FISCAL
2012
A N N U A L R E P O R T
Document #ANNRPT12.2012-05, Rev. A
©2012 STERIS Corporation.
All rights reserved.
Corporate Information
BOARD OF DIRECTORS
John P. Wareham 1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. Breeden 2, 4
Chairman and Chief Executive Officer,
Breeden Capital Management LLC;
Chairman, Richard C. Breeden & Co., LLC
Cynthia L. Feldmann 2
Formerly President and Founder,
Jetty Lane Associates
Jacqueline B. Kosecoff, Ph.D. 3, 4
Managing Partner,
Moriah Partners, LLC
David B. Lewis 2, 4
Partner and Former Chairman,
Lewis & Munday
Kevin M. McMullen 1
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, 4
Managing Partner,
Freudenberg and Co.
Loyal W. Wilson 1, 2
Managing Director,
Primus Capital Partners, Inc.,
Managing Partner,
Primus Venture Partners, L.P.
Michael B. Wood, M.D. 1, 3
Retired President and CEO,
Mayo Clinic Foundation
1 Compensation Committee Member
2 Audit Committee Member
3 Compliance Committee Member
4 Nominating and Governance
Committee Member
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, 2012. 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 2012 annual meeting will
be held on Thursday, July 26, 2012,
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.
Dear Fellow Shareholders,
Heading into fiscal 2012, we told you that we anticipated growth in both revenue and earnings. While we are pleased
with a 6% increase in our top line, we experienced some unanticipated events that challenged our bottom line. These
challenges included an extension of the SYSTEM 1® transition, unanticipated expenses related to SYSTEM 1E® uptime
reliability, and continued global economic challenges, particularly in Europe. Even though we did not grow our profit, we
are pleased with what we have accomplished in the face of such significant challenges.
More specifically, we were able to deliver top-line growth in each major STERIS business line in fiscal 2012, with the
exception of our Healthcare consumables which were impacted by the continued decline in SYSTEM 1 S20 sterilant.
Our Healthcare segment grew revenue 6% for the year. Excluding SYSTEM 1E, Healthcare capital equipment revenue
grew 7%, driven by the success of several major product families, including V-PRO®, Integrated Operating Rooms and
LED lights. Our new products reaffirm our hundred-year-old reputation as a technology leader in our business. This
allows greater margins as Customers find value in our more effective, more efficient, higher capacity and greener
offerings. Outside of SYSTEM 1 and 1E consumables, our Healthcare consumables franchise grew low-single digits,
with continued strength in Prolystica® Chemistries, VHP® consumables related to our growing installed base of V-PRO
sterilizers, and our sterility assurance products.
Our Life Sciences segment had a very solid year in 2012, growing revenue 5%. We started the year anticipating that our
capital equipment business would remain flat. Not only did Life Sciences capital revenue grow 6%, but the profitability
of Life Sciences in total improved over 300 basis points, even with a significant mix shift towards capital which
generally has lower margins. In addition, our Life Sciences consumables franchise delivered another year of high-single
digit growth.
And our Isomedix segment revenue grew a solid 8%, as we have continued to invest in this business by adding capacity
to meet Customer demand. During fiscal 2012, we began expanding a gamma facility in the Northeast which we will
complete in the next few months, and we will be adding additional capacity in the Southwest in fiscal 2013 as well.
Two months ago, we bought Biotest, a contract laboratory which provides validation services to our medical device
and pharma Customers. It is a natural extension of our Isomedix segment, and we are excited about the opportunity to
expand our business.
During fiscal 2011, we decided to make several strategic investments which impacted our profitability during fiscal
2012, but we anticipate will strengthen the business over the long-term. In addition, we have seen continued impact on
our margins from the SYSTEM 1 transition, in particular the decline in S20 sterilant. As a result of those factors, fiscal
2012 adjusted operating profit margins declined to 15% of revenue, and adjusted earnings per share were $2.16,
a slight decline from the prior year.
During the last fiscal year we have improved our working capital performance, ending the year with a strong balance
sheet and improved free cash flow. We have returned value to our shareholders by increasing our quarterly dividend
during fiscal 2012 to $0.17 per share, representing the sixth year in a row of double-digit percentage increases in our
dividend payment. And, we also repurchased close to two million shares of STERIS stock during the fiscal year at a cost
of $56 million.
Moving Forward
Fiscal 2012 was a challenging year for us, and our people did a nice job meeting Customer needs. We anticipate that
fiscal 2013 will be a pivot year for the Company, as we complete the SYSTEM 1 transition in the U.S. this August,
and establish a new baseline of revenue and profitability from which we will grow in the future. Working through the SYSTEM 1 transition, from the warning letter in May of 2008 to the anticipated last shipment of S20 sterilant in the U.S. in August 2012, has taken longer and been more costly than we originally anticipated, and we have hit a few bumps in the road. At every turn, we have worked hard to do what is right by taking actions acceptable to the FDA and providing our Customers the most appropriate products and services to see them through a successful transition - even when it resulted in significant additional expense for STERIS. We believe this long-term view will pay off over time. At the same time we were working through the SYSTEM 1 transition, our business excluding SYSTEM 1 and 1E has performed very well. Beyond fiscal 2013, our long-term plans include goals we think we can reasonably achieve – mid- to high-single digit revenue growth through a combination of market growth, successful new product introductions and acquisitions. We expect to leverage that top line growth to deliver double-digit earnings per share growth. If we look back at what we have accomplished over the last four years, the results are significantly greater than these future earnings goals if we exclude the negative impact of the SYSTEM 1 transition. We have managed through a global recession, healthcare reform, and the significant reduction of one of our most profitable products; and do not expect to face that combination of obstacles in the foreseeable future. Even with all these issues included, we have still grown earnings per diluted share over 15% per year compounded the past four years, which lends credence to our goal of double-digit returns over the long-term. In the coming years, we expect to continue to manage our costs, grow our business with internal product development, invest in greater capacity, and augment these value-creating methods with acquisitions of adjacent products and services. We have a strong balance sheet and reliable free cash flow, and will use both to grow the business. One of the ways we plan to create value going forward is to in-source much of the production that we have traditionally out-sourced. We have come far enough with our Lean approach that we can utilize the capacity we have created to shorten the supply chain and produce many of our purchased components in-house. We expect to invest over $20 million in capital the next 18 months to do this, thus creating better quality, enhanced delivery capability, and lower costs. As we enter the final months of the SYSTEM 1 transition, I am pleased to be able to begin highlighting the good things happening in STERIS that may have been somewhat overshadowed these past four years. I continue to believe, as I have said since the day I arrived at our Company, that STERIS has its greatest opportunities in front of us. I am excited about our ability to refocus on those opportunities, and I am optimistic that the fruits of our efforts will translate into significant value creation for our Customers, our people, and our shareholders in the years to come. I appreciate the counsel of our Board of Directors, the dedication of our people, the leadership of our management team, and your ongoing support. It is a privilege to be allowed to lead our Company, and I am grateful for that honor. Until next year,Walt RosebroughPresident and Chief Executive OfficerJune 2012(Adjusted revenues, operating income and earnings per share for fiscal 2012 exclude the impact of the SYSTEM 1 Rebate Program liability and reversal, restructuring expenses from the Company’s ongoing efficiency efforts and an inventory write-down related to certain SYSTEM 1E components. Please refer to the reconciliation of adjusted results to GAAP results contained at the end of this annual report). 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, 2012
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, 2011: $1,539,707,782
The number of Common Shares outstanding as of May 18, 2012: 57,805,687
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2012 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
Item 1A
Item 1B
Item 2
Item 3
Item 4
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5
Item 6
Item 7
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
Part II
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
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
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
3
3
3
3
9
15
16
18
20
21
22
23
23
23
23
24
25
25
27
41
44
44
45
50
50
50
52
52
52
52
53
95
95
95
96
96
96
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98
103
PART 1
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 2012 ended on March 31, 2012.
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 1,000 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 a
network of 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, 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 2012, 2011, and 2010 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
3
Operations” (“MD&A”), of this Annual Report.
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. We utilize remote equipment monitoring technology to improve Customers’ equipment uptime 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, 2012, 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:
•
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,
4
decontaminate systems, and disinfect or sterilize hard surfaces.
• Vaporized Hydrogen Peroxide (“VHP”®) generators used to decontaminate many high value spaces, from small
isolators to large pharmaceutical processing and laboratory animal rooms.
• High-purity water equipment, which generates water for injection and pure steam.
•
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 components in pharmaceutical and industrial
manufacturing processes and in research labs, such as glassware, vessels, equipment parts, drums, hoses, and animal
cages.
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, 2012, 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 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, 2012, 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
5
problems in fiscal 2013. 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.
We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our
competitive position.
As of March 31, 2012, we held 297 United States patents and 699 foreign patents and had 62 United States patent
applications and 290 foreign patent applications 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, 2012, we had a total of 995 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, 2012, 2011, and 2010, research and development expenses were $36.0 million, $34.3 million, and $34.0 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 Harmony LED Lighting and Visualization
System brings surgical lighting, high definition images and surgeon comfort to a new level. Our V-PRO 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,”
and “Risk Factors, Compliance with the Consent Decree may be more costly and burdensome than anticipated.” and see also
6
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 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, 2012, 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, 2012, we employed approximately 1,150 direct field sales and service
representatives within the United States and approximately 350 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 46%, 22%, 19%, and 13%, respectively, of our total international revenues for the year ended March 31, 2012.
Also see note 12 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A”,
7
for a geographic presentation of our revenues for the three years ended March 31, 2012.
We conduct manufacturing in the United States, Canada, Mexico, Brazil and various European countries. International cost
of 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 2012, revenues were favorably
impacted by $6.1 million and income before taxes was unfavorably impacted by $0.8 million, or 0.4%, 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, 2012,
we had a backlog of $152.6 million. Of this amount, $102.5 million and $50.1 million related to our Healthcare and Life
Sciences segments, respectively. At March 31, 2011, we had backlog orders of $179.3 million. Of this amount $138.6 million
and $40.7 million related to our Healthcare and Life Sciences segments, respectively. We believe that the decline in Healthcare
backlog is more a matter of timing of orders than a reflection of current market trends. A significant portion of the backlog
orders at March 31, 2012, 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. The content on any website referred to in
this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
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.
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
58
63
50
55
67
58
43
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.
Mark D. McGinley serves as Senior Vice President, General Counsel, and Secretary. He assumed this role in April 2005.
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.
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,
8
Mr. Rosebrough served from February 2005 to September 2007 as President and Chief Executive Officer of Coastal
Hydraulics, Inc., a hydraulic and pneumatic systems company that he purchased in 2005 and he continues to serve as non-
executive Chairman. Previously, Mr. Rosebrough spent nearly 20 years in the healthcare industry in various roles as a senior
executive with Hill-Rom Holdings, Inc. (at the time, Hillenbrand Industries, Inc.), a worldwide provider of medical equipment
and related services, including President and CEO of Support Systems International and President and CEO of Hill-Rom.
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.
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.
The current financial crisis and general economic downturn in certain European countries may adversely affect our
business and financial condition.
The continuation or worsening of existing financial and economic conditions in Europe generally, and Southern Europe in
particular, may have adverse effects on our business and financial condition. As a result of these conditions, Customers,
including governmental entities or other entities that rely on government healthcare systems or government funding, in certain
European countries in which we operate may be unable to pay their obligations on a timely basis or to make payment in full.
