEM 1E, our next generation liquid chemical sterilant processing system,
provides an alternative for existing SYSTEM 1 Customers.
Quality Assurance. We manufacture, assemble, and package products in the United States and other countries. Each of our
production facilities are dedicated to particular processes and products. Our success depends upon Customer confidence in the
quality of our production process and the integrity of the data that supports our product safety and effectiveness. We have
implemented quality assurance procedures to support the quality and integrity of scientific information and production
processes. All of our manufacturing and contract sterilization facilities throughout the world are ISO9001 or ISO13485
certified.
Government Regulation. Our business is subject to various degrees of governmental regulation in the countries in which we
operate. In the United States, the United States Food and Drug Administration (“FDA”), the United States Environmental
Protection Agency (“EPA”), the United States Nuclear Regulatory Commission (“NRC”), and other governmental authorities
regulate the development, manufacture, sale, and distribution of our products and services. Our international operations also are
subject to a significant amount of government regulation, including country-specific rules and regulations and U.S. regulations
applicable to our international operations. Government regulations include detailed inspection of, and controls over, research
and development, clinical investigations, product approvals and manufacturing, marketing and promotion, sampling,
distribution, record-keeping, storage, and disposal practices.
Compliance with applicable regulations is a significant expense for us. Past, current or future regulations, their
interpretation, or their application could have a material adverse impact on our operations. Also, additional governmental
regulation may be passed that could prevent, delay, revoke, or result in the rejection of regulatory clearance of our products. We
cannot predict the effect on our operations resulting from current or future governmental regulation or the interpretation or
application of these regulations.
If we fail to comply with any applicable regulatory requirements, sanctions could be imposed on us. For more information
about the risks we face regarding regulatory requirements, see Part I, Item 1A of this Annual Report titled, “Risk Factors, We
are subject to extensive regulatory requirements.”
We have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to
other regulatory sanctions. At the beginning of fiscal 2011 a consent decree, the terms of which had been previously agreed to
by the FDA and us, was approved by the Federal District Court for the Northern District of Ohio concerning our SYSTEM 1
processing system. See Part I, Item 1A of this Annual Report titled, “Risk Factors, We may be adversely affected by product
liability claims or other legal actions or regulatory or compliance matters, including the Warning Letter and Consent Decree,”
“Risk Factors, Our business may be adversely affected as a result of the U.S. Food and Drug Administration notice to
healthcare administrators and device manufacturers, and related matters,” and “Risk Factors, Compliance with the Consent
Decree may be more costly and burdensome than anticipated.” and see also Part I, Item 3, “Legal Proceedings”, for further
information on SYSTEM 1 and other regulatory issues and their potential impact. We believe that we are currently compliant in
all material respects with applicable regulatory requirements. However, we cannot assure you that future or current regulatory,
governmental, or private action will not have a material adverse affect on us or on our performance, results, or financial
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condition.
Environmental Matters. We are subject to various laws and governmental regulations concerning environmental matters and
employee safety and health in the United States and in other countries. We have made, and continue to make, significant
investments to comply with these laws and regulations. We cannot predict the future capital expenditures or operating costs
required to comply with environmental laws and regulations. We believe that we are currently compliant with applicable
environmental, health, and safety requirements in all material respects. However, we cannot assure you that future or current
regulatory, governmental, or private action will not have a material adverse affect on our performance, results, or financial
condition. You should also read Part I, Item 3, “Legal Proceedings” for further information.
In the future, if a loss contingency related to environmental matters, employee safety, health or conditional asset retirement
obligations is significantly greater than the current estimated amount, we would record a liability for the obligation and it may
result in a material impact on net income for the annual or interim period during which the liability is recorded. The
investigation and remediation of environmental obligations generally occur over an extended period of time, and therefore we
do not know if these events would have a material adverse affect on our financial condition, liquidity, or cash flow, nor can we
assure you that such liabilities would not have a material adverse affect on our performance, results, or financial condition.
Competition. The markets in which we operate are highly competitive and generally highly regulated. Competition is intense
in all of our business segments and includes many large and small competitors. Brand, design, quality, safety, ease of use,
serviceability, price, product features, warranty, delivery, service, and technical support are important competitive factors to us.
We expect to face increased competition in the future as new infection prevention, sterile processing, contamination control,
and surgical support products and services enter the market. We believe many organizations are working with a variety of
technologies and sterilizing agents. Also, a number of companies have developed disposable medical instruments and other
devices designed to address the risk of contamination.
We believe that our long-term competitive position depends on our success in discovering, developing, and marketing
innovative, cost-effective products and services. We devote significant resources to research and development efforts and we
believe STERIS is positioned as a global competitor in the search for technological innovations. In addition to research and
development, we invest in quality control, Customer programs, distribution systems, technical services, and other information
services.
We cannot assure you that we will develop significant new products or services, or that new products or services we
provide or develop in the future will be more commercially successful than those provided or developed by our competitors. In
addition, some of our existing or potential competitors may have greater resources than us. Therefore, a competitor may
succeed in developing and commercializing products more rapidly than we do. Competition, as it relates to our business
segments and product categories, is discussed in more detail in the section above titled, “Information Related to Business
Segments.”
Employees. As of March 31, 2011, we had approximately 5,000 employees throughout the world. We believe we have good
relations with our employees.
Methods of Distribution. As of March 31, 2011, we employed approximately 1,180 direct field sales and service
representatives within the United States and approximately 400 in international locations. Sales and service activities are
supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house
Customer service and field support departments. We also contract with distributors and dealers in select markets.
Customer training is important to our business. We provide a variety of courses at Customer locations, at our training and
education centers, and over the internet. Our training programs help Customers understand the science, technology, and
operation of our products. Many of our operator training programs are approved by professional certifying organizations and
offer continuing education credits to eligible course participants.
Seasonality. Our financial results have been, from time to time, subject to seasonal patterns. We cannot assure you that these
patterns will continue.
International Operations. We believe we have a large opportunity to expand internationally, as we currently only serve a
small portion of the world that could benefit from our products. Through our subsidiaries, we operate in various international
locations within the same business segments as in the United States. International revenues have recently represented
approximately one-fourth of our total revenues. Revenues from Europe, Canada, and the Asia Pacific and Latin American
regions were 47.4%, 23.6%, 19.5%, and 9.5%, respectively, of our total international revenues for the year ended March 31,
2011.
Also see note 12 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A”,
for a geographic presentation of our revenues for the three years ended March 31, 2011.
We conduct manufacturing in the United States, Canada, Mexico, and various European countries. International cost of
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revenues have represented approximately one-third of our total cost of revenues.There are, in varying degrees, a number of
inherent risks to our international operations. We describe some of these risks in Part I, Item 1A of this Annual Report titled,
“Risk Factors, We conduct manufacturing, sales, and distribution operations on a worldwide basis.”
Fluctuations in the exchange rate of the U.S. dollar relative to the currencies of foreign countries in which we operate can
also increase or decrease our reported net assets and results of operations. During fiscal 2011, revenues were unfavorably
impacted by $0.1 million and income before taxes was unfavorably impacted by $3.0 million, or 3.9%, as a result of foreign
currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or the
effect they will have on our operations.
Backlog. We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2011,
we had a backlog of $179.3 million. Of this amount, $138.6 million and $40.7 million related to our Healthcare and Life
Sciences segments, respectively. At March 31, 2010, we had backlog orders of $169.6 million. Of this amount $127.8 million
and $41.8 million related to our Healthcare and Life Sciences segments, respectively. A significant portion of the backlog
orders at March 31, 2011, is expected to ship in the next fiscal year.
Availability of Securities and Exchange Commission Filings. We make available free of charge on or through our website
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to
these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to the
Securities and Exchange Commission (“SEC”). You may access these documents on the Investor Relations page of our website
at http://www.steris-ir.com. You may also obtain copies of these documents by visiting the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549 or by accessing the SEC’s website at http://www.sec.gov. You may obtain
information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Code of Ethics,
and our Code of Business Conduct, as well as the Charters of the Audit and Financial Policy Committee, the Compensation and
Corporate Governance Committee, and the Compliance Committee of the Company’s Board of Directors.
ITEM 1A. RISK FACTORS
This item describes certain risk factors that could affect our business, financial condition and results of operations. You
should consider these risk factors when evaluating the forward-looking statements contained in this Annual Report on Form 10-
K, because our actual results and financial condition might differ materially from those projected in the forward-looking
statements should these risks occur. We face other risks besides those highlighted below. These other risks include additional
uncertainties not presently known to us or that we currently believe are immaterial, but may ultimately have a significant
impact. Should any of these risks, described below or otherwise, actually occur, our business, financial condition, performance,
prospects, value, or results of operations could be negatively affected.
The economic climate may adversely affect us.
Adverse economic cycles or conditions and Customer, regulatory or government response to those cycles or conditions,
could affect our results of operations. There can be no assurance when these cycles or conditions will occur or when they will
begin to improve after they occur. There also can be no assurance as to the strength or length of any recovery from a business
downturn or recession. United States and worldwide financial and business conditions are uncertain, and the recent severe
recession has had a significant adverse effect on U.S. and global economies, which also has negatively impacted access to
capital markets and investment activity within key geographic and industry segments served.
Credit and liquidity problems may make it difficult for some businesses to access credit markets and obtain financing and
may cause some businesses to curtail spending to conserve cash in anticipation of persistent business slowdowns and liquidity
needs. If our Customers have difficulty financing their purchases due to tight credit markets or related factors or because of
other operational problems they may be experiencing or otherwise decide to curtail their purchases, our business could be
adversely affected. Our exposure to bad debt losses could also increase if Customers are unable to pay for products previously
ordered and delivered. Also, continuing tightness of credit in financial markets may limit the ability of our lenders to satisfy
their obligations to us to provide funding and letters of credit or the ability of our insurers to respond to a claim under an
insurance policy.
In addition, economic conditions and market volatility impact the investment portfolio of our legacy defined benefit
pension plan. Because the values of the pension plan investments have and will fluctuate in response to changing market
conditions, the amount of gains or losses that will be recognized in subsequent periods and the impact on the funded status of
the plan and future minimum required contributions, if any, might have a material adverse effect on our liquidity, value,
financial conditions or result of operations.
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Our businesses are highly competitive, and if we fail to compete successfully, our revenues and results of operations may be
hurt.
We operate in a highly competitive global environment. Our businesses compete with other broad line manufacturers, as
well as many smaller businesses specializing in particular products or services, primarily on the basis of brand, design, quality,
safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support. We face increased
competition from new infection prevention, sterile processing, contamination control, surgical support, cleaning consumables,
contract sterilization, and other products and services entering the market. Competitors and potential competitors also are
attempting to develop alternate technologies and sterilizing agents, as well as disposable medical instruments and other devices
designed to address the risk of contamination. If our products, services, support, distribution and/or cost structure do not enable
us to compete successfully, our business, performance, prospects, value, financial condition, and results of operations may be
adversely affected.
Our success depends, in part, on our ability to design, manufacture, distribute, and achieve market acceptance of new
products with higher functionality and lower costs.
Many of our Customers operate businesses characterized by technological change, product innovation and evolving
industry standards. Price is a key consideration in their purchasing decisions. To successfully compete, we must continue to
design, develop, and improve innovative products. We also must achieve market acceptance of and effectively distribute those
products, and reduce production costs. Our business, performance, prospects, value, financial condition, and results of
operations might be adversely affected if our competitors' product development capabilities become more effective, if they
introduce new or improved products that displace our products or gain market acceptance, or if they produce and sell products
at lower prices.
If our cost reduction and restructuring efforts are ineffective, our profitability may be hurt or our business otherwise might
be adversely affected.
We have undertaken various cost reduction and restructuring activities over the last several years, including the transfer of
our Erie, Pennsylvania manufacturing operations to Mexico, direct and indirect corporate overhead expense reductions,
restructuring primarily related to our European Healthcare manufacturing operations into two central locations within Europe,
and the transfer of the remaining operations in our Erie, Pennsylvania facility to our U.S. headquarters in Mentor, Ohio. These
efforts may not produce the full efficiencies and cost reduction benefits we expect or efficiencies and benefits might be delayed
or not realized. Implementation costs also might exceed expectations and further cost reduction measures might become
necessary, resulting in additional future charges. If these cost reduction and restructuring efforts are not properly implemented
or are unsuccessful, we might experience business disruptions or our business otherwise might be adversely affected.
Decreased availability or increased costs of raw materials or energy supplies or other supplies might increase our
production costs or limit our production capabilities.
We purchase raw materials, fabricated and other components, and energy supplies from a variety of suppliers. Key
materials include stainless steel, organic chemicals, fuel, cobalt, and plastic components. The availability and prices of raw
materials and energy supplies are subject to volatility and are influenced by worldwide economic conditions, speculative action,
world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or
perceived shortages, and other factors. In some situations, we may be able to temporarily limit price increases or support
availability through supply agreements. Otherwise, raw material prices and availability are subject to numerous factors outside
of our control, including those described above. Increases in prices or decreases in availability of raw materials and oil and gas
might impair our procurement of necessary materials or our product production, or might increase production costs. In addition,
energy costs impact our transportation and distribution and other supply and sales costs. Also, a number of our key materials
and components are single-sourced or have a limited number of suppliers, such as cobalt used in our Isomedix operations.
Shortages in supply, regulatory or security requirements, or increases in the price of raw materials, components and energy
supplies may adversely impact our business, performance, prospects, value, financial condition, or results of operations.
Our operations, and those of our suppliers, are subject to a variety of business continuity hazards and risks, any of which could
interrupt production or operations or otherwise adversely affect our performance, results, or value.
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Business continuity hazards and other risks include:
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explosions, fires, earthquakes, inclement weather, and other disasters;
utility or other mechanical failures;
unscheduled downtime;
labor difficulties;
inability to obtain or maintain any required licenses or permits;
disruption of communications;
data security, preservation and redundancy disruptions;
inability to hire or retain key management or employees;
disruption of supply or distribution; and
regulation of the safety, security or other aspects of our operations.
The occurrence of any of these or other events might disrupt or shut down operations, or otherwise adversely impact the
production or profitability of a particular facility, or our operations as a whole. Certain casualties also might cause personal
injury and loss of life, or severe damage to or destruction of property and equipment, and for casualties occurring at our
facilities, result in liability claims against us. Although we maintain property and casualty insurance and liability and similar
insurance of the types and in the amounts that we believe are customary for our industries, our insurance coverages have limits
and we are not fully insured against all potential hazards and risks incident to our business. Should any of the hazards or risks
occur, or should our insurance coverage be inadequate or unavailable, our business, performance, prospects, value, financial
condition, and results of operations might be adversely affected, both during and after the event.
We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated
with doing business outside the United States.
We maintain significant international operations, including operations in Canada, Europe, Asia and Latin America. As a result,
we are subject to a number of risks and complications associated with international manufacturing, sales, services, and other
operations. These include:
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risks associated with foreign currency exchange rate fluctuations;
difficulties in enforcing agreements and collecting receivables through some foreign legal systems;
foreign Customers with longer payment cycles than Customers in the United States;
tax rates in certain foreign countries that exceed those in the United States, and foreign earnings subject to withholding
requirements;
tax laws that restrict our ability to use tax credits, offset gains, or repatriate funds;
tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one
country are sold to an affiliated entity in another country;
general economic and political conditions in countries where we operate or where end users of our products are situated;
difficulties associated with managing a large organization spread throughout various countries;
difficulties in enforcing intellectual property rights or weaker intellectual property right protections in some countries;
and
difficulties associated with compliance with a variety of laws and regulations governing international trade, including
the Foreign Corrupt Practices Act.
Implementation and achievement of international growth objectives also may be impeded by political, social, and
economic uncertainties or unrest in countries in which we conduct operations or market or distribute our products. In addition,
compliance with multiple, and potentially conflicting, international laws and regulations, import and export limitations, anti-
corruption laws, and exchange controls may be difficult, burdensome or expensive.
For example, we are subject to compliance with various laws and regulations, including the Foreign Corrupt Practices Act
and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to
officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these
laws, we cannot assure you that our internal policies and procedures will always protect us from violations of these laws,
despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of events may
adversely affect our business, performance, prospects, value, financial condition, and results of operations.
Consolidations among our healthcare and pharmaceutical Customers may result in a loss of Customers or more significant
pricing pressures.
A number of our Customers have consolidated. These consolidations are due in part to healthcare cost reduction measures
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initiated by competitive pressures as well as legislators, regulators and third-party payors. In an effort to attract Customers,
some of our competitors have also reduced production costs and lowered prices. This has resulted in greater pricing pressures
on us and in some cases loss of Customers. Additional consolidations could result in a loss of Customers or more significant
pricing pressures. Additional consolidations and pricing pressures may occur as a result of recent healthcare legislation and
economic conditions. A loss of Customers or more significant pricing pressure could have an adverse effect on our business,
performance, prospects, value, financial conditions or results of operations.
Changes in healthcare laws or government and other third-party payor reimbursement levels to healthcare providers, or failure
to meet healthcare reimbursement or other requirements might negatively impact our business.
We sell many of our products to hospitals and other healthcare providers and pharmaceutical manufacturers. Many of these
Customers are subject to or supported by government programs or receive reimbursement for services from third-party payors,
such as government programs, including Medicare and Medicaid, private insurance plans, and managed care programs. In the
United States, many of these programs set maximum reimbursement levels for these healthcare services and can have complex
reimbursement requirements. Outside the United States, reimbursement systems vary significantly by country. However,
government-managed healthcare systems control reimbursement for healthcare services in many foreign countries. In these
countries, as well as in the United States, public budgetary constraints may significantly impact the ability of hospitals,
pharmaceutical manufacturers, and other Customers supported by such systems to purchase our products. If government or
other third-party payors deny or change coverage, reduce their current levels of reimbursement for healthcare services, or
otherwise implement measures to regulate pricing or contain costs or if our costs increase more rapidly than reimbursement
level or permissible pricing increases or we do not satisfy the standards or requirements for reimbursement, our revenues or
profitability may suffer and our business, performance, value, prospects, financial condition or results of operations may be
adversely affected.
In addition, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, contains provisions that could have a material impact on our business. Among other
provisions, this legislation imposes an excise tax on medical devices manufactured or offered for sale in the United States
beginning in 2013. Various health care reform proposals have also emerged at the state level, and we are unable to predict
which, if any, of those proposals will be enacted. However, the ultimate effect of health care reform legislation or any future
legislation or regulation could have a material adverse affect on our business, performance, value, prospects, financial condition
or results of operation.
We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many
products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues,
profitability, financial condition, or value.
Our operations are subject to extensive regulation in both the United States and in other countries where we do business.
In the U.S, our products and services are regulated by the FDA and other regulatory authorities. In many foreign countries,
sales of our products are subject to extensive regulations that may or may not be comparable to those of the FDA. In Europe,
our products are regulated primarily by country and community regulations of those countries within the European Economic
Area and must conform to the requirements of those authorities.
Government regulation applies to nearly all aspects of testing, manufacturing, safety, labeling, storing, recordkeeping,
reporting, promoting, distributing, and importing or exporting of medical devices, products, and services. In general, unless an
exemption applies, a sterilization, decontamination or medical device or product or service must receive regulatory approval or
clearance before it can be marketed or sold. Modifications to existing products or the marketing of new uses for existing
products also may require regulatory approvals, approval supplements or clearances. If we are unable to obtain any required
approvals, approval supplements or clearances for any modification to a previously cleared or approved device, we may be
required to cease manufacturing and sale, or recall or restrict the use of such modified device, pay fines, or take other action
until such time as appropriate clearance or approval is obtained.
Regulatory agencies may refuse to grant approval or clearance, or review and disagree with our interpretation of approvals
or clearances, or with our decision that regulatory approval is not required or has been maintained. Regulatory submissions
may require the provision of additional data and may be time consuming and costly, and their outcome is uncertain. Regulatory
agencies may also change policies, adopt additional regulations, or revise existing regulations, each of which could prevent or
delay approval or clearance of devices, or could impact our ability to market a previously cleared, approved, or unregulated
device. Our failure to comply with the regulatory requirements of the FDA or other applicable regulatory requirements in the
United States or elsewhere might subject us to administratively or judicially imposed sanctions. These sanctions include,
among others, warning letters, fines, civil penalties, criminal penalties, injunctions, debarment, product seizure or detention,
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product recalls and total or partial suspension of production, sale and/or promotion. The failure to receive or maintain, or delays
in the receipt of, relevant United States or international qualifications could have a material adverse affect on our business,
performance, prospects, value, financial condition or results of operations.
Refer also for further information to the “Risk Factor” below titled, “We may be adversely affected by product liability
claims or other legal actions or regulatory or compliance matters, including the Warning Letter and Consent Decree” and the
“Risk Factor” below titled “Our business may be adversely affected as a result of the U.S. Food and Drug Administration
notices to healthcare administrators, and related matters”, and the “Risk Factor” below titled “Compliance with the Consent
Decree may be more costly and burdensome than anticipated.” and to Part I, Item 3, “Legal Proceedings”.
Our products are subject to recalls and restrictions, even after receiving United States or foreign regulatory clearance or
approval.
Ongoing medical device reporting regulations require that we report to appropriate governmental authorities in the United
States and/or other countries when our products cause or contribute to a death or serious injury or malfunction in a way that
would be reasonably likely to contribute to a death or serious injury if the malfunction were to recur. Governmental authorities
can require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues. For the
same reasons, we may voluntarily elect to recall or restrict the use of a product. Any recall or restriction could divert
managerial and financial resources and might harm our reputation among our Customers and other healthcare professionals
who use or recommend the products. Product recalls, restrictions, suspensions, re-labeling, or other change might have a
material adverse affect on our business, performance, prospects, value, financial condition, or results of operations.
We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including
the Warning Letter and Consent Decree.
We face an inherent business risk of exposure to product liability claims and other legal and regulatory actions. A
significant increase in the number, severity, amount, or scope of these claims and actions may result in substantial costs and
harm our reputation or otherwise adversely affect product sales and our business. Product liability claims and other legal and
regulatory actions may also distract management from other business responsibilities.
We are also subject to a variety of other types of claims, proceedings, investigations, and litigation initiated by government
agencies or third parties and other potential risks and liabilities. These include compliance matters, product regulation or safety,
taxes, employee benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export,
government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false
claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar or
different matters. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial
costs, restrictions on product use or sales, or otherwise injure our business.
Administratively or judicially imposed or agreed sanctions might include warning letters, fines, civil penalties, criminal
penalties, loss of tax benefits, injunctions, product seizure, recalls, suspensions or restrictions, re-labeling, detention, and/or
debarment. We also might be required to take actions such as payment of substantial amounts, or revision of financial
statements, or to take the following types of actions with respect to our products, services, or business:
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redesign, re-label, restrict, or recall products;
cease manufacturing and selling products;
seizure of product inventory;
comply with a court injunction restricting or prohibiting further marketing and sale of products or services;
comply with a consent decree, which could result in further regulatory constraints;
dedication of significant internal and external resources and costs to respond to and comply with legal and regulatory
issues and constraints;
respond to claims, litigation, and other proceedings brought by Customers, users, governmental agencies, and others;
disruption of product improvements and product launches;
discontinuation of certain product lines or services; or
other restrictions or limitations on product sales, use or operation, or other activities or business practices.
Some product replacements or substitutions may not be possible or may be prohibitively costly or time consuming.
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Examples of the types of matters described above are the warning letter we received from the FDA on May 16, 2008
regarding our SYSTEM 1 sterile processing system, and the Consent Decree entered into on April 20, 2010. In summary, the
warning letter outlined the FDA's assertion that significant changes or modifications had been made in the design, components,
method of manufacture or intended use of the device, beyond the FDA's 1988 clearance of the device, such that the FDA
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asserted a new premarket notification submission was required. After extensive discussion, negotiation and interaction between
FDA and us, a consent decree was agreed upon and approved by the Federal District Court for the Northern District of Ohio on
April 20, 2010 (the “Consent Decree”). As a consequence of these interactions and the Consent Decree, there are numerous
restrictions on us with respect to SYSTEM 1 and other liquid chemical sterilizing and disinfecting devices, components and
accessories. For example, we have discontinued all sales of our SYSTEM 1 processor to U.S. Customers and will discontinue
the provision of service, parts, accessories and sterilant for SYSTEM 1 units in the U.S. no later than February 2, 2012. As a
result of these current and future restrictions and commitments, our revenues, earnings, business, performance, prospects or
value may be negatively impacted. The Consent Decree also prohibits the sale of liquid chemical sterilizing or disinfecting
products that do not have FDA clearance, describes various process and compliance issues, and defines penalties for non-
compliance. (For more information regarding this warning letter and the Consent Decree, see the “Risk Factor” titled
“Compliance with the Consent Decree may be more costly and burdensome than anticipated” and “Legal Proceedings” in Item
3 of Part I.) The Consent Decree, claims by Customers and other parties, and other events or impact associated with these
matters could materially affect our business, performance, prospects, value, financial condition, or results of operations.
The ongoing impact of the Consent Decree, or the impact of any legal, regulatory, or compliance claims, proceeding,
investigation, or litigation, is difficult to predict. A legal, regulatory or compliance claim or matter regarding any significant
product, service, or obligation of ours, could materially and adversely affect our business, performance, prospects, value,
financial condition, or results of operations.
We maintain product liability and other insurance with coverages believed to be adequate. However, product liability or
other claims may exceed insurance coverage limits, fines, penalties and regulatory sanctions may not be covered by insurance,
or insurance may not continue to be available or available on commercially reasonable terms. Additionally, our insurers might
deny claim coverage for valid or other reasons or may become insolvent.
Our business may be adversely affected as a result of the U.S. Food and Drug Administration notices to healthcare administrators
and device manufacturers, and related matters.
FDA's December 3, 2009 notice advised healthcare administrators that the FDA believed we had significantly modified
SYSTEM 1, and therefore, were required to submit a new premarket notification to the FDA. As a result, the agency stated that
it had not determined that SYSTEM 1 was safe or effective for sterilizing medical devices. The FDA recommended in the
notice that Customers transition to an acceptable alternative as soon as possible if they have one; if not, that they promptly
assess their patient care needs and sterilization and disinfection requirements and take steps to obtain legally-marketed
SYSTEM 1 substitutes. Subsequent FDA announcements have extended the total recommended time period for transition from
SYSTEM 1 in the U.S. through February 2, 2012. On February 22, 2010, FDA provided a notice to device manufacturers,
recommending that manufacturers re-label their devices to identify alternative, legally-marketed, reprocessing methods. As a
result of these notices, possible future FDA recommendations, Customer or patient reaction or claims, or other events,
Customers may more quickly transition away from or terminate the use of SYSTEM 1, reduce or discontinue the purchase of
sterilant and services relating to SYSTEM 1, reduce or discontinue purchases of other STERIS products, including other
STERIS products that the FDA considers acceptable alternatives or take other action that could materially adversely affect our
business. Customers also may be more disinclined to purchase our new SYSTEM 1E Liquid Chemical Sterilant Processing
System. In connection with this transition, we are offering rebates and other considerations to Customers. As a result, revenues
lost, transition costs incurred, incentives or other consideration provided, claims and compliance costs, and other expenses
incurred and impacts resulting from these circumstances, may have a material adverse effect on our business, performance,
prospects, value, financial condition or results of operations. For more information regarding the FDA and SYSTEM 1
situation, see the “Risk Factor” titled “We may be adversely affected by product liability claims or other legal actions or
regulatory or compliance matters, including the Warning Letter and Consent Decree” appearing earlier in this Item 1A and
“Legal Proceedings” in Item 3 of Part 1.
Existing and new Customers may not purchase or use the new liquid chemical sterilant processing system or related consumables
consistent with the purchase and use of SYSTEM 1®.
In January 2009, we submitted a 510(k) premarket notification to the FDA for a new liquid chemical sterilant processing
system. We were notified by the FDA on April 6, 2010 that this new system, known as the SYSTEM 1E Liquid Chemical
Sterilant Processing System, which is indicated for liquid chemical sterilization of cleaned, immersible, and reusable critical
and semi-critical heat sensitive medical devices in healthcare facilities, had been cleared for marketing and sale. However, there
can be no assurance as to the extent that such new liquid chemical sterilant processing system will receive market acceptance or
that any such acceptance will be consistent with the prior market demand for SYSTEM 1. Also, the FDA is continuing its
review of our 510(k) submission for a liquid chemical sterilant processing indicator. The indicator is not required by the FDA
for the proper use of SYSTEM 1E, but certain Customers may be unwilling to purchase SYSTEM 1E units without this
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indicator. Moreover, initially margins for SYSTEM 1E units, sterilant and service will be lower than for SYSTEM 1. In
connection with this transition, we are offering rebates and other considerations to Customers. We began shipping SYSTEM
1E units in December 2010 and shipped approximately 1,300 units through the end of fiscal year 2011. If sales or use of the
SYSTEM 1E or related parts, accessories, sterilant or service are significantly less than previous levels for SYSTEM 1, or if
startup, warranty, guarantee, transition or other costs are greater or the installation process is more difficult than anticipated for
SYSTEM 1E, that could have a material adverse effect on our business, prospects, performance, value, financial condition or
results of operations.
We may not be able to produce or install the new liquid chemical sterilant processing systems quickly enough to meet Customer
demand.
As noted elsewhere, because of the transition away from SYSTEM 1 in the U.S., U.S. Customers currently using SYSTEM
1 will need to position themselves to meet their low temperature medical device reprocessing needs using other products and
systems. We believe that the SYSTEM 1E will meet most of these needs for a large number of current SYSTEM 1 users.
However, to the extent we are unable to produce or install SYSTEM 1E units in sufficient numbers to meet demand of existing
SYSTEM 1 Customers, those Customers who need to replace SYSTEM 1 units and who are unable to obtain SYSTEM 1E or
are unwilling to purchase other systems and products sold by us may purchase alternative systems and products from
competitors, which could have a material adverse effect on our business, prospects, performance, value, financial condition or
results of operations.
Compliance with the Consent Decree may be more costly and burdensome than anticipated.
The Consent Decree contains numerous requirements that could create significant costs and compliance risks. The
Consent Decree, which is expected to remain in force for a minimum period of five years, includes provisions permitting the
government to take corrective actions against us if it determines we have violated the Consent Decree, including the right to
issue an order requiring cessation of production or take other corrective action, and in some cases we may be required to
implement the order before bringing the matter before a court. Failures to comply with the Consent Decree or FDA regulations
respecting liquid chemical sterilizing or disinfecting devices also may result in liquidated damages specified in the Consent
Decree of up to ten million dollars per calendar year. If costs associated with compliance with the Consent Decree significantly
exceed the amounts anticipated, or if we violate the terms of the Consent Decree, our business, performance, value, financial
condition, prospects or results of operations may be adversely affected.
We engage in acquisitions and affiliations, divestitures, and other business arrangements. Our growth may be adversely affected
if we are unable to successfully identify, price, and integrate strategic business candidates or otherwise optimize our business
portfolio.
Our success depends, in part, on strategic acquisitions and joint ventures, which are intended to complement or expand our
businesses, divestiture of non-strategic businesses, and other actions to optimize our portfolio of businesses. This strategy
depends upon our ability to identify, appropriately price, and complete these types of business development transactions or
arrangements and to obtain any necessary financing. Our success will also depend on our ability to integrate the businesses
acquired or to develop satisfactory working arrangements with our strategic partners in joint ventures or other affiliations, or to
divest or realign businesses. Competition for strategic business candidates may result in increases in costs and price for
acquisition candidates and market valuation issues may reduce the value available for divestiture of non-strategic businesses.
These types of transactions are also subject to a number of other risks and uncertainties, including:
•
•
•
•
•
•
•
•
delays in realizing the benefits of the transactions;
diversion of management's time and attention from other business concerns;
difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses;
difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture
difficulties;
adverse effects on existing business relationships with suppliers or Customers;
other events contributing to difficulties in generating future cash flows;
risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for
divested businesses; and
difficulties in obtaining or satisfying financing.
If we are unable to realize the anticipated operating efficiencies and synergies or other expected transaction benefits, our
business, prospects, performance, value, financial condition or results of operation may be adversely impacted.
14
Our business and results of operations may be adversely affected if we are unable to recruit and retain qualified management
and other personnel, or if the Consent Decree or other compliance matters adversely impact our personnel.
Our continued success depends, in large part, on our ability to hire and retain highly qualified people and if we are unable
to do so, our business and operations may be impaired or disrupted. Competition for highly qualified people is intense and there
is no assurance that we will be successful in attracting or retaining replacements to fill vacant positions, successors to fill
retirements or employees moving to new positions, or other highly qualified personnel. Our CEO and Chief Technology
Officer are parties to the Consent Decree, and other officers and directors are also subject to its terms. If the Consent Decree or
other legal, regulatory or compliance matters create significant distraction or diversion of significant or unanticipated resources
or attention, that could have a material adverse effect on the responsibilities and retention of these persons, and on our business,
performance, prospects, value, financial condition or results of operation.
Our business and financial condition could be adversely affected by difficulties in acquiring or maintaining a proprietary
intellectual ownership position.
To maintain our competitive position, we need to obtain patent or other proprietary rights for new and improved products
and to maintain and enforce our existing patents and other proprietary rights. We typically apply for patents in the United States
and in strategic foreign countries. We may also acquire patents through acquisitions. A 2007 United States Supreme Court
decision increases the difficulty of obtaining patent protection in the United States. The actual scope and impact of the decision
on our existing patent rights or patent applications and those of others will not likely be known until other court rulings further
interpret and apply the decision.
We rely on a combination of patents, trade secrets, know-how, and confidentiality agreements to protect the proprietary
aspects of our technology. These measures afford only limited protection, and competitors may gain access to our intellectual
property and proprietary information. Litigation may be necessary to enforce or defend our intellectual property rights, to
protect our trade secrets, and to determine the validity and scope of our proprietary rights. Litigation may also be brought
against us claiming that we have violated the intellectual property rights of others. Litigation may be costly and may divert
management's attention from other matters. Additionally, in some foreign countries with weaker intellectual property rights, it
may be difficult to maintain and enforce patents and other proprietary rights or defend against claims of infringement. If we are
unable to obtain necessary patents, our patents and other proprietary rights are successfully challenged, or competitors
independently develop substantially equivalent information and technology or otherwise gain access to our proprietary
technology, our business, performance, value, financial condition, or results of operations may be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
15
ITEM 2.
PROPERTIES
The following table sets forth the principal plants and other materially important properties of the Company and its
subsidiaries as of March 31, 2011. The Company believes that its facilities are adequate for operations and are maintained in
good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially
reasonable rates.
In the table below, “Contract Sterilization” refers to locations of the Isomedix segment. “Manufacturing,” “Warehousing,”
“Operations,” or “Sales Offices” refer to locations serving both the Healthcare and Life Sciences segments.
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
U.S./INTL
Location
U.S.
Montgomery, AL
Use
Manufacturing
Ontario, CA
San Diego, CA
Temecula, CA
Libertyville, IL (2 locations)
Northborough, MA
St. Louis, MO
South Plainfield, NJ
Whippany, NJ
Chester, NY
Groveport, OH
Mentor, OH (7 locations)
Vega Alta, PR
Spartanburg, SC
El Paso, TX (2 locations)
Grand Prairie, TX
Sandy, UT
Bordeaux, France
Quebec City, Canada
Whitby, Canada
Leicester, England
Tuusula, Finland
Pieterlen, Switzerland
Minneapolis, MN
St. Louis, MO
Reno, NV
Mentor, OH
Erie, PA
Pittsburgh, PA
Brussels, Belgium
Sao Paulo, Brazil
Mississauga, Canada
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Manufacturing
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Corporate Headquarters
Sales/Marketing Offices
Administrative Offices
Manufacturing/Warehousing
Manufacturing/Operations
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Manufacturing/Sales Office/
Showroom
Manufacturing
Contract Sterilization
Manufacturing
Manufacturing/Sales Office
Manufacturing/Sales Office
Contract Sterilization
Warehousing/Distribution
Warehousing
Administrative Offices
Administrative Offices
Sales Office
Sales Office
Sales Office
Sales Office/Warehousing
16
Owned/Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
U.S./INTL
Location
INTL
Shanghai, China
Use
Sales Office
Basingstoke, England
Leicester, England
Saran, France (4 locations)
Cologne, Germany
Calcutta, India
Segrate, Italy
Tokyo, Japan
Petaling Jaya, Malaysia
Guadalupe, Mexico
Moscow, Russia
Singapore
Madrid, Spain
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
European Corporate
Headquarters/Sales Office
Warehousing
Manufacturing/Sales Office/
Showroom
Sales Office
Sales Office
Sales Office
Sales Office
Sales Office
Manufacturing
Sales Office
Sales Office
Sales Office
Owned/Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
17
ITEM 3.
LEGAL PROCEEDINGS
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims,
which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our
business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings,
investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal
injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further
believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our
consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can
be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings
(including without limitation the FDA-related matters discussed below). For certain types of claims, we presently maintain
product liability insurance coverage and other liability coverages in amounts and with deductibles that we believe are prudent,
but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal
proceedings against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our
SYSTEM 1 sterile processor and the STERIS™ 20 sterilant used with the processor (sometimes referred to collectively in the
FDA letter and in this Item 3 as the “device”). Among other matters, the warning letter included the FDA's assertion that
significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the
device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within
FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission
resulted in violations of applicable law. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed
response contending that the assertions in the warning letter were not correct. On November 4, 2008, we received a letter from
the FDA (dated November 3, 2008) in which the FDA stated without elaboration that, after reviewing our response, it disagreed
with our position and that a new premarket notification submission was required. After discussions with the FDA regarding the
November 3rd letter, we received an additional letter on November 6, 2008 from the FDA. The November 6th letter stated that
the intent of the November 3rd letter was to inform us of the FDA's preliminary disagreement with our response to the warning
letter and, before finalizing a position, the FDA reiterated that it wanted to meet with us to discuss the Company's response,
issues related to the warning letter and next steps to resolve any differences between the Company and the FDA. We thereafter
met with the FDA and, on January 20, 2009, we announced that we had submitted to the FDA a new liquid chemical sterilant
processing system for 510(k) clearance, and we communicated to Customers that we would continue supporting the existing
SYSTEM 1installed base in the U.S. for at least a two year period from that date. (On April 5, 2010, we received FDA
clearance of the new liquid chemical sterilant processing system (SYSTEM 1E).)
On December 3, 2009, the FDA provided a notice (“notice”) to healthcare facility administrators and infection control
practitioners describing FDA's “concerns about the SYSTEM 1 Processor, components and accessories, and FDA
recommendations.” In the notice, among other things, FDA stated its belief that the SYSTEM 1 device had been significantly
modified, that FDA had not cleared or approved the modified device, and that FDA had not determined whether the SYSTEM 1
was safe or effective for its labeled claims. The notice further stated that use of a device that does not properly sterilize or
disinfect a medical or surgical device poses risks to patients and users, including the transmission of pathogens, exposure to
hazardous chemicals and affect the quality and functionality of reprocessed instruments. The notice stated that FDA was aware
of reports of malfunctions of the SYSTEM 1 that had the potential to cause or contribute to serious injuries to patients, such as
infections, or injuries to healthcare staff, such as burns. Included in FDA's December 3, 2009 notice was a recommendation
from FDA that if users had acceptable alternatives to meet sterilization and disinfection needs, they should transition to that
alternative as soon as possible. After its December 3, 2009 notice, we engaged in extensive discussions with the FDA regarding
a comprehensive resolution of this matter. During this period, we continued to support the existing SYSTEM 1 installed base
by providing accessories, sterilant, service and parts to U.S. Customers.
In April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19,
2010, a Complaint and Consent Decree were filed in the U.S. District Court for the Northern District of Ohio, and on April 20,
2010, the Court approved the Consent Decree. In general, the Consent Decree addresses regulatory matters regarding SYSTEM
18
1, restricts further sales of SYSTEM 1 processors in the U.S., defines certain documentation and other requirements for
continued service and support of SYSTEM 1 in the U.S., prohibits the sale of liquid chemical sterilization or disinfection
products that do not have FDA clearance, describes various process and compliance matters, and defines penalties in the event
of violation of the Consent Decree.
The Consent Decree also provides that we may continue to support our Customers' use of SYSTEM 1 in the U.S.,
including the sale of consumables, parts and accessories and service for a transition period, not to extend beyond August 2,
2011, subject to compliance with requirements for documentation of the Customer's need for continued support and other
conditions and limitations (the “Transition Plan”.) This transition period has since been extended by the FDA until February 2,
2012. Our Transition Plan includes the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer
rebates to qualifying Customers. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who are
current users of SYSTEM 1 and who return their units will have the option of either a pro-rated cash value or rebate toward the
future purchase of new STERIS capital equipment (including SYSTEM 1E) or consumable products. In addition, we will
provide credits for SYSTEM 1 consumables in unbroken packaging and within shelf life and for the unused portion of
SYSTEM 1 service contracts. As a result, we recorded a pre-tax liability of $110.0 million related to the SYSTEM 1 Rebate
Program. Of the $110.0 million, $102.3 million is attributable to the Customer Rebate portion of the Program and was recorded
as a reduction of revenues, and $7.7 million is attributable to the disposal liability of the SYSTEM 1 units to be returned and
was recorded as an increase in cost of revenues. This also resulted in a $110.0 million reduction in operating income. The
Rebate Program balance at March 31, 2011 is $107,887.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions
since January 2009 with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals
under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory,
administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in
respect of the Consent Decree, the Transition Plan, SYSTEM 1, the EPS System (described subsequently), or otherwise with
respect to regulatory or compliance matters, as described in this Item 3 or in various portions of Item 1A. of Part I contained in
this Annual Report on Form 10-K.
In December of 2010, we began shipping SYSTEM 1E units. We also received FDA clearance for the SYSTEM 1E
chemical indicator, which is used in conjunction with the SYSTEM 1E. We have also requested FDA clearance of an additional
indicator for SYSTEM 1E, although this indicator is not required by regulation to sell or operate the device. No assurance can
be made that the FDA will agree to this request.
Also in April, 2010 we voluntarily submitted information regarding modifications to the Reliance EPS Endoscope
Processing System (the “EPS System”) to the FDA. These incremental modifications to the EPS System were considered minor
by us. FDA subsequently advised us that it believed a new pre-market notification (510(k)) for those modifications should be
submitted. We thereafter submitted this pre-market notification to the FDA. We also suspended shipments of EPS Systems in
the U.S. pending FDA review of the submission but continued servicing and providing consumables necessary for the
continued use of the EPS Systems. In December 2010, we received FDA clearance of the modified EPS System and
immediately resumed shipment in the U.S.
On February 10, 2011, we received a warning letter from the FDA regarding our Verify® SixCess Class 6 Challenge Packs
and Verify SixCess Class 6 Chemical Indicators. These devices are intended for use in steam sterilization applications. The
Verify SixCess Class 6 Challenge Packs and Verify SixCess Class 6 Chemical Indicators are not related to the STERIS
SYSTEM 1E Liquid Chemical Sterilant Processing System. This FDA warning letter claims that certain promotional materials
related to these devices include incorrect statements and, as a result of those statements, the warning letter claims that these
devices are misbranded under the U.S. Food, Drug and Cosmetic Act. We have responded to this warning letter and do not
believe that the impact of this event will have a material adverse effect on our financial results.
In February 5, 2010, a complaint was filed by a Customer that claims to have purchased two SYSTEM 1 devices from
STERIS, Physicians of Winter Haven LLC d/b/a Day Surgery Center v. STERIS Corp., Case No. 1:1-cv-00264-CAB (N.D.
Ohio). The complaint alleges statutory violations, breaches of various warranties, negligence, failure to warn, and unjust
enrichment. Plaintiff seeks class certification, damages, and other legal and equitable relief including, without limitation,
attorneys' fees and an order requiring STERIS to replace, recall or adequately repair the product and/or to take appropriate
regulatory action. On February 7, 2011 we entered into a settlement agreement in which we agreed, among other things, to
provide various categories of economic relief for members of the settlement class and not object to plaintiff's counsel's
application to the court for attorneys' fees and expenses up to a specified amount. The settlement has been preliminarily
approved by the court. Both certification of a settlement class and final approval of the settlement require approval of the
court and satisfaction of certain other conditions. There is no assurance that the court will take such actions, that such
19
conditions will be satisfied, or that this matter will be resolved, or be resolved consistent with the terms and conditions of such
settlement agreement. During the third quarter of fiscal 2011, we recorded in operating expenses a pre-tax charge of
approximately $19.8 million related to the proposed settlement of these proceedings.
This putative class action or other civil, criminal, regulatory or other proceedings involving our SYSTEM 1, SYSTEM 1E,
EPS System, or other products or services could possibly result in judgments, settlements or administrative or judicial decrees
requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or
other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial
condition, and results of operations.
For additional information regarding these matters, see the following portions of this Annual Report on Form 10-K:
“Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled: “We
may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the
Warning Letter and Consent Decree.”, the “Risk Factor” titled: “Our business may be adversely affected as a result of the U.S.
Food and Drug Administration notices to healthcare administrators and device manufacturers, and related matters,” and the
“Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.”
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and
other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
Additional information regarding our commitments and contingencies is included in Item 7, “MD&A,” and in note 11 to
our consolidated financial statements titled, “Commitments and Contingencies.”
20
ITEM 4.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information regarding our executive officers. All executive officers serve at the
pleasure of the Board of Directors.
Name
William L. Aamoth
Dr. Peter A. Burke
Timothy L. Chapman
Mark D. McGinley
Robert E. Moss
Walter M Rosebrough, Jr.
Michael J. Tokich
Age
57
62
49
54
66
57
42
Position
Vice President and Corporate Treasurer
Senior Vice President and Chief Technology Officer
Senior Vice President and Group President, Healthcare
Senior Vice President, General Counsel, and Secretary
Senior Vice President and Group President, STERIS Isomedix Services and Life
Sciences
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
The following discussion provides a summary of each executive officer’s recent business experience:
William L. Aamoth serves as Vice President and Corporate Treasurer. He assumed this role in July 2002.
Dr. Peter A. Burke serves as Senior Vice President and Chief Technology Officer. He assumed this role in July 2002.
Timothy L. Chapman serves as Senior Vice President and Group President, Healthcare. He assumed this role in February 2008.
He joined STERIS in January 2006 and served as Senior Vice President, Business Strategy until February 2008. Prior to joining
STERIS, Mr. Chapman was associated with McKinsey & Company, a professional services firm, from June 1985 through
January 2006, serving most recently as Director (Senior Partner) in McKinsey's Healthcare and Operations practices.
Mark D. McGinley serves as Senior Vice President, General Counsel, and Secretary. He assumed this role in April 2005. He
joined STERIS in March 2002 as Vice President, General Counsel, and Secretary.
Robert E. Moss serves as Senior Vice President and Group President, STERIS Isomedix Services and Life Sciences. He
assumed this role in October 2009. He served as Senior Vice President and Group President, STERIS Isomedix Services, from
April 2005 until October 2009 and served as Vice President and Group President, STERIS Isomedix Services from March 2003
until April 2005.
Walter M Rosebrough, Jr. serves as President and Chief Executive Officer. He assumed this role when he joined STERIS in
October 2007. Mr. Rosebrough also joined our Board of Directors in October 2007. Prior to his employment with STERIS,
Mr. Rosebrough served from February 2005 to September 2007 as President and Chief Executive Officer of Coastal
Hydraulics, Inc., a company that he purchased in 2005 and he continues to serve as non-executive Chairman. From January
2003 until February 2005, Mr. Rosebrough was involved in a variety of personal business matters, including the purchase of
Coastal Hydraulics. From 2000 to 2003, he was President and CEO of Vasocor, Inc., a start-up focused on the development of
medical devices to detect atherosclerosis. Prior to Vasocor, Mr. Rosebrough spent nearly 20 years in the healthcare industry in
various roles as a senior executive with Hillenbrand Industries, Inc., a worldwide provider of medical equipment and related
services, including President and CEO of Support Systems International, President and CEO of Hill-Rom, and Executive Vice
President of Hillenbrand.
Michael J. Tokich serves as Senior Vice President and Chief Financial Officer. He assumed this role in March 2008. He served
as Vice President and Corporate Controller from July 2002 until March 2008.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information. Our common shares are traded on the New York Stock Exchange under the symbol “STE.” The
following table presents, for the quarters indicated, the high and low sales prices for our common shares.
Quarters Ended
Fiscal 2011
High
Low
Fiscal 2010
High
Low
March 31
December 31
September 30
June 30
$
$
$
37.38
31.86
$
38.00
32.66
$
33.65
28.07
34.63
$
35.42
$
30.85
$
25.65
25.65
24.68
38.16
29.84
27.02
22.22
Holders. As of March 31, 2011, there were approximately 1,304 holders of record of our common shares. However, we
believe that we have a significantly larger number of beneficial holders of common shares.
Dividend Policy. The Company’s Board of Directors decides the timing and amount of any dividends we may pay. During
fiscal 2011, we paid cash dividends totaling $0.56 per outstanding common share ($0.11 per outstanding common share to
common shareholders of record on May 27, 2010 and $0.15 per outstanding common share to common shareholders of record
on each of the following record dates: August 24, 2010, November 24, 2010, and March 1, 2011). During fiscal 2010, we paid
cash dividends totaling $2.44 per outstanding common share ($2.11 per outstanding common share to common shareholders of
record on November 24, 2009 and $0.11 per outstanding common share to common shareholders of record on each of the
following record dates: May 21, 2009, August 20, 2009, and February 23, 2010).
Recent Sales of Unregistered Securities. None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following table presents information with
respect to purchases STERIS made of its shares of common stock during the fourth quarter of the 2011 fiscal year:
Total Number of
Shares Purchased(1)
Average Price Paid
Per Share
5,300
141,400
148,889
295,589
$
$
34.77
34.01
33.47
33.75
Total
Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(2)
Maximum Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plan at Period End(2)
5,300
141,400
148,889
295,589
$
$
(in thousands)
184,194
179,385
174,402
174,402
January 1 - 31
February 1 - 28
March 1 - 31
Total
(1) Does not include 18 shares purchased during the quarter at an average price of $34.84 per share by the STERIS
Corporation 401(k) Plan on behalf of certain executive officers of the Company who may be deemed to be affiliated
purchasers.
(2) On March 14, 2008 we announced that, the Board of Directors had authorized the repurchase of up to $300.0 million
of our common shares. As of March 31, 2011, $174.4 million remained authorized for repurchase of our common
shares under the current share repurchase authorization. This authorization does not have a stated maturity date. We
provide information about our full year fiscal 2011 share repurchase activity in note 14 to our consolidated financial
statements titled, “Repurchases of Common Shares.”
22
ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
2011(1)(2)
Statements of Income Data:
Years Ended March 31,
2009(1)
2010(1)
2008(1)
2007(1)(3)
Revenues
Gross profit
Restructuring expenses
Income from continuing operations
Income taxes
Gain on the sale of discontinued
operations, net of tax
Net income
Basic income per common share:
Income from continuing
operations
Income from discontinued
operations
Net income
Shares used in computing net
income per common share – basic
Diluted income per common share:
Income from continuing
operations
Income from discontinued
operations
Net income
Shares used in computing net
income per common share – diluted
Dividends per common share
Balance Sheets Data:
Working capital
Total assets
Long-term indebtedness
Total liabilities
Total shareholders’ equity
$ 1,207,448
$ 1,257,733
$ 1,298,525
$ 1,265,090
$ 1,197,407
446,162
1,202
85,212
22,554
—
51,265
539,181
4,848
203,712
63,349
526,742
3,554
175,445
55,800
510,603
15,461
123,545
42,693
—
—
—
128,467
110,685
77,106
0.86
$
2.18
$
1.88
$
1.22
$
—
0.86
—
—
—
$
2.18
$
1.88
$
1.22
$
492,253
6,584
137,701
51,833
1,058
82,155
1.24
0.02
1.26
59,306
58,826
58,778
63,300
65,174
1.23
0.02
1.25
0.85
$
2.16
$
1.86
$
1.20
$
—
0.85
60,148
0.56
361,060
$
$
$
—
—
—
2.16
$
1.86
$
1.20
$
59,423
2.44
379,328
$
$
59,448
0.30
351,104
$
$
64,077
0.23
65,731
0.18
283,017
$
267,321
1,426,685
1,238,402
1,216,939
1,239,292
1,209,170
210,000
638,020
787,569
210,000
483,908
753,714
210,000
498,774
717,736
179,280
532,817
706,152
100,800
434,878
774,292
$
$
$
$
$
$
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2) Presented amounts include the impact of the SYSTEM 1 Rebate Program and the proposed SYSTEM 1 class action
settlement.
(3) On October 31, 2005, we completed the sale of our lyophilizer (freeze dryer) product line to GEA Group of Germany
for 20.8 million euros (approximately $25.2 million). As a result of this transaction, we recorded an after-tax gain of
approximately $7.3 million ($6.2 million in fiscal 2006 and $1.1 million in fiscal 2007). The freeze dryer product line,
based in Cologne, Germany, was part of our Life Sciences segment.
23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
In Management’s Discussion and Analysis (“MD&A”), we explain the general financial condition and the results of
operations for STERIS and its subsidiaries including:
• what factors affect our business;
• what our earnings and costs were;
• why those earnings and costs were different from the year before;
• where our earnings came from;
how this affects our overall financial condition;
•
• what our expenditures for capital projects were; and
• where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchase
common shares, pay cash dividends and fund future working capital needs.
The MD&A also analyzes and explains the annual changes in the specific line items in the Consolidated Statements of
Income. As you read the MD&A, it may be helpful to refer to information in Item 1, “Business,” Item 6, “Selected Financial
Data,” and our consolidated financial statements, which present the results of our operations for fiscal 2011, 2010 and 2009, as
well as Part I, Item 1A, “Risk Factors” and Part I, Item 3, “Legal Proceedings” for a discussion of some of the matters that can
adversely affect our business and results of operations. This information, discussion, and disclosure may be important to you in
making decisions about your investments in STERIS.
FINANCIAL MEASURES
When we discuss our financial condition and the results of our operations, we, at times, may refer to financial measures
that are not required to be presented in the consolidated financial statements under accounting principles generally accepted in
the United States. We sometimes use the following financial measures in the context of this discussion and define these
financial measures as follows:
• Backlog – We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use
this figure as a measure to assist in the projection of short-term financial results and inventory requirements.
• Debt-to-total capital – We define debt-to-total capital as total debt divided by the sum of total debt and shareholders’
equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth.
• Net debt-to-total capital – We define net debt-to-total capital as total debt less cash (“net debt”) divided by the sum of
net debt and shareholders’ equity. We also use this figure as a financial liquidity measure to gauge our ability to
borrow and fund growth.
• Days sales outstanding (“DSO”) – We define DSO as the average collection period for accounts receivable. It is
calculated as net accounts receivable divided by the trailing four quarters’ revenues, multiplied by 365 days. We use
this figure to help gauge the quality of accounts receivable and expected time to collect.
We, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under SEC
rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is
enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not
be considered an alternative to measures required by accounting principles generally accepted in the United States. Our
calculations of these measures may differ from calculations of similar measures used by other companies and you should be
careful when comparing these financial measures to those of other companies. Additional information regarding these financial
measures, including reconciliations of each non- GAAP financial measure, is available in the subsection of MD&A titled,
"Non-GAAP Financial Measures."
REVENUES-DEFINED
As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues
on our Consolidated Statements of Income for each year presented. When we discuss revenues, we may, at times, refer to
revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms
that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe
revenues:
• Revenues – Our revenues are presented net of sales returns and allowances.
•
Product Revenues – We define product revenues as revenues generated from sales of capital equipment, which
includes steam sterilizers, low temperature liquid chemical sterilant processing systems, washing systems, VHP®
technology, water stills, and pure steam generators; integrated OR; surgical lights and tables; and the consumable
24
•
family of products, which includes SYSTEM 1 and 1E consumables, sterility assurance products, skin care products,
and cleaning consumables.
Service Revenues – We define service revenues as revenues generated from parts and labor associated with the
maintenance, repair, and installation of our capital equipment, as well as revenues generated from contract sterilization
offered through our Isomedix segment.
• Capital Revenues – We define capital revenues as revenues generated from sales of capital equipment, which includes
steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1E, washing
systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.
• Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family
of products, which includes SYSTEM 1 and 1E consumables, sterility assurance products, skin care products, and
cleaning consumables.
• Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and
service revenues.
• Acquired Revenues – We define acquired revenues as base revenues generated from acquired businesses or assets and
additional volumes driven through acquired businesses or assets. We will use such measure for up to a year after
acquisition.
GENERAL COMPANY OVERVIEW AND OUTLOOK
Our Business. Our mission is to provide a healthier today and safer tomorrow through knowledgeable people and innovative
infection prevention, decontamination and health science technologies, products, and services. Our dedicated employees around
the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, and
services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these
industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering
their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new
technologies, government policies, and general economic conditions. In addition, each of our core industries is experiencing
specific trends that could increase demand. Within healthcare, there is increased concern regarding the level of hospital-
acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning
and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, the aging
population increases the demand for medical procedures, which increases the consumption of single use medical devices and
surgical kits.
Beyond our core markets, infection-control issues are becoming a global concern, and emerging threats are prominent in
the news. We are actively pursuing new opportunities to adapt our proven technologies to meet the changing needs of the global
marketplace.
Highlights. We entered fiscal 2011 with numerous challenges, including the uncertainty inherent in the transition from
SYSTEM 1 to alternative products, the impact of the European economic conditions and the related potential for exchange rate
volatility, the strength of the economic recovery of the U.S., and the lack of clarity around the implications of health care
reform in the United States. Revenues in fiscal 2011 declined by $50.3 million, or 4.0%, to $1,207.4 million primarily as a
result of the SYSTEM 1 Rebate Program. Adjusted revenues, excluding the impact of the SYSTEM 1 Rebate Program,
increased $52.0 million, or 4.1%, to $1,309.8 million (see subsection of MD&A titled "Non-GAAP Financial Measures" for
additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures.)
Even with continuing declines in SYSTEM 1 consumables and a mix shift in our product revenues toward lower gross margin
capital equipment, we delivered improved operating income compared with fiscal 2010, excluding the impact of the SYSTEM
1 Rebate Program and proposed class action settlement.
For fiscal 2011, our financial position and cash flows remained strong, affording us financial flexibility. Cash flows from
operations were $117.7 million and free cash flow was $41.6 million (see subsection of MD&A titled, "Non-GAAP Financial
Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable
GAAP measures). We continue to maintain low debt levels with debt-to-total capital of 21.1% at March 31, 2011. We used cash
during fiscal 2011 to fund working capital requirements, primarily due to inventory build of SYSTEM 1E, and higher accounts
receivable balances driven by the timing of shipments. In addition, capital spending levels increased significantly during the
year, driven in part by the timing of radioisotope purchases for the Isomedix segment, the purchase of two previously leased
Isomedix facilities and additional costs related to consolidation projects in Europe and North America.
A detailed discussion of our fiscal 2011 performance is included in the subsection of MD&A titled, “Results of
Operations.”
Outlook. In fiscal 2012, we will continue to face numerous challenges but are anticipating solid growth driven by new
25
products and services that are designed to improve our Customers’ operations. Shipment and installation of SYSTEM 1E, our
next generation liquid chemical sterilant processing system, is underway. The ultimate level of market acceptance of this
product remains uncertain but we anticipate a substantial increase in revenue from this product and modest growth in the rest of
the business. We will continue to experience a decline in revenues associated with SYSTEM 1 parts, accessories, sterilant and
services, which we will discontinue in the United States no later than February 2, 2012. See Part I, Item 3, “Legal
Proceedings.”
We anticipate moderate increases in raw material costs in fiscal 2012, primarily related to metals and chemicals. The
actions we have taken over the last several years have meaningfully reduced our cost base. However, we have several
headwinds on the cost side with higher insurance costs, particularly for health benefits, and legal, regulatory and quality related
spending, that in combination with the SYSTEM 1E transition, will impact our profitability. In addition, fluctuations in foreign
currency rates can impact revenues and costs outside of the United States creating uncertainty for our results for fiscal 2012 and
beyond.
Although we still face uncertainties, at this time we believe our balance sheet and ability to generate cash is strong and
provides us with the flexibility to pursue opportunities for growth.
MATTERS AFFECTING COMPARABILITY
SYSTEM 1 Rebate Program and proposed class action settlement. In April 2010, we introduced the SYSTEM 1 Rebate
Program ("Rebate Program") to Customers as a component of our Transition Plan for SYSTEM 1. Generally, U.S. Customers
that purchased SYSTEM 1 processors directly from us or who are current users of SYSTEM 1 and who return their units will
have the option of either a pro-rated cash value or rebate toward the future purchase of new STERIS capital equipment or
consumable products. In addition, we will provide credits for SYSTEM 1 services contracts.
During the first quarter of fiscal 2011, we recorded a pre-tax liability related to the SYSTEM 1 Rebate Program. Of the
$110.0 million recorded, $102.3 million is attributable to the Customer Rebate portion of the Program and was recorded as a
reduction to revenue, and $7.7 million is attributable to the disposal liability of the SYSTEM 1 units to be returned and was
recorded in cost of revenues.
In addition, fiscal 2011 operating expenses include a pre-tax charge of $19.8 million related to the proposed settlement of
SYSTEM 1 class action litigation. This settlement is subject to, among other things, certification of the class and final approval
of the settlement by the court. The impact of the charge was a reduction in net income of $13.1 million (after tax of $6.7
million).
Restructuring. During the fourth quarter of fiscal 2010, we adopted a restructuring plan primarily related to the transfer of the
remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our
European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”).
In addition, we rationalized certain products and eliminated certain positions.
In fiscal 2011, in connection with the Fiscal 2010 Restructuring Plan, we recorded pre-tax expenses totaling $1.6 million
related to these actions, of which, $1.4 million was recorded as restructuring expenses and $0.2 million was recorded in cost of
revenues. In fiscal 2010, we recorded pre-tax expenses totaling $6.3 million in connection with the Fiscal 2010 Restructuring
Plan. We also expect to incur an additional $2.7 million during fiscal 2012. These actions are intended to enhance profitability
and increase efficiencies.
During the third quarter of fiscal 2009, we adopted a restructuring plan primarily focused on our international operations
(the “Fiscal 2009 Restructuring Plan”). As part of this plan, we took actions to improve operations at our Pieterlen, Switzerland
manufacturing facility, rationalized certain products, recorded impairment charges for certain assets no longer used, and made
targeted workforce reductions. We also consolidated our operations in Japan. These actions directly impacted approximately
100 employees worldwide.
In fiscal 2010, we settled certain obligations related to the Fiscal 2009 Restructuring Plan for less then anticipated resulting
in a reversal of $1.9 million in restructuring expenses, primarily due to the settlement of vendor supply and warehouse lease
contracts for less than anticipated. In fiscal 2009, we recorded pre-tax expenses totaling $15.6 million related to these actions,
of which $4.8 million was recorded as restructuring expenses and $10.8 million was recorded in cost of revenues. We do not
expect to incur significant additional expenses related to this plan.
During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused on our North American
operations (the “Fiscal 2008 Restructuring Plan”). As part of this plan, we announced the closure of two sales offices, reduced
the workforce in certain support functions, and rationalized certain products. These actions were intended to enhance
profitability and improve efficiencies by reducing ongoing operating costs. Across all of our reporting segments, approximately
90 employees, primarily located in North America, were directly impacted.
In the third quarter of fiscal 2009, we reversed our decision in connection with the Fiscal 2008 Restructuring Plan, to close
26
one of the sales offices, because a satisfactory exit from our warranty and service obligations could not be achieved. As a result,
we reversed restructuring expenses recorded in the fourth quarter of fiscal 2008 totaling approximately $1.0 million.
We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not
committed to any additional specific actions.
Further information regarding our restructuring actions is included in note 2 to our consolidated financial statements titled,
“Restructuring.”
International Operations. Since we conduct operations outside of the United States using various foreign currencies,
fluctuations in the exchange rate of the U.S. dollar relative to the currencies of foreign countries in which we operate can also
increase or decrease our reported net assets and results of operations. During fiscal 2011, our revenues were unfavorably
impacted by $0.1 million and income before taxes was unfavorably impacted by $3.0 million, or 3.9%, as a result of foreign
currency movements relative to the U.S. dollar.
NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We,
at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not
indicative of future results, in order to provide meaningful comparisons between the years presented.
These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an
alternative to the most directly comparable GAAP financial measures.
These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental
financial information used by management and the Board of Directors in their financial analysis and operational decision-
making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it
will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying
performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial
measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete
understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for
the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be
comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash
Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment,
and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our
ability to fund future debt principal repayments, growth outside of core operations, repurchase common shares, and pay cash
dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2011, 2010 and
2009:
(dollars in thousands)
Net cash provided by operating activities
Purchases of property, plant and equipment, and intangibles
Proceeds from the sale of property, plant and equipment, and intangibles
Free Cash Flow
Years Ended March 31,
2011
2010
2009
$
$
$
117,744
(77,442)
1,301
224,954
(44,087)
3,105
$ 167,384
(40,889)
19,341
41,603
$
183,972
$ 145,836
To supplement our financial results presented in accordance with U.S. GAAP, we have sometimes referred to certain
measures of revenues, gross profit, income tax expense, and the Healthcare segment results of operations in the section of
MD&A titled, "Results of Operations" excluding the impact of the SYSTEM 1 Rebate Program and proposed class action
settlement recorded in fiscal 2011. These two items had a significant impact on the fiscal 2011 measures and the corresponding
trend in each of these measures. We provide adjusted measures to give the reader a more complete understanding of the factors
and trends affecting our business than could be obtained absent this disclosure. These measures are used by management and
the Board of Directors in making comparisons to our historical operating results and analyzing the underlying performance of
our operations. The tables below provide a reconciliation of each of these measures to its most directly comparable GAAP
financial measure.
27
(dollars in thousands)
Reported revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted revenues
Reported capital revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted capital revenues
Reported United States revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted United States Revenues
Reported Healthcare revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted Healthcare revenues
Reported gross profit
Impact of the SYSTEM 1 Rebate Program
Adjusted gross profit
Reported gross profit percentage
Impact of the SYSTEM 1 Rebate Program
Adjusted gross profit percentage
Reported Healthcare operating income
Impact of the SYSTEM 1 Rebate Program and proposed class action settlement
Adjusted Healthcare operating income
Reported income tax expense
Impact of the SYSTEM 1 Rebate Program and proposed class action settlement
Adjusted income tax expense
Reported effective income tax rate
Impact of the SYSTEM 1 Rebate Program and proposed class action settlement
Adjusted effective income tax rate
Year ended March 31, 2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,207,448
102,313
1,309,761
433,944
102,313
536,257
882,281
102,313
984,594
835,832
102,313
938,145
446,162
110,004
556,166
37.0%
5.5%
42.5%
21,317
129,800
151,117
22,554
50,183
72,737
30.6%
5.1%
35.7%
RESULTS OF OPERATIONS
In the following subsections, we discuss our earnings and the factors affecting them. We begin with a general overview of
the results of operations of the Company and then separately discuss earnings for our operating segments.