In particular, there have been increased delays in collection of trade receivables due from Spanish hospitals, and to a lesser
degree Italian hospitals, that are directly or indirectly dependent upon government funding. Although we have been able to
collect most of these types of receivables, it may become necessary to increase reserves. In addition, there can be no assurance
that there will not be an increase in collection difficulties. Prospectively, additional adverse effects resulting from these
conditions may include decreased healthcare utilization, further pricing pressure on our products, and/or weaker overall
demand for our products and services, particularly capital products. Accounts receivable at March 31, 2012 related to
Customers in Spain and Italy were less than 8% of our total accounts receivable. We do not have noteworthy accounts
receivable balances related to Customers in Greece and Portugal. We continue to monitor conditions and the creditworthiness
of our Customers and the need for additional reserves as well as sales trends and issues. Although we cannot predict at this
9
time how this situation may develop, should the current condition continue or worsen our business, performance, prospects,
value, financial condition or results of operations may be adversely affected.
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 effected 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
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. Business continuity
hazards and other risks include:
•
•
explosions, fires, earthquakes, inclement weather, and other disasters;
utility or other mechanical failures;
10
•
•
•
•
•
•
•
•
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 Pacific 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:
•
•
•
•
•
•
•
•
•
•
•
risks associated with foreign currency exchange rate fluctuations;
difficulties in enforcing agreements and collecting receivables through some foreign legal systems;
enhanced credit risks in certain European countries as well as emerging market regions;
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
11
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 January 1, 2013 and we believe this excise tax may have a material impact on our profitability. 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,
product recalls and total or partial suspension of production, sale and/or promotion. The failure to receive or maintain, or delays
12
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 “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:
•
•
•
•
•
•
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.
•
•
•
•
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
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
13
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 August 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. The occurrence of any new legal, regulatory or compliance claim or problem
respecting any of our significant products, particularly should such events occur in the near term, could adversely affect our
reputation with current and prospective Customers and could otherwise materially and adversely affect our business,
performance, prospects, value, financial condition, or results of operations. Additionally, some U.S. Customers may be
reluctant to satisfy their payment obligations until rebate or SYSTEM 1E obligations have been resolved.
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.
Customers may not purchase or use consumables related to our new SYSTEM 1E liquid chemical sterilant processing
system at planned levels.
There currently are fewer SYSTEM 1E Liquid Chemical Sterilant Processing System units in use than the SYSTEM 1
units they replaced, and FDA approved uses for SYSTEM 1E are narrower than the SYSTEM 1 uses. Nonetheless, the S-40
sterilant used in connection with SYSTEM 1E units provides an additional element of profitability with respect to our
SYSTEM 1E units. If fewer additional SYSTEM 1E units are sold than planned or usage of S-40 sterilant in SYSTEM 1E
units currently in operation or expected to be sold declines below planned levels, these reductions might have a material
adverse effect on our business, prospects, performance, value, financial condition, or results of operation.
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;
14
•
•
•
•
•
•
•
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.
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, 2012. 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.
Ontario, CA
Chester, NY
Whippany, NJ
Temecula, CA
Groveport, OH
San Diego, CA
Northborough, MA
Brooklyn Park, MN
Mentor, OH (7 locations)
Libertyville, IL (2 locations)
St. Louis, MO
South Plainfield, NJ
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
U.S./INTL
Location
U.S.
Montgomery, AL
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.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
INTL
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
Use
Manufacturing
Contract Sterilization
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
Sales Office
Contract Sterilization
Warehousing/Distribution
Warehousing
Administrative Offices
Administrative Offices
Sales Office
Sales Office
Quebec City, Canada
Whitby, Canada
Mentor, OH
Erie, PA
El Paso, TX (2 locations)
Mogi das Cruzes, Brazil
Pieterlen, Switzerland
Berchem, Belgium
Leicester, England
Grand Prairie, TX
Minneapolis, MN
Bordeaux, France
Tuusula, Finland
Spartanburg, SC
Pittsburgh, PA
Vega Alta, PR
St. Louis, MO
Sandy, UT
Reno, NV
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
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Beijing, China
Shanghai, China
Leicester, England
Cologne, Germany
Mississauga, Canada
Basingstoke, England
La Chapelle St. Mesmin, France
Use
Sales Office
Sales Office/Warehousing
Sales Office
Sales Office
Sales Office
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
U.S./INTL
Location
INTL
Sao Paulo, Brazil
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
Sales Office
Sales Office
Sales Office
Sales Office
Sales Office
Sales Office
Manufacturing
Sales Office
Sales Office
Sales Office
Sales Office
Madrid, Spain
United Arab Emirates
Petaling Jaya, Malaysia
Guadalupe, Mexico
Moscow, Russia
Calcutta, India
Tokyo, Japan
Segrate, Italy
Warehousing
Singapore
Owned/Leased
Leased
Leased
Leased
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
insurance coverage for personal injury and property damage 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 1 installed base in the U.S. for at least a two year period from that date.
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 may 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. On February 2, 2010, the FDA notified healthcare facility
administrators and infection control practitioners that FDA's total recommended time period for transitioning from SYSTEM 1
in the U.S. was 18 months from that date.
On April 5, 2010, we received FDA clearance of the new liquid chemical sterilant processing system (SYSTEM 1E). Also
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,
18
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 August 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
were users of SYSTEM 1 at the time the Rebate Program was introduced and who return their units have the option of either a
pro-rated cash rebate or rebate toward the future purchase of new STERIS capital equipment (including SYSTEM 1E) or
consumable products. In addition, we provide credits for the return of SYSTEM 1 consumables in unbroken packaging and
within shelf life and for the unused portion of SYSTEM 1 service contracts.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions
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, or otherwise with respect to regulatory or compliance matters,
as described in this Item 1 or in various portions of Item 1A.
In December of 2010, we began shipping SYSTEM 1E units after having received FDA clearance for the SYSTEM 1E
chemical indicator, which is used in conjunction with the SYSTEM 1E. We also submitted a 510(k) to FDA for an optional
spore-based indicator strip for use with SYSTEM 1E. Thereafter, as a result of discussions with FDA, we filed a de novo
submission requesting classification of this strip in accordance with Section 513(f)(2) of the Federal Food Drug & Cosmetic
Act. The de novo process is part of the initial classification for new devices. This spore-based monitoring strip received FDA
clearance on March 30, 2012. This new clearance does not affect the prior clearance of the SYSTEM 1E processor or the
SYSTEM 1E chemical indicator.
On February 5, 2010, a complaint was filed by a Customer that claimed 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 alleged statutory violations, breaches of various warranties, negligence, failure to warn, and unjust
enrichment and Plaintiff sought 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. Certification of a settlement class was
approved and final approval of the settlement was given by the court in the first quarter of fiscal 2012. During the third quarter
of fiscal 2011, we recorded in operating expenses a pre-tax charge of approximately $19.8 million related to the settlement of
these proceedings.
Other civil, criminal, regulatory or other proceedings involving our products or services also 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 for the
fiscal year ended March 31, 2012: “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” 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
19
our consolidated financial statements titled, "Commitments and Contingencies."
ITEM 4. MINE SAFETY DISCLOSURES
None.
20
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 2012
High
Low
Fiscal 2011
High
Low
March 31
December 31
September 30
June 30
$
$
$
32.38
27.70
$
32.68
27.08
$
36.76
27.66
37.38
$
38.00
$
33.65
$
31.86
32.66
28.07
36.57
33.14
38.16
29.84
Holders. As of March 31, 2012, there were approximately 1,293 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 2012, we paid cash dividends totaling $0.66 per outstanding common share ($0.15 per outstanding common share to
common shareholders of record on June 28, 2011 and $0.17 per outstanding common share to common shareholders of record
on each of the following record dates: September 20, 2011, December 21, 2011, and March 27, 2012). 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).
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 2012 fiscal year:
(a)
Total Number of
Shares Purchased
—
—
—
— (1) $
$
(b)
Average Price
Paid
Per Share
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
(2)
(d)
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Plans at Period End
—
—
—
— (1)
—
—
—
—
$
$
118,460
118,460
118,460
118,460
January 1-31
February 1-29
March 1-31
Total
(1) Does not include 89 shares purchased during the quarter at an average price of $30.71 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, 2012, $118.5 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 2012 share repurchase activity in note 14 to our consolidated financial
statements titled, “Repurchases of Common Shares.”
21
ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
2012(1)(2)
Statements of Income Data:
Years Ended March 31,
2010(1)
2011(1)(2)
2009(1)
2008(1)
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:
Net income
Shares used in computing net
income per common share – basic
Diluted income per common share:
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
$ 1,406,810
$ 1,207,448
$ 1,257,733
$ 1,298,525
$ 1,265,090
568,465
446,162
644
222,316
74,993
1,202
85,212
22,554
539,181
4,848
203,712
63,349
526,742
3,554
175,445
55,800
—
—
—
—
136,115
51,265
128,467
110,685
510,603
15,461
123,545
42,693
—
77,106
$
$
$
$
2.33
$
0.86
$
2.18
$
1.88
$
1.22
58,367
59,306
58,826
58,778
63,300
2.31
$
0.85
$
2.16
$
1.86
$
1.20
58,963
0.66
373,488
$
$
60,148
0.56
361,060
$
$
59,423
2.44
379,328
$
$
59,448
0.30
64,077
0.23
351,104
$
283,017
1,405,696
1,426,685
1,238,402
1,216,939
1,239,292
210,000
583,032
821,401
210,000
638,020
787,569
210,000
483,908
753,714
210,000
498,774
717,736
179,280
532,817
706,152
(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 SYSTEM 1 class action settlement.
22
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 2012, 2011 and 2010, 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
In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented
in the consolidated financial statements under U.S. GAAP. We sometimes use the following financial measures in the context of
this report: backlog; debt-to-total capital; net debt-to-total capital; and days sales outstanding. We 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 period 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:
23
• 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
family of products, which includes SYSTEM 1 and SYSTEM 1E consumables, V-Pro 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 Equipment Revenues – We define capital equipment revenues as revenues generated from sales of capital
equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, including
SYSTEM 1® and 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 SYSTEM 1E consumables, V-Pro 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. Heading into fiscal 2012, we anticipated growth in both revenue and earnings. Revenues in fiscal 2012 increased
by $199.4 million, or 16.5%, to $1,406.8 million. Revenue growth was driven by increased demand for our products including
SYSTEM 1E, international growth and the SYSTEM 1 Rebate Program. Adjusted revenues, excluding the impact of the
SYSTEM 1 Rebate Program, increased $81.7 million, or 6.2%, to $1,391.5 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). However, we experienced some unanticipated events that challenged our bottom line. These
challenges included an extension of the SYSTEM 1 transition, as well as the unanticipated expenses related to SYSTEM 1E
uptime reliability, both of which hindered our profitability in fiscal 2012.
For fiscal 2012, our financial position and cash flows remained strong, affording us financial flexibility. Cash flows from
operations were $149.4 million and free cash flow was $82.7 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 20.4% at March 31, 2012. The
operating cash flow increase resulted primarily from higher net earnings adjusted for non-cash items and a lower use of cash to
fund operating asset and liability changes. These increases in cash were partially offset by the use of cash to fund settlements of
liabilities arising from the SYSTEM 1 Rebate Program and class action settlement. The increase in free cash flow also reflects
lower capital spending levels as capital costs associated with radioisotope purchases for the Isomedix segment declined and the
consolidation projects in Europe and North America were completed.
24
A detailed discussion of our fiscal 2012 performance is included in the subsection of MD&A titled, “Results of
Operations.”
Outlook. We anticipate that fiscal 2013 will be a pivot year for the Company, as we complete the SYSTEM 1 transition in the
U.S., and establish a new baseline of revenue and profitability from which we will grow in the future. 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 August 2, 2012. See Part I, Item 3, “Legal Proceedings.” We anticipate moderate
increases in raw material costs in fiscal 2013, primarily related to metals and chemicals. In addition, fluctuations in foreign
currency rates can impact revenues and costs outside of the United States creating uncertainty for our results for fiscal 2013 and
beyond.
In fiscal 2013 and beyond, we expect to continue to manage our costs, grow our business with internal product
development, invest in greater capacity, and augment these value creating methods with acquisitions of adjacent products and
services. We have a strong balance sheet and reliable cash flow, and will use both to grow the business. One of the ways we
will plan to create value going forward is to in-source much of the production that we have traditionally out-sourced. We have
come far enough with our Lean approach that we can utilize the capacity we have created to shorten the supply chain and
produce many of our purchased components in-house. Our planned increase in capital expenditures in fiscal 2013 reflects this
plan and will provide the opportunity to create better quality, enhanced delivery capability, and lower costs.
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 settlement of SYSTEM
1 class action litigation. The impact of the charge was a reduction in net income of $13.1 million (after tax of $6.7 million).
During the fourth quarter of fiscal 2012, based on actual experience to date, we adjusted a portion of the original estimated
liability related to the SYSTEM 1 Rebate Program. The total pre-tax adjustment was $17.4 million, of which $15.3 million was
recorded as an increase to revenue for the Customer rebate portion, and $2.1 million was recorded as a reduction in cost of
revenues related to the disposal liability. This adjustment results primarily from a decrease in the estimated number of eligible
Customers that will ultimately participate in the Rebate Program.
Restructuring. In fiscal 2012, 2011 and 2010 we recorded pre-tax expenses totaling $0.7 million, $1.4 million, and $4.4
million, respectively, related to previously announced restructuring actions. These actions are intended to enhance profitability
and increase operating efficiencies. We continue 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 2012, our revenues were favorably impacted
by $6.1 million and income before taxes was unfavorably impacted by $0.8 million, or 0.4%, 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 periods 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.
25
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 financial statement users 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, 2012, 2011 and
2010:
(dollars in thousands)
Net cash flows provided by operating activities
Purchases of property, plant, equipment and intangibles, net
Proceeds from the sale of property, plant, equipment and intangibles
Free cash flow
2012
$ 149,372
(66,682)
42
82,732
$
2011
$ 117,744
(77,442)
1,301
41,603
$
2010
$ 224,954
(44,087)
3,105
$ 183,972
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 adjustments recorded in connection with the SYSTEM 1 Rebate
Program in the first quarter of fiscal 2011 and in the fourth quarter of fiscal 2012, and the SYSTEM 1 class action settlement
recorded in the third quarter of fiscal 2011. These items had a significant impact on the fiscal 2011 and fiscal 2012 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.
(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
Years Ended March 31,
2012
2011
$
$
$
$
$
$
$
1,406,810
(15,306)
1,391,504
626,959
(15,306)
611,653
1,057,460
(15,306)
1,042,154
1,013,102
(15,306)
$
$
$
$
$
$
$
1,207,448
102,313
1,309,761
433,944
102,313
536,257
882,281
102,313
984,594
835,832
102,313
26
Adjusted Healthcare revenues
Healthcare capital revenues
Impact of SYSTEM 1 Rebate Program
Adjusted Healthcare capital 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 operating income
Impact of the SYSTEM 1 Rebate Program and class action settlement
Adjusted operating income
Reported Healthcare operating income
Impact of the SYSTEM 1 Rebate Program and class action settlement
Adjusted Healthcare operating income
Reported income tax expense
Impact of the SYSTEM 1 Rebate Program and class action settlement
Adjusted income tax expense
Reported effective income tax rate
Impact of the SYSTEM 1 Rebate Program and class action settlement
Adjusted effective income tax rate
RESULTS OF OPERATIONS
$
$
$
$
$
$
$
$
$
$
997,796
$
938,145
545,596
(15,306)
530,290
568,465
(17,403)
551,062
40.4 %
(0.8)%
39.6 %
222,316
(17,403)
204,913
141,742
(17,403)
124,339
74,993
(6,780)
68,213
$
$
$
$
$
$
$
$
$
35.5 %
(0.3)%
35.2 %
357,465
102,313
459,778
446,162
110,004
556,166
37.0%
5.5%
42.5%
85,212
129,800
215,012
21,317
129,800
151,117
22,554
50,183
72,737
30.6%
5.1%
35.7%
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.
27
FISCAL 2012 AS COMPARED TO FISCAL 2011
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2012
to the year ended March 31, 2011:
(dollars in thousands)
2012
2011
Change
Percent Change
Years Ended March 31,
Total revenues
$ 1,406,810
$ 1,207,448
$
199,362
16.5 %
Revenues by type:
Capital revenues
Consumable revenues
Service revenues
Revenues by geography:
United States revenues
International revenues
626,959
301,171
478,680
433,944
309,894
463,610
193,015
(8,723)
15,070
44.5 %
(2.8)%
3.3 %
1,057,460
349,350
882,281
325,167
175,179
24,183
19.9 %
7.4 %
Revenues increased $199.4 million, or 16.5%, to $1,406.8 million for the year ended March 31, 2012, as compared to
$1,207.4 million for the year ended March 31, 2011. The increase reflects growth in capital and service revenues and the
negative impact of the SYSTEM 1 Rebate Program in fiscal 2011. Adjusted revenues, excluding the impact of the SYSTEM 1
Rebate Program in both periods, increased $81.7 million, or 6.2%, to $1,391.5 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.
Revenues by segment are further discussed in the section of MD&A titled, “Business Segment Results of Operations.”
Capital revenues increased $193.0 million or 44.5% during fiscal 2012 as compared to fiscal 2011. The increase in capital
revenues was driven by the positive impact of the $15.3 million adjustment to Healthcare capital revenues related to the
SYSTEM 1 Rebate Program in fiscal 2012 and the negative impact of the $102.3 million adjustment to Healthcare capital
revenues related to the SYSTEM 1 Rebate Program in fiscal 2011. Adjusted capital revenues increased $75.4 million or 14.1%
to $611.7 million during fiscal 2012 (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). Excluding
the impact of the SYSTEM 1 Rebate Program in both periods, Healthcare capital revenues increased $70.5 million during fiscal
2012 from fiscal 2011, reflecting revenues derived from shipments of SYSTEM 1E products as well as increases in other
Healthcare infection prevention and surgical equipment products. Capital revenues within the Life Sciences segment increased
$4.8 million or 6.3% to $81.3 million.
During fiscal 2012, recurring revenues increased $6.3 million or 0.8% as compared to fiscal 2011. The recurring revenues
increase was generated by a 3.3% increase in service revenues, which was partially offset by a 2.8% decrease in consumable
revenues during fiscal 2012 as compared to fiscal 2011. The increase in service revenues of $15.1 million in fiscal 2012
compared to fiscal 2011, was driven primarily by the Isomedix business segment but also reflects growth in both the Healthcare
and Life Science business segments. Consumable revenues decreased $8.7 million or 2.8% during fiscal 2012 from fiscal 2011
as Healthcare consumable revenues decreased by 6.1% driven mainly by the continued decline in SYSTEM 1 sterilant
volumes, and Life Science consumable revenues increased by 9.4%.
United States revenues for fiscal 2012 were $1,057.5 million, an increase of $175.2 million, or 19.9%, as compared to
fiscal 2011. Adjusted United States revenues for fiscal 2012 were $1,042.2 million, an increase of $57.6 million or 5.8% as
compared to adjusted fiscal 2011 revenues (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 products and Life Sciences capital equipment revenues. United States consumable and service revenues were
negatively impacted by the SYSTEM 1 transition with a decrease in consumable revenues of 6.7%, primarily driven by the
decline in SYSTEM 1 sterilant volumes offset by an increase in service revenues of 2.5%.
International revenues for fiscal 2012 were $349.4 million, an increase of $24.2 million, or 7.4%, as compared to fiscal
28
2011. The increase in year-over-year international revenues was driven by increases in capital, consumable and service
revenues of 6.5%, 9.8%, 7.5%, respectively. The most significant gains were in the Healthcare business segment. The
Healthcare international revenue increase includes the benefit of a fiscal 2012 acquisition in Brazil but also reflects increases in
all our international regions including Canada, Europe, Asia Pacific and Latin America.
Gross Profit. The following table compares our gross profit for the year ended March 31, 2012 to the year ended March 31,
2011:
(dollars in thousands)
Gross Profit:
Product
Service
Total Gross Profit
Gross Profit Percentage:
Product
Service
Total Gross Profit Percentage
Years Ended March 31,
2012
2011
Change
Percent
Change
$ 376,134
192,331
$ 568,465
$
$
249,374
196,788
446,162
$
$
126,760
(4,457)
122,303
50.8 %
(2.3)%
27.4 %
40.5%
40.2%
40.4%
33.5%
42.4%
37.0%
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 increased $122.3 million and gross profit percentage
increased to 40.4% for fiscal 2012 as compared to 37.0% for fiscal 2011. The most significant driver of this increase results
from the change brought about by SYSTEM 1 Rebate Program which had a $110.0 million negative impact in fiscal 2011 and a
$17.4 million positive impact in fiscal 2012. Excluding the impact of the SYSTEM 1 Rebate Program, fiscal 2012 gross profit
and gross profit percentage were $551.1 million and 39.6% respectively, while 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 130 basis points in the gross profit
percentage as the decline in SYSTEM 1 sterilant volume more than offset the benefits of SYSTEM 1E units and higher
volumes in the Isomedix segment and the continued growth in Life Sciences consumables volume. The gross profit percentage
was also negatively impacted by approximately 60 basis points as a result of increased labor costs and by approximately 50
basis points by increases in inventory reserves, including the reserves associated with certain SYSTEM 1E components made
obsolete by the recent special 510(k) clearance which contained a modification of the UV light intensity threshold.
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2012 to the year
ended March 31, 2011:
(dollars in thousands)
Operating Expenses:
Selling, general, and administrative
Research and development
Restructuring expenses
Total Operating Expenses
Years Ended March 31,
2012
2011
Change
Percent
Change
$
$
309,552
35,953
644
$
325,468
34,280
1,202
$
346,149
$
360,950
$
(15,916)
1,673
(558)
(14,801)
(4.9)%
4.9 %
(46.4)%
(4.1)%
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 $15.9 million in fiscal 2012 as compared to fiscal 2011. Fiscal 2011 SG&A was negatively impacted by the
estimated $19.8 million expense associated with the proposed SYSTEM 1 class action settlement. Excluding the SYSTEM 1
class action settlement, SG&A increased 1.3% during fiscal 2012 primarily attributable to higher spending with regard to
product uptime reliability and sales related costs offset by decreases in professional fees and insurance as well as the lower cost
of our annual incentive compensation plan since bonuses will not be paid as performance targets for fiscal 2012 were not met.