FISCAL 2011 AS COMPARED TO FISCAL 2010
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2011
to the year ended March 31, 2010:
28
(dollars in thousands)
2011
2010
Change
Percent Change
Years Ended March 31,
Total revenues
$ 1,207,448
$ 1,257,733
$
(50,285)
(4.0)%
Revenues by type:
Capital revenues
Consumable revenues
Service revenues
Revenues by geography:
United States revenues
International revenues
433,944
309,894
463,610
481,527
317,475
458,731
(47,583)
(7,581)
4,879
(9.9)%
(2.4)%
1.1 %
882,281
325,167
949,637
308,096
(67,356)
17,071
(7.1)%
5.5 %
Revenues decreased $50.3 million, or 4.0%, to $1,207.4 million for the year ended March 31, 2011, as compared to
$1,257.7 million for the year ended March 31, 2010. The decline reflects the $102.3 million negative impact of the SYSTEM 1
Rebate Program. Adjusted revenues, excluding the impact of the SYSTEM 1 Rebate Program, increased $52.0 million, or
4.1%, to $1,309.8 million (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and
related reconciliation of non-GAAP financial measures to the most comparable GAAP measures.) We analyze our revenues in
two ways, by type and geography, in the discussion that follows.
For fiscal 2011, recurring revenues decreased $2.7 million or 0.3% as compared to fiscal 2010. The recurring revenues
decrease was generated by a 2.4% decrease in consumable revenues, which was partially offset by a 1.1% increase in service
revenues during fiscal 2011 as compared to fiscal 2010. Consumable revenues increased in the Life Sciences segment by 7.6%
and decreased in the Healthcare segment by 4.8%, respectively. Service revenues increased $4.9 million or 1.1% resulting
from an increase in revenues from our Isomedix segment partially offset by a declines in the Healthcare segment during fiscal
2011 as compared to fiscal 2010. Capital revenues decreased $47.6 million or 9.9% during fiscal 2011 as compared to fiscal
2010. The decrease in capital revenues was driven by the $102.3 million negative impact of the SYSTEM 1 Rebate Program on
Healthcare capital revenues. Adjusted capital revenues increased $54.7 million or 11.4%, to $536.3 million (see subsection of
MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial
measures to the most comparable GAAP measures). Healthcare revenues decreased $56.6 million in fiscal 2011 compared to
fiscal 2010. Healthcare capital revenues, excluding the impact of the SYSTEM 1 Rebate Program, increased $63.6 million
reflecting revenues derived from shipments of SYSTEM 1E products as well as increases in other Healthcare infection
prevention and surgical equipment. Capital revenues within the Life Sciences segment decreased 9.6%. The Life Sciences
segment capital equipment revenues have been affected by the economic downturn and consolidations within the industry
limiting the order levels from our pharmaceutical Customers.
International revenues for fiscal 2011 were $325.2 million, an increase of $17.1 million, or 5.5%, as compared to fiscal
2010. The increase in year-over-year international revenues was driven by increases in capital, consumable and service
revenues of 6.4%, 3.4% and 5.7%, respectively. The most significant gains were in Healthcare capital revenues, with growth in
Europe, Asia Pacific and Latin America, and service revenues in Canada within the Life Science segment.
United States revenues for fiscal 2011 were $882.3 million, a decrease of $67.4 million, or 7.1%, as compared to fiscal
2010. Adjusted United States revenues for fiscal 2011 were $984.6 million, an increase of $35.0 million, or 3.7%, as compared
to fiscal 2010 (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related
reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Increases include revenues derived
from SYSTEM 1E products as well as increases in other Healthcare infection prevention and surgical equipment. United States
consumable and service revenues were negatively impacted by the SYSTEM 1 transition with a decrease in consumable
revenues of 4.0%, primarily driven by the decline in SYSTEM 1 sterilant volumes offset by an increase in service revenues of
0.2%. Life Sciences consumable revenues continued to demonstrate growth with an increase within the United States of 6.9%
in fiscal 2011 compared to fiscal 2010.
Revenues by segment are further discussed in the section of MD&A titled, “Business Segment Results of Operations.”
Gross Profit. The following table compares our gross profit for the year ended March 31, 2011 to the year ended March 31,
2010:
29
(dollars in thousands)
Gross Profit:
Product
Service
Total Gross Profit
Gross Profit Percentage:
Product
Service
Total Gross Profit Percentage
Years Ended March 31,
2011
2010
Change
Percent
Change
$ 249,374
196,788
$ 446,162
$
$
344,014
195,167
539,181
$
$
(94,640)
1,621
(93,019)
(27.5)%
0.8 %
(17.3)%
33.5%
42.4%
37.0%
43.1%
42.5%
42.9%
Our gross profit is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs
associated with the products and services that are sold. Our gross profit decreased $93.0 million. Our gross profit percentage
decreased to 37.0% for fiscal 2011 as compared to 42.9% for fiscal 2010. The most significant driver of this decrease is the
$110.0 million negative impact of the SYSTEM 1 Rebate Program. Excluding the impact of the SYSTEM 1 Rebate Program,
fiscal 2011 gross profit and gross profit percentage were $556.2 million and 42.5%, respectively (see subsection of MD&A
titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures
to the most comparable GAAP measures). Changes in volume are the secondary driver resulting in a net reduction of
approximately 40 basis points in the gross profit percentage as the decline in SYSTEM 1 sterilant volume more than offset the
benefits of higher volumes in the Isomedix segment and the continued growth in Life Sciences consumables volume.
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2011 to the year
ended March 31, 2010:
(dollars in thousands)
Operating Expenses:
Years Ended March 31,
2011
2010
Change
Percent
Change
Selling, general, and administrative
$
325,468
$
296,613
$
Research and development
Restructuring expenses
Total Operating Expenses
34,280
1,202
34,008
4,848
$
360,950
$
335,469
$
28,855
272
(3,646)
25,481
9.7 %
0.8 %
(75.2)%
7.6 %
Compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general
and administrative expenses are significant components of selling, general, and administrative expenses (“SG&A”). SG&A
increased $28.9 million, in fiscal 2011 as compared to fiscal 2010. Fiscal 2011 SG&A was negatively impacted by the
estimated $19.8 million expense associated with the proposed SYSTEM 1 class action settlement. The remaining increase of
3.1% in SG&A during fiscal 2011 reflects higher sales related fees and commissions, increased legal, regulatory, and quality
spending and higher insurance costs.
Research and development expenses increased $0.3 million for fiscal 2011 as compared to fiscal 2010. Research and
development expenses are influenced by the number and timing of in-process projects and labor hours and other costs
associated with these projects. Our research and development initiatives continually emphasize new product development,
product improvements, and the development of new technological platform innovations. During fiscal 2011, our investments in
research and development focused on, but were not limited to, enhancing capabilities of new chemistries and delivery systems
for disinfection and sterilization, sterile processing combination technologies, surgical equipment and accessories, and the area
of emerging infectious agents such as Prions and Nanobacteria.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and
property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated
depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value
of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and
equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of
depreciation and amortization of certain assets.
During the fourth quarter of fiscal 2010, we adopted a restructuring plan primarily related to the transfer of the remaining
operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European
30
Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In
addition, we rationalized certain products and eliminated certain positions.
In fiscal 2011, in connection with the Fiscal 2010 Restructuring Plan, we recorded pre-tax expense totaling totaling $1.6
million related to these actions, of which, $1.4 million was recorded as restructuring expenses and $0.2 million was recorded in
cost of revenues. In fiscal 2010, we recorded pre-tax expenses totaling $6.3 million related to these actions, of which, $5.4
million was recorded as restructuring expenses and $0.9 million was recorded in cost of revenues. We also expect to incur an
additional $2.7 million during fiscal 2012. These actions are intended to enhance profitability and increase operating
efficiencies.
During the third quarter of fiscal 2009, we adopted a restructuring plan primarily focused on our international operations
(the “Fiscal 2009 Restructuring Plan”). As part of this plan, we took actions to improve operations at our Pieterlen, Switzerland
manufacturing facility, rationalized certain products, recorded impairment charges for certain assets no longer used, and made
targeted workforce reductions. We also consolidated our operations in Japan. These actions directly impacted approximately
100 employees worldwide. In fiscal 2010, we settled certain obligations related to the Fiscal 2009 Restructuring Plan for less
then anticipated resulting in a reversal of $1.9 million in restructuring expenses, primarily due to the settlement of vendor
supply and warehouse lease contracts for less than anticipated. We do not expect to incur significant additional expenses related
to this plan.
During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused on our North American
operations (the “Fiscal 2008 Restructuring Plan”). As part of this plan, we announced the closure of two sales offices, reduced
the workforce in certain support functions, and rationalized certain products. These actions are intended to enhance profitability
and improve efficiency by reducing ongoing operating costs. Across all of our reporting segments, approximately 90
employees, primarily located in North America, were directly impacted. We do not expect to incur any significant additional
restructuring expenses related to this plan.
We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not
committed to any additional specific actions.
Further information regarding our restructuring actions is included in note 2 to our consolidated financial statements titled,
“Restructuring.”
The following tables summarize our total restructuring charges for fiscal 2011 and fiscal 2010:
(dollars in thousands)
Severance, payroll and other related costs
Asset impairment and accelerated depreciation
Lease termination costs
Other
Total Restructuring Charges
Year Ended March 31, 2011
Fiscal 2010
Restructuring
Plan(1)
Fiscal 2008
Restructuring
Plan
Total
$
$
454
559
595
33
1,641
$
$
—
(289)
—
—
(289)
$
$
454
270
595
33
1,352
(1)
Includes $0.2 million in charges recorded in cost of revenues on the Consolidated Statements of Income.
(dollars in thousands)
Severance, payroll and other related costs
Asset impairment and accelerated depreciation
Product rationalization
Lease termination costs
Other
Total Restructuring Charges
Year Ended March 31, 2010
Fiscal 2010
Restructuring
Plan(1)
Fiscal 2009
Restructuring
Plan(2)
Total
$
$
1,939
1,804
883
1,243
426
6,295
$
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
1,715
1,802
(502)
815
564
4,394
(1)
Includes $0.9 million in charges recorded in cost of revenues on the Consolidated Statements of Income.
31
(2)
Includes a negative $1.4 million in charges recorded in cost of revenues on the Consolidated Statements of
Income.
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance
Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following tables
summarize the liabilities related to our restructuring activities:
Severance and termination benefits
Asset impairments
Lease termination obligations
Other
Total
Severance and termination benefits
Asset impairments
Lease termination obligations
Total
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2011
March 31,
2010
Provision
Payments/
Impairments
March 31,
2011
1,894
—
1,200
509
3,603
$
$
454
559
595
33
1,641
$
$
(355)
(559)
(5)
(349)
(1,268)
$
$
1,993
—
1,790
193
3,976
Fiscal 2008 Restructuring Plan
Fiscal 2011
March 31,
2010
Provision
Payments/
Impairments
March 31,
2011
102
289
411
802
$
$
—
(289)
—
(289)
$
$
(102)
—
(254)
(356)
$
$
—
—
157
157
March 31,
2009
Fiscal 2010 Restructuring Plan
Fiscal 2010
Provision
$
1,939
$
1,804
883
1,243
426
$
6,295
$
—
—
—
—
—
—
Payments/
Impairments
March 31,
2010
(45)
(1,804)
(883)
(43)
83
(2,692)
$
$
1,894
—
—
1,200
509
3,603
Fiscal 2009 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
March 31,
2010
1,920
$
—
75
337
241
2,573
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
(1,696)
2
1,310
91
(379)
(672)
$
$
—
—
—
—
—
—
$
$
$
$
$
$
$
$
32
Fiscal 2008 Restructuring Plan
Fiscal 2010
(dollars in thousands)
Severance and termination benefits
Asset impairment
Lease termination obligations
Total
March 31,
2009
Provision
Payments/
Impairments
March 31,
2010
$
$
$
501
409
881
1,791
$
—
—
—
—
$
$
(399)
(120)
(470)
(989)
$
$
102
289
411
802
Non-Operating Expenses, Net. Non-operating expense (income), net consists primarily of interest expense on debt, offset by
interest earned on cash, cash equivalents, and short-term investment balances, and other miscellaneous income. The following
table compares our non-operating expense (income), net for the year ended March 31, 2011 to the year ended March 31, 2010:
(dollars in thousands)
Non-Operating Expenses:
Interest expense
Interest and miscellaneous income
Non-Operating Expenses, Net
Years Ended March 31,
2011
2010
Change
$
$
12,000
(607)
11,393
$
$
13,171
(1,275)
11,896
$
$
(1,171)
668
(503)
During fiscal 2011, interest expense decreased as compared to fiscal 2010 as a result of repayment of borrowings and
higher capitalized interest. Interest and miscellaneous income decreased as compared to the same prior year period due to
changes in net miscellaneous (income) expense that are not individually significant.
Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled,
“Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”
Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended
March 31, 2011 and 2010:
(dollars in thousands)
Income tax expense
Effective income tax rate
Years Ended March 31,
2011
2010
Change
Percent
Change
$
22,554
$
63,349
$
(40,795)
(64.4)%
30.6%
33.0%
The effective income tax rate for fiscal 2011 was 30.6% as compared to 33.0% for fiscal 2010. The effective tax rate in
fiscal 2011 was impacted by the reduction in United States income as a result of the impact of the SYSTEM 1 Rebate Program
and proposed SYSTEM 1 class action settlement. The adjusted effective income tax rate for fiscal 2011, excluding the impact
of these two items was 35.7% (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and
related reconciliation of non-GAAP financial measures to the most comparable GAAP measures.) The lower effective income
tax rate for fiscal 2010 resulted principally from a favorable change in valuation allowances. Additional information regarding
our income tax expense is included in note 9 to our consolidated financial statements titled, “Income Taxes.”
Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and
Isomedix. “Corporate and other,” which is presented separately, contains the Defense and Industrial business unit plus costs
that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office
costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and
post-retirement benefit costs. Note 12 to our consolidated financial statements titled, “Business Segment Information,” and
Item 1, “Business” provide detailed information regarding each business segment. The following table compares business
segment revenues and Corporate and other for the year ended March 31, 2011 to the year ended March 31, 2010:
33
(dollars in thousands)
Revenues:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Revenues
Years Ended March 31,
2011
2010
Change
Percent
Change
$
835,832
215,437
152,242
1,203,511
3,937
$ 1,207,448
$
892,474
218,209
140,871
1,251,554
6,179
$ 1,257,733
$
$
(56,642)
(2,772)
11,371
(48,043)
(2,242)
(50,285)
(6.3)%
(1.3)%
8.1 %
(3.8)%
(36.3)%
(4.0)%
Healthcare segment revenues decreased $56.6 million or 6.3%, to $835.8 million for the year ended March 31, 2011, as
compared to $892.5 million for the prior fiscal year. Adjusted Healthcare segment revenues, excluding the impact of the
SYSTEM 1 Rebate Program, were $938.1 million representing an increase of 5.1% over the prior year (see subsection of
MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial
measures to the most comparable GAAP measures.) The 5.1% increase in adjusted Healthcare revenues reflects growth in
capital equipment revenues in the United States as well as in the European, Asia Pacific and Latin American regions.
Approximately one-third of the increase is attributable to SYSTEM 1E shipments that occurred during the fourth quarter of
fiscal 2011. Consumable and service revenues declined 4.8% and 2.4%, respectively, as a result of the impact of the SYSTEM
1 transition. At March 31, 2011, our Healthcare segment’s backlog amounted to $138.6 million, as compared to $127.8 million
at March 31, 2010. SYSTEM 1E related backlog was $21.3 million as of March 31, 2011.
Life Sciences segment revenues decreased $2.8 million, or 1.3%, to $215.4 million for the year ended March 31, 2011, as
compared to $218.2 million for the prior fiscal year. Our Life Sciences segment fiscal 2011 revenues were favorably impacted
by strong demand for our consumable products which grew 7.6%. The increase in consumable revenues combined with a 1.0%
increase in service revenues was not enough to offset the decline in capital equipment revenues of 9.6%. The decline in Life
Sciences capital equipment revenues occurred throughout key geographies but was most notable in the United States, reflecting
low order levels during the first half of the fiscal year. The Asia Pacific region was the exception with growth of 75.7%.
Revenues have been unfavorably impacted by consolidations within the industry limiting the order levels from our
pharmaceutical Customers. At March 31, 2011, our Life Sciences segment’s backlog amounted to $40.7 million, as compared
to $41.8 million at March 31, 2010.
Isomedix segment revenues increased $11.4 million, or 8.1%, during fiscal 2011, as compared to fiscal 2010. The growth
in revenues during fiscal 2011 is attributable to increased demand from our core medical device Customers.
The following table compares our business segments and Corporate and other operating results for the year ended
March 31, 2011 to the year ended March 31, 2010:
(dollars in thousands)
Operating Income:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Operating Income
Years Ended March 31,
2011
2010
Change
Percent
Change
$
21,317
$
151,520
$
33,069
39,833
94,219
(9,007)
85,212
$
30,952
31,103
213,575
(9,863)
203,712
$
$
(130,203)
2,117
8,730
(119,356)
856
(118,500)
(85.9)%
6.8 %
28.1 %
(55.9)%
(8.7)%
(58.2)%
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations,
which results in the full allocation of all distribution and research and development expenses, and the partial allocation of
corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in
relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one
manufacturing facility and uses standard cost to sell products to the Life Sciences segment. “Corporate and other” includes the
gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs
related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
Our Healthcare segment’s operating income decreased $130.2 million, or 85.9%, to $21.3 million for the year ended
34
March 31, 2011 from $151.5 million during the prior fiscal year. Adjusted fiscal 2011 Healthcare operating income, excluding
the impact of the SYSTEM 1 Rebate Program and class action settlement, was $151.1 million reflecting a slight reduction from
the prior year (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related
reconciliation of non-GAAP financial measures to the most comparable GAAP measures.) The segment was negatively
impacted by the decline in SYSTEM 1 sterilant volumes as well as higher sales related fees and commissions, increased legal,
regulatory, and quality spending and higher insurance costs. The Healthcare segment’s fiscal 2011 and fiscal 2010 operating
margins include restructuring expenses of $1.0 million and $3.8 million, respectively. The fiscal 2010 operating margin
includes $3.2 million in product modification expenses primarily associated with corrections made to certain of our surgical
tables in the field.
Our Life Sciences segment’s operating income increased $2.1 million, or 6.8%, to $33.1 million in fiscal 2011 from $31.0
million in fiscal 2010. Our Life Sciences segment’s operating margins were 15.3% and 14.2%, respectively, for the years ended
March 31, 2011 and March 31, 2010. The improvement was primarily driven by product mix and operating efficiencies. In
fiscal 2011 and fiscal 2010, Life Sciences segment’s operating income includes $0.2 million and $0.6 million, respectively, in
restructuring expenses.
Our Isomedix segment’s operating income increased $8.7 million, or 28.1%, to $39.8 million for the year ended March 31,
2011 as compared to $31.1 million during the prior fiscal year. Isomedix segment’s operating margins were 26.2% and 22.1%,
respectively, for the years ended March 31, 2011 and March 31, 2010. Restructuring expenses of $0.1 million are included in
this segment’s fiscal 2011 operating income.
FISCAL 2010 AS COMPARED TO FISCAL 2009
Revenues. The following table compares our revenues for the year ended March 31, 2010 to the year ended March 31, 2009:
(dollars in thousands)
2010
2009
Change
Percent Change
Years Ended March 31,
Total revenues
$ 1,257,733
$ 1,298,525
$
(40,792)
(3.1)%
Revenues by type:
Capital revenues
Consumable revenues
Service revenues
Revenues by geography:
United States revenues
International revenues
481,527
317,475
458,731
536,647
294,882
466,996
(55,120)
22,593
(8,265)
(10.3)%
7.7 %
(1.8)%
949,637
308,096
993,487
305,038
(43,850)
3,058
(4.4)%
1.0 %
Revenues decreased $40.8 million, or 3.1%, to $1,257.7 million for the year ended March 31, 2010, as compared to
$1,298.5 million for the year ended March 31, 2009. For fiscal 2010, recurring revenues increased $14.3 million or 1.9% as
compared to fiscal 2009. The recurring revenues increase was generated by a 7.7% increase in consumable revenues, which
was partially offset by a 1.8% decrease in service revenues during fiscal 2010 as compared to fiscal 2009. Consumable
revenues increased in the Healthcare and Life Sciences segments by 6.7% and 12.6%, respectively. Service revenues decreased
$8.3 million or 1.8% resulting from declines in all three reportable segments during fiscal 2010 as compared to fiscal 2009.
Capital revenues decreased $55.1 million or 10.3% during fiscal 2010 as compared to fiscal 2009. The decrease in capital
revenues was driven by an 11.4% decrease within the Healthcare segment and 5.2% decrease within the Life Sciences segment.
The Healthcare segment capital equipment revenues were generally affected by the macroeconomic environment in the U.S.,
which limited capital investments by our Customers. The Life Sciences segment capital equipment revenues were also affected
by the economic downturn and consolidations within the industry limiting the order levels from our pharmaceutical Customers.
International revenues for fiscal 2010 were $308.1 million, an increase of $3.1 million, or 1.0%, as compared to fiscal
2009. The increase in year-over-year international revenues was primarily attributable to increases in consumable revenues
within Healthcare and Life Sciences of 4.2% and 13.4% respectively. International consumable revenues growth was led by
increases in Canada and Europe of 14.5% and 2.4%, respectively.
United States revenues for fiscal 2010 were $949.6 million, a decrease of $43.9 million, or 4.4%, as compared to fiscal
35
2009. The decrease was primarily driven by a decrease in Healthcare capital equipment revenues of 16.8% offset by an increase
in consumable revenues of 8.3%.
Revenues by segment are further discussed in the section of MD&A titled, “Business Segment Results of Operations.”
Gross Profit. The following table compares our gross profit for the year ended March 31, 2010 to the year ended March 31,
2009:
(dollars in thousands)
Gross Profit:
Product
Service
Total Gross Profit
Gross Profit Percentage:
Product
Service
Total Gross Profit Percentage
Years Ended March 31,
2010
2009
Change
Percent
Change
$ 344,014
195,167
$ 539,181
$
$
334,614
192,128
526,742
$
$
9,400
3,039
12,439
2.8%
1.6%
2.4%
43.1%
42.5%
42.9%
40.2%
41.1%
40.6%
Our gross profit is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs
associated with the products and services that are sold. Our gross profit percentage increased 230 basis points to 42.9% for
fiscal 2010 as compared to 40.6% for fiscal 2009. In fiscal 2010, we benefited from price increases (approximately 60 bps),
productivity improvements, lower restructuring expenses related to inventory, decreased material costs, and favorable foreign
currency exchange rates partially offset by decreased volume (approximately 70 bps).
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2010 to the year
ended March 31, 2009:
(dollars in thousands)
Operating Expenses:
Years Ended March 31,
2010
2009
Change
Percent
Change
Selling, general, and administrative
$
296,613
$
314,983
$
Research and development
Restructuring expenses
Total Operating Expenses
34,008
4,848
32,760
3,554
$
335,469
$
351,297
$
(18,370)
1,248
1,294
(15,828)
(5.8)%
3.8 %
36.4 %
(4.5)%
Compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general
and administrative expenses are significant components of selling, general, and administrative expenses (“SG&A”). SG&A
decreased $18.4 million, or 70 basis points, to 23.6% of total revenues for fiscal 2010 as compared to fiscal 2009. The decrease
in SG&A during fiscal 2010 primarily reflects improved operating efficiencies and the benefit of initiatives implemented during
prior years. Included in the fiscal 2009 SG&A is a reduction of $7.9 million resulting from a third quarter change in our paid
time off benefit, which is now earned throughout the calendar year rather than earned in full at the beginning of the year. SG&A
expenses for fiscal 2009 also include a $3.8 million gain on the sale of two Isomedix facilities.
Research and development expenses as a percentage of total revenues increased 20 basis points to 2.7% for fiscal 2010 as
compared to fiscal 2009. The fiscal 2010 period includes a government subsidy of $1.1 million received for research and
development expenses incurred by one of our international locations. Research and development expenses are influenced by the
number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and
development initiatives continually emphasize new product development, product improvements, and the development of new
technological platform innovations. During fiscal 2010, our investments in research and development focused on, but were not
limited to, enhancing capabilities of new chemistries and delivery systems for disinfection and sterilization, sterile processing
combination technologies, surgical equipment and accessories, and the area of emerging infectious agents such as Prions and
Nanobacteria.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and
property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated
36
depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value
of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and
equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of
depreciation and amortization of certain assets.
During the fourth quarter of fiscal 2010, we adopted a restructuring plan primarily related to the transfer of the remaining
operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European
Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In
addition, we rationalized certain products and eliminated certain positions.
In fiscal 2010 in connection with the Fiscal 2010 Restructuring Plan, we recorded pre-tax expenses totaling $6.3 million
related to these actions, of which, $5.4 million was recorded as restructuring expenses and $0.9 million was recorded in cost of
revenues. We also expect to incur an additional $4.3 million during the next two fiscal years. These actions are intended to
enhance profitability and increase operating efficiencies.
During the third quarter of fiscal 2009, we adopted a restructuring plan primarily focused on our international operations
(the “Fiscal 2009 Restructuring Plan”). As part of this plan, we took actions to improve operations at our Pieterlen, Switzerland
manufacturing facility, rationalized certain products, recorded impairment charges for certain assets no longer used, and made
targeted workforce reductions. We also consolidated our operations in Japan. These actions directly impacted approximately
100 employees worldwide.
In fiscal 2010, we settled certain obligations related to the Fiscal 2009 Restructuring Plan for less then anticipated,
resulting in a reversal of $1.9 million in restructuring expenses, primarily due to the settlement of vendor supply and warehouse
lease contracts for less than anticipated. In fiscal 2009, we recorded pre-tax expenses totaling $15.6 million related to these
actions, of which $4.8 million was recorded as restructuring expenses and $10.8 million was recorded in cost of revenues. We
do not expect to incur significant additional expenses related to this plan.
During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused on our North American
operations (the “Fiscal 2008 Restructuring Plan”). As part of this plan, we announced the closure of two sales offices, reduced
the workforce in certain support functions, and rationalized certain products. These actions were intended to enhance
profitability and improve efficiency by reducing ongoing operating costs. Across all of our reporting segments, approximately
90 employees, primarily located in North America, were directly impacted.
In the third quarter of fiscal 2009, we reversed our decision in connection with the Fiscal 2008 Restructuring Plan, to close
one of the sales offices, because a satisfactory exit from our warranty and service obligations could not be achieved. As a result,
we reversed restructuring expenses recorded in the fourth quarter of fiscal 2008 totaling approximately $1.0 million.
During fiscal 2009, we did not incur any additional significant restructuring expenses related to the Fiscal 2008
Restructuring Plan, and we settled certain termination benefits and other costs for less than originally expected. In fiscal 2008,
we recorded pre-tax expenses totaling approximately $15.8 million related to these actions, including $11.7 million recorded as
restructuring expenses and $4.1 million recorded as cost of revenues. We do not expect to incur any significant additional
restructuring expenses related to this plan.
During the third quarter of fiscal 2007, we adopted a restructuring plan related to certain of our European operations (the
“European Restructuring Plan”). As part of this plan, we closed two sales offices. We also took steps to reduce the workforce in
certain European support functions. These actions were intended to improve our cost structure in Europe. Approximately 40
employees were directly impacted in various European locations. During the first quarter of fiscal 2009, we settled the
remaining obligations associated with this plan.
On January 30, 2006, we announced that the manufacturing portion of our Erie, Pennsylvania operations would be
transferred to Mexico to reduce production costs and improve our competitive position. Plans for other restructuring actions,
including the closure of a sales office, rationalization of operations in Finland, and the elimination of certain management
positions were also approved. These actions were designed to reduce operating costs within the ongoing operations of both the
Healthcare and Life Sciences segments, and together we refer to them as the “Fiscal 2006 Restructuring Plan.”
Operating income for fiscal 2009 includes pre-tax restructuring expenses of approximately a negative $0.2 million
primarily for certain severance benefits that were settled for less than originally expected. We completed the transfer of our
Erie, Pennsylvania manufacturing operations during fiscal 2008. During the fourth quarter of fiscal 2009, we settled the
remaining obligations associated with the Fiscal 2006 Restructuring Plan.
We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not
committed to any additional specific actions.
Further information regarding our restructuring actions is included in note 2 to our consolidated financial statements titled,
“Restructuring.”
37
The following tables summarize our total restructuring charges for fiscal 2010 and fiscal 2009:
(dollars in thousands)
Severance, payroll and other related costs
Asset impairment and accelerated depreciation
Product rationalization
Lease termination costs
Other
Total Restructuring Charges
Year Ended March 31, 2010
Fiscal 2009
Restructuring
Plan(2)
Fiscal 2010
Restructuring
Plan(1)
Total
$
$
1,939
1,804
883
1,243
426
6,295
$
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
1,715
1,802
(502)
815
564
4,394
(1)
(2)
Includes $0.9 million in charges recorded in cost of revenues on the Consolidated Statements of Income.
Includes a negative $1.4 million in charges recorded in cost of revenues on the Consolidated Statements of
Income.
(dollars in thousands)
Fiscal 2009
Restructuring
Plan(1)
Year Ended March 31, 2009
European
Restructuring
Plan
Fiscal 2006
Restructuring
Plan
Fiscal 2008
Restructuring
Plan(2)
Total
Severance, payroll and other related costs
$
4,280
$
(365)
$
—
$
(178)
$
3,737
Asset impairment and accelerated
depreciation
Product rationalization
Lease termination costs
Other
Total Restructuring Charges
1,112
9,485
354
349
$
15,580
$
(83)
(464)
20
(609)
(1,501)
$
—
—
99
—
99
—
—
—
—
(178)
$
$
1,029
9,021
473
(260)
14,000
(1)
(2)
Includes $10.8 million in charges recorded in cost of revenues on the Consolidated Statements of Income.
Includes a negative $0.4 million in charges recorded in cost of revenues on the Consolidated Statements of
Income.
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance
Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following tables
summarize our liabilities related to restructuring activities:
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
March 31,
2010
—
—
—
—
—
—
$
$
1,939
1,804
883
1,243
426
6,295
$
$
(45)
(1,804)
(883)
(43)
83
(2,692)
$
$
1,894
—
—
1,200
509
3,603
$
$
38
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
(dollars in thousands)
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
(dollars in thousands)
Severance and termination benefits
Asset impairment
Lease termination obligations
Other
Total
Fiscal 2009 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
March 31,
2010
1,920
—
75
337
241
2,573
$
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
(1,696)
2
1,310
91
(379)
(672)
Fiscal 2008 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
501
409
—
881
—
1,791
$
$
—
—
—
—
—
—
$
$
(399)
(120)
—
(470)
—
(989)
Fiscal 2009 Restructuring Plan
Fiscal 2009
March 31,
2008
Provision
Payments/
Impairments
—
—
—
—
—
—
$
$
4,280
1,112
9,485
354
349
15,580
$
$
(2,360)
(1,112)
(9,410)
(17)
(108)
(13,007)
$
$
$
$
$
$
—
—
—
—
—
—
March 31,
2010
102
289
—
411
—
802
March 31,
2009
1,920
—
75
337
241
2,573
Fiscal 2008 Restructuring Plan
Fiscal 2009
March 31,
2008
Provision(1)
Payments/
Impairments
March 31,
2009
4,244
492
898
609
6,243
$
$
(365)
(83)
20
(609)
(1,037)
$
$
(3,378)
—
(37)
—
(3,415)
$
$
501
409
881
—
1,791
$
$
$
$
$
$
$
$
(1) Does not include a negative $0.4 million in product rationalization costs that were charged against inventory.
(dollars in thousands)
Lease termination obligations
Total
European Restructuring Plan
Fiscal 2009
March 31,
2008
Provision
Payments/
Impairments
March 31,
2009
$
$
247
247
$
$
99
99
$
$
(346)
(346)
$
$
—
—
39
(dollars in thousands)
Severance and termination benefits
Total
Fiscal 2006 Restructuring Plan
Fiscal 2009
March 31,
2008
Provision
Payments
March 31,
2009
$
$
879
879
$
$
(178)
(178)
$
$
(701)
(701)
$
$
—
—
Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest
earned on cash, cash equivalents, and short-term investment balances, and other miscellaneous income. The following table
compares our non-operating expense (income), net for the year ended March 31, 2010 to the year ended March 31, 2009:
(dollars in thousands)
Non-Operating Expenses:
Interest expense
Interest and miscellaneous income
Non-Operating Expenses, Net
Years Ended March 31,
2010
2009
Change
$
$
13,171
(1,275)
11,896
$
$
10,563
(1,603)
8,960
$
$
2,608
328
2,936
During fiscal 2010, we had higher average outstanding debt levels and higher interest rates as compared to fiscal 2009. As
a result, interest expense increased year over year.
Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled,
“Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”
Income Tax Expense. The following table compares our income tax expense and effective tax rates for the years ended
March 31, 2010 and 2009:
(dollars in thousands)
Income tax expense
Effective income tax rate
Years Ended March 31,
2010
2009
Change
Percent
Change
$
63,349
$
55,800
$
7,549
13.5%
33.0%
33.5%
The effective income tax rate for fiscal 2010 was 33.0% as compared to 33.5% for fiscal 2009. The lower effective income
tax rate for fiscal 2010 resulted principally from a favorable change in valuation allowances. Additional information regarding
our income tax expense is included in note 9 to our consolidated financial statements titled, “Income Taxes.”
Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and
Isomedix. “Corporate and other,” which is presented separately, contains the Defense and Industrial business unit plus costs
that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office
costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and
post-retirement benefit costs from our former Erie, Pennsylvania manufacturing operation. Note 12 to our consolidated
financial statements titled, “Business Segment Information,” and Item 1, “Business” provide detailed information regarding
each business segment. The following table compares business segment revenues and Corporate and other for the year ended
March 31, 2010 to the year ended March 31, 2009:
(dollars in thousands)
Revenues:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Revenues
Years Ended March 31,
2010
2009
Change
Percent
Change
$
892,474
218,209
140,871
1,251,554
6,179
$ 1,257,733
$
931,263
216,701
142,645
1,290,609
7,916
$ 1,298,525
$
$
(38,789)
1,508
(1,774)
(39,055)
(1,737)
(40,792)
(4.2)%
0.7 %
(1.2)%
(3.0)%
(21.9)%
(3.1)%
40
Healthcare segment revenues decreased $38.8 million or 4.2%, to $892.5 million for the year ended March 31, 2010, as
compared to $931.3 million for the prior fiscal year. Our Healthcare segment’s fiscal 2010 revenues were positively impacted
by a 6.7% increase in consumable revenues driven by increases in demand in the United States and Canada of 7.4% and 14.6%,
respectively. Healthcare revenues were negatively impacted by an 11.4% decrease in capital equipment revenues driven
primarily by decreases in the United States, for both infection prevention and surgical equipment. Service revenues decreased
1.6% primarily as result of a decline in capital equipment project installations within United States hospitals. At March 31,
2010, our Healthcare segment’s backlog amounted to $127.8 million, as compared to $119.8 million at March 31, 2009.
Life Sciences segment revenues increased $1.5 million, or 0.7%, to $218.2 million for the year ended March 31, 2010, as
compared to $216.7 million for the prior fiscal year. Our Life Sciences segment fiscal 2010 revenues were favorably impacted
by strong demand for our consumable products in the United States and Europe. The increase in consumable revenues was
partially offset by a decline in capital equipment and service revenues of 5.2% and 0.9%, respectively. Life Sciences capital
equipment revenues were unfavorably impacted by the economic downturn and consolidations within the industry limiting the
order levels from our pharmaceutical Customers. At March 31, 2010, our Life Sciences segment’s backlog amounted to $41.8
million, as compared to $45.2 million at March 31, 2009.
Isomedix segment revenues decreased $1.8 million, or 1.2%, during fiscal 2010, as compared to fiscal 2009. Revenues
during fiscal 2010 were affected by the previously disclosed sale of two facilities during fiscal 2009, which were partially offset
by increased demand from our core medical device Customers.
The following table compares our business segments and Corporate and other operating results for the year ended
March 31, 2010 to the year ended March 31, 2009:
(dollars in thousands)
Operating Income:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Operating Income
NM – Not meaningful.
Years Ended March 31,
2010
2009
Change
Percent
Change
$
151,520
$
132,601
$
30,952
31,103
213,575
(9,863)
203,712
$
18,413
34,763
185,777
(10,332)
175,445
$
18,919
12,539
(3,660)
27,798
469
$
28,267
14.3 %
68.1 %
(10.5)%
15.0 %
(4.5)%
16.1 %
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations,
which results in the full allocation of all distribution and research and development expenses, and the partial allocation of
corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in
relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one
manufacturing facility and uses standard cost to sell products to the Life Sciences segment. “Corporate and other” includes the
gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs
related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
In fiscal 2010, restructuring expenses of $3.8 million and $0.6 million were included in operating income for Healthcare
and Life Sciences, respectively. In fiscal 2009, restructuring expenses of $11.4 million and $2.6 million, were included in the
operating income for Healthcare and Life Sciences respectively.
Our Healthcare segment’s operating income increased $18.9 million, or 14.3%, to $151.5 million for the year ended
March 31, 2010 from $132.6 million during the prior fiscal year. Our Healthcare segment’s operating margins were 17.0% and
14.2%, respectively, for the years ended March 31, 2010 and March 31, 2009. Lower raw material costs, modest price
increases, and operating efficiencies more than offset decreases in volume. The Healthcare segment’s fiscal 2010 and fiscal
2009 operating margins include restructuring expenses of $3.8 million and $11.4 million, respectively. The fiscal 2010
operating margin includes $3.2 million in product modification expenses primarily associated with corrections made to certain
of our surgical tables in the field. Fiscal 2009 results also include a pre-tax benefit of $5.9 million resulting from the third
quarter change in our benefit policy related to paid time off which is now earned throughout the year rather than earned in full
at the beginning of the year.
Our Life Sciences segment’s operating income increased $12.5 million, or 68.1%, to $31.0 million in fiscal 2010 from
$18.4 million in fiscal 2009. Our Life Sciences segment’s operating margins were 14.2% and 8.5%, respectively, for the years
41
ended March 31, 2010 and March 31, 2009. The improvement was primarily driven by product mix and operating efficiencies.
In fiscal 2010 and fiscal 2009, Life Sciences segment’s operating income includes $0.6 million and $2.6 million, respectively,
in restructuring expenses. Fiscal 2009 results also include a pre-tax benefit of $1.2 million resulting from the third quarter
change in our benefit policy related to paid time off.
Our Isomedix segment’s operating income decreased $3.7 million, or 10.5%, to $31.1 million for the year ended March 31,
2010 as compared to $34.8 million during the prior fiscal year. Isomedix segment’s operating margins were 22.1% and 24.4%,
respectively, for the years ended March 31, 2010 and March 31, 2009. Restructuring expenses of $0.4 million associated with
the Fiscal 2008 Restructuring Plan are included in this segment’s fiscal 2009 operating income. The segment’s fiscal 2009
results also include a pre-tax benefit of $0.8 million resulting from the third quarter change in our benefit policy related to paid
time off and a $3.8 million gain from the sale of two facilities. Operating margins of Isomedix are impacted by volume levels
as the facilities operate with relatively high percentages of fixed costs.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes significant components of our cash flows for the years ended March 31, 2011, 2010 and
2009:
(dollars in thousands)
Operating Activities:
Net income
Non-cash items
Changes in operating assets and liabilities
Net Cash Provided by Operating Activities
Investing Activities:
Purchases of property, plant, equipment, and intangibles, net
Proceeds from the sale of property, plant and equipment, and intangibles
Equity investments
Investments in business, net of cash acquired
Net Cash Used in Investing Activities
Financing Activities:
Proceeds from the issuance of long-term obligations
Payments on long-term obligations, net
(Payments) proceeds under credit facility, net
Deferred financing fees and debt issuance costs
Repurchases of common shares
Cash dividends paid to common shareholders
Stock option and other equity transactions, net
Tax benefit from stock options exercised
Net Cash Used in Financing Activities
Debt-to-capital ratio
Free cash flow
Years Ended March 31,
2011
2010
2009
$
51,265
31,433
35,046
$ 117,744
$
$
$
$
$
(77,442)
1,301
(16,900)
(4,000)
(97,041)
—
—
—
—
(29,965)
(33,228)
12,730
2,525
(47,938)
$
$
$
$
$
128,467
69,414
27,073
224,954
(44,087)
3,105
(1,500)
—
(42,482)
$
—
—
—
—
(310)
(144,017)
14,047
2,467
$ (127,813)
$
$
$
$
$
$
$
110,685
58,422
(1,723)
167,384
(40,889)
19,341
(4,150)
—
(25,698)
150,000
(40,800)
(79,180)
(476)
(80,466)
(17,657)
33,621
6,982
(27,976)
21.1%
21.8%
22.6%
$
41,603
$
183,972
$
145,836
Net Cash Provided by Operating Activities. The net cash provided by our operating activities was $117.7 million for the
year ended March 31, 2011 compared to $225.0 million for the year ended March 31, 2010 and $167.4 million for the year
ended March 31, 2009. The following discussion summarizes the significant changes in our operating cash flows:
• Non-cash items – Our non-cash items include depreciation, depletion, and amortization, (gains) losses on the disposal of
property, plant, equipment and intangibles, share-based compensation expense, changes in deferred income taxes, and
other items. Non-cash items were $31.4 million, $69.4 million and $58.4 million for fiscal 2011, fiscal 2010 and fiscal
2009, respectively.
42
• Depreciation, depletion, and amortization – Depreciation, depletion, and amortization expense is the most significant
component of non-cash items. This expense totaled $54.4 million, $56.2 million and $58.8 million for fiscal 2011,
fiscal 2010 and fiscal 2009, respectively. Lower capital spending during fiscal 2010 and 2009 has resulted in declines
in depreciation, depletion and amortization during the three years presented.
• Deferred income taxes – The fiscal 2011 change in deferred income taxes was negative $43.1 million while the fiscal
2010 change was a positive $2.2 million. This increase is attributable to the recognition of a deferred tax asset in
connection with the recording of the SYSTEM 1 Rebate Program and proposed class action settlement accruals. The
fiscal 2010 change in deferred income taxes resulted primarily from post retirement benefit obligation and
depreciation and amortization of fixed assets and intangibles. The fiscal 2009 change in deferred income taxes was
positive $6.8 million resulted primarily from changes related to our post-retirement benefit obligation.
•
Share-based compensation expense – We recorded non-cash share-based compensation expense of $10.2 million for
fiscal 2011 and $7.4 million for both fiscal 2010 and fiscal 2009. The $2.8 million increase from fiscal 2010 to fiscal
2011 reflects an increase in the number and value of stock options and restricted shares subject to amortization over
the respective fiscal years.
• Loss (gain) on the disposal of property, plant, equipment, and intangibles, net – In fiscal 2011, we recorded a net loss
of $1.8 million primarily as a result of the disposal of several individually insignificant items. We recorded a net loss
of $2.1 million in fiscal 2010 comprised of the impairment of certain assets related to the Nogales, Arizona facility and
intangible assets associated with products rationalized in the Fiscal 2010 Restructuring Plan partially offset by a gain
of $1.6 million, primarily from the sale of property, plant, equipment and intangibles associated with Hausted product
line. During fiscal 2009, we recorded a gain of $2.8 million, primarily related to gains of $3.8 million for the sale of
Isomedix facilities in Illinois and Rhode Island.
• Other items – Other items amounted to $8.1 million for fiscal 2011 as compared to $1.6 million for fiscal 2010 and a
negative $11.8 million for fiscal 2009. Fiscal 2009 was primarily driven by a $7.9 million non-cash adjustment as a
result of a change in our benefit policy with respect to paid time off and an estimated curtailment gain of
approximately $0.4 million related to our Switzerland defined benefit pension plan as a result of restructuring actions
taken in the third quarter of fiscal 2009.
• Changes in operating assets and liabilities – Changes to our operating assets and liabilities provided cash of $35.0 million
and $27.1 million in the years ended March 31, 2011 and 2010, respectively, and used cash of $1.7 million in the year
ended March 31, 2009. Significant changes from fiscal 2011, fiscal 2010 and fiscal 2009 are summarized below:
• Accounts receivable, net – Changes in our net accounts receivable balances used cash of $54.5 million in fiscal 2011
and provided cash of $27.8 million and $0.5 million in fiscal 2010 and fiscal 2009, respectively. Our accounts
receivable balances may change from period to period due to the timing of revenues and Customer payments.
•
Inventories, net – An increase in our net inventory balance used cash of $42.2 million in fiscal 2011. This increase
primarily resulted from the increase in inventories associated with the SYSTEM 1E product. Decreases in our net
inventory balances provided cash of $15.3 million, and $0.7 million during fiscal 2010 and fiscal 2009, respectively.
Inventory balances in fiscal 2010 reflected inventory management and lower raw material costs. These favorable
changes were partially offset by reduced order levels and new product launches. During fiscal 2009, inventory
decreased as a result of operational changes implemented and pre-tax product rationalization expenses recorded as part
of the Fiscal 2009 Restructuring Plan which were offset by higher raw material costs and new product inventory.
• Other current assets – Our other current assets primarily consist of prepaid expenses for insurance, taxes, and other
general corporate items. Changes in other current asset balances provided cash of $2.2 million, $5.4 million and $10.8
million during fiscal 2011, fiscal 2010 and fiscal 2009, respectively. Balances often fluctuate from period to period
due to the timing of accruals and payments. Cash is driven by changes in accrued income taxes, prepaid insurance and
leases, and other deposits.
• Accounts payable – An increase in our net accounts payable during fiscal 2011 provided cash of $23.7 million.
Decreases in our net accounts payable balances drove uses of cash of $4.5 million and $2.7 million during fiscal 2010
and fiscal 2009, respectively. Cash flows related to accounts payable may change from period to period due to the
timing of purchases as well as varying payment due dates and other terms of our accounts payable obligations.
• Accrued SYSTEM 1 Rebate Program and proposed class action settlement – The increase results from the
establishment of the accrual in the amount of $110.0 million for liabilities resulting from the SYSTEM 1 Rebate
Program and the establishment of the accrual in the amount of $19.8 million resulting from the proposed settlement of
the SYSTEM 1 class action litigation during fiscal 2011, offset by rebate settlements of approximately $2.1 million.
• Accruals and other, net – Changes in our net accruals and other liabilities balances drove our use of cash higher by
43
$21.8 million, $16.8 million and $11.0 million during fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The use of
cash during fiscal 2011 was primarily driven by contributions of $2.1 million to our United States defined benefit
pension plan and the payment of fiscal 2010 bonuses. The use of cash during fiscal 2010 was primarily driven by
increased contributions of $9.2 million to our United States defined benefit pension plans and payments related to
compensation and bonuses and benefit related liabilities. The use of cash during fiscal 2009 was driven by increased
income tax payments and contributions of $4.0 million to our United States defined benefit pension plans.
Net Cash Used in Investing Activities. The net cash we used in investing activities totaled $97.0 million during fiscal 2011
compared to $42.5 million during fiscal 2010 and $25.7 million during fiscal 2009. The following discussion summarizes the
significant changes in our investing cash flows for the years ended March 31, 2011, 2010 and 2009:
•
•
Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $77.4 million during fiscal
2011, $44.1 million during fiscal 2010 and $40.9 million during fiscal 2009. Fiscal 2011 capital expenditures were higher
than fiscal 2010 as a result of higher radioisotope purchases, the purchase of two previously leased Isomedix facilities
totaling $8.4 million, and capital costs associated with the consolidation projects in the United States and Europe. Capital
expenditures were higher during fiscal 2010 relative to fiscal 2009 as a result of an increased investment in Customer
dispensing systems.
Proceeds from the sale of property, plant, equipment, and intangibles – Fiscal 2011 proceeds of $1.3 million relate to
several minor disposals. During fiscal 2010, these proceeds include $2.2 million we received from the sale of assets
associated with the Hausted product line within the Healthcare segment. The proceeds received during fiscal 2009 include
$9.5 million we received from the sale of an Isomedix facility located in Illinois, $1.5 million we received from the
settlement of an insurance claim, and $8.0 million we received from the sale of an Isomedix facility located in Rhode
Island.
• Equity investments – During fiscal 2011, we invested $16.9 million in VTS Medical Systems Inc. designed to bring the
latest high-definition video, touch-screen integration, and communication technology into hospital operating rooms. We
invested $1.5 million and $4.2 million in the same joint venture during fiscal 2010 and 2009, respectively. We currently
own just under 50% of this venture.
•
Investment in business, net of cash acquired – During fiscal 2011, we used $4.0 million of cash to acquire a company
which provides management technology solutions designed to improve a hospital's perioperative process.
Net Cash Used in Financing Activities. The net cash we used in financing activities totaled $47.9 million in fiscal 2011,
$127.8 million in fiscal 2010, and $28.0 million in fiscal 2009. The following discussion summarizes the significant changes in
our financing cash flows for the years ended March 31, 2011, 2010 and 2009:
•
•
•
Proceeds from the issuance of long-term obligations – We issued no new debt during fiscal years 2011 and 2010. During
the second quarter of fiscal 2009, we issued $150.0 million of senior notes in an offering that was exempt from the
registration requirements of the Securities Act of 1933. These senior notes are discussed further in note 7 to our
consolidated financial statements titled, “Debt,” and in this section of the MD&A titled, “Liquidity and Capital Resources”
in the subsection titled, “Sources of Credit.”
Payments on long-term obligations and capital leases – In fiscal 2009, the amounts we repaid include $40.0 million for the
notes issued in December 2003, which matured, and we repaid $0.8 million outstanding on industrial development revenue
bonds. We provide additional information about our debt structure in note 7 to our consolidated financial statements titled,
“Debt,” and in this section of the MD&A titled, “Liquidity and Capital Resources” in the subsection titled, “Sources of
Credit.”
(Payments) proceeds under credit facility, net – During fiscal 2010, we borrowed and repaid $100.0 million of debt under
our revolving credit facility. For the year ended March 31, 2009, we repaid the $79.2 million that was borrowed in fiscal
2008 under our revolving credit facility. We provide additional information about our debt structure in note 7 to our
consolidated financial statements titled, “Debt,” and in the section of the MD&A titled, “Liquidity and Capital Resources”
in the subsection titled, “Sources of Credit.”
• Repurchases of common shares – During fiscal 2011, we paid for the repurchase of 925,848 common shares at an average
purchase price of $31.82 and obtained common shares in connection with our stock-based compensation award programs
in the amount of $0.5 million. During fiscal 2010, we obtained common shares in connection with our stock-based
compensation award programs in the amount of $0.3 million. We did not repurchase any shares during fiscal 2010 under
the authorization provided by our Board of Directors. During fiscal 2009, we paid for the repurchase of 2,646,177 common
shares at an average purchase price of $30.41 per common share. We provide additional information about our common
share repurchases in note 14 to our consolidated financial statements titled, “Repurchases of Common Shares.”
• Cash dividends paid to common shareholders – During fiscal 2011, we paid cash dividends totaling $33.2 million, or $0.56
44
per outstanding common share. During fiscal year 2010, we paid cash dividends of $144.0 million, or $2.44 per
outstanding common share, including a special dividend of $2.00 per outstanding common share. We paid cash dividends
of $17.7 million or $0.30 per outstanding common share during fiscal year 2009.
• Deferred financing fees and debt issuance costs – In fiscal 2009, we paid fees of $0.5 million related to the issuance of the
new senior notes in connection with the August 2008 Private Placement and amendment of the senior notes issued in
December 2003. This amount is being amortized over the terms of the underlying agreement.
•
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee
stock option programs. During fiscal 2011, fiscal 2010 and fiscal 2009, we received cash proceeds totaling $12.7 million,
$14.0 million, and $33.6 million, respectively, under these programs.
• Tax benefit from stock options exercised – For the years ended March 31, 2011, 2010 and 2009, our income taxes were
reduced by $2.5 million, $2.5 million, and $7.0 million, respectively, as a result of deductions allowed for stock options
exercised.
Cash Flow Measures. Free cash flow was $41.6 million and $184.0 million in fiscal 2011 and 2010, respectively, reflecting an
increase during fiscal 2011 in working capital requirements, primarily due to the inventory build related to the SYSTEM 1E
product and higher accounts receivable balances. Higher capital expenditures also contributed to the decline in free cash flow in
fiscal 2011. Our debt-to-capital ratio was 21.1% at March 31, 2011 and 21.8% at March 31, 2010.
Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated by operations,
and our existing credit facility for short and long-term capital expenditures and our other liquidity needs. We believe that these
amounts will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve
months. However, our capital requirements will depend on many uncertain factors, including our rate of sales growth, our
Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and
extent of our research and development projects, and changes in our operating expenses. If our existing sources of cash are not
sufficient to continue our future activities, we may need to raise additional funds through additional borrowing or selling equity
securities. We cannot assure you that we will be able to obtain additional funds on terms favorable to us, or at all.
Sources of Credit. Our sources of credit as of March 31, 2011 are summarized in the following table:
(dollars in thousands)
Sources of Credit
Private placement
Credit facility(1)
Total Sources of Credit
Maximum
Amounts
Available
Reductions in
Available Credit
Facility for Other
Financial
Instruments
March 31, 2011
Amounts
Outstanding
March 31, 2011
Amounts
Available
$
$
210,000
400,000
610,000
$
$
—
21,714
21,714
$
$
210,000
—
210,000
$
$
—
378,286
378,286
(1)
Our revolving credit facility contains a sub-limit that reduces the maximum amount available to us for borrowings
by letters of credit outstanding.
Our sources of funding from credit are summarized below:
•
In December 2003, we issued $100.0 million in senior notes to certain institutional investors in a private placement that
was not required to be registered with the SEC. The agreements related to these notes require us to maintain certain
financial covenants, including limitations on debt and a minimum consolidated net worth requirement. Of the $100.0
million in outstanding notes, $40.0 million had a maturity of five years at an annual interest rate of 4.20%, another $40.0
million has a maturity of 10 years at an annual interest rate of 5.25%, and the remaining $20.0 million has a maturity of 12
years at an annual interest rate of 5.38%. Therefore, payment of the first $40.0 million of notes became due and was made
in December 2008.
• On August 15, 2008, we issued $150.0 million in senior notes to certain institutional investors in a private placement that
was not required to be registered with the SEC. We have used and will use the proceeds for general corporate purposes,
including repayment of debt, capital expenditures, acquisitions, dividends, and share repurchases. The agreements related
to these notes require us to maintain certain financial covenants, including limitations on debt and a minimum consolidated
net worth requirement. Of the $150.0 million in outstanding notes, $30.0 million has a maturity of five years at an annual
interest rate of 5.63%, another $85.0 million has a maturity of 10 years at an annual interest rate of 6.33%, and the
remaining $35.0 million has a maturity of 12 years at an annual interest rate of 6.43%.
45
• On September 13, 2007, we signed the Second Amended and Restated Credit Agreement (the “Credit Agreement”) with
KeyBank National Association, as administrative agent for the lending institutions that are parties to the Credit Agreement
(the “Agent”), and the lenders party to the Credit Agreement. This Credit Agreement amended, restated, and replaced our
Amended and Restated Credit Agreement dated March 29, 2004, as amended, which was to mature in June 2010. The
Credit Agreement matures on September 13, 2012 and provides $400.0 million of credit, which may be increased by up to
an additional $100.0 million in specified circumstances, for borrowings and letters of credit. The Credit Agreement
provides a multi-currency borrowing option and may be used for general corporate purposes. At our option, loans can be
borrowed on a floating or fixed rate basis. Floating rate loans bear interest at the greater of (1) the Prime Rate established
by the Agent, or (2) the Federal Funds effective rate plus 0.50%, plus in each case a margin based on our leverage ratio.
Fixed rate loans bear interest at the Eurodollar Rate or other defined currency rate, plus, in each case, a margin based on
our leverage ratio. Interest is payable quarterly or at the end of the interest period, if shorter. The Credit Agreement also
requires the payment of a facility fee on the total facility commitment amount, which is determined based on our leverage
ratio. We may prepay floating rate loans without paying a penalty, but we may be required to pay a penalty for prepaying
fixed rate loans. The Credit Agreement also allows us to make short-term swing loan borrowings not to exceed $35.0
million, with an interest rate equal to the Agent’s cost of funds plus a margin based on our leverage ratio. The Credit
Agreement requires us to maintain compliance with certain financial covenants, including a maximum leverage ratio and a
minimum interest coverage ratio. Our obligations under the Credit Agreement are unsecured but guaranteed by our
material domestic subsidiaries.
At March 31, 2011, we had $378.3 million of funding available from our $400.0 million Credit Agreement. The Credit
Agreement includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. At March 31,
2011, there were letters of credit outstanding of $21.7 million.
At March 31, 2011, we were in compliance with all financial covenants associated with our indebtedness. We provide
additional information regarding our debt structure and payment obligations in the section of the MD&A titled, “Liquidity and
Capital Resources” in the subsection titled, “Contractual and Commercial Commitments” and in note 7 to our consolidated
financial statements titled, “Debt.”
CAPITAL EXPENDITURES
Our capital expenditure program is a component of our long-term strategy. This program includes, among other things,
investments in new and existing facilities, business expansion projects, radioisotope (cobalt-60) and information technology
enhancements. During fiscal 2011, our capital expenditures amounted to $77.4 million. We use cash provided by operating
activities and our cash and cash equivalent balances to fund capital expenditures. We expect fiscal 2012 capital expenditures to
continue to be above historical levels due to the consolidation projects in the United States and Europe as well as capacity
expansion plans within the Isomedix segment. Beyond fiscal 2012, we expect capital expenditures to moderate but future
events can occur which could cause anticipated capital expenditure levels to change.
CONTRACTUAL AND COMMERCIAL COMMITMENTS
At March 31, 2011, we had commitments under non-cancelable operating leases totaling $47.9 million.
Our contractual obligations and commercial commitments as of March 31, 2011 are presented in the following tables.
Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk
retention policies, and other potential cash outflows resulting from an event that requires us to fulfill a commitment.
46
Payments due by March 31,
(in thousands)
2012
2013
2014
2015
2016 and
thereafter
Total
Contractual Obligations:
Debt
Operating leases
Purchase obligations
Contributions to defined benefit pension plans
Benefit payments under defined benefit plans
Trust assets available for benefit payments
under defined benefit plans
Benefit payments under other post-retirement
welfare benefit plans
Unrecognized tax benefits
Other obligations
Total Contractual Obligations
$
$
—
14,391
13,413
2,599
4,733
$
—
11,720
14,455
—
5,051
$ 70,000
7,742
12,587
—
4,733
—
4,502
—
—
4,453
$ 140,000
9,549
—
—
27,144
$ 210,000
47,904
40,455
2,599
46,114
(4,733)
(5,051)
(4,733)
(4,453)
(27,144)
(46,114)
3,274
—
421
$ 34,098
3,112
—
433
$ 29,720
2,924
—
162
$ 93,415
$
2,698
—
165
7,365
10,522
—
167
$ 160,238
22,530
9,594
1,348
$ 334,430
The table above includes only the principal amounts of our contractual obligations. We provide information about the
interest component of our long-term debt in the subsection of MD&A titled, “Liquidity and Capital Resources,” and in note 7 to
our consolidated financial statements titled, “Debt.”
Purchase obligations shown in the table above relate to minimum purchase commitments with suppliers for materials
purchases.
The table above excludes contributions we make to our defined contribution plan. Our future contributions to this plan
depend on uncertain factors, such as the amount and timing of employee contributions and discretionary employer
contributions. We provide additional information about our defined benefit pension plan, defined contribution plan, and other
post-retirement medical benefit plan in note 10 to our consolidated financial statements titled, “Benefit Plans.”
The table above includes total unrecognized tax benefits of $9.6 million. Due to the high degree of uncertainty regarding
the timing of future cash outflows associated with these tax positions, we are unable to estimate when cash settlements may
occur.
(in thousands)
2012
2013
2014
2015
2016 &
Beyond
Totals
Amount of Commitment Expiring March 31,
Commercial Commitments:
Performance and surety bonds
Letters of credit as security for self-insured risk
retention policies
Total Commercial Commitments
$ 19,280
$ 5,602
$
20
$
15
$ 1,673
$ 26,590
7,261
479
$ 26,541
$ 6,081
$
—
20
$
—
15
—
7,740
$ 1,673
$ 34,330
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS
The following subsections describe our most critical accounting policies, estimates, and assumptions. Our accounting
policies are more fully described in note 1 to our consolidated financial statements titled, “Nature of Operations and Summary
of Significant Accounting Policies.”
Estimates and Assumptions. Our discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements that were prepared in accordance with United States generally accepted accounting principles.
We make certain estimates and assumptions that we believe to be reasonable when preparing these financial statements. These
estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict and are beyond
management’s control. As a result, actual amounts could be materially different from these estimates. We periodically review
these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit and Financial Policy
Committee of the Company’s Board of Directors.
Revenue Recognition. We recognize revenue for products when ownership passes to the Customer, which is based on contract
or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as
dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or
47
distributor. We have no further obligations related to bringing about resale, and our standard return and restocking fee policies
are applied.
We also have individual Customer contracts that offer extended payment terms and/or discounted pricing. Dealers and
distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns,
rebates, and other similar allowances in the same period the related revenues are recorded. Returns, rebates, and similar
allowances are estimated based on historical experience and trend analysis.
In transactions that contain multiple elements, such as when products, maintenance services, and other services are
combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total
arrangement consideration to each element based on its relative fair value, based on the price for the product or service when it
is sold separately.
We offer preventative maintenance agreements to our Customers with contract terms that range from one to five years,
which require us to maintain and repair our products during this time. Amounts received under these Customer contracts are
initially recorded as deferred service revenues and then recognized as service revenues ratably over the contract term.
We classify shipping and handling amounts billed to Customers in sales transactions as revenues.
Allowance for Doubtful Accounts Receivable. We maintain an allowance for uncollectible accounts receivable for estimated
losses in the collection of amounts owed by Customers. We estimate the allowance based on analyzing a number of factors,
including amounts written off historically, Customer payment practices, and general economic conditions. We also analyze
significant Customer accounts on a regular basis and record a specific allowance when we become aware of a specific
Customer’s inability to pay. As a result, the related accounts receivable are reduced to an amount that we reasonably believe is
collectible. These analyses require a considerable amount of judgment. If the financial condition of our Customers worsens, or
economic conditions change, we may be required to make changes to our allowance for doubtful accounts receivable.
Allowance for Sales Returns. We maintain an allowance for sales returns based upon known returns and estimated returns for
both capital equipment and consumables. We estimate returns of capital equipment and consumables based upon historical
experience less the estimated inventory value of the returned goods.
Inventories and Reserves. Inventories are stated at the lower of their cost or market value. We determine cost based upon a
combination of the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods. We determine the LIFO inventory
value at the end of the year based on inventory levels and costs at that time. For inventories valued using the LIFO method, we
believe that the use of the LIFO method results in a matching of current costs and revenues. Inventories valued using the LIFO
method represented approximately 37.3% and 41.8% of total inventories at March 31, 2011 and 2010, respectively. Inventory
costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have
been $17.6 million and $16.0 million higher than those reported at March 31, 2011 and 2010, respectively.
We review the net realizable value of inventory on an ongoing basis, considering factors such as deterioration,
obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that
particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be
inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues.
Asset Impairment Losses. Property, plant, equipment, and identifiable intangible assets (except for goodwill and intangible
assets with indefinite lives) are reviewed for impairment when events and circumstances indicate that the carrying value of
such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We
conduct this review on an ongoing basis and, if impairment exists, we record the loss in the Consolidated Statements of Income
during that period.
When we evaluate assets for impairment, we make certain judgments and estimates, including interpreting current
economic indicators and market valuations, evaluating our strategic plans with regards to operations, historical and anticipated
performance of operations, and other factors. If we incorrectly anticipate these factors, or unexpected events occur, our
operating results could be materially affected.
Restructuring. We have recorded specific accruals in connection with plans for restructuring elements of our business. These
accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities,
contractual obligations, and the valuation of certain assets including property, plant, and equipment. Actual amounts could
differ from the original estimates.
We review our restructuring-related accruals on a quarterly basis and changes to plans are appropriately recognized in the
Consolidated Statements of Income in the period the change is identified. Note 2 to our consolidated financial statements titled,
“Restructuring,” summarizes our restructuring plans.
Purchase Accounting and Goodwill. We account for business acquisitions using the purchase method of accounting. This
48
method requires us to record the assets and liabilities of the business acquired at their estimated fair values as of the acquisition
date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded
as goodwill. We use valuation specialists with expertise in performing appraisals to assist us in determining the fair values
of assets acquired and liabilities assumed. These valuations require us to make estimates and assumptions, especially with
respect to intangible assets. We generally amortize our intangible assets over their useful lives. We do not amortize goodwill,
but we evaluate it annually for impairment. Therefore, the allocation of acquisition costs to intangible assets and goodwill has a
significant impact on future operating results.
We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists.
This evaluation requires a valuation of the underlying business. The valuation can be significantly affected by estimates of
future performance and discount rates over a relatively long period of time, market price valuation multiples, allocation of
assets, and other factors. Using different assumptions in our valuation could result in significantly different estimates of the fair
value of the reporting units, which could result in the impairment of goodwill.
We performed our annual goodwill impairment evaluation as of October 31, 2010. As a result of this evaluation, we
determined that there was no impairment of the recorded goodwill amounts.
Income Taxes. Our provision for income taxes is based on our current period income, changes in deferred income tax assets
and liabilities, income tax rates, changes in uncertain tax benefits, and tax planning opportunities available to us in the various
jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and the
respective governmental taxing authorities. We use significant judgment in determining our annual effective income tax rate
and evaluating our tax positions. We prepare and file tax returns based on our interpretation of tax laws and regulations, and we
record estimates based on these judgments and interpretations. We cannot be sure that the tax authorities will agree with all of
the tax positions taken by us. The actual income tax liability for each jurisdiction in any year can, in some instances, be
ultimately determined several years after the tax return is filed and the financial statements are published.
We evaluate our tax positions using the recognition threshold and measurement attribute in accordance with current
accounting guidance. We determine whether it is more-likely-than-not that a tax position will be sustained upon examination,
including resolution of related appeals or litigation processes, based on the technical merits of the position. In evaluating
whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined
by the appropriate taxing authority and that the taxing authority will have full knowledge of all relevant information. A tax
position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. The appropriate unit of account for determining what
constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a
matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence.
We review and adjust our tax estimates periodically because of ongoing examinations by and settlements with the various
taxing authorities, as well as changes in tax laws, regulations and precedent.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts
and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation
allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing
temporary differences, and the implementation of tax planning strategies. If we are unable to generate sufficient future taxable
income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which
the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance,
which would increase our effective income tax rate and could result in an adverse impact on our consolidated financial position,
results of operations, or cash flows.