Research and development expenses increased $1.7 million for fiscal 2012 as compared to fiscal 2011. 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,
29
product improvements, and the development of new technological platform innovations. During fiscal 2012, 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
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 2012, in connection with the Fiscal 2010 Restructuring Plan, we recorded pre-tax expense totaling totaling $0.8
million related to these actions. In fiscal 2011, 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. Since the
inception of the Fiscal 2010 Restructuring Plan, we have incurred $8.7 million of pre-tax expenses. These actions are intended
to enhance profitability and increase operating efficiencies. Production has ceased in our Switzerland manufacturing facility.
Included in restructuring expenses are an impairment loss with regard to this facility based on a sale agreement and a pension
curtailment benefit as a result of the reduction in workforce.
We do not expect to incur any significant additional restructuring 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 2012, and 2011:
(dollars in thousands)
Severance and other compensation related costs
Product rationalization
Asset impairment and accelerated depreciation
Lease termination obligation and other
Total restructuring charges
Year Ended March 31, 2012
Fiscal 2010
Restructuring
Plan
Fiscal 2008
Restructuring
Plan
Total
$
$
(776) $
335
1,103
143
805
$
— $
—
—
(152)
(152) $
(776)
335
1,103
(9)
653
30
(dollars in thousands)
Severance and other compensation 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.
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 other compensation related costs
Product rationalization
Asset impairments
Lease termination obligations
Other
Total
Severance and other compensation related costs
Asset impairments
Lease termination obligations
Other
Total
Severance and other compensation related costs
Asset impairments
Lease termination obligations
Total
Fiscal 2010 Restructuring Plan
Fiscal 2012
March 31,
2011
Provision
Payments/
Impairments
March 31,
2012
1,993
—
—
1,790
193
3,976
March 31,
2010
1,894
—
1,200
509
3,603
$
$
$
$
(776) $
335
1,103
139
4
805
$
(558) $
(335)
(1,103)
(982)
(121)
(3,099) $
659
—
—
947
76
1,682
Fiscal 2010 Restructuring Plan
Fiscal 2011
Provision
Payments/
Impairments
March 31,
2011
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
$
$
$
$
$
$
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, 2012 to the year ended March 31, 2011:
31
(dollars in thousands)
Non-Operating Expenses:
Interest expense
Interest and miscellaneous income
Non-Operating Expenses, Net
Years Ended March 31,
2012
2011
Change
$
$
12,065
(857)
11,208
$
$
12,000
(607)
11,393
$
$
65
(250)
(185)
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, 2012 and 2011:
(dollars in thousands)
Income tax expense
Effective income tax rate
Years Ended March 31,
2012
2011
Change
Percent
Change
$
74,993
$
22,554
$
52,439
232.5%
35.5%
30.6%
The effective income tax rate for fiscal 2012 was 35.5% as compared to 30.6% for fiscal 2011. The effective tax rate in
fiscal 2012 was impacted by the increase in United States income as a result of the impact of the SYSTEM 1 Rebate Program.
The adjusted effective income tax rate for fiscal 2012, excluding the impact of this item was 35.2% (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 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). 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, 2012 to the year ended March 31, 2011:
(dollars in thousands)
Revenues:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Revenues
Years Ended March 31,
2012
2011
Change
Percent
Change
$ 1,013,102
226,658
164,257
1,404,017
2,793
$ 1,406,810
$
835,832
215,437
152,242
1,203,511
3,937
$ 1,207,448
$
$
177,270
11,221
12,015
200,506
(1,144)
199,362
21.2 %
5.2 %
7.9 %
16.7 %
(29.1)%
16.5 %
Healthcare segment revenues increased $177.3 million or 21.2%, to $1,013.1 million for the year ended March 31, 2012,
as compared to $835.8 million for the prior fiscal year. Adjusted Healthcare segment revenues, excluding the impact of the
SYSTEM 1 Rebate Program, were $997.8 million for the year ended March 31, 2012 representing an increase of 6.4% 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 increase in adjusted Healthcare
revenues reflects growth in capital equipment revenues, including revenue associated with SYSTEM 1E products in the United
Sates, as well as increases in other Healthcare infection prevention and surgical equipment products. Healthcare service
32
revenues also increased with growth of 1.7%. These increases were partially offset by a decrease in Healthcare consumable
revenues of 6.1% as a result of the SYSTEM 1 transition. At March 31, 2012, our Healthcare segment’s backlog amounted to
$102.5 million, as compared to $138.6 million at March 31, 2011. We believe that the decline in backlog is more a matter of
timing of orders than a reflection of current market trends. SYSTEM 1E related backlog was $11.7 million as of March 31,
2012, as compared to $21.3 million as of March 31, 2011.
Life Sciences segment revenues increased $11.2 million, or 5.2%, to $226.7 million for the year ended March 31, 2012, as
compared to $215.4 million for the prior fiscal year. Our Life Sciences segment fiscal 2012 revenues were favorably impacted
by strong demand for our capital and consumable products which grew at 6.3% and 9.4%, respectively. The demand for
capital equipment reflects replacement product purchases by our pharmaceutical Customers. At March 31, 2012, our Life
Sciences segment’s backlog amounted to $50.1 million as compared to $40.7 million at March 31, 2011.
Isomedix segment revenues increased $12.0 million, or 7.9%, during fiscal 2012, as compared to fiscal 2011. The growth
in revenues during fiscal 2012 is attributable to increased demand from our core medical device Customers and market share
gains made possible by capacity expansion investments.
The following table compares our business segments and Corporate and other operating results for the year ended
March 31, 2012 to the year ended March 31, 2011:
(dollars in thousands)
Operating Income:
Healthcare
Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Operating Income
Years Ended March 31,
2012
2011
Change
Percent
Change
$
141,742
$
21,317
$
120,425
41,633
47,596
230,971
(8,655)
222,316
$
$
33,069
39,833
94,219
(9,007)
85,212
8,564
7,763
136,752
352
$
137,104
564.9 %
25.9 %
19.5 %
145.1 %
(3.9)%
160.9 %
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 increased $120.4 million, or 564.9% to $141.7 million for the year ended
March 31, 2012 from $21.3 million during the prior fiscal year. Adjusted fiscal 2012 Healthcare operating income, excluding
the impact of the SYSTEM 1 Rebate Program and class action settlement, was $124.3 million as compared to adjusted $151.1
million during the prior fiscal period (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 spending with regard to
product uptime reliability and sales related costs. The Healthcare segment’s fiscal 2012 and fiscal 2011 operating margins
include restructuring expenses of $0.6 million and $0.9 million, respectively.
Our Life Sciences segment’s operating income increased $8.6 million, or 25.9% to $41.6 million in fiscal 2012 from $33.1
million in fiscal 2011. Our Life Sciences segment’s operating margins were 18.4% and 15.3%, respectively, for the years ended
March 31, 2012 and March 31, 2011. The improvement was primarily driven by product mix and operating efficiencies. In
fiscal 2011, Life Sciences segment’s operating income includes $0.2 million in restructuring expenses.
Our Isomedix segment’s operating income increased $7.8 million, or 19.5% to $47.6 million for the year ended March 31,
2012 as compared to $39.8 million in fiscal 2011. Isomedix segment’s operating margins were 29.0% and 26.2%, respectively,
for the years ended March 31, 2012 and March 31, 2011. The improvement was primarily driven by the increased volume.
Restructuring expenses of $0.1 million are included in this segment’s fiscal 2011 operating income.
33
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:
(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.
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.
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.
34
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:
(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 and 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 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
35
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 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. 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 former 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.
36
(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)
(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.
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
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
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
$
$
$
$
$
$
37
(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
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
$
— $
—
—
501
409
881
1,791
$
— $
Payments/
Impairments
March 31,
2010
(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 March 31, 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 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.”
38
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:
(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
33,069
39,833
94,219
(9,007)
85,212
$
$
151,520
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)%
$
$
39
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
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.
40
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes significant components of our cash flows for the years ended March 31, 2012, 2011 and
2010:
(dollars in thousands)
Operating Activities:
Net income
Non-cash items
Accrued SYSTEM 1 Rebate Program and class action settlement
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:
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,
2012
2011
2010
$ 136,115
88,854
(58,618)
(16,979)
$ 149,372
$
(66,682)
42
—
(34,635)
$
$ (101,275)
(56,751)
(38,560)
5,723
1,514
(88,074)
$
20.4%
$
82,732
$
$
$
$
$
$
$
51,265
31,433
127,683
(92,637)
117,744
(77,442)
1,301
(16,900)
(4,000)
(97,041)
$
$
$
$
$
128,467
69,414
—
27,073
224,954
(44,087)
3,105
(1,500)
—
(42,482)
(29,965)
(33,228)
12,730
2,525
(47,938)
(310)
(144,017)
14,047
2,467
$ (127,813)
21.1%
21.8%
41,603
$
183,972
Net Cash Provided by Operating Activities. The net cash provided by our operating activities was $149.4 million for the
year ended March 31, 2012 compared to $117.7 million for the year ended March 31, 2011 and $225.0 million for the year
ended March 31, 2010. The following discussion summarizes the significant changes in our operating cash flows:
• Net cash provided by operating activities increased 26.9% in fiscal 2012 compared to fiscal 2011. The operating cash flow
increase resulted primarily from higher net earnings adjusted for non-cash items (deprecation, depletion, and amortization,
share-based compensation, deferred income taxes, the adjustment to the accrual for the SYSTEM 1 Rebate Program, and
other non-cash items) and a lower use of cash to fund operating asset and liability changes. These increases in cash were
partially offset by the use of cash to fund settlements of liabilities arising from the SYSTEM 1 Rebate Program and class
action settlement.
• Net cash provided by operating activities decreased 47.7% in fiscal 2011 compared to fiscal 2010. Higher net earnings
adjusted for non-cash items (deprecation, depletion, and amortization, share-based compensation, deferred income taxes,
the establishment of accruals for the SYSTEM 1 Rebate Program and class action settlement, and other non-cash items) in
fiscal 2011 were more than offset by a higher use of cash to fund operating asset and liability changes. Increases in
accounts receivable and inventory in fiscal 2011 of $54.5 million and $42.2 million, respectively, consumed operating cash
flow. Accounts receivable balances change from period to period due to the timing of revenues and Customer payments.
The increase in inventory levels in fiscal 2011 primarily resulted from the increase in inventories associated with the
SYSTEM 1E product.
Net Cash Used in Investing Activities. The net cash we used in investing activities totaled $101.3 million during fiscal 2012
compared to $97.0 million during fiscal 2011 and $42.5 million during fiscal 2010. The following discussion summarizes the
significant changes in our investing cash flows for the years ended March 31, 2012, 2011 and 2010:
•
Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $66.7 million during fiscal
41
2012, $77.4 million during fiscal 2011 and $44.1 million during fiscal 2010. Fiscal 2012 capital expenditures were lower
than fiscal 2011 as consolidation projects in the United States and Europe were completed. 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.
•
Proceeds from the sale of property, plant, equipment, and intangibles – Fiscal 2012 and fiscal 2011 proceeds relate to
minor disposals. Fiscal 2010 proceeds received were $3.1 million, including $2.2 million we received from the sale of
assets associated with the Hausted product line within the Healthcare segment.
• 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 in the same joint venture during fiscal 2010. We currently own just under 50% of this venture.
•
Investment in business, net of cash acquired – During fiscal 2012, we used $34.6 million of cash to acquire two businesses.
We acquired the stock of a privately held company with operations located near Sao Paulo, Brazil which 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). We also acquired the stock of a
privately held company with lab operations in Minneapolis, Minnesota which provides validation services to our
Customers and is a natural extension of our Isomedix segment. 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 $88.1 million in fiscal 2012,
$47.9 million in fiscal 2011, and $127.8 million in fiscal in fiscal 2010. The following discussion summarizes the significant
changes in our financing cash flows for the years ended March 31, 2012, 2011 and 2010:
•
•
•
Proceeds from the issuance of long-term obligations – We issued no new debt during fiscal years 2012, 2011 and 2010. 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 on long-term obligations and capital leases – We made no payments on long-term obligations or capital leases in
fiscal years 2012, 2011, and 2010.
(Payments) proceeds under credit facility, net – We made no payments or borrowed from our revolving credit facility
during fiscal years 2012 and 2011. During fiscal 2010, we borrowed and repaid $100.0 million of debt under our revolving
credit facility.
• Repurchases of common shares – During fiscal 2012, we paid for the repurchase of 1,851,510 common shares at an
average purchase price of $30.21 and obtained common shares in connection with our stock-based compensation award
programs in the amount of $0.8 million. 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. 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 2012, we paid cash dividends totaling $38.6 million or $0.66
per outstanding common share. During fiscal 2011, we paid cash dividends totaling $33.2 million, or $0.56 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.
•
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee
stock option programs. During fiscal 2012, fiscal 2011 and fiscal 2010, we received cash proceeds totaling $5.7 million
$12.7 million, and $14.0 million, respectively, under these programs.
• Tax benefit from stock options exercised – For the years ended March 31, 2012, 2011 and 2010, our income taxes were
reduced by $1.5 million, $2.5 million, and $2.5 million, respectively, as a result of deductions allowed for stock options
exercised.
Cash Flow Measures. Free cash flow was $82.7 million and $41.6 million in fiscal 2012 and 2011, 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). Our free cash flow increased in fiscal 2012 as cash used
to fund changes in operating assets and liabilities decreased compared to fiscal 2011. Lower capital expenditures in fiscal 2012
as compared to fiscal 2011 also contributed to the increase in free cash flow during fiscal 2012. Our debt-to-capital ratio was
42
20.4% at March 31, 2012 and 21.1% at March 31, 2011.
Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated by operations,
and our 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.
At March 31, 2012, approximately 71% of our consolidated cash and cash equivalents were held in locations outside of the
United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through
acquisitions outside the United States. We do not intend to repatriate any significant amounts of cash in the foreseeable future.
Sources of Credit. Our sources of credit as of March 31, 2012 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, 2012
Amounts
Outstanding
March 31, 2012
Amounts
Available
$
$
210,000
400,000
610,000
$
$
— $
—
— $
210,000
—
210,000
$
$
—
400,000
400,000
(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%.
• On September 13, 2007, we signed the Second Amended and Restated Credit Agreement (the “Former Credit Agreement”)
with KeyBank National Association, as administrative agent for the lending institutions that are parties to the Former
Credit Agreement (the “Former Agent”), and the lenders party to the Former Credit Agreement. This Former 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 Former Credit Agreement was to mature on September 13, 2012 and
provided $400.0 million of credit, which could be increased by up to an additional $100.0 million in specified
circumstances, for borrowings and letters of credit. The Former Credit Agreement provided a multi-currency borrowing
option and could be used for general corporate purposes. At our option, loans could be borrowed on a floating or fixed rate
basis. Floating rate loans bore interest at the greater of (1) the Prime Rate established by the Former 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 bore
interest at the Eurodollar Rate or other defined currency rate, plus, in each case, a margin based on our leverage ratio.
Interest was payable quarterly or at the end of the interest period, if shorter. The Former Credit Agreement also required
the payment of a facility fee on the total facility commitment amount, which was determined based on our leverage ratio.
43
We could prepay floating rate loans without paying a penalty, but we could be required to pay a penalty for prepaying fixed
rate loans. The Former Credit Agreement also allowed us to make short-term swing loan borrowings not to exceed $35.0
million, with an interest rate equal to the Former Agent’s cost of funds plus a margin based on our leverage ratio. The
Former Credit Agreement required us to maintain compliance with certain financial covenants, including a maximum
leverage ratio and a minimum interest coverage ratio. Our obligations under the Former Credit Agreement were unsecured
but guaranteed by our material domestic subsidiaries.
• On April 13, 2012 we signed a Third Amended and Restated Credit Agreement (the "Credit Agreement") with KeyBank
National Association, as administrative agent (“Agent”) for the lenders from time to time party thereto ("Lenders") and
such Lenders. The Credit Agreement amended, restated and replaced the Former Credit Agreement. The Credit Agreement
provides a $300.0 million credit facility (which may be increased by up to an additional $100.0 million in specified
circumstances, and subject to certain Lender consent requirements) for borrowings and letters of credit, and will mature
April 13, 2017. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable
on that date. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms
of the Credit Agreement. Borrowings bear interest at floating rates based upon the Base Rate (as defined) or fixed rates
based upon the Eurodollar Rate or Alternate Currency Rate (as defined), plus the Applicable Margin (as defined) in effect
from time to time under the Credit Agreement based upon the Company's Leverage Ratio (as defined). Interest on floating
rate loans is payable quarterly in arrears and interest on fixed rate loans is payable at the end of the relevant interest period
therefor, but in no event less frequently than every three months. The Credit Agreement also requires the payment of a
facility fee on the total facility commitment amount, which fee is determined based on the Company's Leverage Ratio.
There is no premium or penalty for prepayment of floating rate loans but prepayments of fixed rate loans may be subject to
a prepayment fee. The Credit Agreement also permits the Company to make short term "Swing Loan" borrowings from the
Agent in an aggregate amount not to exceed $35.0 million outstanding at any time. Swing Loans bear interest at the
Agent's cost of funds plus the applicable margin in effect from time to time. The Credit Agreement requires the Company
to maintain compliance with certain financial covenants, including a maximum Leverage Ratio and a minimum Interest
Coverage Ratio. The Company's obligations under the Credit Agreement are unsecured but guaranteed by its material
domestic subsidiaries.
At March 31, 2012, we had $400.0 million of funding available from our $400.0 million Former Credit Agreement. The
Former Credit Agreement included a sub-limit that reduced the maximum amount available to us by letters of credit
outstanding. At March 31, 2012, there were no letters of credit outstanding.
At March 31, 2012, 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 2012, our capital expenditures amounted to $66.7 million. We use cash provided by operating
activities and our cash and cash equivalent balances to fund capital expenditures. We expect fiscal 2013 capital expenditures to
increase over fiscal 2012 levels due to increased investments in the Healthcare and Life Science businesses intended to improve
efficiency and lower operating costs; and expansion projects in the Isomedix business.
CONTRACTUAL AND COMMERCIAL COMMITMENTS
At March 31, 2012, we had commitments under non-cancelable operating leases totaling $48.2 million.
Our contractual obligations and commercial commitments as of March 31, 2012 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 events that require us to fulfill commitments.
44
Payments due by March 31,
(in thousands)
2013
2014
2015
2016
2017 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
$
— $ 70,000
12,172
12,763
—
4,347
15,044
14,677
2,595
4,345
$
— $ 20,000
6,354
9,840
$ 120,000
4,778
—
4,148
—
4,132
—
23,519
$ 210,000
48,188
27,440
2,595
40,491
(4,345)
(4,347)
(4,148)
(4,132)
(23,519)
(40,491)
3,040
—
433
$ 35,789
2,850
—
162
$ 97,947
2,623
—
165
$ 12,628
2,411
—
167
$ 28,932
9,146
—
—
$ 133,924
20,070
1,527
927
$ 310,747
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 $1.5 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)
2013
2014
2015
2016
2017 &
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
$ 24,078
$ 6,050
$
139
$
11
$ 1,725
$ 32,003
6,261
—
—
$ 30,339
$ 6,050
$
139
$
—
11
—
6,261
$ 1,725
$ 38,264
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 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
45
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.
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 37.7% and 37.3% of total inventories at March 31, 2012 and 2011, respectively. Inventory
costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have
been $18.2 million and $17.6 million higher than those reported at March 31, 2012 and 2011, 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 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. Assets and liabilities of the business acquired are accounted for at their estimated fair
46
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.
We have early-adopted the provisions of accounting standards update titled "Intangibles - Goodwill and Other: Testing
Goodwill for Impairment," which permits us to consider qualitative indicators of the fair value of a reporting unit when it is
unlikely that a reporting unit has impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain
assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test
goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We calculate the
fair value of our reporting units based on the present value of estimated future cash flows. Considerable management judgment
is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair
value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with
internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be
used by other marketplace participants.
We performed our annual goodwill impairment evaluation as of October 31, 2011. 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. The rebate portion of the Rebate Program is recognized as contra-revenue consistent
47
with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the returned SYSTEM
1 processors is recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions
involved in the estimates associated with the Rebate Program included: the number and age of SYSTEM 1 processors eligible
for rebates under the Rebate Program, the number of Customers that would elect to participate in the Rebate Program, the
proportion of Customers that would choose each rebate option, and the estimated per unit costs of disposal.
The number and age of SYSTEM 1 processors was estimated based on our historical sales and service records and we
initially assumed that 100% of eligible Customers would elect to participate in the Rebate Program. As of March 31, 2012,
based upon actual experience to date, we estimate that approximately 83% of eligible Customers will ultimately 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 trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. Order and quote
data for fiscal 2011 and fiscal 2012 provide indications of the proportion of Customers that are expected to choose each of the
other rebate options. The per unit costs associated with disposal are estimated based on the service hours involved and existing
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, 2012 and 2011
was $10.8 million and $13.0 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 may 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, 2012 and 2011, we had accrued $11.2 million and $7.5 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
48
our federal income tax returns. In the second quarter of fiscal 2012, we reached a settlement with the IRS on all material tax
matters for fiscal 2008 through fiscal 2009. In the third quarter of fiscal 2012, the IRS began its audit of fiscal 2010 through
fiscal 2011. In addition, we are participating in the Compliance Assurance Process (CAP) with the IRS for the fiscal 2012 and
2013 tax years. We remain subject to tax authority audits in various other jurisdictions in which we operate. If we prevail in
matters for 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, 2012, we sponsored defined benefit pension plans for eligible
participants in the United States and Switzerland. In addition, as of March 31, 2012, we sponsored an unfunded post-retirement
welfare benefits plan for two groups of United States retirees, including the same retirees 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, 2012 projected benefit obligations and the fiscal 2012 net periodic benefit costs is as follows:
Funding Status
Assumptions used to determine March 31, 2012
benefit obligations:
Discount rate
Expected return on plan assets
Assumptions used to determine fiscal 2012
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
4.25%
8.00%
2.25%
3.25%
3.75%
NA
5.25%
8.00%
2.75%
3.25%
4.50%
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 2012 benefit costs by $0.2 million. The projected benefit obligations at March 31, 2012 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 2012 net periodic benefit costs by approximately $0.1 million and would have increased the projected benefit
obligations by approximately $3.4 million at March 31, 2012.