We believe that adequate accruals have been made for income taxes. Differences between the estimated and actual amounts
determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on our
consolidated financial position, but could possibly be material to our consolidated results of operations or cash flow for any one
period.
Additional information regarding income taxes is included in note 9 to our consolidated financial statements titled,
“Income Taxes.”
SYSTEM 1 Rebate Program. The Accrued SYSTEM 1 Rebate Program (the “Rebate Program”), initially recognized during
the first quarter of fiscal 2011, is based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value
of rebates to be provided upon their return. Rebates of $102,313 are recognized as contra-revenue consistent with other returns
and allowances offered to Customers. The estimated cost of $7,691 to facilitate the disposal of the returned SYSTEM 1
processors has been recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions
involved in the estimates associated with the Rebate Program include: the number and age of SYSTEM 1 processors eligible
for rebates under the Rebate Program, the number of Customers that will elect to participate in the Rebate Program, the
proportion of Customers that will choose each rebate option, and the estimated per unit costs of disposal.
49
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we
have assumed that 100% of these Customers will elect to participate in the Rebate Program. In order to estimate the portion of
Customers that will choose each available rebate option, we first assessed the trend in sales of the proprietary consumable
products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments during the period
between the notice and the announcement of the Rebate Program which indicated that a portion of our Customers had already
transitioned away from the SYSTEM 1 technology. The remaining 81%, provides the best available indication of the portion of
Customers likely to elect the rebate for the SYSTEM 1E processor. Order and quote data for fiscal 2011 year to date provides
indications of the proportion of Customers that are expected to choose each of the other rebate options. The per unit costs
associated with disposal were estimated based on the service hours involved and quotes from our vendors which are based on
current freight and disposal contracts.
Self-Insurance Liabilities. We record a liability for self-insured risks that we retain for general and product liabilities,
workers’ compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and
actuarial methods to calculate the estimated liability. This liability includes estimated amounts for both losses and incurred but
not reported claims. We review the assumptions used to calculate the estimated liability at least annually to evaluate the
adequacy of the amount recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are
subject to the terms and conditions of those policies. Our accrual for self-insured risk retention as of March 31, 2011 and 2010
was $13.0 million and $13.1 million, respectively.
We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based
upon recent claims experience.
Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgments to
estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual
results are not consistent with these assumptions and judgments, we could be exposed to additional costs in subsequent periods.
Warranty Reserves. We generally offer a limited one-year parts and labor warranty on our capital equipment. The specific
terms and conditions of warranties vary depending on the product sold and the country where we conduct business. We record a
liability for the estimated cost of product warranties in the period revenues are recognized. We estimate warranty expenses
based primarily on historical warranty claim experience. While we have extensive quality programs and processes and actively
monitor and evaluate the quality of suppliers, actual warranty experience could be different from our estimates. If actual
product failure rates, material usage, or service costs are different from our estimates, we may have to record an adjustment to
the estimated warranty liability. As of March 31, 2011 and 2010, we had accrued $7.5 million and $6.1 million, respectively, for
warranty exposures.
Contingencies. We are, and will likely continue to be, involved in a number of legal proceedings, government investigations,
and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of
our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings,
investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal
injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable.
We consider many factors in making these assessments, including the professional judgment of experienced members of
management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of
such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material
adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of
proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our
estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Part I,
Item 3, “Legal Proceedings” for additional information.
We are subject to taxation from United States federal, state, and local, and foreign jurisdictions. Tax positions are settled
primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation.
Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of
our federal income tax returns. In the first quarter of fiscal 2009, we reached a settlement with the IRS on all material tax
matters for fiscal 2002 through fiscal 2005. In the second quarter of fiscal 2010, we reached a settlement with the IRS on all
material tax matters for fiscal 2006 through fiscal 2007. The IRS also began its audit of fiscal 2008 and fiscal 2009 in fiscal
2010. We remain subject to tax authority audits in various other jurisdictions in which we operate. If we prevail in matters for
50
which accruals have been recorded, or are required to pay amounts in excess of recorded accruals, our effective income tax rate
in a given financial statement period could be materially impacted.
Additional information regarding our commitments and contingencies is included in note 11 to our consolidated financial
statements titled, “Commitments and Contingencies.”
Benefit Plans. We provide defined benefit pension plans for certain current and former manufacturing and plant administrative
personnel throughout the world as determined by collective bargaining agreements or employee benefit standards set at the
time of acquisition of certain businesses. As of March 31, 2011, we sponsored defined benefit pension plans for eligible
participants in the United States and Switzerland. In addition, as of March 31, 2011, we sponsored an unfunded post-retirement
welfare benefits plan for two groups of United States employees, including the same employees who receive pension benefits
under the United States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree medical
insurance, including prescription drug coverage.
Employee pension and post-retirement welfare benefits plans are a significant cost of conducting business and represent
obligations that will be settled far in the future and therefore, require us to use estimates and make certain assumptions to
calculate the expense and liabilities related to the plans. Changes to these estimates and assumptions can result in different
expense and liability amounts. Future actual experience may be significantly different from our current expectations. We
believe that the most critical assumptions used to determine net periodic benefit costs and projected benefit obligations are the
expected long-term rate of return on plan assets and the discount rate. A summary of significant assumptions used to determine
the March 31, 2011 projected benefit obligations and the fiscal 2011 net periodic benefit costs is as follows:
Funding Status
Assumptions used to determine March 31, 2011
benefit obligations:
Discount rate
Expected return on plan assets
Assumptions used to determine fiscal 2011
net periodic benefit costs:
Discount rate
Expected return on plan assets
NA – Not applicable.
Defined Benefit Pension Plans
U.S. Qualified
International
Other Post-
Retirement Plan
Funded
Funded
Unfunded
5.25%
8.00%
2.75%
3.25%
4.50%
NA
5.75%
8.00%
3.00%
4.00%
5.00%
NA
We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party
professional advisors, taking into consideration the asset allocation of the portfolios, and the long-term asset class return
expectations. Generally, net periodic benefit costs and projected benefit obligations both increase as the expected long-term rate
of return on plan assets assumption decreases. Holding all other assumptions constant, lowering the expected long-term rate of
return on plan assets assumption for our funded defined benefit pension plans by 50 basis points would have increased the
fiscal 2011 benefit costs by $0.2 million. The projected benefit obligations at March 31, 2011 would remain approximately the
same.
We develop our discount rate assumptions by evaluating input from third-party professional advisors, taking into
consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow
streams as our projected benefit obligations. Generally, the projected benefit obligations and the net periodic benefit costs both
increase as the discount rate assumption decreases. Holding all other assumptions constant, lowering the discount rate
assumption for our defined benefit pension plans and for the other post-retirement plan by 50 basis points would have increased
the fiscal 2011 net periodic benefit costs by approximately $0.1 million and would have increased the projected benefit
obligations by approximately $3.5 million at March 31, 2011.
We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The
assumed rates of increase generally decline ratably over a five year-period from the assumed current year healthcare cost trend
rate to the assumed long-term healthcare cost trend rate. A 100 basis point change in the assumed healthcare cost trend rate
(including medical, prescription drug, and long-term rates) would have had the following effect at March 31, 2011:
51
(dollars in thousands)
Effect on total service and interest cost components
Effect on postretirement benefit obligation
100 Basis Point
Increase
Decrease
$
$
11
217
(10)
(207)
We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and
post-retirement benefit plans in our balance sheets. This amount is measured as the difference between the fair value of plan
assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-retirement benefit
obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in other
comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date. Note 10 to
our consolidated financial statements titled, “Benefit Plans,” contains additional information about our pension and other post-
retirement welfare benefits plans.
We concluded that the prescription drug benefit provided in our post-retirement welfare benefits plan is considered to be
actuarially equivalent to the benefit provided under the Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (the “Act”) and thus qualifies for the subsidy under the Act. The expected future subsidies reduced our accumulated post-
retirement benefit obligation and our net periodic benefit cost as of and for the fiscal year ended March 31, 2011 by
approximately $3.4 million and $0.7 million, respectively. We collected subsidies totaling approximately $0.8 million and $0.1
million during fiscal 2011 and fiscal 2010, respectively, which reduced our net post-retirement medical payments.
Share-Based Compensation. We measure the estimated fair value for all share-based compensation awards, including grants
of employee stock options at the grant date and recognize the related compensation expense over the period in which the share-
based compensation vests. We selected the Black-Scholes-Merton option pricing model as the most appropriate method for
determining the estimated fair value of our share-based compensation awards. This model involves assumptions that are
judgmental and affect share-based compensation expense.
Share-based compensation expense was $10.2 million in fiscal 2011 and was $7.4 million in both fiscal 2010 and fiscal
2009. Note 15 to our consolidated financial statements titled, “Share-Based Compensation,” contains additional information
about our various share-based compensation plans.
RECENTLY ISSUED ACCOUNTING STANDARDS IMPACTING THE COMPANY
Recently issued accounting standards that are relevant to us are presented in note 1 to our consolidated financial statements
titled, “Nature of Operations and Summary of Significant Accounting Policies.”
INFLATION
Our business has not been significantly impacted by the overall effects of inflation. We monitor the prices we charge for
our products and services on an ongoing basis and plan to adjust those prices to take into account future changes in the rate of
inflation. However, we may not be able to completely offset the impact of inflation.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain statements concerning certain trends, expectations, forecasts, estimates, or
other forward-looking information affecting or relating to the Company or its industry, products or activities 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,” “impact,” “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 this Form 10-K and
other securities filings. Many of these important factors are outside of our control. No assurances can be provided as to any
result or the timing of any outcome regarding matters described herein or otherwise with respect to any regulatory action,
administrative proceedings, government investigations, litigation (including the proposed settlement of the SYSTEM 1 class
action litigation), warning letters, consent decree, rebate program, transition, cost reductions, business strategies, earnings or
revenue trends, expense reduction, or future financial results. References to products, the consent decree, the transition or
52
rebate program are summaries only and do not alter or modify the specific terms of the decree, settlement, program or product
clearance or literature. Unless legally required, we do 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 our 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 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, the outcome of any pending FDA requests and
clearances or other requirements or standards may delay, limit or prevent new product introductions, affect the production and
marketing of existing products or services, or otherwise affect our performance, results, prospects, or value, (d) the potential of
international unrest, or effects of fluctuations in currencies, tax assessments or anticipated 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 our 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 our business, industry or initiatives including, without limitation, the consent decree, rebate program, and the
transition from the SYSTEM 1 processing system or those matters described in this Form 10-K and other securities filings, may
adversely impact our performance, results, prospects or value, (g) the effect of increases in raw material costs, (h) 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 (i) those risks described in this Annual Report on Form 10-K and in other securities filings for the
year ended March 31, 2011.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In the ordinary course of business, we are exposed to various risks, including, but not limited to, interest rate, foreign
currency, and commodity risks. These risks are described in the sections that follow.
INTEREST RATE RISK
As of March 31, 2011, we had $210.0 million in fixed rate senior notes outstanding. We had no outstanding borrowings
under our revolving credit facility. If we utilize the revolving credit facility, we would be exposed to changes in interest rates in
the case of floating rate revolving credit facility borrowings. We monitor our interest rate risk, but do not engage in any hedging
activities using derivative financial instruments. For additional information regarding our debt structure, refer to note 7 to our
Consolidated Financial Statements titled, “Debt.”
FOREIGN CURRENCY RISK
We are exposed to the impact of foreign currency exchange fluctuations. This foreign currency exchange risk arises when
we conduct business in a currency other than the U.S. dollar. For most international operations, local currencies have been
determined to be the functional currencies. The financial statements of international subsidiaries are translated to their U.S.
dollar equivalents at end-of-period exchange rates for assets and liabilities and at average currency exchange rates for revenues
and expenses. Translation adjustments for international subsidiaries whose local currency is their functional currency are
recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Note 3 to our
consolidated financial statements titled, “Accumulated Other Comprehensive Income (Loss),” contains additional information
about the impact of translation on accumulated other comprehensive income (loss) and shareholders’ equity. Transaction gains
and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the
functional currency are recognized in the Consolidated Statements of Income. Since we operate internationally and
approximately one-fourth of our revenues and one-third of our cost of revenues are generated outside the United States, foreign
currency exchange rate fluctuations can significantly impact our financial position, results of operations, and competitive
position.
We enter into foreign currency forward contracts to hedge assets and liabilities denominated in foreign currencies,
including inter-company transactions. We do not use derivative financial instruments for speculative purposes. At March 31,
2011, we held foreign currency forward contracts to buy 106.2 million Mexican pesos, 6.6 million Canadian dollars and 4.0
million Euros and foreign currency forward contracts to sell 4.0 million Euros.
COMMODITY RISK
We are dependent on basic raw materials, sub-assemblies, components, and other supplies used in our operations. Our
financial results could be affected by the availability and changes in prices of these materials. Some of these materials are
sourced from a limited number of suppliers. These materials are also key source materials for our competitors. Therefore, if
demand for these materials rises, we may experience increased costs and/or limited supplies. As a result, we may not be able to
acquire key production materials on a timely basis, which could impact our ability to produce products and satisfy incoming
sales orders on a timely basis. In addition, the costs of these materials can rise suddenly and result in significantly higher costs
of production. We believe that we have adequate primary and secondary sources of supply in each of our key materials and
energy sources. Where appropriate, we enter into long-term supply contracts as a basis to guarantee a reliable supply. We also
enter into commodity swap contracts to hedge price changes in certain commodities that impact raw materials included in our
cost of revenues. At March 31, 2011, we held commodity swap contracts to buy 464,700 pounds of nickel.
54
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Management
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Page
56
57
59
60
61
62
63
96
55
REPORT OF MANAGEMENT
Board of Directors and Shareholders
STERIS Corporation
Management of STERIS Corporation (the “Company”) is responsible for the preparation of the consolidated financial
statements and disclosures included in this Annual Report. Management believes that the consolidated financial statements and
disclosures have been prepared in accordance with accounting principles generally accepted in the United States and that any
amounts included herein which are based on estimates of the expected effects of events and transactions have been made with
sound judgment and approved by qualified personnel. The opinion of Ernst & Young LLP, an independent registered public
accounting firm, on the financial statements is included herein.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rule 13a-15(f).
Management has used the criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) to evaluate the effectiveness of internal control
over financial reporting as of March 31, 2011.
Based on this evaluation under the COSO criteria, management has concluded that the Company’s internal control over
financial reporting was effective as of March 31, 2011. There were no material weaknesses in internal control over financial
reporting identified by management.
The Audit and Financial Policy Committee of the Board of Directors of the Company is composed of directors who are not
officers of the Company. It meets regularly with members of management, internal auditors, and the representatives of the
independent registered public accounting firm to discuss the adequacy of the Company’s internal control over financial
reporting, financial statements, and the nature, extent, and results of the audit effort. Management reviews with the Audit and
Financial Policy Committee all of the Company’s significant accounting policies and assumptions affecting the results of
operations. Both the independent registered public accounting firm and the internal auditors have direct access to the Audit and
Financial Policy Committee without the presence of management.
/s/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
/s/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President and Chief Financial Officer
May 27, 2011
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
STERIS Corporation
We have audited STERIS Corporation and subsidiaries’ internal control over financial reporting as of March 31, 2011,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO criteria”). STERIS Corporation and subsidiaries’ management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on STERIS Corporation and subsidiaries’ internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, STERIS Corporation and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of STERIS Corporation and subsidiaries as of March 31, 2011 and 2010, and the
related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2011, of STERIS Corporation and subsidiaries and our report dated May 27, 2011 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 27, 2011
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
STERIS Corporation
We have audited the accompanying consolidated balance sheets of STERIS Corporation and subsidiaries as of March 31,
2011 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended March 31, 2011. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of STERIS Corporation and subsidiaries at March 31, 2011 and 2010, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended March 31, 2011, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), STERIS Corporation and subsidiaries’ internal control over financial reporting as of March 31, 2011, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated May 27, 2011 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 27, 2011
58
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
2011
2010
March 31,
Assets
Current Assets:
Cash and cash equivalents
$
193,016
$
214,971
Accounts receivable (net of allowances of $9,085 and $9,238, respectively)
Inventories, net
Deferred income taxes
Prepaid expenses and other current assets
Total Current Assets
Property, plant, and equipment, net
Goodwill and intangibles, net
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable
Accrued payroll and other related liabilities
Accrued SYSTEM 1 Rebate Program and proposed class action settlement
Accrued expenses and other
Total Current Liabilities
Long-term indebtedness
Deferred income taxes, net
Other liabilities
Total Liabilities
Commitments and Contingencies (see note 11)
Serial preferred shares, without par value, 3,000 shares authorized; no shares issued or
outstanding
Common shares, without par value, 300,000 shares authorized; 70,040 shares issued;
59,122 and 59,227 shares outstanding, respectively
Common shares held in treasury, 10,918 and 10,813 shares, respectively
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
See notes to consolidated financial statements.
272,248
167,344
56,715
16,483
705,806
370,402
318,810
31,667
214,940
121,135
6,976
18,435
576,457
346,858
305,311
9,776
$ 1,426,685
$ 1,238,402
$
90,981
$
52,251
127,683
73,831
344,746
210,000
26,662
56,612
$
638,020
$
66,035
58,986
—
72,108
197,129
210,000
20,749
56,030
483,908
—
—
241,343
(305,808)
816,846
35,188
787,569
1,096
788,665
237,165
(295,251)
798,809
12,991
753,714
780
754,494
$ 1,426,685
$ 1,238,402
59
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years Ended March 31,
Revenues:
Product
Service
Total Revenues
Cost of Revenues:
Product
Service
Total Cost of Revenues
Gross Profit
Operating Expenses:
Selling, general, and administrative
Research and development
Restructuring expenses
Total Operating Expenses
Income From Operations
Non-operating Expenses:
Interest expense
Interest and miscellaneous income
Total Non-operating Expenses, Net
Income Before Income Tax Expense
Income tax expense
Net Income
Earnings Per Common Share:
Earnings per share – basic
Earnings per share – diluted
Cash Dividends Declared Per Common Share Outstanding
See notes to consolidated financial statements.
2011
2010
2009
$
743,838
463,610
1,207,448
$
799,002
458,731
1,257,733
$
831,529
466,996
1,298,525
494,463
266,823
761,286
446,162
325,468
34,280
1,202
360,950
85,212
12,000
(607)
11,393
73,819
22,554
51,265
0.86
0.85
0.56
$
$
$
$
$
$
$
$
454,988
263,564
718,552
539,181
296,613
34,008
4,848
335,469
203,712
13,171
(1,275)
11,896
191,816
63,349
128,467
2.18
2.16
2.44
$
$
$
$
496,915
274,868
771,783
526,742
314,983
32,760
3,554
351,297
175,445
10,563
(1,603)
8,960
166,485
55,800
110,685
1.88
1.86
0.30
60
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended March 31,
Operating Activities:
Net income
2011
2010
2009
$
51,265
$
128,467
$
110,685
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization
Deferred income taxes
Share-based compensation expense
Loss (gain) on the disposal of property, plant, equipment, and
intangibles, net
Other items
Changes in operating assets and liabilities
Accounts receivable, net
Inventories, net
Other current assets
Accounts payable
Accrued SYSTEM 1 Rebate Program and class action settlement
Accruals and other, net
Net Cash Provided by Operating Activities
Investing Activities:
Purchases of property, plant, equipment, and intangibles, net
Proceeds from the sale of property, plant, equipment, and intangibles
Equity investments
Investments in businesses, net of cash acquired
Net Cash Used in Investing Activities
Financing activities:
Proceeds from the issuance of long-term obligations
Payments on long-term obligations and capital leases
(Payments) proceeds under credit facility, net
Deferred financing fees and debt issuance costs
Repurchases of common shares
Cash dividends paid to common shareholders
Stock option and other equity transactions, net
Tax benefit from stock options exercised
Net Cash Used in Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See notes to consolidated financial statements.
61
54,389
(43,071)
10,186
1,800
8,129
(54,517)
(42,233)
2,227
23,714
127,683
(21,828)
117,744
(77,442)
1,301
(16,900)
(4,000)
(97,041)
—
—
—
—
(29,965)
(33,228)
12,730
2,525
(47,938)
5,280
(21,955)
214,971
56,218
2,178
7,370
2,085
1,563
27,764
15,271
5,351
(4,522)
—
(16,791)
224,954
(44,087)
3,105
(1,500)
—
(42,482)
—
—
—
—
(310)
(144,017)
14,047
2,467
(127,813)
6,132
60,791
154,180
58,773
6,817
7,370
(2,755)
(11,783)
454
675
10,840
(2,741)
—
(10,951)
167,384
(40,889)
19,341
(4,150)
—
(25,698)
150,000
(40,800)
(79,180)
(476)
(80,466)
(17,657)
33,621
6,982
(27,976)
(11,398)
102,312
51,868
$
193,016
$
214,971
$
154,180
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Balance at March 31, 2008
Comprehensive income:
Net income
Pension and postretirement
liability adjustment,
(net of income tax of $18,602)
Unrealized loss on
investments
Foreign currency translation
adjustment
Total comprehensive income
Repurchases of common shares
Equity compensation programs
Tax benefit of stock options
exercised
Cash dividends – $0.30 per
common share
Change in noncontrolling interest
Balance at March 31, 2009
Comprehensive income:
Net income
Pension and postretirement
liability adjustment, (net of
income tax of $790)
Unrealized gain on
investments
Foreign currency translation
adjustment
Total comprehensive income
Repurchases of common shares
Equity compensation programs
Tax benefit of stock options
exercised
Cash dividends – $2.44 per
common share
Change in noncontrolling interest
Balance at March 31, 2010
Comprehensive income:
Net income
Pension and postretirement
liability adjustment, (net of
income tax of $1,473)
Unrealized gain on
investments
Foreign currency translation
adjustment
Total comprehensive income
Repurchases of common shares
Equity compensation programs
Tax benefit of stock options
exercised
Cash dividends – $0.56 per
common share
Change in noncontrolling interest
Balance at March 31, 2011
Common Shares
Number
Amount
Treasury Shares
Number Amount
10,777 $ (279,841 )
231,566
59,263 $
—
—
—
—
—
(2,646 )
1,835
—
—
—
58,452
—
—
—
—
—
(24 )
799
—
—
—
—
—
—
—
(6,266 )
6,982
—
—
232,282
—
—
—
—
—
—
2,416
2,467
—
—
—
—
—
2,646
(1,835 )
—
—
—
11,588
—
—
—
—
—
24
(799 )
—
—
—
—
—
—
(80,466 )
47,202
—
—
—
(313,105 )
—
—
—
—
—
(310 )
18,164
—
—
—
59,227
—
—
237,165
—
—
10,813
—
—
(295,251 )
—
—
—
—
—
(952 )
847
—
—
—
—
—
—
—
1,653
2,525
—
—
—
—
—
952
(847 )
—
—
—
—
—
—
(29,965 )
19,408
—
—
—
59,122 $
—
—
241,343
—
—
—
—
10,918 $ (305,808 ) $
See notes to consolidated financial statements.
62
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Non-controlling
Interest
Total
Equity
$ 721,331 $
33,096 $
323
$
706,475
110,685
—
—
—
—
—
—
—
—
(17,657 )
—
814,359
128,467
—
—
—
—
—
—
—
(144,017 )
—
798,809
51,265
—
—
—
—
—
—
—
20,933
(318 )
(69,511 )
—
—
—
—
—
—
(15,800 )
—
554
423
27,814
—
—
—
—
—
—
12,991
—
(1,024 )
192
23,029
—
—
—
—
—
—
—
—
—
—
—
—
—
106
429
—
—
—
—
—
—
—
—
—
351
780
—
—
—
—
—
—
—
—
(33,228 )
—
816,846 $
—
—
35,188 $
—
316
1,096 $
110,685
20,933
(318 )
(69,511 )
61,789
(80,466 )
40,936
6,982
(17,657 )
106
718,165
128,467
554
423
27,814
157,258
(310 )
20,580
2,467
(144,017 )
351
754,494
51,265
(1,024 )
192
23,029
73,462
(29,965 )
21,061
2,525
(33,228 )
316
788,665
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. STERIS Corporation, an Ohio corporation, together with its subsidiaries, develops, manufactures, and
markets infection prevention, contamination control, microbial reduction, and surgical support products and services for
healthcare, pharmaceutical, scientific, research, industrial, and governmental Customers throughout the world. As used in this
annual report, STERIS Corporation and its subsidiaries together are called “STERIS,” the “Company,” “we,” “us,” or “our,”
unless otherwise noted.
We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services (“Isomedix”).
We describe our operating segments in note 12. Our fiscal year ends on March 31. References in this Annual Report to a
particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying
consolidated financial statements of the Company are summarized below:
Principles of Consolidation. We use the consolidation method to report our investments in our subsidiaries. Therefore, the
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-
owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Actual results could differ from those estimates. On an ongoing basis, we
revise the estimates and assumptions as new information becomes available.
Cash Equivalents and Supplemental Cash Flow Information. Cash equivalents are all highly liquid investments with a
maturity of three months or less when purchased.
Information supplementing our Consolidated Statements of Cash Flows is as follows:
Years Ended March 31,
2011
2010
2009
Cash paid during the year for:
Interest
Income taxes
Cash received during the year for income tax refunds
$
12,496
64,372
3,067
$
$
13,360
61,988
4,864
10,748
48,489
1,870
Revenue Recognition. We recognize revenue for products when ownership passes to the Customer, which is based on contract
or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as
dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or
distributor. We have no further obligations related to bringing about resale and our standard return and restocking fee policies
are applied. Revenues are reported net of sales and value-added taxes collected from Customers.
We also have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales
incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances
in the same period the related revenues are recorded. Returns, rebates, and similar allowances are estimated based on historical
experience and trend analysis.
In transactions that contain multiple elements, such as when products, maintenance services, and other services are
combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total
arrangement consideration to each element based on its relative fair value, based on the price for the product or service when it
is sold separately.
We offer preventative maintenance agreements to our Customers with contract terms of one to five years which require us
to maintain and repair our products during this time. Amounts received under these Customer contracts are initially recorded as
deferred service revenues and then recognized as service revenues ratably over the contract term.
Accounts Receivable. Accounts receivable are presented at their face amount, less allowances for sales returns and
uncollectible accounts. Accounts receivable consist of amounts billed and currently due from Customers and amounts earned
but unbilled. We generally obtain and perfect security interest in products sold in the United States when we have a concern
with the Customer's risk profile..
We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by
63
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Customers. We estimate the allowance based on analyzing a number of factors, including amounts written off historically,
Customer payment practices, and general economic conditions. We also analyze significant Customer accounts on a regular
basis and record a specific allowance when we become aware of a specific Customer’s inability to pay. As a result, the related
accounts receivable are reduced to an amount that we reasonably believe is collectible.
We maintain an allowance for sales returns based upon known returns and estimated returns for both capital equipment and
consumables. We estimate returns of capital equipment and consumables based upon recent historical experience less the
estimated inventory value of the returned goods.
Inventories, net. Inventories are stated at the lower of their cost or market value. We determine cost based upon a combination
of the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods. For inventories valued using the LIFO method,
we believe that the use of the LIFO method results in a matching of current costs and revenues. Inventories valued using the
LIFO method represented approximately 37.3% and 41.8% of total inventories at March 31, 2011 and 2010, respectively.
Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories
would have been $17,551 and $15,961 higher than those reported at March 31, 2011 and 2010, respectively.
We review the net realizable value of inventory on an ongoing basis, considering factors such as deterioration,
obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that
particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be
inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues.
Property, Plant, and Equipment. Our property, plant, and equipment consists of land and land improvements, buildings and
leasehold improvements, machinery and equipment, information systems, radioisotope (cobalt-60), and construction in
progress. Property, plant, and equipment are presented at cost less accumulated depreciation and depletion. We capitalize
additions and improvements. Repairs and maintenance are charged to expense as they are incurred.
Land is not depreciated and construction in progress is not depreciated until placed in service. Depreciation of most assets
is computed on the cost less the estimated salvage value by using the straight-line method over the estimated remaining useful
lives. Depletion of radioisotope is computed using the annual decay factor of the material, which is similar to the sum-of-the-
years-digits method.
We generally depreciate or deplete property, plant, and equipment over the useful lives presented in the following table:
Asset Type
Land improvements
Buildings and leasehold improvements
Machinery and equipment
Information Systems
Radioisotope (cobalt-60)
Useful Life
(years)
3-40
2-50
3-35
2-17
20
When we sell, retire, or dispose of property, plant, and equipment, we remove the asset’s cost and accumulated
depreciation from our Consolidated Balance Sheets. We recognize the net gain or loss on the sale or disposition in the
Consolidated Statements of Income in the period when the transaction occurs.
Interest. We capitalize interest costs incurred during the construction of long-lived assets. We capitalized interest costs of $574
and $358 for the years ended March 31, 2011 and 2010, respectively.
Total interest expense for the years ended March 31, 2011, 2010, and 2009 was $12,000, $13,171, and $10,563,
respectively.
Identifiable Intangible Assets. Our identifiable intangible assets include product technology rights, trademarks, licenses, and
Customer relationships. We record these assets at cost, or when acquired as part of a business acquisition, at estimated fair
value. We generally amortize identifiable intangible assets over periods ranging from 5 to 20 years using the straight-line
method.
Investments. Investments in marketable securities are stated at fair value. Fair value is determined using quoted market prices
at the end of the reporting period. Unrealized gains and losses on marketable securities classified as available-for-sale are
recorded in Accumulated Other Comprehensive Income (Loss).
64
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Asset Impairment Losses. Property, plant, equipment, and identifiable intangible assets (except for goodwill and intangible
assets with indefinite lives) are reviewed for impairment when events and circumstances indicate that the carrying value of
such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We
conduct this review on an ongoing basis and, if an impairment exists, we record the loss in the Consolidated Statements of
Income during that period.
Business Acquisitions. We account for business acquisitions using the purchase method of accounting. This method requires
us to record the assets and liabilities of the business acquired at their estimated fair values as of the acquisition date. Any excess
of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. We
include certain transaction costs in determining the total cost of an acquisition. Operating results of the acquired businesses are
included in the Consolidated Statements of Income from the acquisition date.
Goodwill. The goodwill presented in our Consolidated Balance Sheets represents the excess of the purchase price and related
costs of businesses or assets we acquired over the fair value assigned to the identifiable net assets acquired. We review goodwill
and indefinite-lived intangible assets at least annually for impairment. We use a two-step process to test goodwill for
impairment. First, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value
of a reporting unit exceeds its carrying amount, we do not consider goodwill to be impaired. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of any impairment loss. We
compare the implied fair value of the reporting unit’s goodwill to the carrying amount of the goodwill. If the carrying amount
of the reporting unit’s goodwill exceeds the fair value of that goodwill, we record an impairment loss in the Consolidated
Statements of Income for an amount equal to that excess, but not more than the carrying amount of the goodwill.
SYSTEM 1 Rebate Program. The Accrued SYSTEM 1 Rebate Program (the “Rebate Program”) initially recognized during
the first quarter of fiscal 2011 is based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value
of rebates to be provided upon their return. Rebates of $102,313 are recognized as contra-revenue consistent with other returns
and allowances offered to Customers. The estimated cost of $7,691 to facilitate the disposal of the returned SYSTEM 1
processors has been recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions
involved in the estimates associated with the Rebate Program include: the number and age of SYSTEM 1 processors eligible
for rebates under the Rebate Program, the number of Customers that will elect to participate in the Rebate Program, the
proportion of Customers that will choose each rebate option, and the estimated per unit costs of disposal.
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we
have assumed that 100% of these Customers will elect to participate in the Rebate Program. In order to estimate the portion of
Customers that will choose each available rebate option, we first assessed the trend in sales of the proprietary consumable
products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments during the period
between the notice and the announcement of the Rebate Program which indicated that a portion of our Customers had already
transitioned away from the SYSTEM 1 technology. The remaining 81%, provides the best available indication of the portion of
Customers likely to elect the rebate for the SYSTEM 1E processor. Order and quote data for fiscal 2011 year to date provides
indications of the proportion of Customers that are expected to choose each of the other rebate options. The per unit costs
associated with disposal were estimated based on the service hours involved and quotes from our vendors which are based on
current freight and disposal contracts.
Self-Insurance Liabilities. We record a liability for self-insured risks that we retain for general and product liabilities,
workers’ compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and
actuarial methods to calculate the liability. This liability includes estimates for both losses and incurred but not reported claims.
We review the assumptions used to calculate the estimated liability at least annually to evaluate the adequacy of the amount
recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are subject to the terms and
conditions of those policies.
We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based
upon recent claims experience.
Benefit Plans. We sponsor defined benefit pension and other post-retirement welfare benefit plans for certain current and
former employees. We determine our costs and obligations related to these plans by evaluating input from third-party
professional advisors. These costs and obligations are affected by assumptions including the discount rate, expected long-term
rate of return on plan assets, the annual rate of change in compensation for eligible employees, estimated changes in costs of
healthcare benefits, and other factors. We review the assumptions used on an annual basis.
We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and
65
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
post-retirement benefit plans in our consolidated balance sheets. This amount is measured as the difference between the fair
value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-
retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in
other comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date.
We provide additional information about our pension and other post-retirement welfare benefits plans in note 10 to our
consolidated financial statements titled, “Benefit Plans.”
Litigation and Contingencies. When we determine that it is probable that we have incurred a liability, and the amount of the
liability can be reasonably estimated, we record a charge to earnings. We consider the facts and circumstances, including any
settlement offers, associated with litigation and contingencies in making the determination.