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
49
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, 2012:
(dollars in thousands)
Effect on total service and interest cost components
Effect on postretirement benefit obligation
100 Basis Point
Increase
Decrease
$
$
7
167
(6)
(159)
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, 2012 by
approximately $3.1 million and $0.3 million, respectively. We collected subsidies totaling approximately $0.4 million and $0.8
million during fiscal 2012 and fiscal 2011, 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 $7.9 million in fiscal 2012, $10.2 million in fiscal 2011 and $7.4 million in fiscal
2010. 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
50
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, 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, rebate program or the class action settlement 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, inspections, and submissions 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, economic downturn 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, product acceptance, or approvals including without limitation SYSTEM 1E and accessories thereto and S-40
sterilant, 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 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, 2012.
51
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, 2012, 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,
2012, we held foreign currency forward contracts to buy 106.3 million Mexican pesos and 7.3 million Canadian dollars.
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.
52
ITEM 8.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Annual Report on Internal Control Over Financial Reporting
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
54
55
57
58
59
60
61
94
53
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
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, 2012.
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, 2012. There were no material weaknesses in internal control over financial
reporting identified by management.
The Audit 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 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 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 29, 2012
54
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, 2012,
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 Annual 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, 2012, 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, 2012 and 2011, and the
related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2012, of STERIS Corporation and subsidiaries and our report dated May 29, 2012 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 29, 2012
55
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,
2012 and 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended March 31, 2012. 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, 2012 and 2011, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended March 31, 2012, 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, 2012, 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 29, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 29, 2012
56
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31,
Current assets:
Assets
Cash and cash equivalents
Accounts receivable (net of allowances of $11,428 and $9,085, respectively)
Inventories, net
Deferred income taxes, net
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Goodwill and intangibles, net
Other assets
Total assets
Current liabilities:
Liabilities and Equity
Accounts payable
Accrued payroll and other related liabilities
Accrued SYSTEM 1 Rebate Program and 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;
57,733 and 59,122 shares outstanding, respectively
Common shares held in treasury, 12,307 and 10,918 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.
2012
2011
150,821
280,324
157,712
43,211
19,815
651,883
386,409
337,784
29,620
1,405,696
83,188
29,899
69,065
96,243
278,395
210,000
42,703
51,934
583,032
$
$
$
$
193,016
272,248
167,344
56,715
16,483
705,806
370,402
318,810
31,667
1,426,685
90,981
52,251
127,683
73,831
344,746
210,000
26,662
56,612
638,020
—
—
244,091
(350,718)
914,401
13,627
821,401
1,263
822,664
1,405,696
$
241,343
(305,808)
816,846
35,188
787,569
1,096
788,665
1,426,685
$
$
$
$
$
57
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, net:
Interest expense
Interest income and miscellaneous expense
Total non-operating expenses, net
Income before income tax expense
Income tax expense
Net income
Net income per common share
Basic
Diluted
Cash dividends declared per common share outstanding
2012
2011
2010
$
928,129
478,681
1,406,810
$
743,838
463,610
1,207,448
$
799,002
458,731
1,257,733
551,995
286,350
838,345
568,465
309,552
35,953
644
346,149
222,316
12,065
(857)
11,208
211,108
74,993
136,115
2.33
2.31
0.66
$
$
$
$
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
See notes to consolidated financial statements.
58
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended March 31,
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization
Deferred income taxes
Share-based compensation expense
Loss 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:
Repurchases of common shares
Cash dividends paid to common shareholders
Stock option transactions, net
Tax benefit from stock options exercised
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2012
2011
2010
$
136,115
$
51,265
$
128,467
62,906
22,093
7,858
664
(4,667)
(6,517)
11,833
385
(9,120)
(58,618)
(13,560)
149,372
(66,682)
42
—
(34,635)
(101,275)
(56,751)
(38,560)
5,723
1,514
(88,074)
(2,218)
(42,195)
193,016
150,821
$
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
193,016
$
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
214,971
$
See notes to consolidated financial statements.
59
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
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
Comprehensive income:
Net income
Pension and postretirement
liability adjustment, (net of
income tax of $4,102)
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 – $0.66 per
common share
Change in noncontrolling
interest
Balance at March 31, 2012
Common Shares
Treasury Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
Total
Equity
Number
58,452
Amount
$
232,282
Number
11,588
Amount
$
(313,105)
$ 814,359
$
(15,800) $
429
$ 718,165
—
—
—
—
(24)
799
—
—
—
—
—
—
128,467
—
—
—
—
2,416
2,467
—
—
—
—
—
24
(799)
—
—
—
—
—
—
(310)
18,164
—
—
—
—
—
—
—
—
—
(144,017)
—
—
554
423
27,814
—
—
—
—
—
—
59,227
237,165
10,813
(295,251)
798,809
12,991
—
—
—
—
—
(952)
847
—
—
—
—
—
—
—
—
—
1,653
2,525
—
—
—
—
—
—
—
—
—
—
—
—
952
(847)
(29,965)
19,408
—
—
—
—
—
—
51,265
—
—
—
—
—
—
—
—
(33,228)
—
(1,024)
192
23,029
—
—
—
—
—
—
59,122
241,343
10,918
(305,808)
816,846
35,188
—
—
—
—
—
(1,887)
498
—
—
—
—
—
—
—
—
—
1,234
1,514
—
—
—
—
—
—
—
—
—
—
—
—
1,887
(498)
(56,751)
11,841
—
—
—
—
—
—
136,115
—
—
—
—
—
—
—
—
(38,560)
—
(7,279)
70
(14,352)
—
—
—
—
—
—
—
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
136,115
(7,279)
70
(14,352)
114,554
(56,751)
13,075
1,514
(38,560)
—
—
—
—
—
—
—
351
780
—
—
—
—
—
—
—
—
—
316
1,096
—
—
—
—
—
—
—
—
—
167
167
57,733
$
244,091
12,307
$
(350,718) $
914,401
$
13,627
$
1,263
$
822,664
See notes to consolidated financial statements.
60
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. 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 U.S. 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. 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.
Information supplementing our Consolidated Statements of Cash Flows is as follows:
Years Ended March 31,
2012
2011
2010
Cash paid during the year for:
Interest
Income taxes
Cash received during the year for income tax refunds
$
12,496
52,213
408
$
$
12,496
64,372
3,067
13,360
61,988
4,864
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
61
with the Customer's risk profile.
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.
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 37.7% and 37.3% of total inventories at March 31, 2012 and 2011, respectively.
Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories
would have been $18,158 and $17,551 higher than those reported at March 31, 2012 and 2011, 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 $705
and $574 for the years ended March 31, 2012 and 2011, respectively.
Total interest expense for the years ended March 31, 2012, 2011, and 2010 was $12,065, $12,000, and $13,171,
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. Unrealized gains and losses on marketable securities
62
classified as available-for-sale are recorded in Accumulated Other Comprehensive Income (Loss).
Asset Impairment Losses. Property, plant, equipment, and identifiable intangible assets are reviewed for impairment when
indicators of impairment exist 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.
Acquisitions of Business. Assets acquired and liabilities assumed in a business combination are accounted for at fair value on
the date of acquisition. Costs related to the acquisition are expensed as incurred.
Goodwill. We perform our annual impairment test for goodwill in the third quarter of each year. We have early-adopted the
provisions of accounting standards update titled "Intangibles - Goodwill and Other: Testing Goodwill for Impairment," which
permits us to consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has
impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made
regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing
the book value compared to the fair value at the reporting unit level. We calculate the fair value of our reporting units based on
the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of
operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our
impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and
operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other
marketplace participants.
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. The rebate portion of the Rebate Program is recognized as contra-revenue consistent
with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the returned SYSTEM
1 processors is recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions
involved in the estimates associated with the Rebate Program included: the number and age of SYSTEM 1 processors eligible
for rebates under the Rebate Program, the number of Customers that would elect to participate in the Rebate Program, the
proportion of Customers that would choose each rebate option, and the estimated per unit costs of disposal.
The number and age of SYSTEM 1 processors was estimated based on our historical sales and service records and we
initially assumed that 100% of eligible Customers would elect to participate in the Rebate Program. As of March 31, 2012,
based upon actual experience to date we estimated that approximately 83% of eligible Customers will ultimately 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 trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. Order and quote
data for fiscal 2011 and fiscal 2012 provide indications of the proportion of Customers that are expected to choose each of the
other rebate options. The per unit costs associated with disposal are estimated based on the service hours involved and existing
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
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
63
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.”
Fair Value of Financial Instruments. Except for long-term debt, our financial instruments are highly liquid or have short-
term maturities.
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.
Forward and Swap 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” or "Cost of revenues" in the accompanying Consolidated Statements of Income.
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 $5,857, $6,013, and $6,468 of
advertising costs during the years ended March 31, 2012, 2011, and 2010, respectively.
Research and Development. We incur research and development costs associated with commercial products and expense
these costs 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,
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
64
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 share-based compensation expense in our Consolidated Statements of Income. The
expense is classified as cost of goods sold, selling, general and administrative expenses or research and development expenses
in a manner consistent with the employee’s compensation and benefits. 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 September 2011, the FASB issued an accounting standard update titled “Testing Goodwill for Impairment,” which
allows an entity the option of performing a qualitative assessment to determine whether it is necessary to perform the current
two-step annual impairment test. The guidance permits an entity to assess qualitative factors to determine if it is more-likely-
than-not that the fair value of the reporting unit exceeds the carrying amount to determine if the two-step impairment test is
required. The guidance does not change how goodwill is calculated or the requirement to test goodwill annually for impairment.
The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011, with early adoption permitted. The early adoption of this standard did not have an impact on our
consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued new guidance titled "Comprehensive Income," which altered the presentation of
comprehensive income. More specifically, the updated guidance permits an entity to present components of net income and
other comprehensive income in either one continuous statement, referred to as the statement of comprehensive income, or in
two separate, but consecutive statements. The guidance now eliminates the current option to report other comprehensive income
and its components in the statement of changes in equity. These changes to the presentation of comprehensive income do not
change the components that are recognized in net income or other comprehensive income under current accounting guidance.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and will become effective for
us at the beginning of our first quarter of fiscal 2013. The adoption of this standard will not have an impact on our consolidated
financial position, results of operations or cash flows.
In April 2011, the FASB issued new guidance titled "Fair Value Measurement," intended to achieve common fair value
measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance
amends current fair value measurement and disclosure guidance to include increased transparency regarding valuation inputs
and investment categorization. This new guidance is effective for annual and interim periods beginning after December 15,
2011 and was adopted and applied during the fourth quarter of fiscal 2012. The adoption of this standard did not have an impact
on our consolidated financial position, results of operations or cash flows.