Fair Value of Financial Instruments. Except for long-term debt, our financial instruments are highly liquid or have short-
term maturities. Therefore, the recorded value is approximately equal to the fair value. We estimate the fair value of our long-
term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing
arrangements. We determined that the estimated fair value of our long-term debt is $237,167 at March 31, 2011 and $232,238
at March 31, 2010. The financial instruments we hold could potentially expose us to a concentration of credit risk. We invest
our excess cash in short-term instruments including money market funds and time deposits with major banks and financial
institutions. We select investments in accordance with the criteria established in our investment policy. Our investment policy
specifies, among other things, maturity, credit quality and concentration restrictions with the objective of preserving capital and
maintaining adequate liquidity.
We provide additional information about the fair value of our financial instruments in note 18 titled, “Fair Value
Measurements.”
Foreign Currency Translation. Most of our international operations use their local currency as their functional currency.
Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses.
Translation adjustments for international subsidiaries whose local currency is their functional currency are recorded as a
component of accumulated other comprehensive income (loss) within shareholders’ equity. Transaction gains and losses
resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional
currency are recognized as incurred in the accompanying Consolidated Statements of Income, except for certain inter-company
balances designated as long-term investments.
Foreign Currency Forward Contracts. We enter into foreign currency forward contracts to hedge assets and liabilities
denominated in foreign currencies, including inter-company transactions. We do not use derivative financial instruments for
speculative purposes. These contracts are marked to market, with gains and losses recognized within “Selling, general, and
administrative expenses” in the accompanying Consolidated Statements of Income. At March 31, 2011, we held foreign
currency forward contracts to buy 106.2 million Mexican pesos, 6.6 million Canadian dollars and 4.0 million Euros and foreign
currency forward contracts to sell 4.0 million Euros.
Warranty. Warranties are provided on the sale of certain of our products and services and an accrual for estimated future
claims is recorded at the time revenue is recognized. We estimate warranty expense based primarily on historical warranty
claim experience.
Shipping and Handling. We record shipping and handling costs in costs of revenues. Shipping and handling costs charged to
Customers are recorded as revenues in the period the product revenues are recognized.
Advertising Expenses. Costs incurred for communicating, advertising and promoting our products are generally expensed
when incurred as a component of Selling, General and Administrative Expense. We incurred $6,013, $6,468, and $7,198 of
advertising costs during the years ended March 31, 2011, 2010, and 2009, respectively.
Research and Development. We incur research and development costs associated with commercial products. We expense
these costs in the Consolidated Statements of Income as incurred. If a Customer reimburses us for research and development
costs, the costs are charged to the related contracts as costs of revenues.
Income Taxes. Our income tax expense includes United States federal, state, and local, and foreign income taxes, and is based
on reported pre-tax income. We defer income taxes for all temporary differences between pre-tax financial and taxable income
and between the book and tax basis of assets and liabilities. We record valuation allowances to reduce net deferred tax assets to
an amount that we expect will more-likely-than-not be realized. In making such a determination, we consider all available
information, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies,
66
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax
assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes and the effective tax rate.
We evaluate uncertain tax positions in accordance with a two-step process. The first step is recognition: The determination
of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has
met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate tax
authority and that the tax authority will have full knowledge of all relevant information. The second step is measurement: A tax
position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to recognize in the
financial statements. The measurement process requires the determination of the range of possible settlement amounts and the
probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do
not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent
financial reporting period in which the threshold is no longer met.
We describe income taxes further in note 9 to our consolidated financial statements titled, “Income Taxes.”
Share-Based Compensation. We describe share-based compensation in note 15 to our consolidated financial statements titled,
“Share-Based Compensation.” We measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. We record liability awards at fair value each reporting period and
the change in fair value is reflected as stock compensation expense in our Consolidated Statements of Income. These costs are
recognized in the Consolidated Statement of Income over the period during which an employee is required to provide service in
exchange for the award. Excess tax benefits realized from the exercise of stock options are reported as a financing cash inflow.
Restructuring. We have recognized restructuring expenses as incurred. In addition, the property, plant, and equipment
associated with the related facilities were assessed for impairment as performed on an annual basis. Asset impairment and
accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the
carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property,
plant, and equipment associated with the related operations were reevaluated based on the respective restructuring plan,
resulting in the acceleration of depreciation and amortization of certain assets.
Recently Issued Accounting Standards Impacting the Company. In 2009, the Financial Accounting Standards Board
("FASB") issued a revised standard for accounting and disclosures of revenues related to arrangements with customers to
provide multiple products and services at different points in time or over different time periods. This standard is effective for
us in fiscal 2012. We do not expect this standard to have a material impact on our financial position, results of operations or
cash flows.
In 2010, the FASB issued guidance to amend the disclosure requirements for recurring and nonrecurring fair value
measurements. The guidance requires disclosures on the transfers of assets and liabilities between Level 1 and Level 2 of the
fair value measurement hierarchy, including the reasons for the transfers. Also, the amended guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable
inputs (Level 3). The guidance became effective for us with the reporting period beginning April 1, 2010. Disclosures of the
gross purchases, sales, issuances and settlements activity in Level 3 of the fair value measurement hierarchy will be required
for fiscal 2012.
2. RESTRUCTURING
The following summarizes our restructuring plans announced in prior fiscal years. We recognize restructuring expenses as
incurred. In addition, we assess the property, plant and equipment associated with the related facilities for impairment.
Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 in connection with the Fiscal 2010 Restructuring
Plan, we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania
facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations
into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products
and eliminated certain positions.
Since the inception of the Fiscal 2010 Restructuring Plan, we have incurred pre-tax expenses totaling $7,936 related to
67
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
these actions, of which, $6,839 was recorded as restructuring expenses and $1,097 was recorded in cost of revenues. We also
expect to incur an additional $2,660 during fiscal 2012. These actions are intended to enhance profitability and improve
efficiencies.
Fiscal 2009 Restructuring Plan. During the third quarter of fiscal 2009, we adopted a restructuring plan primarily focused on
our international operations (the “Fiscal 2009 Restructuring Plan”). As part of this plan, we took actions to improve operations
at our Pieterlen, Switzerland manufacturing facility, rationalized certain products, recorded impairment charges for certain
assets no longer used, and made targeted workforce reductions. We also consolidated our operations in Japan. These actions are
expected to directly impact approximately 100 employees worldwide. These restructuring actions are intended to enhance our
profitability and increase operating efficiencies.
Since the inception of the Fiscal 2009 Restructuring Plan, we have incurred pre-tax expenses totaling $13,679 related to
these actions of which $4,266 was recorded as restructuring expenses and $9,413 was recorded in cost of revenues. We do not
expect to incur significant additional expenses related to this plan.
Fiscal 2008 Restructuring Plan. During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused
on our North American operations (the “Fiscal 2008 Restructuring Plan”). As part of this plan, we announced the closure of two
sales offices and the rationalization of certain products. We also reduced the workforce in certain support functions. Across all
of our reporting segments approximately 90 employees, primarily located in North America, were directly impacted. These
restructuring actions were designed to enhance profitability and improve efficiency by reducing ongoing operating costs.
In fiscal 2009, we reversed our decision to close one of the sales offices, because we could not achieve a satisfactory exit
from our warranty and service obligations. As a result, we reversed restructuring expenses recorded in fiscal 2008 totaling
approximately $1,000.
Since the inception of the Fiscal 2008 Restructuring Plan, we have recorded pre-tax expenses totaling $14,044, of which
$9,594 was recorded as restructuring expenses and $4,450 was recorded in cost of revenues. We do not expect to incur any
significant additional restructuring expenses related to the Fiscal 2008 Restructuring Plan.
The following tables summarize our total restructuring charges for fiscal 2011, fiscal 2010 and fiscal 2009:
Year Ended March 31, 2011
Severance, payroll and other related costs
Asset impairment and accelerated depreciation
Lease termination costs
Other
Total Restructuring Charges
Fiscal 2010
Restructuring
Plan(1)
Fiscal 2008
Restructuring
Plan
Total
$
$
$
454
559
595
33
1,641
$
—
(289)
—
—
(289)
$
$
454
270
595
33
1,352
(1)
Includes $150 in charges recorded in cost of revenues on the Consolidated Statements of Income.
Year Ended March 31, 2010
Severance, payroll and other related costs
Asset impairment and accelerated depreciation
Product rationalization
Lease termination costs
Other
Total Restructuring Charges
Fiscal 2010
Restructuring
Plan(1)
Fiscal 2009
Restructuring
Plan(2)
Total
$
$
1,939
1,804
883
1,243
426
6,295
$
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
1,715
1,802
(502)
815
564
4,394
(1)
(2)
Includes $947 in charges recorded in cost of revenues on the Consolidated Statements of Income.
Includes a negative $1,401 in charges recorded in cost of revenues on the Consolidated Statements of Income.
68
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Year Ended March 31, 2009
Fiscal 2009
Restructuring
Plan(1)
Fiscal 2008
Restructuring
Plan(2)
European
Restructuring
Plan
Fiscal 2006
Restructuring
Plan
Total
Severance, payroll and other related costs
$
4,280
$
(365)
$
—
$
(178)
$
3,737
Asset impairment and accelerated
depreciation
Product rationalization
Lease termination costs
Other
Total Restructuring Charges
1,112
9,485
354
349
$
15,580
$
(83)
(464)
20
(609)
(1,501)
$
—
—
99
—
99
—
—
—
—
(178)
$
$
1,029
9,021
473
(260)
14,000
(1)
(2)
Includes $10,813 in charges recorded in cost of revenues on the Consolidated Statements of Income.
Includes a negative $366 in charges recorded in cost of revenues on the Consolidated Statements of Income.
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance
Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following tables
summarize the liabilities related to our restructuring activities:
Severance and termination benefits
Asset impairments
Lease termination obligations
Other
Total
Severance and termination benefits
Asset impairments
Lease termination obligations
Total
Severance and termination benefits
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
$
$
$
$
$
$
Fiscal 2010 Restructuring Plan
Fiscal 2011
March 31,
2010
Provision
Payments/
Impairments
March 31,
2011
1,894
—
1,200
509
3,603
$
$
454
559
595
33
1,641
$
$
(355)
(559)
(5)
(349)
(1,268)
$
$
1,993
—
1,790
193
3,976
Fiscal 2008 Restructuring Plan
Fiscal 2011
March 31,
2010
Provision
Payments/
Impairments
March 31,
2011
102
289
411
802
$
$
—
(289)
—
(289)
$
$
(102)
—
(254)
(356)
$
$
—
—
157
157
Fiscal 2010 Restructuring Plan
Fiscal 2010
Provision
$
1,939
$
1,804
883
1,243
426
$
6,295
$
Payments/
Impairments
March 31,
2010
(45)
(1,804)
(883)
(43)
83
(2,692)
$
$
1,894
—
—
1,200
509
3,603
March 31,
2009
—
—
—
—
—
—
69
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Fiscal 2009 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
March 31,
2010
Severance and termination benefits
$
1,920
$
Asset impairment
Product rationalization
Lease termination obligations
Other
Total
—
75
337
241
$
2,573
$
(224)
(2)
(1,385)
(428)
138
(1,901)
$
$
(1,696)
2
1,310
91
(379)
(672)
Severance and termination benefits
Asset impairment
Lease termination obligations
Total
Fiscal 2008 Restructuring Plan
Fiscal 2010
March 31,
2009
Provision
Payments/
Impairments
$
$
$
501
409
881
1,791
$
—
—
—
—
$
$
(399)
(120)
(470)
(989)
$
$
$
$
—
—
—
—
—
—
102
289
411
802
March 31,
2010
3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) shown in our Consolidated Statements of Shareholders’ Equity consists
of the following:
Unrecognized pension and post-retirement benefits costs, net of tax
Unrealized gain (loss) on investments
Cumulative foreign currency translation adjustment
Total
Years Ended March 31,
2011
2010
2009
$
$
6,177
$
104
28,907
$
7,201
(88)
5,878
35,188
$
12,991
$
6,647
(511)
(21,936)
(15,800)
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill is tested annually for impairment. Further, goodwill is reviewed for impairment whenever events or changes in
circumstances indicate there may be a possible permanent loss of value. We performed our annual impairment tests for
goodwill and indefinite life intangible assets during the third quarter of fiscal 2011. These tests confirmed that the fair value of
STERIS’s reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment
loss was required to be recognized in fiscal 2011 or for any prior periods. Future impairment tests will be performed annually in
the fiscal third quarter, or sooner if a triggering event occurs.
Changes to the carrying amount of goodwill for the years ended March 31, 2011 and 2010 were as follows:
70
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Balance at March 31, 2009
Foreign currency translation adjustments
Balance at March 31, 2010
Goodwill acquired or allocated
Foreign currency translation adjustments
Healthcare
Segment
Life Sciences
Segment
STERIS
Isomedix Services
Segment
Total
$
163,437
$
28,693
$
79,896
$
272,026
3,243
166,680
4,145
5,020
1,589
30,282
—
3,165
—
79,896
—
—
79,896
4,832
276,858
4,145
8,185
$
289,188
Balance at March 31, 2011
$
175,845
$
33,447
$
The fiscal 2011 increase in goodwill associated with the Healthcare segment resulted from the acquisition of a company
which provides management technology solutions. Further information regarding this company is presented in note 12,
“Business Segment Information.”
Information regarding our intangible assets is as follows:
Customer relationships
Non-compete agreements
Patents and technology
Trademarks and tradenames
Other
Total
March 31, 2011
March 31, 2010
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
20,930
$
16,874
$
20,035
$
3,099
43,545
16,970
4,410
3,099
28,080
11,249
30
3,083
40,821
16,078
12
13,495
3,083
24,961
10,026
12
$
88,954
$
59,332
$
80,029
$
51,577
We did not hold any indefinite-lived intangible assets in fiscal 2011 or fiscal 2010. Total amortization expense for finite-
lived intangible assets was $6,617, $6,941, and $7,513 for the years ended March 31, 2011, 2010, and 2009, respectively. Based
upon the current amount of intangible assets subject to amortization, the amortization expense for each of the five succeeding
fiscal years is estimated to be as follows:
Estimated amortization expense
$
5,219
$
4,365
$
3,275
$
2,042
$
1,565
2012
2013
2014
2015
2016
The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31,
2011 foreign currency exchange rates.
5. INVENTORIES, NET
Inventories, net consisted of the following:
March 31,
Raw materials
Work in process
Finished goods
Total Inventories, Net
6. PROPERTY, PLANT, AND EQUIPMENT
Information related to the major categories of our depreciable assets is as follows:
71
2011
2010
$
58,375
$
16,928
92,041
$
167,344
$
36,170
20,668
64,297
121,135
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
March 31,
Land and land improvements(1)
Buildings and leasehold improvements
Machinery and equipment
Information systems
Radioisotope
Construction in progress(1)
Total Property, Plant, and Equipment
Less: accumulated depreciation and depletion
Property, Plant, and Equipment, Net
2011
2010
$
30,194
$
26,234
201,883
286,103
101,934
194,882
40,665
192,722
276,714
103,056
172,489
29,614
855,661
(485,259)
370,402
$
800,829
(453,971)
346,858
$
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
Depreciation and depletion expense was $47,772, $49,277, and $51,260, for the years ended March 31, 2011, 2010, and
2009, respectively.
Rental expense for operating leases was $16,904, $17,583, and $17,982, for the years ended March 31, 2011, 2010, and
2009, respectively. Operating leases relate to manufacturing, warehouse and office space, service facilities, vehicles,
equipment, and communication systems. Certain lease agreements grant us varying renewal and purchase options.
Future minimum annual rentals payable under noncancelable operating lease agreements at March 31, 2011 were as
follows:
2012
2013
2014
2015
2016 and thereafter
Total Minimum Lease Payments
Operating
Leases
14,391
11,720
7,742
4,502
9,549
47,904
$
$
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign
currencies have been calculated based upon March 31, 2011 foreign currency exchange rates.
7. DEBT
Indebtedness was as follows:
March 31,
Private Placement
Credit facility
Total long-term debt
2011
210,000
—
210,000
$
$
2010
210,000
—
210,000
$
$
On August 15, 2008, we issued $150,000 of senior notes in a private placement (the “August 2008 Private Placement”) to
certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933.
We have used and will use the proceeds for general corporate purposes, including repayment of debt, capital expenditures,
acquisitions, dividends, and share repurchases. Of the $150,000 notes, $30,000 have a maturity of five years at an annual
interest rate of 5.63%, another $85,000 have a maturity of 10 years at an annual interest rate of 6.33%, and the remaining
$35,000 have a maturity of 12 years at an annual interest rate of 6.43%. The agreements governing the senior notes issued in
the August 2008 Private Placement contain financial covenants, including limitations on debt and a minimum consolidated net
worth requirement.
In December 2003, we issued $100,000 of senior notes in a private placement (the “December 2003 Private Placement”) to
72
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933.
Of the $100,000 of notes, $40,000 had a maturity of five years at an annual interest rate of 4.20%, an additional $40,000 has a
maturity of 10 years at an annual interest rate of 5.25%, and the remaining $20,000 has a maturity of 12 years at an annual
interest rate of 5.38%. Therefore, in December 2008, the first series of the December 2003 Private Placement notes in an
aggregate principal amount of $40,000 matured and was repaid. The agreements governing the senior notes issued in the
December 2003 Private Placement contain financial covenants, including limitations on debt and a minimum consolidated net
worth requirement.
On August 15, 2008, we signed an amendment to the December 2003 Private Placement note purchase agreements. This
amendment, which was signed by the requisite majority in aggregate principal amount of the holders of the December 2003
Private Placement notes, modified the respective note purchase agreements primarily as they pertained to liens, electronic
delivery of financial information and notices, and certain provisions regarding an intercreditor agreement.
In September 2007, we signed the Second Amended and Restated Credit Agreement (the “Credit Agreement”) with
KeyBank National Association, as administrative agent for the lending institutions that are parties to the Credit Agreement (the
“Agent”), and the lenders party to the Credit Agreement. This Credit Agreement amended, restated, and replaced our Amended
and Restated Credit Agreement dated March 29, 2004, as amended, which was to mature in June 2010. The Credit Agreement
matures on September 13, 2012 and provides $400,000 of credit, which may be increased by up to an additional $100,000 in
specified circumstances, for borrowings and letters of credit. The Credit Agreement provides a multi-currency borrowing
option and may be used for general corporate purposes. At our option, loans can be borrowed on a floating or fixed interest rate
at the greater of (1) the Prime Rate established by the Agent, or (2) the Federal Funds effective rate plus 0.50%, plus in each
case a margin based on our leverage ratio. Fixed rate loans bear interest at the Eurodollar Rate or other defined currency rate
plus, in each case, a margin based on our leverage ratio. Interest is payable quarterly or at the end of the interest period, if
shorter. The Credit Agreement also requires the payment of a facility fee on the total facility commitment amount, which is
determined based on our leverage ratio. We may prepay floating rate loans without paying a penalty, but we may be required to
pay a penalty for prepaying fixed rate loans. The Credit Agreement also allows us to make short-term swing loan borrowings
not to exceed $35,000, with an interest rate equal to the Agent’s cost of funds plus a margin based on our leverage ratio. The
Credit Agreement requires us to maintain compliance with certain financial covenants, including a maximum leverage ratio and
a minimum interest coverage ratio. Our obligations under the Credit Agreement are unsecured but guaranteed by our material
domestic subsidiaries.
At March 31, 2011, we were in compliance with all financial covenants associated with our indebtedness.
The combined annual aggregate amount of maturities of our outstanding debt by fiscal year is as follows:
2012
2013
2014
2015
2016 and thereafter
Total
8. ADDITIONAL BALANCE SHEET INFORMATION
Additional information related to our Consolidated Balance Sheets is as follows:
$
—
—
70,000
—
140,000
$
210,000
73
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
March 31,
Accrued Payroll and Other Related Liabilities:
2011
2010
Compensation and related items
Accrued vacation/paid time off
Accrued bonuses
Accrued employee commissions
Other post-retirement benefit obligation- current portion
Other employee benefit plans’ obligations- current portion
Total Accrued Payroll and Other Related Liabilities
Accrued Expenses and Other:
Deferred revenues
Self-insured reserves- current portion
Accrued dealer commissions
Accrued warranty
Other
Total Accrued Expenses and Other
Other Liabilities:
Self-insured reserves- long-term portion
Other post-retirement benefit obligation- long-term portion
Defined benefit pension plans’ obligations- long-term portion
Other employee benefit plans’ obligations- long-term portion
Accrued long-term income taxes
Other contingent obligations
Total Other Liabilities
9. INCOME TAXES
Income from continuing operations before income taxes was as follows:
Years Ended March 31,
United States operations
Non-United States operations
2011
30,088
43,731
73,819
$
$
$
$
$
$
$
$
$
$
16,160
6,379
13,925
11,985
3,274
528
52,251
34,396
3,610
7,354
7,509
20,962
73,831
10,233
20,526
8,006
3,897
9,140
4,810
56,612
2010
153,165
38,651
191,816
$
$
$
$
$
$
$
$
15,314
5,734
23,457
10,565
3,340
576
58,986
27,908
4,956
6,972
6,070
26,202
72,108
9,986
21,839
10,179
2,336
11,690
—
56,030
2009
148,839
17,646
166,485
The components of the provision for income taxes related to income from continuing operations consisted of the
following:
74
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
Current:
United States federal
United States state and local
Non-United States
Deferred:
United States federal
United States state and local
Non-United States
2011
2010
2009
$
46,036
$
45,092
$
7,726
12,252
66,014
(36,497)
(6,016)
(947)
(43,460)
22,554
6,954
9,501
61,547
2,591
265
(1,054)
1,802
29,355
8,211
11,417
48,983
6,010
923
(116)
6,817
Total Provision for Income Taxes
$
$
63,349
$
55,800
The total provision for income taxes can be reconciled to the tax computed at the United States federal statutory tax rate as
follows:
Years Ended March 31,
United States federal statutory tax rate
Increase (decrease) in accruals for uncertain tax positions
Net (decrease) increase in valuation allowances
State and local taxes, net of federal income tax benefit
Foreign income tax credit
Difference in non-United States tax rates
U.S. manufacturing deduction
All other, net
Total Provision for Income Taxes
2011
2010
2009
35.0 %
1.8 %
(0.6)%
1.5 %
(0.6)%
(3.1)%
(4.4)%
1.0 %
30.6 %
35.0 %
0.6 %
(0.2)%
2.5 %
(0.1)%
(1.8)%
(0.7)%
(2.3)%
33.0 %
35.0 %
(4.6)%
2.1 %
2.7 %
(0.8)%
(0.7)%
(0.7)%
0.5 %
33.5 %
Unrecognized Tax Benefits. We classify uncertain tax positions and related interest and penalties as long-term liabilities
within “Other liabilities” in our accompanying Consolidated Balance Sheets, unless they are expected to be paid within 12
months, in which case, the uncertain tax positions would be classified as current liabilities within “Accrued income taxes.” We
recognize interest and penalties related to unrecognized tax benefits within “Income tax expense” in our accompanying
Consolidated Statements of Income.
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
Unrecognized Tax Benefits Balance at April 1
Increases for tax provisions of prior years
Decreases for tax provisions of prior years
Increases for tax provisions of current year
Decreases for tax provisions of current year
Settlements
Lapse of statute of limitations
Unrecognized Tax Benefits Balance at March 31
2011
2010
$
$
11,788
3,458
(2,221)
391
(3,661)
—
(161)
9,594
$
$
10,926
2,275
(206)
881
—
(2,088)
—
11,788
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $4,975 at
March 31, 2011 and $2,740 at March 31, 2010. In addition, we believe that it is reasonably possible that unrecognized tax
75
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
benefits may decrease by up to $4,226 within 12 months of March 31, 2011, primarily as a result of audit settlements and the
lapse of statute of limitations.
For the years ended March 31, 2011 and 2010, current income tax expense includes expense of $417 and $359 for interest,
and expense of $60 and $67 for penalties, respectively. In total, as of March 31, 2011 and March 31, 2010, we have recognized
a liability for interest of $1,567 and $1,150 and penalties of $81 and $141, respectively.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state,
and local, as well as foreign, jurisdictions. We are no longer subject to United States federal examinations for years before
fiscal 2008 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income
tax examinations by tax authorities for years before fiscal 2007. We remain subject to tax authority audits in various
jurisdictions wherever we do business. We do not expect the results of these examinations to have a material adverse affect on
our consolidated financial statements.
Deferred Taxes. The significant components of the deferred tax assets and liabilities recorded in our accompanying balance
sheets at March 31, 2011 and 2010 were as follows:
March 31,
Deferred Tax Assets:
Post-retirement benefit accrual
Compensation
Net operating loss carryforwards
Accrued SYSTEM 1 Rebate
Accrued expenses
Insurance
Deferred income
Bad debt
Pension
Other
Deferred Tax Assets
Less: Valuation allowance
Total Deferred Tax Assets
Deferred Tax Liabilities:
Depreciation and depletion
Intangibles
Inventory
Other
Total Deferred Tax Liabilities
Net Deferred Tax Assets (Liabilities)
2011
2010
$
$
9,496
17,800
13,348
49,366
6,894
4,197
5,011
1,935
2,240
814
111,101
11,421
99,680
39,169
23,738
2,422
4,298
69,627
30,053
$
$
10,100
19,292
11,696
—
7,602
4,732
1,607
2,336
3,166
1,416
61,947
9,881
52,066
38,759
21,388
2,255
3,439
65,841
(13,775)
At March 31, 2011, we had federal operating loss carryforwards of $2,468, which can be utilized subject to certain
limitations, and foreign operating loss carry forwards of $51,564. Substantially all of the carryforwards are available for at least
three years or have an indefinite carryforward period. In addition, we have recorded tax benefits of $286 related to state
operating loss carryforwards. At March 31, 2011, we had $290 of tax credit carryforwards. These credit carryforwards expire
between fiscal 2016 and fiscal 2021.
We periodically review the need for a valuation allowance against our deferred tax assets. A valuation allowance of
$11,421 has been applied to a portion of the net deferred tax assets because we do not believe it is more-likely-than-not that we
will receive future benefit. The valuation allowance increased during fiscal 2011 by $1,540.
At March 31, 2011, cumulative undistributed earnings of international operations amounted to approximately $158,792.
These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for deferred
taxes related to the future repatriation of such earnings, nor is it practicable to determine the amount of this liability.
76
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
At March 31, 2011, we had a current prepaid income tax position. This was mainly due to the timing of U.S. Federal
income tax estimated payments.
10. BENEFIT PLANS
We provide defined benefit pension plans for certain current and former manufacturing and plant administrative personnel
throughout the world as determined by collective bargaining agreements or employee benefit standards set at the time of
acquisition of certain businesses. In addition to providing pension benefits to certain employees, we sponsor an unfunded post-
retirement welfare benefits plan for two groups of United States employees; including the same employees who receive pension
benefits under the Unites States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree
medical insurance, including prescription drug coverage.
During the second quarter of fiscal 2009, we amended our United States post-retirement welfare benefits plan, reducing the
benefits to be provided to retirees under the plan and increasing their share of the costs. The amendments resulted in a decrease
of $46,001 in the accumulated post-retirement benefit obligation. The impact of this change was recognized in our
Consolidated Balance Sheets in fiscal 2009 and is being amortized as a component of the annual net periodic benefit cost over a
period of approximately thirteen years.
A defined benefit pension plan is also provided to the employees of our Pieterlen, Switzerland manufacturing facility.
During the third quarter of fiscal 2009, we adopted profitability improvement actions related to the Pieterlen, Switzerland
manufacturing facility. These actions were part of the Fiscal 2009 Restructuring Plan and included a workforce reduction that
impacted approximately 24 employees at the facility. These restructuring actions resulted in a curtailment and a partial
settlement of the plan as the vested benefits of certain affected employees were settled.
We recognize the funded status of our defined benefit pension and post-retirement benefit plans in our Consolidated
Balance Sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The funded status is
measured as of March 31 each year and is calculated as the difference between the fair value of plan assets and the benefit
obligation (which is the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation
for post-retirement benefit plans). Accumulated comprehensive income (loss) represents the net unrecognized actuarial losses
and unrecognized prior service cost. These amounts will be recognized in net periodic benefit cost as they are amortized. We
will recognize future changes to the funded status of these plans in the year the change occurs, through other comprehensive
income.
Obligations and Funded Status. The following table reconciles the funded status of the defined benefit pension plans and the
other post-retirement medical benefit plan to the amounts recorded on our Consolidated Balance Sheets at March 31, 2011 and
2010, respectively. Benefit obligation balances presented in the following table reflect the projected benefit obligations for our
defined benefit pension plans and the accumulated other post-retirement benefit obligation for our other post-retirement
medical benefit plan. The measurement date of our defined benefit pension plans and the other post-retirement medical benefit
plan is March 31 for both periods presented.
77
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Pension Plans
U.S. Qualified
International
Other
Post-retirement Plan
2011
2010
2011
2010
2011
2010
Change in Benefit Obligations:
Benefit Obligations at Beginning of Year
$
47,638
$
42,732
$
11,903
$
10,244
$
25,179
$
29,882
Service cost
Interest cost
Actuarial (gain) loss
Benefits and expenses
Employee contributions
Curtailments/settlements
Impact of foreign currency exchange
rate changes
Benefit Obligations at End of Year
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of
Year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits and expenses paid
Curtailments/settlements
Impact of foreign currency exchange
rate changes
Fair Value of Plan Assets at End of Year
190
2,617
2,724
(4,609)
—
—
—
48,560
40,142
4,340
2,125
—
(4,584)
—
—
42,023
Funded Status of the Plans
$
(6,537)
$
185
3,046
6,554
(4,879)
—
—
—
47,638
26,244
9,604
9,184
—
(4,890)
—
531
334
(942)
(665)
473
(1,872)
15
9,777
9,220
445
473
473
(665)
(1,872)
554
368
821
(1,530)
498
(1,405)
—
1,169
683
(3,231)
—
—
2,353
11,903
—
23,800
8,466
724
498
498
(1,530)
(1,405)
—
—
3,231
—
(3,231)
—
—
1,948
(2,930)
(3,721)
—
—
—
25,179
—
—
3,721
—
(3,721)
—
—
234
1,969
—
—
40,142
(7,496)
$
8,308
(1,469)
$
9,220
(2,683)
—
$ (23,800)
—
$ (25,179)
Amounts recognized in the consolidated balance sheets consist of the following:
Pension Plans
U.S. Qualified
International
Other Post-retirement Plan
2011
2010
2011
2010
2011
2010
Current liabilities
Noncurrent liabilities
$
$
—
(6,537)
(6,537)
$
$
—
(7,496)
(7,496)
$
$
—
(1,469)
(1,469)
$
$
—
(2,683)
(2,683)
$
$
(3,274)
(20,526)
(23,800)
$
$
(3,340)
(21,839)
(25,179)
The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other
comprehensive income (loss) at March 31, 2011 was ($9,746) and $(12,243), respectively. During fiscal 2012, we will amortize
the following pre-tax amounts from accumulated other comprehensive income:
Actuarial loss
Prior Service Cost
Pension Plans
U.S. Qualified
Plan
International
Plan
Other Post-
retirement
Benefit Plan
$
$
1,066
—
$
$
—
—
$
$
425
(3,263)
Defined benefit plans with an accumulated benefit obligation exceeding the fair value of plan assets had the following plan
assets and obligations at March 31, 2011 and 2010:
78
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Aggregate fair value of plan assets
$
42,023
$
40,142
$
8,308
$
9,220
$
50,331
$
49,362
Aggregate accumulated benefit obligations
48,560
47,638
9,286
10,844
57,846
58,482
U.S. Qualified
International
Total
2011
2010
2011
2010
2011
2010
Defined benefit plans with a projected benefit obligation exceeding the fair value of plan assets had the following plan
assets and obligations at March 31, 2011 and 2010:
Aggregate fair value of plan assets
$
42,023
$
40,142
$
8,308
$
9,220
$
50,331
$
49,362
Aggregate projected benefit obligations
48,560
47,638
9,777
11,903
58,337
59,541
U.S. Qualified
International
Total
2011
2010
2011
2010
2011
2010
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income. Components of the annual net periodic benefit cost of our defined benefit pension plans and our other post-retirement
medical benefit plan were as follows:
79
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Service cost
Interest cost
Expected return on plan
assets
Prior service cost recognition
Net amortization and deferral
Net periodic benefit cost
Curtailments/settlements
Termination benefits
Total benefit cost
Recognized in other
comprehensive (income)
loss before tax:
Amendment of prior service
cost (credit)
Net loss (gain) occurring
during year
Amortization of prior service
credit (cost)
Amortization of net (loss)
gain
Amortization of transition
asset (obligation)
Total recognized in other
comprehensive loss
(income)
Total recognized in total
benefits cost and other
comprehensive loss
(income)
Pension Plans
U.S. Qualified
International
Other Post-retirement Plan
2011
2010
2009
2011
2010
2009
$
190
$
185
$
210
$
2,617
3,046
2,741
$
531
334
554
368
$
381
468
2011
$ —
1,169
2010
2009
$ —
$ —
1,948
2,703
(3,033)
(2,484)
(2,867)
—
1,068
842
—
—
842
$
—
1,062
1,809
—
—
—
526
610
—
—
$ 1,809
$
610
$
(356)
—
—
509
(95)
—
414
(416)
—
—
506
(63)
—
(522)
—
(3)
324
(358)
807
$
443
$
773
—
(3,263)
388
(1,706)
—
—
(3,263)
626
(689)
—
—
$ (1,706)
$
—
(689)
—
(3,884)
1,366
185
—
—
$
185
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$(46,001)
1,393
(554)
8,323
(1,031)
502
864
683
(2,930)
(4,750)
—
—
—
(1,068)
(1,132)
(636)
—
70
110
—
95
—
—
63
—
—
37
—
3,263
3,263
3,884
(388)
(626)
(1,366)
—
—
—
325
(1,616)
7,797
(936)
565
901
3,558
(293)
(48,233)
$ 1,167
$
193
$ 8,407
$ (522)
$ 1,008
$ 1,674
$ 1,852
$
(982)
$(48,048)
Assumptions Used in Calculating Benefit Obligations and Net Periodic Benefit Cost. The following table presents
significant assumptions used to determine the projected benefit obligations at March 31:
Discount Rate:
U.S. qualified pension plan
Switzerland pension plan
Other post-retirement plan
Expected Return on Plan Assets:
U.S. qualified pension plan
Switzerland pension plan
Rate of Compensation Increase:
Switzerland pension plan
80
2011
2010
5.25%
2.75%
4.50%
8.00%
3.25%
5.75%
3.00%
5.00%
8.00%
4.00%
2.50%
2.50%
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following table presents significant assumptions used to determine the net periodic benefit costs for the years
ended March 31:
Discount Rate:
U.S. qualified pension plan
Switzerland pension plan
Other post-retirement plan
Expected Return on Plan Assets:
U.S. qualified pension plan
Switzerland pension plan
Rate of Compensation Increase:
Switzerland pension plan
2011
2010
2009
5.75%
3.00%
5.00%
8.00%
4.00%
7.50%
3.25%
7.00%
8.00%
4.50%
6.00%
3.75%
6.00%
8.00%
4.50%
2.50%
2.50%
2.50%
The net periodic benefit cost and the actuarial present value of projected benefit obligations are based upon assumptions
that we review on an annual basis. These assumptions may be revised annually based upon an evaluation of long-term trends,
as well as market conditions that may have an impact on the cost of providing benefits.