In December 2010, the FASB issued an accounting standard update titled “When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts," amending Accounting Standards Codification
(ASC) Topic 350, “Intangibles - Goodwill and Other.” This guidance amends the ASC requiring entities that have a reporting
unit with zero or negative carrying value to assess whether qualitative factors indicate that it is more likely than not that an
impairment of goodwill exists. If the entity concludes that it is more likely than not that an impairment exists, the entity must
then measure the goodwill impairment. The new guidance, amending the ASC is effective for fiscal 2012 and was applied
during our annual goodwill impairment testing in the third quarter of fiscal 2012 and did not impact our results.
In October 2009, the FASB issued an accounting standard update titled “Multiple-Deliverable Revenue Arrangements,”
65
amending Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition.” This guidance amends the ASC
requiring entities to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, requiring
arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price
method. The guidance also established a selling price hierarchy for determining the selling price of a deliverable, which
includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is
not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. The guidance was
adopted and applied prospectively for multiple element revenue arrangements that are new or materially modified beginning on
or after April 1, 2011. The adoption of this guidance did not impact our financial position or results of operations.
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 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 $8,741 related to
these actions, of which $7,635 was recorded as restructuring expenses and $1,106 was recorded in cost of revenues. These
actions are intended to enhance profitability and improve efficiencies. Production has ceased in our Pieterlen, Switzerland
manufacturing facility. We recognized an impairment loss with regard to this facility based on a sale agreement. In addition,
we realized a pension curtailment benefit as a result of the reduction in workforce. We do not expect to incur any significant
additional restructuring expenses related to this plan.
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 former 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
directly impacted 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 $13,892, of which
$10,233 was recorded as restructuring expenses and $3,659 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 pre-tax restructuring expenses for fiscal 2012, fiscal 2011 and fiscal 2010:
66
Year Ended March 31, 2012
Severance and other compensation related costs
Product rationalization
Asset impairment and accelerated depreciation
Lease termination obligation and other
Total restructuring charges
Fiscal 2010
Restructuring
Plan (1)
Fiscal 2008
Restructuring
Plan
Total
$
$
(776) $
335
1,103
143
805 $
— $
—
—
(152)
(152) $
(776)
335
1,103
(9)
653
(1) Includes $9 in charges recorded in cost of revenues on Consolidated Statements of Income.
Year Ended March 31, 2011
Severance and other compensation 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 Consolidated Statements of Income.
Year Ended March 31, 2010
Severance and other compensation 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 $(1,401) 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 table
summarizes our liabilities related to these restructuring activities:
Severance and other compensation related costs
Product rationalization
Asset impairment and accelerated depreciation
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2012
March 31,
2011
Provision
Payments/
Impairments
(1)
March 31,
2012
$
$
1,993
—
—
1,790
193
3,976
$
$
(776) $
335
1,103
139
4
805
$
(558) $
(335)
(1,103)
(982)
(121)
(3,099) $
659
—
—
947
76
1,682
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
67
Severance, and other compensation related costs
Asset impairments
Lease termination obligations
Other
Total
Severance, and other compensation related costs
Asset impairments
Lease termination obligations
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
$
$
$
$
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income shown in our Consolidated Statements of Shareholders' Equity consists of the
following:
Cumulative foreign currency translation adjustment
Amortization of pension and postretirement benefit plans costs, net of taxes
Unrealized gain (loss) on available for sale securities
Total
$
$
14,555 $
(1,102)
174
13,627 $
28,907 $
6,177
104
35,188 $
5,878
7,201
(88)
12,991
Year Ended March 31,
2011
2012
2010
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 2012. 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 2012 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, 2012 and 2011 were as follows:
68
Balance at March 31, 2010
Goodwill acquired or allocated
Foreign currency translation adjustments
Balance at March 31, 2011
Goodwill acquired or allocated
Foreign currency translation adjustments
Healthcare
Segment
Life Sciences
Segment
STERIS
Isomedix Services
Segment
Total
$
166,680
$
30,282
$
79,896
$
276,858
4,145
5,020
175,845
13,971
—
—
3,165
33,447
—
401
—
—
79,896
2,473
(184)
82,185
4,145
8,185
289,188
16,444
217
$
305,849
Balance at March 31, 2012
$
189,816
$
33,848
$
The fiscal 2012 increase in goodwill associated with the Healthcare segment resulted from the acquisition of a privately
held company with operations located near Sao Paulo, Brazil which 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). The fiscal 2012 increase in goodwill associated with the Isomedix segment
resulted from the acquisition of a privately held company with lab operations in Minneapolis, Minnesota which provides
validation services to our Customers and is a natural extension of our Isomedix segment. 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, 2012
March 31, 2011
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
25,595
$
19,124
$
20,930
$
3,518
43,218
16,953
12
3,121
25,979
9,125
12
3,099
47,942
16,970
13
16,874
3,099
28,097
11,249
13
$
89,296
$
57,361
$
88,954
$
59,332
We did not hold any indefinite-lived intangible assets in fiscal 2012 or fiscal 2011. Total amortization expense for finite-
lived intangible assets was $7,726, $6,617, and $6,941 for the years ended March 31, 2012, 2011, and 2010, respectively.
During fiscal 2012, an impairment charge of $2,199 was incurred relative to certain acquired intangible assets due to a
significant decline in associated projected cash flows. 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
$
5,314
$
5,083
$
4,064
$
3,805
$
2,165
2013
2014
2015
2016
2017
The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31,
2012 foreign currency exchange rates.
5. INVENTORIES, NET
Inventories, net consisted of the following:
69
Raw materials
Work in process
Finished goods
LIFO reserve
Reserve for excess and obsolete inventory
Inventories, net
6. PROPERTY, PLANT AND EQUIPMENT
March 31,
2012
March 31,
2011
$
$
56,525
25,236
109,422
(18,158)
(15,313)
157,712
$
$
64,326
19,897
110,794
(17,551)
(10,122)
167,344
Information related to the major categories of our depreciable assets is as follows:
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
March 31,
2012
March 31,
2011
$
$
33,099
230,823
301,665
110,130
210,899
22,811
909,427
(523,018)
386,409
$
$
30,194
201,883
286,103
101,934
194,882
40,665
855,661
(485,259)
370,402
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
Depreciation and depletion expense was $52,980, $47,772 and $49,277, for the years ended March 31, 2012, 2011, and
2010, respectively.
Rental expense for operating leases was $14,635, $16,904, and $17,583, for the years ended March 31, 2012, 2011, and
2010, 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, 2012 were as
follows:
2013
2014
2015
2016
2017 and thereafter
Total Minimum Lease Payments
Operating
Leases
15,044
12,172
9,840
6,354
4,778
48,188
$
$
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign
currencies have been calculated based upon March 31, 2012 foreign currency exchange rates.
7. DEBT
Indebtedness was as follows:
70
Private Placement
Credit facility
Total long term debt
March 31,
2012
March 31,
2011
$
$
210,000
—
210,000
$
$
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
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.
On September 13, 2007, we signed the Second Amended and Restated Credit Agreement (the “Former Credit Agreement”)
with KeyBank National Association, as administrative agent for the lending institutions that are parties to the Former Credit
Agreement (the “Former Agent”), and the lenders party to the Former Credit Agreement. This Former 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 Former Credit Agreement was to mature on September 13, 2012 and provided $400,000 of credit,
which could be increased by up to an additional $100,000 in specified circumstances, for borrowings and letters of credit. The
Former Credit Agreement provided a multi-currency borrowing option and could be used for general corporate purposes. At our
option, loans could be borrowed on a floating or fixed rate basis. Floating rate loans bore interest at the greater of (1) the Prime
Rate established by the Former 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 bore interest at the Eurodollar Rate or other defined currency rate, plus, in each case, a
margin based on our leverage ratio. Interest was payable quarterly or at the end of the interest period, if shorter. The Former
Credit Agreement also required the payment of a facility fee on the total facility commitment amount, which was determined
based on our leverage ratio. We could prepay floating rate loans without paying a penalty, but we could be required to pay a
penalty for prepaying fixed rate loans. The Former Credit Agreement also allowed us to make short-term swing loan
borrowings not to exceed $35,000, with an interest rate equal to the Former Agent’s cost of funds plus a margin based on our
leverage ratio. The Former Credit Agreement required us to maintain compliance with certain financial covenants, including a
maximum leverage ratio and a minimum interest coverage ratio. Our obligations under the Former Credit Agreement were
unsecured but guaranteed by our material domestic subsidiaries.
On April 13, 2012 we signed a Third Amended and Restated Credit Agreement (the "Credit Agreement") with KeyBank
National Association, as administrative agent (“Agent”) for the lenders from time to time party thereto ("Lenders") and such
Lenders. The Credit Agreement amended, restated and replaced the Former Credit Agreement. The Credit Agreement provides
a $300,000 credit facility (which may be increased by up to an additional $100,000 in specified circumstances, and subject to
certain Lender consent requirements) for borrowings and letters of credit, and will mature April 13, 2017. The aggregate unpaid
principal amount of all borrowings, to the extent not previously repaid, is repayable on that date. Borrowings also are repayable
at such other earlier times as may be required under or permitted by the terms of the Credit Agreement. Borrowings bear
interest at floating rates based upon the Base Rate (as defined) or fixed rates based upon the Eurodollar Rate or Alternate
Currency Rate (as defined), plus the Applicable Margin (as defined) in effect from time to time under the Credit Agreement
71
based upon the Company's Leverage Ratio (as defined). Interest on floating rate loans is payable quarterly in arrears and
interest on fixed rate loans is payable at the end of the relevant interest period therefor, but in no event less frequently than
every three months. The Credit Agreement also requires the payment of a facility fee on the total facility commitment amount,
which fee is determined based on the Company's Leverage Ratio. There is no premium or penalty for prepayment of floating
rate loans but prepayments of fixed rate loans may be subject to a prepayment fee. The Credit Agreement also permits the
Company to make short term "Swing Loan" borrowings from the Agent in an aggregate amount not to exceed $35,000
outstanding at any time. Swing Loans bear interest at the Agent's cost of funds plus the applicable margin in effect from time to
time. The Credit Agreement requires the Company to maintain compliance with certain financial covenants, including a
maximum Leverage Ratio and a minimum Interest Coverage Ratio. The Company's obligations under the Credit Agreement
are unsecured but guaranteed by its material domestic subsidiaries.