We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party
professional advisors, taking into consideration the asset allocation of the portfolios and the long-term asset class return
expectations.
We develop our discount rate assumptions by evaluating input from third-party professional advisors, taking into
consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow
streams as our projected obligations.
We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The
assumed rates of increase generally decline ratably over a five-year period from the assumed current year healthcare cost trend
rate to the assumed long-term healthcare cost trend rate noted below.
Healthcare cost trend rate – medical
Healthcare cost trend rate – prescription drug
Long-term healthcare cost trend rate
2011
2010
2009
10.0%
10.0%
5.0%
11.0%
11.0%
5.0%
9.0%
9.0%
5.0%
To determine the healthcare cost trend rates, we evaluate a combination of information, including ongoing claims cost
monitoring, annual statistical analyses of claims data, reconciliation of forecasted claims against actual claims, review of trend
assumptions of other plan sponsors and national health trends, and adjustments for plan design changes, workforce changes,
and changes in plan participant behavior.
A one-percentage-point change in assumed healthcare cost trend rates (including medical, prescription drug, and long-term
rates) would have had the following effect at March 31, 2011:
Effect on total service and interest cost components
Effect on other post-retirement benefit obligation
One-Percentage
Point
Increase
Decrease
$
$
11
217
(10)
(207)
Plan Assets. Our United States and Switzerland defined benefit pension plans are funded. The following table presents the
targeted asset allocation of plan assets at March 31, 2011 and the actual allocation of plan assets at March 31, 2011 and 2010
for these plans:
81
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
U.S. Qualified Plan:
Equity securities
Debt securities
Cash
Total
Switzerland Plan:
Equity securities
Debt securities
Cash
Insurance contracts
Total
Long-Term
Target
Allocation
Percentage
Percentage of Plan
Assets March 31
2011
2010
60%
40%
0%
100%
0%
0%
0%
100%
100%
57.7%
41.4%
0.9%
100%
0%
0%
0%
100%
100%
59.1%
40.0%
0.9%
100%
38.7%
9.4%
22.9%
29.0%
100%
The long-term target allocations in the preceding table reflect our asset class return expectations and tolerance for
investment risk within the context of the pension plans’ long-term benefit obligations. Investment policies, strategies, and long-
term target allocations are developed on a plan specific and country specific basis. We continually challenge the long-term
target asset allocations and support the allocations by an analysis that incorporates historical and expected returns by asset class
as well as volatilities across asset classes and our liability profile. Due to market conditions and other factors, actual asset
allocations may vary from the long-term target allocations presented in the preceding table. Plan assets are managed by outside
investment managers. If asset allocations move outside of the target ranges, the portfolios are rebalanced. For the purpose of the
above analysis, debt and equity securities include fixed income and equity security mutual funds, respectively. At March 31,
2011 and 2010, the plans’ assets did not include investments in STERIS common shares.
Financial instruments included in pension plan assets are categorized into three tiers. These tiers include a fair value hierarchy
of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 - Quoted prices for identical assets in active markets.
Level 2 - Quoted prices for similar assets in active markets with inputs that are observable, either directly or indirectly.
Level 3 - Unobservable prices or inputs in which little or no market data exists.
The fair value of our pension benefits plan assets at March 31, 2011 and 2010 by asset category is as follows:
Fair Value Measurements at March 31, 2011
U.S. Qualified Pension Plan
International Plan
(In millions)
Total
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobserva
ble
Inputs
(Level 3)
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobserva
ble
Inputs
(Level 3)
Total
Cash and Short Term
Securities
Equity Securities
$
359
$
359
$
—
$
—
$
—
$
—
$
—
$
Mutual Funds
24,229
24,229
Debt Securities
Mutual Funds
Insurance Contracts
Total Plan Assets
17,435
$
—
$ 42,023
$
17,435
—
42,023
$
—
—
—
—
—
—
8,308
8,308
$
$
$
—
—
—
—
$
—
—
—
—
—
—
—
—
82
$
—
—
—
8,308
$
8,308
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Fair Value Measurements at March 31, 2010
U.S. Qualified Pension Plan
International Plan
(In millions)
Total
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobserva
ble
Inputs
(Level 3)
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobserva
ble
Inputs
(Level 3)
Total
$
361
$
361
$
—
$
—
$ 2,109
$
2,109
$
—
$
Cash and Short Term
Securities
Equity Securities
Mutual Funds
Debt Securities
Government Bonds
Mutual Funds
Other Investments
23,714
23,714
—
16,067
—
—
16,067
—
—
—
—
—
—
$
—
—
—
—
—
3,560
3,560
192
673
2,686
192
673
—
—
—
—
2,686
$ 9,220
$
6,534
$
2,686
$
Total Plan Assets
$ 40,142
$
40,142
$
—
—
—
—
—
—
In fiscal 2011, we liquidated the international plan assets categorized as level 1 and 2 and reinvested in insurance contracts
categorized as level 3.
Cash Flows. We contribute amounts to our defined benefit pension plans at least equal to the minimum amounts required by
applicable employee benefit laws and local tax laws. We have recorded liabilities for amounts greater than the required funding
levels on our accompanying Consolidated Balance Sheets. As of March 31, 2011, we expect to make contributions of
approximately $2,168 to the U.S. qualified defined benefit pension plan in fiscal 2012.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2011, the following benefit
payments are expected to be made to plan participants:
Defined Benefit Pension Plans
Other Post-Retirement Benefit Plan
U.S. Qualified
International
Total
$
4,263
$
4,157
4,037
3,929
3,868
18,114
470
894
696
524
1,118
4,044
$
4,733
$
5,051
4,733
4,453
4,986
22,158
Gross
Benefit
Payments
3,505
3,355
3,177
2,960
2,733
9,271
$
$
Medicare
Reimbursement
(231)
(243)
(253)
(262)
(267)
(1,215)
Total
3,274
3,112
2,924
2,698
2,466
8,056
2012
2013
2014
2015
2016
2017-2021
In the preceding table, projected benefit payments denominated in foreign currencies have been calculated based upon
March 31, 2011 foreign currency exchange rates.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) provides a prescription drug
benefit for Medicare beneficiaries, a benefit we provide to Medicare eligible retirees covered by our post-retirement benefits
plan. We have concluded that the prescription drug benefit provided in our post-retirement benefit plan is considered to be
actuarially equivalent to the benefit provided under the Act and thus qualifies for the subsidy under the Act. As a result, all the
measures of our accumulated post-retirement benefit obligation and net periodic benefit cost in the accompanying consolidated
financial statements and notes reflect the effects of the Act on the plan for the entire fiscal year. This expected future subsidy
reduced our accumulated post-retirement benefit obligation and our net periodic benefit cost as of and for the fiscal year ended
March 31, 2011 by $3,405 and $666, respectively. We collected subsidies totaling approximately $768 and $79, during fiscal
2011 and fiscal 2010, which reduced our net post-retirement medical payments.
83
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Defined Contribution Plans. We maintain a 401(k) defined contribution plan for eligible employees. We provide a match on a
specified portion of an employee’s contribution as approved by the Company’s Board of Directors. The plan assets are held in
trust and invested as directed by the plan participants. The aggregate fair value of plan assets was $304,882 at March 31, 2011.
At March 31, 2011, the plan held 876,892 STERIS common shares with a fair value of $30,288. We paid dividends of $498,
$2,253, and $262 to the plan and participants on STERIS common stock held by the plan for the years ended March 31, 2011,
2010, and 2009, respectively. We contributed $7,476, $6,226, and $5,965, to the defined contribution plan for the years ended
March 31, 2011, 2010, and 2009, respectively.
We also maintain a domestic non-qualified deferred compensation plan covering certain employees, which allows for the
deferral of compensation for an employee-specified term or until retirement or termination. Employee contributions to this plan
were $237, $594, and $567 in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. We hold investments in mutual funds to
satisfy future obligations of the plan. We account for these assets as available-for-sale securities and they are included in “Other
assets” on our accompanying Consolidated Balance Sheets, with a corresponding liability for the plan’s obligation recorded in
“Accrued expenses and other.” The aggregate value of the assets was $2,493 and $1,778 at March 31, 2011 and March 31,
2010, respectively. Realized gains and losses on these investments are recorded in “Interest and miscellaneous income” within
“Non-operating expenses” on our accompanying Consolidated Statements of Income. Changes in the fair value of the assets are
recorded in other comprehensive income on our accompanying balance sheets.
11. COMMITMENTS AND CONTINGENCIES
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims,
which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our
business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings,
investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal
injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further
believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our
consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can
be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings
(including without limitation the matters discussed below). For certain types of claims, we presently maintain product liability
insurance coverage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be
no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings
against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our
SYSTEM 1 sterile processor and the STERIS 20 sterilant used with the processor (sometimes referred to collectively in the
FDA letter and in this note 11 as the “device”). Among other matters, the warning letter included the FDA's assertion that
significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the
device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within
FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission
resulted in violations of applicable law. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed
response contending that the assertions in the warning letter were not correct. On November 4, 2008, we received a letter from
the FDA (dated November 3, 2008) in which the FDA stated without elaboration that, after reviewing our response, it disagreed
with our position and that a new premarket notification submission was required. After discussions with the FDA regarding the
November 3rd letter, we received an additional letter on November 6, 2008 from the FDA. The November 6th letter stated that
the intent of the November 3rd letter was to inform us of the FDA's preliminary disagreement with our response to the warning
letter and, before finalizing a position, the FDA reiterated that it wanted to meet with us to discuss the Company's response,
issues related to the warning letter and next steps to resolve any differences between the Company and the FDA. We thereafter
met with the FDA and, on January 20, 2009, we announced that we had submitted to the FDA a new liquid chemical sterilant
processing system for 510(k) clearance, and we communicated to Customers that we would continue supporting the existing
84
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
SYSTEM 1 installed base in the U.S. for at least a two year period from that date. (On April 5, 2010, we received FDA
clearance of the new liquid chemical sterilant processing system (SYSTEM 1E).)
On December 3, 2009, the FDA provided a notice (“notice”) to healthcare facility administrators and infection control
practitioners describing FDA's “concerns about the SYSTEM 1 Processor, components and accessories, and FDA
recommendations.” In the notice, among other things, FDA stated its belief that the SYSTEM 1 device had been significantly
modified, that FDA had not cleared or approved the modified device, and that FDA had not determined whether the SYSTEM 1
was safe or effective for its labeled claims. The notice further stated that use of a device that does not properly sterilize or
disinfect a medical or surgical device poses risks to patients and users, including the transmission of pathogens, exposure to
hazardous chemicals and affect the quality and functionality of reprocessed instruments. The notice stated that FDA was aware
of reports of malfunctions of the SYSTEM 1 that had the potential to cause or contribute to serious injuries to patients, such as
infections, or injuries to healthcare staff, such as burns. Included in FDA's December 3, 2009 notice was a recommendation
from FDA that if users had acceptable alternatives to meet sterilization and disinfection needs, they should transition to that
alternative as soon as possible. After its December 3, 2009 notice, we engaged in extensive discussions with the FDA regarding
a comprehensive resolution of this matter. During this transition period, we continued to support the existing SYSTEM 1
installed base by providing accessories, sterilant, service and parts to U.S. Customers.
In April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19,
2010, a Complaint and Consent Decree were filed in the U.S. District Court for the Northern District of Ohio, and on April 20,
2010, the Court approved the Consent Decree. In general, the Consent Decree addresses regulatory matters regarding SYSTEM
1, restricts further sales of SYSTEM 1 processors in the U.S., defines certain documentation and other requirements for
continued service and support of SYSTEM 1 in the U.S., prohibits the sale of liquid chemical sterilization or disinfection
products in the U.S. that do not have FDA clearance, describes various process and compliance matters, and defines penalties in
the event of violation of the Consent Decree.
The Consent Decree also provides that we may continue to support our Customers' use of SYSTEM 1 in the U.S.,
including the sale of consumables, parts and accessories and service for a transition period, not to extend beyond August 2,
2011, subject to compliance with requirements for documentation of the Customer's need for continued support and other
conditions and limitations (the “Transition Plan”). This transition period has since been extended by the FDA until February 2,
2012. Our Transition Plan includes the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer
rebates to qualifying Customers. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who are
current users of SYSTEM 1 and who return their units will have the option of either a pro-rated cash rebate or a rebate toward
the future purchase of new STERIS capital equipment (including SYSTEM 1E) or consumable products. In addition, we will
provide credits for SYSTEM 1 consumables in unbroken packaging and within shelf life and for the unused portion of
SYSTEM 1 service contracts. As a result, we recorded a pre-tax liability of $110,004 related to the SYSTEM 1 Rebate
Program. Of the $110,004, $102,313 is attributable to the Customer Rebate portion of the Program and was recorded as a
reduction of revenues, and $7,691 is attributable to the disposal liability of the SYSTEM 1 units to be returned and was
recorded as an increase in cost of revenues. This also resulted in a $110,004 reduction in operating income. The Rebate
Program balance at March 31, 2011 is $107,887.
Recording the obligations associated with the Rebate Program requires the use of estimates and assumptions. The use of
estimates and assumptions involves judgments with respect to factors that may impact the ultimate outcome and may be
beyond management's control. The amount recognized during the first quarter of fiscal 2011 is based upon the quantity of
SYSTEM 1 processors eligible for rebates and the estimated value of rebates to be provided upon their return. Rebates of
$102,313 are recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated
cost of $7,691 to facilitate the return and disposal of the processors has been recognized as cost of revenues. Both components
are recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program include:
the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that will
elect to participate in the Rebate Program, the proportion of Customers that will choose each rebate option, and the estimated
per unit costs of disposal.
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we
have assumed that 100% of eligible Customers will elect to participate in the Rebate Program. In order to estimate the portion
of Customers that will choose each available rebate option, we first assessed the trend in sales of the proprietary consumable
products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments during the period
85
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
between the notice and the announcement of the Rebate Program which indicated that a portion of our Customers had already
transitioned away from the SYSTEM 1 technology. The remaining 81%, provided the best available indication of the portion of
Customers likely to elect the rebate for the SYSTEM 1E processor. Order and quote data for the fiscal 2011 year provides
indications of the proportion of Customers that are expected to choose each of the other cash and rebate options. The per unit
costs associated with disposal were estimated based on the service hours involved and quotes from our vendors which are based
on current freight and disposal contracts.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions
since January 2009 with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals
under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory,
administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in
respect of the Consent Decree, the Transition Plan, SYSTEM 1, the EPS System (described subsequently), or otherwise with
respect to regulatory or compliance matters, as described in this note 11 or in various portions of Item 1A. of Part I of this
Annual Report on Form 10-K.
Our assumptions regarding the response of our Customers to the Rebate Program could be wrong and actual results could
be different from these estimates. For example, if all Customers elected the maximum incentive rebate associated with the
SYSTEM 1E processor rebate, the total estimated rebate liability of $102,313 would increase to approximately $111,000.
Conversely, if all Customers elected the cash rebate option, the total estimated rebate liability would decrease to approximately
$52,000.
In December of 2010, we began shipping SYSTEM 1E units in limited numbers, after having received FDA clearance for
the SYSTEM 1E chemical indicator, which is used in conjunction with the SYSTEM 1E. We have also requested FDA
clearance or approval of an additional indicator for SYSTEM 1E, although this indicator is not required by regulation to sell or
operate the device. No assurance can be made that the FDA will agree to this request.
Also in April, 2010 we voluntarily submitted information regarding modifications to the Reliance EPS Endoscope
Processing System (the “EPS System”) to the FDA. These incremental modifications to the EPS System were considered minor
by us. FDA subsequently advised us that it believed a new pre-market notification (510(k)) for those modifications should be
submitted. We thereafter submitted this pre-market notification to the FDA. We also suspended shipments of EPS Systems in
the U.S. pending FDA review of the submission but continued servicing and providing consumables necessary for the
continued use of the EPS Systems. In December 2010, we received FDA clearance of the modified EPS System and
immediately resumed shipment in the U.S.
On February 10, 2011, we received a warning letter from the FDA regarding our Verify® SixCess Class 6 Challenge Packs
and Verify SixCess Class 6 Chemical Indicators. These devices are intended for use in steam sterilization applications. The
Verify SixCess Class 6 Challenge Packs and Verify SixCess Class 6 Chemical Indicators are not related to the STERIS
SYSTEM 1E Liquid Chemical Sterilant Processing System. This FDA warning letter claims that certain promotional materials
related to these devices include incorrect statements and, as a result of those statements, the warning letter claims that these
devices are misbranded under the U.S. Food, Drug and Cosmetic Act. We have responded to this warning letter and do not
believe that the impact of this event will have a material adverse effect on our financial results.
On February 5, 2010, a complaint was filed by a Customer that claims to have purchased two SYSTEM 1 devices from
STERIS, Physicians of Winter Haven LLC d/b/a Day Surgery Center v. STERIS Corp., Case No. 1:1-cv-00264-CAB (N.D.
Ohio). The complaint alleges statutory violations, breaches of various warranties, negligence, failure to warn, and unjust
enrichment. Plaintiff seeks class certification, damages, and other legal and equitable relief including, without limitation,
attorneys' fees and an order requiring STERIS to replace, recall or adequately repair the product and/or to take appropriate
regulatory action. On February 7, 2011 we entered into a settlement agreement in which we agreed, among other things, to
provide various categories of economic relief for members of the settlement class and not object to plaintiff's counsel's
application to the court for attorneys' fees and expenses up to a specified amount. The settlement has been preliminarily
approved by the court. Both certification of a settlement class and final approval of the settlement require approval of the court
and satisfaction of certain other conditions. There is no assurance that the court will take such actions, that such conditions will
be satisfied, or that this matter will be resolved, or be resolved consistent with the terms and conditions of such settlement
agreement. During the third quarter of fiscal 2011, we recorded in operating expenses a pre-tax charge of approximately
$19,796 related to the proposed settlement of these proceedings. The assumptions regarding the amount of this charge include,
86
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
among others, the portion of class members participating in the settlement and their choice of the categories of economic relief
available for such members. These assumptions may be incorrect and the costs of the settlement may be higher or lower than
the charge recorded. The actual settlement could be as low as $7,000 and as high as $22,000 depending on the options selected
by the class members.
This putative class action or other civil, criminal, regulatory or other proceedings involving our SYSTEM 1, SYSTEM 1E,
EPS System, or other products or services could possibly result in judgments, settlements or administrative or judicial decrees
requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or
other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial
condition, and results of operations.
For additional information regarding these matters, see the following portions of this Annual Report on Form 10-K:
“Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled: “We
may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the
Warning Letter and Consent Decree.”, the “Risk Factor” titled: “Our business may be adversely affected as a result of the U.S.
Food and Drug Administration notices to healthcare administrators and device manufacturers, and related matters,” and the
“Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.”
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and
other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state, and local, and foreign jurisdictions. Tax positions are settled
primarily through the completion of audits within each individual jurisdiction or the closing of statute of limitation. Changes in
applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 9 to
our consolidated financial statements titled, “Income Taxes”, in this Annual Report on Form 10-K.
Additional information regarding our contingencies is included in Item 7 of Part II titled, “Management’s Discussion and
Analysis of Financial Conditions and Results of Operations,” and in Item 3 of Part I titled, “Legal Proceedings” contained in
this Annual Report on Form 10-K.
As of March 31, 2011 and 2010, our commercial commitments totaled $34,330 and $36,706, respectively. Commercial
commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies,
and other potential cash outflows resulting from an event that requires payment by us. Approximately $7,740 and $8,341,
respectively, of the totals at March 31, 2011 and 2010 relate to letters of credit required as security under our self-insured risk
retention policies.
As of March 31, 2011 and 2010, we had minimum purchase commitments with suppliers for raw material purchases
totaling $40,455 and $17,666, respectively.
12. BUSINESS SEGMENT INFORMATION
We operate and report in three reportable business segments: Healthcare, Life Sciences, and Isomedix. “Corporate and
other,” which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being
a publicly traded company and certain other corporate costs.
Our Healthcare segment manufactures and sells capital equipment, accessory, consumable, and service solutions to
healthcare providers, including acute care hospitals and surgery centers. These solutions aid our Customers in improving the
safety, quality, and productivity of their surgical, sterile processing, gastrointestinal, and emergency environments.
Our Life Sciences segment manufactures and sells engineered capital equipment, formulated cleaning chemistries, and
service solutions to pharmaceutical companies, and private and public research facilities around the globe.
Our Isomedix segment operates through a network of 18 facilities located in North America. We sell a comprehensive
array of contract sterilization services using gamma irradiation, and ethylene oxide (“EO”) technologies. We provide
sterilization and microbial reduction services to companies that supply products to the healthcare, industrial, and consumer
products industries.
Financial information for each of our segments is presented in the following table. Operating income (loss) for each
segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full
allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These
87
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare segment is
responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life
Sciences segment. “Corporate and other” includes the gross profit and direct expenses of the Defense and Industrial business
unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-
retirement benefits.
The accounting policies for segments are the same as those for the consolidated Company. For the year ended March 31,
2011, revenues from a single Customer did not equal ten percent or more of any segment’s revenues.
Years Ended March 31,
Revenues:
Healthcare (1)
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Revenues
Operating Income:
Healthcare (2)
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Operating Income
2011
2010
2009
$
835,832
215,437
152,242
1,203,511
3,937
$ 1,207,448
$
892,474
218,209
140,871
1,251,554
6,179
$ 1,257,733
$
931,263
216,701
142,645
1,290,609
7,916
$ 1,298,525
$
$
21,317
33,069
39,833
94,219
(9,007)
85,212
$
$
151,520
30,952
31,103
213,575
(9,863)
203,712
$
$
132,601
18,413
34,763
185,777
(10,332)
175,445
(1) Includes a reduction of $102,313 resulting from the SYSTEM 1 Rebate Program.
(2) Includes reductions of $110,004, resulting from the SYSTEM 1 Rebate Program, and $19,796, resulting from the proposed class action
settlement.
For the year ended March 31, 2011, pre-tax restructuring expenses of $1,020, $190 and $142 are included in the operating
results of the Healthcare, Life Sciences and Isomedix segments, respectively. For the year ended March 31, 2010, pre-tax
restructuring expenses of $3,839 and $555 are included in the operating results of the Healthcare and Life Sciences segments,
respectively. For the year ended March 31, 2009, pre-tax restructuring expenses of $11,399, $2,562, $40 and $(1) are included
in the operating results of the Healthcare, Life Sciences, and Isomedix segments, and in Corporate and other, respectively.
Assets include the current and long-lived assets directly attributable to the segment based on the management of the
location or on utilization. Certain corporate assets were allocated to the reportable segments based on revenues. Assets
attributed to sales and distribution locations are only allocated to the Healthcare and Life Sciences segments. Capital
expenditures and depreciation and amortization are allocated to the segments based on variables such as headcount and
revenues. Capital expenditures and depreciation and amortization related to research and development efforts are allocated to
the Healthcare and Life Sciences segments based on the respective proportion of research and development expenses.
“Corporate and other” includes assets, capital expenditures, and depreciation and amortization directly attributable to the
Defense and Industrial business unit, as well as certain unallocated amounts related to being a publicly traded company.
Individual facilities, equipment, and intellectual properties are utilized for production by both the Healthcare and Life
Sciences segments at varying levels over time. As a result, an allocation of total assets, capital expenditures, and depreciation
and amortization is not meaningful to the individual performance of the Healthcare and Life Sciences segments. Therefore,
their respective amounts are reported together.
88
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
March 31,
Assets:
Healthcare and Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Assets
2011
2010
$ 1,072,892
352,153
1,425,045
1,640
$ 1,426,685
$
895,694
341,452
1,237,146
1,256
$ 1,238,402
Years Ended March 31,
2011
2010
2009
Capital Expenditures:
Healthcare and Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Capital Expenditures
Depreciation, Depletion, and Amortization:
Healthcare and Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Depreciation, Depletion, and Amortization
$
$
$
$
36,156
41,271
77,427
15
77,442
30,188
24,183
54,371
18
54,389
$
$
$
$
20,602
23,454
44,056
31
44,087
32,640
23,553
56,193
25
56,218
$
$
$
$
15,278
25,559
40,837
52
40,889
34,866
23,848
58,714
59
58,773
Financial information for each of our United States and international geographic areas is presented in the following table.
Revenues are based on the location of these operations and their Customers. Property, plant and equipment, net are those assets
that are identified within the operations in each geographic area.
Years Ended March 31,
Revenues:
United States
International
Total Revenues
March 31,
Property, Plant, and Equipment, Net
United States
International
Property, Plant, and Equipment, Net
13. COMMON SHARES
2011
2010
2009
$
882,281
325,167
$ 1,207,448
$
949,637
308,096
$ 1,257,733
$
993,487
305,038
$ 1,298,525
2011
2010
$
$
318,110
52,292
370,402
$
$
301,405
45,453
346,858
We calculate basic earnings per common share based upon the weighted average number of common shares outstanding.
We calculate diluted earnings per share based upon the weighted average number of common shares outstanding plus the
dilutive effect of common share equivalents calculated using the treasury stock method. The following is a summary of
common shares and common share equivalents outstanding used in the calculations of basic and diluted earnings per share:
89
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(in thousands)
Weighted average common shares outstanding – basic
Dilutive effect of common share equivalents
Weighted Average Common Shares and Equivalents – diluted
Years Ended March 31,
2011
2010
2009
59,306
842
60,148
58,826
597
59,423
58,778
670
59,448
Options to purchase the following number of common shares were outstanding but excluded from the computation of
diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon
exercise were greater than the average market price for the common shares during the periods, so including these options would
be anti-dilutive:
(shares in thousands)
Number of common share options
14. REPURCHASES OF COMMON SHARES
Years Ended March 31,
2011
2010
2009
383
1,138
1,286
In March 2008, we announced that the Company’s Board of Directors provided authorization to repurchase up to $300,000
of STERIS common shares. The March 2008 common share repurchase authorization does not have a stated maturity date.
Under this authorization, we may purchase shares from time to time through open market purchases, including transactions
pursuant to Rule 10b5-1 plans, or privately negotiated transactions.
Under the stock repurchase authorization provided by our Board of Directors, we repurchased 925,848 of our common
shares during fiscal 2011 in the aggregate amount of $29,462, representing an average price of $31.82 per common share. We
did not repurchase any shares under this authorization during fiscal 2010. During fiscal 2009, we paid an aggregate amount of
$80,466 for the repurchase of 2,646,177 of our common shares, representing an average price of $30.41 per common share.
This includes certain March 2008 repurchases of 225,000 of our common shares for an aggregate amount of $6,028 that were
not settled until April 2008.
We obtained 15,224 of our common shares during fiscal 2011 in the aggregate amount of $503 in connection with stock-
based compensation award programs. We obtained 11,220 of our common shares during fiscal 2010 in the aggregate amount of
$310 in connection with these programs. At March 31, 2011, $174,402 remained available for the repurchase of STERIS
common shares pursuant to the March 2008 Board authorization.
15. SHARE-BASED COMPENSATION
We maintain a long-term incentive plan that makes available common shares for grants, at the discretion of the
Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options,
restricted shares, restricted share units, and stock appreciation rights. Stock options provide the right to purchase our common
shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of
the stock options granted become exercisable for each full year of employment following the date of grant. Stock options
granted generally expire 10 years after the date of grant, or earlier if an option holder is no longer employed by us. Restricted
shares and restricted share units generally cliff vest over an approximately three or four-year period. As of March 31, 2011,
3,519,891 shares remain available for grant under the long-term incentive plan.
The fair value of share-based compensation awards was estimated at their grant date using the Black-Scholes-Merton
option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted
consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock
options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or
selling, general, and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted average assumptions were used for options granted during fiscal 2011, fiscal 2010, and fiscal
2009:
90
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Risk-free interest rate
Expected life of options
Expected dividend yield of stock
Expected volatility of stock
Fiscal 2011
Fiscal 2010
Fiscal 2009
2.68%
5.7 years
1.59%
30.13%
1.89%
5.5 years
1.49%
27.96%
2.65%
5.6 years
0.86%
27.72%
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of our
historical experience, vesting schedules, and contractual terms. The expected dividend yield of stock represents our best
estimate of expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices
over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.27, 2.39 and 2.86 percent
was applied in fiscal years 2011, 2010, and 2009, respectively. This rate is calculated based upon historical activity and
represents an estimate of the granted awards not expected to vest. If actual forfeitures differ from this calculated rate, we may
be required to make additional adjustments to compensation expense in future periods. The assumptions used above are
reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
Outstanding at March 31, 2010
Granted
Exercised
Forfeited
Canceled
Outstanding at March 31, 2011
Exercisable at March 31, 2011
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
24.96
31.92
22.43
26.40
28.02
25.95
25.31
5.56
4.52
$
$
28,133
21,153
Shares
3,599,221
273,578
(560,908)
(28,340)
(9,156)
3,274,395
2,291,039
$
$
$
We estimate that 971,694 of the non-vested stock options outstanding at March 31, 2011 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $34.54 closing price of
our common shares on March 31, 2011 over the exercise price of the stock option, multiplied by the number of options
outstanding or outstanding and exercisable. The aggregate intrinsic value is not recorded for financial accounting purposes and
the value changes daily based on the daily changes in the fair market value of our common shares.
The total intrinsic value of stock options exercised during the years ended March 31, 2011, 2010, and 2009 was $6,669,
$6,546, and $24,416, respectively. Net cash proceeds from the exercise of stock options were $ 12,730, $14,047, and $33,621
for the years ended March 31, 2011, 2010, and 2009, respectively. The tax benefit from stock option exercises was $2,525,
$2,467, and $6,982 for the years ended March 31, 2011, 2010, and 2009, respectively.
The weighted average grant date fair value of share-based compensation grants was $8.80, $5.69, and $8.74 for the years
ended March 31, 2011, 2010, and 2009, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that
they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of outstanding SARS as of
March 31, 2011 and 2010 was $996 and $791, respectively. The fair value of each outstanding SAR is revalued each reporting
date and the related liability and expense are adjusted appropriately.
A summary of the non-vested restricted share and share settled restricted share unit activity is presented below:
91
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Non-vested at March 31, 2010
Granted
Vested
Forfeited
Non-vested at March 31, 2011
Number of
Restricted
Shares
Number of
Restricted
Share Units
Settled in Shares
Weighted
Average
Grant Date
Fair Value
222,590
263,397
(73,613)
(11,423)
400,951
23,000
—
(23,000)
—
—
$
26.80
31.99
28.55
29.90
29.70
Restricted shares and restricted share units granted are valued based on the closing stock price at the grant date and
generally cliff vest over approximately a three or four-year period based upon the terms of the grants. The total fair value of
restricted shares that vested during the years ended March 31, 2011, 2010, and 2009 was $2,758, $2,630, and $1,903,
respectively.
Cash-settled restricted share units carry generally the same terms and vesting requirements as share settled restricted share
units except that they are settled in cash upon vesting and therefore, are classified as liabilities. The fair value of outstanding
cash-settled restricted share units as of March 31, 2011, and 2010 was $1,214 and $340, respectively. The fair value of each
cash-settled restricted share unit is revalued at each reporting date and the related liability and expense are adjusted
appropriately.
As of March 31, 2011, there was $8,428 of total unrecognized compensation cost related to non-vested share-based
compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average
period of 1.97 years.
16. FINANCIAL AND OTHER GUARANTEES
We generally offer a limited one-year parts and labor warranty on our capital equipment. The specific terms and conditions
of those warranties vary depending on the product sold and the country where we conduct business. We record a liability for the
estimated cost of product warranties at the time product revenue is recognized. The amounts we expect to incur on behalf of our
Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying
Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed
units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the
adequacy of our recorded warranty liabilities and adjust the recorded amounts as necessary.
Changes in our warranty liability during the periods presented are as follows:
Years Ended March 31,
Balance, Beginning of Year
Warranties issued during the period
Settlements made during the period
Balance, End of Year
2011
2010
2009
$
$
6,070
11,185
(9,746)
7,509
$
$
7,573
8,706
(10,209)
6,070
$
$
7,825
11,152
(11,404)
7,573
We also sell product maintenance contracts to our Customers. These contracts range in terms from one to five years and
require us to maintain and repair the product over the maintenance contract term. We initially record amounts due from
Customers under these contracts as a liability for deferred service contract revenue on the accompanying Consolidated Balance
Sheets. The liability recorded for deferred service revenue was $17,551 and $17,709 as of March 31, 2011 and 2010,
respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service
revenue on the accompanying Consolidated Statements of Income. The activity related to the liability for deferred service
revenue has been excluded from the table presented above.
17. FORWARD AND SWAP CONTRACTS
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from
transactions denominated in foreign currencies, including inter-company transactions. We also enter into commodity swap
contracts to hedge price changes in commodities that impact raw materials included in our cost of revenues. We do not use
92
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not
receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the
Consolidated Statements of Income.
Balance Sheet Location
Prepaid & Other
Accrued expenses and other
Asset Derivatives
Liability Derivatives
Fair Value
at March 31, 2011
Fair Value
at March 31, 2010
Fair Value
at March 31, 2011
Fair Value
at March 31, 2010
$
$
1,483
—
$
$
992
—
$
$
—
41
$
$
—
—
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of
Income.
Amount of gain (loss)
recognized in income
Years ended March 31,
Foreign currency forward contracts
Selling, general and administrative
Commodity swap contracts
Cost of Revenues
Location of gain (loss)
recognized in income
2011
2010
2009
$
$
1,696
306
$
$
541
826
$
$
(2,064)
—
18. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We estimate the fair value of financial instruments
using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are
classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own
assumptions. The following table shows our financial assets and liabilities accounted for at fair value on a recurring basis at
March 31, 2011:
Assets:
Cash and cash equivalents
Forward and swap contracts (1)
Investments (2)
Liabilities:
Forward and swap contracts (1)
Deferred compensation plans (2)
Fair Value Measurements at March 31, 2011
March 31,
2011
Quoted Prices
in Active Markets
for Identical Assets
Significant Other
Observable Inputs
Level 1
Level 2
Significant
Unobservable
Inputs
Level 3
$
$
193,016
1,483
2,493
41
2,493
$
$
193,016
—
2,493
—
2,493
$
$
$
$
—
1,483
—
41
—
—
—
—
—
—
(1)
(2)
The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the
amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
We provide a domestic non-qualified deferred compensation plan covering certain employees, which allows for the
deferral of compensation for an employee-specified term or until retirement or termination. Amounts deferred can be
allocated to various hypothetical investment options. We hold investments to satisfy the future obligations of the plan.
Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying
investments. Employees making deferrals are entitled to receive distributions of their hypothetical account balances
(amounts deferred, together with earnings (losses)).
93
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
19. SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the financial statements were filed with the SEC. Based upon this
evaluation, we have determined that no material subsequent events occurred that require recognition in the financial statements.
In May 2011 we acquired the stock of a privately held company with operations located near Sao Paulo, Brazil for
approximately $30 million, including contingent consideration. The company designs and manufactures small, medium and
large sterilizers used by public hospitals, clinics, dental offices and industrial companies (e.g., research laboratories and
pharmaceutical research and production companies).
94
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
20. QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
Fiscal 2011 (1)
Revenues:
Product
Service
Total Revenues
Cost of Revenues:
Product
Service
Total Cost of Revenues
Gross Profit
Percentage of Revenues
Restructuring Expenses
Net Income
Basic Income Per Common Share:
Net income
Diluted Income Per Common Share:
Net income
Fiscal 2010
Revenues:
Product
Service
Total Revenues
Cost of Revenues:
Product
Service
Total Cost of Revenues
Gross Profit
Percentage of Revenues
Restructuring Expenses
Net Income
Basic Income Per Common Share:
Net income
Diluted Income Per Common Share:
Net income
March 31,
December 31,
September 30,
June 30,
$ 256,852
120,908
377,760
$ 212,622
115,661
328,283
$ 197,092
115,333
312,425
$
77,272
111,708
188,980
153,770
67,963
221,733
156,027
41.3%
779
39,000
0.66
0.65
$
$
$
123,381
67,888
191,269
137,014
41.7%
(23)
21,765
0.37
0.36
$
$
$
110,736
66,634
177,370
135,055
43.2%
105
35,711
0.60
0.59
$
$
$
106,576
64,338
170,914
18,066
9.6%
341
(45,210)
(0.76)
(0.76)
$
$
$
$ 212,296
119,833
332,129
$ 214,072
113,760
327,832
$ 199,135
115,094
314,229
$ 173,500
110,043
283,543
122,428
67,493
189,921
142,208
42.8 %
5,161
29,835
0.50
0.50
$
$
$
122,324
66,025
188,349
139,483
42.5 %
14
41,006
0.70
0.69
$
$
$
115,958
65,616
181,574
132,655
42.2 %
(115)
32,084
0.55
0.54
$
$
$
94,277
64,430
158,707
124,836
44.0 %
(211)
25,542
0.44
0.43
$
$
$
(1)
The fiscal 2011 quarter ended June 30 includes the impact of the SYSTEM 1 Rebate Program as a $102,313 reduction
in product revenues and a $7,691 increase in product cost of revenues. The fiscal 2011 quarter ended December 31 includes the
impact of the proposed class action settlement as a $19,796 increase in selling, general and administrative expenses.
95
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Description
(in thousands)
Year ended March 31, 2011
Deducted from asset accounts:
Allowance for trade accounts
receivable(1)
Inventory valuation reserve
Deferred tax asset valuation
allowance
Recorded within liabilities:
Casualty loss reserves
Accrued SYSTEM 1 Rebate
Program and proposed class action
settlement
Year ended March 31, 2010
Deducted from asset accounts:
Allowance for trade accounts
receivable(1)
Inventory valuation reserve
Deferred tax asset valuation
allowance
Recorded within liabilities:
Casualty loss reserves
Year ended March 31, 2009
Deducted from asset accounts:
Allowance for trade accounts
receivable(1)
Inventory valuation reserve
Deferred tax asset valuation
allowance
Recorded within liabilities:
Casualty loss reserves
Balance at
Beginning
of Period
Charges
to Costs
and
Expenses
Charges
to Other
Accounts
Deductions
Balance at
End of
Period
$
$
9,238
10,557
2,016
(638)
(2)
9,880
970
$
13,130
$
2,952
—
129,800
(5)
$
$
10,728
15,025
948
(5,205)
(2)
9,957
$
15,277
$
741
753
$
$
9,396
12,940
8,998
(2)
6,982
3,433
4,103
$
16,400
$
2,555
$
$
$
$
$
$
25
203
(3)
(3)
$
(4)
$
(2,195)
—
(1,669)
9,084
10,122
11,421
$
(3,045)
$
13,037
(2,117)
127,683
101
737
(3)
(3)
$
(2,539)
—
(4)
$
(892)
9,238
10,557
9,881
$
(2,900)
$
13,130
2,240
—
—
75
—
(4)
$
(242)
(1,348)
(3)
(3)
$
(1,602)
(5,408)
—
(1,542)
10,728
15,025
9,957
—
$
(3,678)
$
15,277
(1)
(2)
(3)
(4)
(5)
Net allowance for doubtful accounts and allowance for sales and returns.
Provision for excess and obsolete inventory, net of inventory written off.
Change in foreign currency exchange, international subsidiaries.
Uncollectible accounts written off, net of recoveries.
Charges were classified as follows: $102,313 as a reduction of revenues, $7,691 as cost of revenues, and $19,796 as
selling, general and administrative expenses.
96
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), has
evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e), as of the end of the period covered by this report. Based on this evaluation, the PEO and PFO have determined that, as of
the end of the period covered by this report, our disclosure controls and procedures were effective.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in the Exchange Act Rules 13a-15(f) and 15(d)-15(f). Under the supervision and with the participation of
management, including the PEO and PFO, we conducted an evaluation of the effectiveness of internal control over financial
reporting as of March 31, 2011 based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation under this framework,
management concluded that the internal control over financial reporting was effective as of March 31, 2011.
The effectiveness of our internal controls over financial reporting as of March 31, 2011 has been audited by our
independent registered public accounting firm, Ernst & Young LLP. The Report of Management and the Report of Independent
Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROLS
During the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
97
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
This Annual Report on Form 10-K incorporates by reference the information appearing under the caption “Nominees for
Election as Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board Meetings and Committees” and
“Shareholder Nominations of Directors and Nominee Criteria” of our definitive proxy statement to be filed with the SEC in
connection with our 2011 Annual Meeting of Shareholders (the “Proxy Statement”).
Our executive officers serve for a term of one year from the date of election to the next organizational meeting of the
Board of Directors and until their respective successors are elected and qualified, except in the case of death, resignation, or
removal. Information concerning our executive officers is contained in Item 4 of Part I of this Annual Report. We have adopted
a code of ethics, our Code of Business Conduct for Employees that applies to our PEO and PFO and Principal Accounting
Officer as well as all our other employees. We have also adopted a code of ethics, our Director Code of Ethics, which applies to
the members of the Company’s Board of Directors, including our PEO. Our Code of Business Conduct for Employees and the
Director Code of Ethics can be found on our Investor Relations website at www.steris-ir.com. Any amendments or waivers of
either of these codes will be made available on this website.
ITEM 11. EXECUTIVE COMPENSATION
This Annual Report on Form 10-K incorporates by reference the information appearing beginning under the captions
“Executive Compensation,” “Non-Employee Director Compensation” and “Miscellaneous Matters” of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This Annual Report on Form 10-K incorporates by reference the information appearing under the captions “Ownership of
Voting Securities” and "Summary of Equity Compensation Plans" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
This Annual Report on Form 10-K incorporates by reference the information appearing beginning under the captions
“Governance Generally,” “Board Meetings and Committees” and “Miscellaneous Matters” of the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This Annual Report on Form 10-K incorporates by reference the information relating to principal accounting fees and
services appearing under the caption “Independent Registered Public Accounting Firm” of the Proxy Statement.
98
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) The following consolidated financial statements of STERIS Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheets – March 31, 2011 and 2010.
Consolidated Statements of Income – Years ended March 31, 2011, 2010, and 2009.
Consolidated Statements of Cash Flows – Years ended March 31, 2011, 2010, and 2009.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2011, 2010, and 2009.
Notes to Consolidated Financial Statements.
(a) (2) The following consolidated financial statement schedule of STERIS Corporation and subsidiaries is included in Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required
under the related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) Exhibits
Exhibit
Number
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Exhibit Description
1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996,
November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal
year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by
reference).
Amended and Restated Regulations of STERIS Corporation, as amended on July 26, 2007 (filed
as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 2007 (Commission File No.
1-14643), and incorporated herein by reference).
Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the
fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by
reference).
Amended and Restated Non-Qualified Stock Option Plan (filed as Exhibit 10.1 to Form 10-K
filed for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated
herein by reference).*
STERIS Corporation 1994 Equity Compensation Plan (filed as Exhibit 10.2 to Form 10-K filed
for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated
herein by reference).*
STERIS Corporation 1994 Nonemployee Directors Equity Compensation Plan (filed as Exhibit
10.3 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed
as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File
No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal
year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).*
STERIS Corporation 1998 Long-Term Incentive Stock Plan (filed as Exhibit 10.8 to Form 10-K
for fiscal year ended March 31, 1999 (Commission File No. 1-14643), and incorporated herein
by reference).*
99
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal
year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).*
STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K
filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
Amendment No. 1 to STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as
Exhibit 10.11 to Form 10-K for the fiscal year ended March 31, 2007 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.3
to Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by
reference).*
STERIS Corporation Form of Restricted Stock Agreement for Directors (filed as Exhibit 10.5 to
Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by
reference).*
STERIS Corporation Form of Restricted Stock Unit Agreement for Employees (filed as Exhibit
10.5 to Form 10-Q filed for the fiscal quarter ended September 30, 2007 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.7 to Form 10-Q filed for the fiscal quarter ended September 30, 2006 (Commission
File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors
(filed as Exhibit 10.8 to Form 10-Q filed for the fiscal quarter ended September 30, 2006
(Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643),
and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Nonemployee Directors (filed as
Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.3 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors
(filed as Exhibit 10.4 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission
File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q filed for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643),
and incorporated herein by reference).*
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended June 30, 2009 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees*.
STERIS Corporation Form of Restricted Stock Agreement for Employees*.
STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K
filed September 1, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated
Effective January 1, 2009) (filed as Exhibit 10.1 to Form 10-Q filed for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
Amended and Restated Adoption Agreement related to STERIS Corporation Deferred
Compensation Plan (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
100
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
STERIS Corporation Incentive Compensation Plan (filed as Exhibit 10.1 to Form 8-K filed May
7, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Senior Executive Management Incentive Compensation Plan, as Amended
and Restated Effective April 1, 2010 (filed as Appendix A to Schedule 14A (Definitive Proxy
Statement) filed June 8, 2010 (Commission File No. 1-14643), and incorporated herein by
reference).*
Form of Change of Control Agreement between STERIS Corporation and certain executive
officers of STERIS Corporation other than Mr. Walter M Rosebrough, Jr. (filed as Exhibit 10.2 to
Form 10-Q filed for the quarter ended June 30, 1999 (Commission File No. 1-14643), and
incorporated herein by reference).*
Employment Agreement dated September 7, 2007 between STERIS Corporation and Mr.
Rosebrough (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended September 30, 2007
(Commission File No. 1-14643), and incorporated herein by reference).*
Agreement dated September 7, 2007 between STERIS Corporation and Mr. Rosebrough (filed as
Exhibit 10.4 to Form 10-Q for the fiscal quarter ended September 30, 2007 (Commission File
No. 1-14643), and incorporated herein by reference).*
Executive Retention Agreement dated April 1, 2010 between STERIS Corporation and Dr. Peter
Burke (filed as Exhibit 10.1 to Form10-Q filed for the fiscal quarter ended June 30, 2010
(Commission File No. 1-14643), and incorporated herein by reference). *
Form of Indemnification Agreement between STERIS Corporation and each of its directors and
executive officers (filed as Exhbit 10.31 to Form 10-K for the fiscal year ended March 31, 2010
(Commission File No. 1-14643), and incorporated herein by reference).
Agreement dated as of April 23, 2008 by and among STERIS Corporation, Richard C. Breeden,
Robert H. Fields, and the Breeden Investors identified therein (filed as Exhibit 10.1 to Form 8-K
filed April 24, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
Second Amended and Restated Credit Agreement, dated September 13, 2007, among STERIS
Corporation, KeyBank National Association, as agent for the lenders from time to time party
thereto, and such lenders (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
September 30, 2007 (Commission File No. 1-14643), and incorporated herein by reference).
Form of Note Purchase Agreements, dated December 17, 2003, between STERIS Corporation
and certain institutional investors (filed as Exhibit 10.3 to Form 10-Q filed for the fiscal quarter
ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).
First Amendment dated as of August 15, 2008 to Note Purchase Agreements dated as of
December 17, 2003 between STERIS Corporation and certain institutional investors (filed as
Exhibit 10.1 to Form 10-Q filed for the fiscal quarter ended September 30, 2008 (Commission
File No. 1-14643), and incorporated herein by reference).
Subsidiary Guaranty dated December 17, 2003, by certain subsidiaries of STERIS Corporation
(filed as Exhibit 10.4 to Form 10-Q filed for the fiscal quarter ended December 31, 2003
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated March 29, 2004, by SterilTek Holdings, Inc. and STERIS
Corporation (filed as Exhibit 10.16 to Form 10-K for the fiscal year ended March 31, 2004
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated January 7, 2005, by STERIS Isomedix Services, Inc. and STERIS
Corporation (filed as Exhibit 10.20 to Form 10-K for the fiscal year ended March 31, 2005
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated September 25, 2007, by HSTD LLC and STERIS Corporation filed
as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2007 (Commission File
No. 1-14643), and incorporated herein by reference).
10.42
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation.
101
10.43
10.44
Form of Note Purchase Agreements dated as of August 15, 2008, between STERIS Corporation
and certain institutional investors (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter
ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by
reference).
Subsidiary Guaranty dated as of August 15, 2008, by certain subsidiaries of STERIS Corporation
(filed as Exhibit 10.3 to Form 10-Q filed for the fiscal quarter ended September 30, 2008
(Commission File No. 1-14643), and incorporated herein by reference).
10.45
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation.
21.1
23.1
24.1
31.1
31.2
32.1
Subsidiaries of STERIS Corporation
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a)
Certification of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a)
Certification of the Principal Executive Officer and the Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* A management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
STERIS or its subsidiaries are parties to indentures relating to long-term debt instruments, which, individually or in
the aggregate, do not exceed 10% of the total assets of STERIS and its subsidiaries on a consolidated basis. STERIS will
furnish a copy of any such indenture to the SEC upon request.
(b) Exhibits
The response to this portion of Item 15 is included under (a) (3) of this Item 15.
(c) Financial Statement Schedules
Not applicable.
102
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
SIGNATURES
Date: May 27, 2011
STERIS CORPORATION
(Registrant)
/S/ MICHAEL J. TOKICH
By:
Michael J. Tokich
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE
TITLE
DATE
/S/ WALTER M ROSEBROUGH, JR.
President, Chief Executive Officer and Director
May 27, 2011
Walter M Rosebrough, Jr.
/S/ MICHAEL J. TOKICH
Senior Vice President and Chief Financial Officer
May 27, 2011
Michael J. Tokich
*
John P. Wareham
*
Richard C. Breeden
*
Cynthia L. Feldmann
*
David B. Lewis
*
Jacqueline B. Kosecoff
*
Kevin M. McMullen
*
Mohsen M. Sohi
*
Loyal W. Wilson
*
Michael B. Wood
Chairman and Director
Director
Director
Director
Director
Director
Director
Director
Director
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
May 27, 2011
*
The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the
Powers of Attorney executed by the above-named directors of the Registrant and filed with the Securities and Exchange
Commission on behalf of such directors.
Date: May 27, 2011
By:
/s/ MARK D. MCGINLEY
Mark D. McGinley,
Attorney-in-Fact for Directors
103
EXHIBIT INDEX
(a)
Exhibit
Number
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Exhibit Description
1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996,
November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal
year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by
reference).
Amended and Restated Regulations of STERIS Corporation, as amended on July 26, 2007 (filed
as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 2007 (Commission File No.
1-14643), and incorporated herein by reference).
Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the
fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by
reference).
Amended and Restated Non-Qualified Stock Option Plan (filed as Exhibit 10.1 to Form 10-K
filed for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated
herein by reference).
STERIS Corporation 1994 Equity Compensation Plan (filed as Exhibit 10.2 to Form 10-K filed
for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated
herein by reference).
STERIS Corporation 1994 Nonemployee Directors Equity Compensation Plan (filed as Exhibit
10.3 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed
as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File
No. 1-14643), and incorporated herein by reference).
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal
year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).
STERIS Corporation 1998 Long-Term Incentive Stock Plan (filed as Exhibit 10.8 to Form 10-K
for fiscal year ended March 31, 1999 (Commission File No. 1-14643), and incorporated herein
by reference).
STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal
year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).
STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K
filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).
Amendment No. 1 to STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as
Exhibit 10.11 to Form 10-K for the fiscal year ended March 31, 2007 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.3
to Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by
reference).
STERIS Corporation Form of Restricted Stock Agreement for Directors (filed as Exhibit 10.5 to
Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by
reference).
STERIS Corporation Form of Restricted Stock Unit Agreement for Employees (filed as Exhibit
10.5 to Form 10-Q filed for the fiscal quarter ended September 30, 2007 (Commission File No.
1-14643), and incorporated herein by reference).
104
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.7 to Form 10-Q filed for the fiscal quarter ended September 30, 2006 (Commission
File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors
(filed as Exhibit 10.8 to Form 10-Q filed for the fiscal quarter ended September 30, 2006
(Commission File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643),
and incorporated herein by reference).
STERIS Corporation Form of Restricted Stock Agreement for Nonemployee Directors (filed as
Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.3 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors
(filed as Exhibit 10.4 to Form 10-Q filed for the fiscal quarter ended June 30, 2008 (Commission
File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q filed for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643),
and incorporated herein by reference).
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended June 30, 2009 (Commission File No.
1-14643), and incorporated herein by reference).
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees.
STERIS Corporation Form of Restricted Stock Agreement for Employees.
STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K
filed September 1, 2006 (Commission File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated
Effective January 1, 2009) (filed as Exhibit 10.1 to Form 10-Q filed for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
Amended and Restated Adoption Agreement related to STERIS Corporation Deferred
Compensation Plan (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Incentive Compensation Plan (filed as Exhibit 10.1 to Form 8-K filed May
7, 2009 (Commission File No. 1-14643), and incorporated herein by reference).
STERIS Corporation Senior Executive Management Incentive Compensation Plan, as Amended
and Restated Effective April 1, 2010 (filed as Appendix A to Schedule 14A (Definitive Proxy
Statement) filed June 8, 2010 (Commission File No. 1-14643), and incorporated herein by
reference).
Form of Change of Control Agreement between STERIS Corporation and certain executive
officers of STERIS Corporation other than Mr. Walter M Rosebrough, Jr. (filed as Exhibit 10.2 to
Form 10-Q filed for the quarter ended June 30, 1999 (Commission File No. 1-14643), and
incorporated herein by reference).
Employment Agreement dated September 7, 2007 between STERIS Corporation and Mr.
Rosebrough (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended September 30, 2007
(Commission File No. 1-14643), and incorporated herein by reference).
Agreement dated September 7, 2007 between STERIS Corporation and Mr. Rosebrough (filed as
Exhibit 10.4 to Form 10-Q for the fiscal quarter ended September 30, 2007 (Commission File
No. 1-14643), and incorporated herein by reference).
105
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
Executive Retention Agreement dated April 1, 2010 between STERIS Corporation and Dr. Peter
Burke (filed as Exhibit 10.1 to Form10-Q filed for the fiscal quarter ended June 30, 2010
(Commission File No. 1-14643), and incorporated herein by reference).
Form of Indemnification Agreement between STERIS Corporation and each of its directors and
executive officers (filed as Exhbit 10.31 to Form 10-K for the fiscal year ended March 31, 2010
(Commision File No. 1-14643), and incorporated herin by reference).
Agreement dated as of April 23, 2008 by and among STERIS Corporation, Richard C. Breeden,
Robert H. Fields, and the Breeden Investors identified therein (filed as Exhibit 10.1 to Form 8-K
filed April 24, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
Second Amended and Restated Credit Agreement, dated September 13, 2007, among STERIS
Corporation, KeyBank National Association, as agent for the lenders from time to time party
thereto, and such lenders (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
September 30, 2007 (Commission File No. 1-14643), and incorporated herein by reference).
Form of Note Purchase Agreements, dated December 17, 2003, between STERIS Corporation
and certain institutional investors (filed as Exhibit 10.3 to Form 10-Q filed for the fiscal quarter
ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).
First Amendment dated as of August 15, 2008 to Note Purchase Agreements dated as of
December 17, 2003 between STERIS Corporation and certain institutional investors (filed as
Exhibit 10.1 to Form 10-Q filed for the fiscal quarter ended September 30, 2008 (Commission
File No. 1-14643), and incorporated herein by reference).
Subsidiary Guaranty dated December 17, 2003, by certain subsidiaries of STERIS Corporation
(filed as Exhibit 10.4 to Form 10-Q filed for the fiscal quarter ended December 31, 2003
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated March 29, 2004, by SterilTek Holdings, Inc. and STERIS
Corporation (filed as Exhibit 10.16 to Form 10-K for the fiscal year ended March 31, 2004
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated January 7, 2005, by STERIS Isomedix Services, Inc. and STERIS
Corporation (filed as Exhibit 10.20 to Form 10-K for the fiscal year ended March 31, 2005
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated September 25, 2007, by HSTD LLC and STERIS Corporation filed
as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2007 (Commission File
No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation.
Form of Note Purchase Agreements dated as of August 15, 2008, between STERIS Corporation
and certain institutional investors (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter
ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by
reference).
Subsidiary Guaranty dated as of August 15, 2008, by certain subsidiaries of STERIS Corporation
(filed as Exhibit 10.3 to Form 10-Q filed for the fiscal quarter ended September 30, 2008
(Commission File No. 1-14643), and incorporated herein by reference).
10.45
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation.
21.1
23.1
24.1
31.1
31.2
32.1
Subsidiaries of STERIS Corporation
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of the Principal executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a)
Certification of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a)
Certification of the Principal Executive Officer and the Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
106
Subsidiaries of STERIS Corporation
STERIS Corporation has no parent company. As of March 31, 2011, its direct and indirect subsidiaries(1) were as follows:
Exhibit 21.1
Albert Browne Limited
American Sterilizer Company
CLBV Limited
Global Risk Insurance Company
Hausted, Inc.
HSTD LLC
HTD Holding Corp.
Isomedix Corporation
Isomedix Inc.
Isomedix Operations Inc.
SB Servicos Administrativos Ltda.
PeriOptimum, Inc.
SterilTek Holdings, Inc.
SterilTek, Inc.
STERIS
STERIS AB
STERIS Asia Pacific, Inc.
STERIS-Austar Pharmaceutical Systems Hong Kong Limited
STERIS-Austar Pharmaceutical Systems (Shanghai) Limited
STERIS (Barbados) Corp.
STERIS Brasil Servicos Administrativos Ltda.
STERIS (BVI) I Limited
STERIS Brazil Holdings, LLC
STERIS Canada Corporation
STERIS Canada Inc.
STERIS CH Limited
STERIS China Holdings Limited
STERIS Corporation de Costa Rica, S.A.
STERIS Deutschland GmbH
STERIS Enterprises LLC
STERIS Europe, Inc.
STERIS GmbH
STERIS Holdings B.V.
STERIS Iberia, S.A.
STERIS Inc.
STERIS (India) Private Limited
STERIS Isomedix Services, Inc.
STERIS Isomedix Puerto Rico, Inc.
STERIS Japan Inc.
STERIS Latin America, Inc.
STERIS Limited
107
United Kingdom
Pennsylvania
United Kingdom
Vermont
Delaware
Delaware
Delaware
Canada
Delaware
Delaware
Brazil
Delaware
Delaware
Nevada
France
Sweden
Delaware
Hong Kong
China
Barbados
Brazil
British Virgin Islands
Delaware
Canada
Canada
United Kingdom
Hong Kong
Costa Rica
Germany
Russia
Delaware
Switzerland
Netherlands
Spain
Delaware
India
Delaware
Puerto Rico
Japan
Delaware
United Kingdom
STERIS Mauritius Limited
STERIS Mexico, S. de R.L. de C.V.
STERIS Personnel Services, Inc.
STERIS Personnel Services Mexico, S.de RL.de C.V.
STERIS SA
STERIS SEA Sdn. Bhd. (Malaysia)
STERIS (Shanghai) Trading Co. Ltd.
STERIS Singapore Pte. Ltd.
STERIS S.r.l.
STERIS Surgical Technologies
STERIS Surgical Technologies Holdings
Strategic Technology Enterprises, Inc.
Republic of Mauritius
Mexico
Delaware
Mexico
Belgium
Malaysia
China
Singapore
Italy
France
France
Delaware
(1) The names of one or more subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute at the end of fiscal
2011 a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X have been excluded.
108
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference of our reports dated May 27, 2011, with respect to the consolidated financial
statements and schedule of STERIS Corporation and subsidiaries, and the effectiveness of internal control over financial reporting
of STERIS Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended March 31, 2011 in the
following Registration Statements and in the related Prospectuses:
Registration
Number
Description
333-65155
Form S-8 Registration Statement - STERIS Corporation 1998 Long-Term Incentive
Compensation Plan
333-32005
Form S-8 Registration Statement - STERIS Corporation 1997 Stock Option Plan
333-06529
Form S-3 Registration Statement - STERIS Corporation
333-01610
Post-effective Amendment to Form S-4 on Form S-8 - STERIS Corporation
33-55976
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
333-09733
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
333-101308
Form S-8 Registration Statement - STERIS Corporation 2002 Stock Option Plan
333-137167
Form S-8 Registration Statement - STERIS Corporation Deferred Compensation Plan
333-136239
Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan
333-170884
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
Cleveland, Ohio
May 27, 2011
/S/ ERNST & YOUNG LLP
109
Certification of the Principal Executive Officer
I, Walter M Rosebrough, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of STERIS Corporation;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c.
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize,
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: May 27, 2011
/s/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and
Chief Executive Officer
110
Certification of the Principal Financial Officer
I, Michael J. Tokich, certify that:
1.
I have reviewed this annual report on Form 10-K of STERIS Corporation;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c.
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize,
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: May 27, 2011
/s/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President and
Chief Financial Officer
111
Exhibit 32.1
Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the
filing of the Form 10-K of STERIS Corporation (the “Company”) for the fiscal year ended March 31, 2011, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company
certifies, that, to such officer's knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of the dates and for the periods expressed in the Report.
/s/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
/s/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President and Chief Financial Officer
Name:
Title:
Name:
Title:
Date: May 27, 2011
112
[THIS PAGE INTENTIONALLY LEFT BLANK]
113
This Page is Not Part of STERIS’s Form 10-K Filing
Performance Graph. The following graph shows the cumulative performance for our common shares over the
last five years as of March 31 of each year compared with the performance of the Standard & Poor’s 500 Index and
the Dow Jones U.S. Medical Supplies Index as of the same date. The graph assumes $100 invested as of March 31,
2006 in our common shares and in each of the named indices. The past performance shown in this graph does not
necessarily guarantee future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among STERIS Corporation, the S&P 500 Index
and the Dow Jones US Medical Supplies Index
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
3/06
3/07
3/08
3/09
3/10
3/11
STERIS Corporation
S&P 500
Dow Jones US Medical Supplies
*$100 invested on 3/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2011 Dow Jones & Co. All rights reserved.
STERIS Corporation
S&P 500
Dow Jones US Medical Supplies
100.00
100.00
100.00
108.41
111.83
122.63
110.48
106.15
132.65
96.76
65.72
105.71
150.96
98.43
137.78
157.61
113.83
150.42
3/06
3/07
3/08
3/09
3/10
3/11
Corporate Information
EXECUTIVE OFFICERS
William L. Aamoth
Vice President and
Corporate Treasurer
Peter A. Burke
Senior Vice President and
Chief Technology Officer
Timothy L. Chapman
Senior Vice President and
Group President, Healthcare
Mark D. McGinley
Senior Vice President,
General Counsel and Secretary
Robert E. Moss
Senior Vice President and
Group President,
STERIS Isomedix Services
and Life Sciences
Walter M Rosebrough, Jr.
President and Chief Executive Officer
Michael J. Tokich
Senior Vice President and
Chief Financial Officer
EXECUTIVE OFFICES
5960 Heisley Road
Mentor, OH 44060-1834 USA
440-354-2600
www.steris.com
ANNUAL REPORT
Included in this Annual Report is a copy of
STERIS Corporation’s Form 10-K filed with the
Securities and Exchange Commission for the year
ended March 31, 2011. Additional copies of the
Company’s Form 10-K and other information
are available at www.steris-ir.com or upon
written request to:
Julie Winter
Director, Investor Relations
STERIS Corporation
5960 Heisley Road
Mentor, OH 44060-1834 USA
TRANSFER AGENT AND
REGISTRAR
ComputerShare
P.O. Box 43078
Providence, RI 02940
800-622-6757
www.computershare.com/investor
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Suite 1300
925 Euclid Avenue
Cleveland, OH 44115-1476
STOCK EXCHANGE LISTING
STERIS common stock is listed on the New York
Stock Exchange under the symbol STE.
ANNUAL MEETING OF
SHAREHOLDERS
The Company’s 2011 annual meeting will be held
on Thursday, July 28, 2011, at 9:00 a.m. Eastern
time at its Executive Offices.
Portions of this Annual Report, other than the Form 10-K,
have not been filed with the SEC.
Product and service descriptions and financial information
herein are for illustration purposes only and do not modify
or alter product warranties, labeling, instructions, or other
technical literature, or the financial information contained in
the Form 10-K.
BOARD OF DIRECTORS
John P. Wareham1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. Breeden1
Chairman and Chief Executive Officer,
Breeden Capital Management LLC;
Chairman, Richard C. Breeden & Co., LLC
Cynthia L. Feldmann2
President and Founder,
Jetty Lane Associates
Jacqueline B. Kosecoff, Ph.D.3
Chief Executive Officer,
Prescription Solutions,
UnitedHealth Group
David B. Lewis2
Former Chairman, Lewis & Munday
Kevin M. McMullen1
Chairman of the Board,
Chief Executive Officer and
President, OMNOVA Solutions Inc.
Walter M Rosebrough, Jr.3
President and Chief Executive Officer,
STERIS Corporation
Mohsen M. Sohi, D.Sc.3
Managing Partner,
Freudenberg & Co.
Loyal W. Wilson2
Managing Director,
Primus Capital Partners, Inc.,
Managing Partner,
Primus Venture Partners, L.P.
Michael B. Wood, M.D.3
Retired President and CEO,
Mayo Clinic Foundation
1 Compensation and Corporate
Governance Committee Member
2 Audit and Financial Policy
Committee Member
3 Compliance Committee Member
62012_AR_2011_Cvr.indd 3
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Document #ANNRPT11.2011-05, Rev. A
©2011 STERIS Corporation.
All rights reserved.
62012_AR_2011_Cvr.indd 4
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