At March 31, 2012, 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:
2013
2014
2015
2016
2017 and thereafter
Total
8. ADDITIONAL CONSOLIDATED BALANCE SHEETS INFORMATION
Additional information related to our Consolidated Balance Sheets is as follows:
Accrued payroll and other related liabilities:
Compensation and related items
Accrued vacation/paid time off
Accrued bonuses
Accrued employee commissions
Other postretirement benefit obligations-current portion
Other employee benefit plans' obligations-current portion
Total accrued payroll and other related liabilities
Accrued expenses and other:
Deferred revenues
Self-insured risk reserves-current portion
Accrued dealer commissions
Accrued warranty
Other
Total accrued expenses and other
Other liabilities:
Self-insured risk reserves-long-term portion
Other postretirement benefit obligations-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
Total other liabilities
72
$
—
70,000
—
20,000
120,000
$
210,000
March 31,
2012
March 31,
2011
$
$
$
$
$
$
9,273
6,583
750
9,845
3,255
193
29,899
51,412
3,006
9,171
11,189
21,465
96,243
8,786
21,639
9,881
4,486
1,925
5,217
51,934
$
$
$
$
$
$
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
9. INCOME TAXES
Income from continuing operations before income taxes was as follows:
Years Ended March 31,
United States operations
Non-United States operations
2012
170,776
40,332
211,108
$
$
$
$
2011
30,088
43,731
73,819
$
$
2010
153,165
38,651
191,816
The components of the provision for income taxes related to income from continuing operations consisted of the
following:
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
2012
2011
2010
$
33,129
$
46,036
$
45,092
4,956
15,049
53,134
20,762
3,506
(2,409)
21,859
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
$
63,349
Total Provision for Income Taxes
$
74,993
$
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
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
2012
2011
2010
35.0 %
(0.7)%
2.8 %
(0.2)%
(0.3)%
(1.6)%
0.5 %
35.5 %
35.0 %
1.8 %
1.5 %
(0.6)%
(3.7)%
(4.4)%
1.0 %
30.6 %
35.0 %
0.6 %
2.5 %
(0.1)%
(2.0)%
(0.7)%
(2.3)%
33.0 %
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:
73
Years Ended March 31,
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
2012
2011
9,594
3
(4,488)
—
—
(3,582)
—
1,527
$
$
11,788
3,458
(2,221)
391
(3,661)
—
(161)
9,594
$
$
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $1,242 at
March 31, 2012 and $4,975 at March 31, 2011. In addition, we believe that it is reasonably possible that unrecognized tax
benefits may decrease by up to $1,124 within 12 months of March 31, 2012, primarily as a result of audit settlements and the
lapse of statute of limitations.
For the years ended March 31, 2012 and 2011, current income tax expense includes (benefit) expense of $(631) and $417
for interest, and expense of $16 and $60 for penalties, respectively. In total, as of March 31, 2012 and March 31, 2011, we have
recognized a liability for interest of $936 and $1,567 and penalties of $64 and $81, 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
2010 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 2008. 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, 2012 and 2011 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)
74
2012
2011
9,752
11,832
14,418
25,353
10,897
3,363
10,600
1,962
2,928
607
91,712
11,842
79,870
46,876
28,470
101
3,915
79,362
508
$
$
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
$
$
At March 31, 2012, we had federal operating loss carryforwards of $1,958, which can be utilized subject to certain
limitations, and foreign operating loss carry forwards of $56,870. 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 $374 related to state
operating loss carryforwards. At March 31, 2012, we had $77 of tax credit carryforwards. These credit carryforwards expire
between fiscal 2017 and fiscal 2026.
We review the need for a valuation allowance against our deferred tax assets. A valuation allowance of $11,842 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 2012 by $421.
At March 31, 2012, cumulative undistributed earnings of international operations amounted to approximately $178,318.
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.
At March 31, 2012, 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 retirees; including the same retirees 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.
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 former Pieterlen, Switzerland manufacturing
facility. Restructuring actions related to the Pieterlen, Switzerland manufacturing facility were taken as part of the Fiscal 2010
Restructuring Plan and the Fiscal 2009 Restructuring Plan. These actions resulted in workforce reductions that resulted in
curtailments and partial settlements of the plan as the vested benefits of 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, 2012 and
2011, 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 post-retirement medical
benefit plan. The measurement date of our defined benefit pension plans and other post-retirement medical benefit plan is
March 31, for both periods presented.
75
Change in Benefit Obligations:
Benefit Obligations at Beginning of Year
Service cost
Interest cost
Actuarial loss (gain)
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 (loss) 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
Funded Status of the Plans
Defined Benefit Pension Plans
U.S. Qualified
International
Other
Postretirement
Benefits Plan
2012
2011
2012
2011
2012
2011
$ 48,560
205
2,438
4,482
(4,366)
—
—
51,319
42,023
2,566
2,168
—
(4,366)
—
—
42,391
$ 47,638
190
2,617
2,724
(4,609)
—
—
—
48,560
$ 9,777
334
195
506
20
317
(6,576)
530
5,103
$ 11,903
531
334
(942)
(665)
473
(1,872)
15
9,777
$ 23,800
—
991
3,512
(3,409)
—
—
—
24,894
$ 25,179
—
1,168
683
(3,230)
—
—
—
23,800
40,142
4,340
2,125
—
(4,584)
—
—
42,023
8,308
—
(104)
—
317
3,231
317
—
20
(3,231)
(4,890)
—
182
—
4,150
—
(953) $ (1,469) $(24,894) $(23,800)
9,220
445
473
473
(665)
(1,872)
234
8,308
—
—
3,409
—
(3,409)
—
—
—
$ (8,928) $ (6,537) $
Amounts recognized in the consolidated balance sheets consist of the following:
Current liabilities
Noncurrent liabilities
Pension Plans
U.S. Qualified
International
Other Post-retirement Plan
2012
2011
2012
2011
2012
2011
$
$
— $
(8,928)
(8,928) $
— $
(6,537)
(6,537) $
— $
(953)
(953) $
— $
(1,469)
(1,469) $
(3,255) $
(21,639)
(24,894) $
(3,274)
(20,526)
(23,800)
The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other
comprehensive (loss) income at March 31, 2012 was $(34,437) and $32,895 respectively. During fiscal 2013, 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
$
$
1,333
$
— $
— $
— $
726
(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, 2012 and 2011:
76
Aggregate fair value of plan assets
$
42,391
$
42,023
$
4,150
$
8,308
$
46,541
$
50,331
Aggregate accumulated benefit obligations
51,319
48,560
4,820
9,286
56,139
57,846
U.S. Qualified
International
Total
2012
2011
2012
2011
2012
2011
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, 2012 and 2011:
Aggregate fair value of plan assets
$
42,391
$
42,023
$
4,150
$
8,308
$
46,541
$
50,331
Aggregate projected benefit obligations
51,319
48,560
5,103
9,777
56,422
58,337
U.S. Qualified
International
Total
2012
2011
2012
2011
2012
2011
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:
77
Pension Plans
U.S. Qualified
International
Other Post-retirement Plan
2012
2011
2010
2012
2011
2010
2012
2011
2010
Service cost
Interest cost
$
205
$
190
$
185
$
2,438
2,617
3,046
$
334
195
531
334
$
554
368
$ — $ — $ —
1,948
1,169
991
Expected return on plan
assets
(3,304)
(3,033)
(2,484)
Prior service cost recognition
—
—
—
1,066
1,068
1,062
405
—
842
—
1,809
320
— (1,384)
$
405
$
842
$ 1,809
$(1,064) $
(209)
—
—
(356)
—
—
509
(95)
414
$
(416)
—
— (3,263)
425
—
(1,847)
—
506
(63)
443
—
(3,263)
388
(1,706)
—
—
(3,263)
626
(689)
—
(689)
$ (1,847) $ (1,706) $
Net amortization and deferral
Net periodic benefit cost
Curtailments/settlements
Total benefit cost
Recognized in other
comprehensive (income)
loss before tax:
Net loss (gain) occurring
during year
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)
Amortization of prior service
credit (cost)
—
—
—
$ 5,220
$ 1,393
$ (554) $
818
$(1,031) $
502
$ 3,512
$
683
$ (2,930)
(1,066)
(1,068)
(1,132)
—
—
70
—
87
—
—
95
—
—
63
—
3,263
3,263
3,263
(425)
(388)
(626)
—
—
—
4,154
325
(1,616)
905
(936)
565
6,350
3,558
(293)
$ 4,559
$ 1,167
$
193
$ (159) $ (522) $ 1,008
$ 4,503
$ 1,852
$
(982)
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
2012
2011
4.25%
2.25%
3.75%
8.00%
3.25%
5.25%
2.75%
4.50%
8.00%
3.25%
2.50%
2.50%
The following table presents significant assumptions used to determine the net periodic benefit costs for the years
ended March 31:
78
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
2012
2011
2010
5.25%
2.75%
4.50%
8.00%
3.25%
5.75%
3.00%
5.00%
8.00%
4.00%
7.50%
3.25%
7.00%
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
2012
2011
2010
8.0%
8.0%
4.5%
10.0%
10.0%
5.0%
11.0%
11.0%
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, 2012:
Effect on total service and interest cost components
Effect on other post-retirement benefit obligation
One-Percentage
Point
Increase
Decrease
$
$
7
167
(6)
(159)
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, 2012 and the actual allocation of plan assets at March 31, 2012 and 2011
for these plans:
79
U.S. Qualified Plan:
Equity securities
Debt securities
Cash
Total
Switzerland Plan:
Insurance contracts
Total
Long-Term
Target
Allocation
Percentage
Percentage of Plan
Assets March 31
2012
2011
60%
40%
0%
100%
100%
100%
59.3%
39.9%
0.8%
100%
100%
100%
57.7%
41.4%
0.9%
100%
100%
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,
2012 and 2011, 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, 2012 and 2011 by asset category is as follows:
Fair Value Measurements at March 31, 2012
U.S. Qualified Pension Plan
International Plan
(In thousands)
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
$
353
$
353
$
— $
— $
— $
— $
— $
Mutual Funds
25,152
25,152
Debt Securities
Government Bonds
—
Mutual Funds
Other Investments
Total Plan Assets
16,886
—
$ 42,391
$
—
16,886
—
42,391
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
— $
4,150
4,150
$
$
—
— $
4,150
4,150
$
—
—
—
—
—
—
80
Fair Value Measurements at March 31, 2011
U.S. Qualified Pension Plan
International Plan
(In thousands)
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
17,435
—
17,435
—
—
—
—
—
—
—
—
—
8,308
—
—
—
—
—
—
—
—
—
8,308
Total Plan Assets
$ 42,023
$
42,023
$
— $
— $
8,308
$
— $
— $
8,308
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, 2012, we expect to make contributions of
approximately $2,595 to the U.S. qualified defined benefit pension plan in fiscal 2013.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2012, 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
Gross
Benefit
Payments
Medicare
Reimbursement
Total
2013
2014
2015
2016
2017
2018-2022
$
4,201
$
4,087
3,983
3,938
3,848
17,739
144
260
165
194
210
4,347
4,148
4,132
4,058
3,073
2,853
2,645
2,322
8,126
1,722
19,461
$
4,345
$
3,256
$
(216) $
(223)
(230)
(234)
(241)
(1,061)
3,040
2,850
2,623
2,411
2,081
7,065
In the preceding table, projected benefit payments denominated in foreign currencies have been calculated based upon
March 31, 2012 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, 2012 by $3,065 and $263, respectively. We collected subsidies totaling approximately $420 and $768, during fiscal
2012 and fiscal 2011, which reduced our net post-retirement medical payments.
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 $304,996 at March 31, 2012.
At March 31, 2012, the plan held 835,690 STERIS common shares with a fair value of $26,425. We paid dividends of $545,
$498, and $2,253 to the plan and participants on STERIS common stock held by the plan for the years ended March 31, 2012,
81
2011, and 2010, respectively. We contributed $7,265, $7,476, and $6,226, to the defined contribution plan for the years ended
March 31, 2012, 2011, and 2010, respectively.
We also maintain a domestic non-qualified deferred compensation plan covering certain employees, which formerly
allowed for the deferral of compensation for an employee-specified term or until retirement or termination. Employee
contributions to this plan were $443, $237, and $594 in fiscal 2012, fiscal 2011, and fiscal 2010, respectively. The Plan was
amended in fiscal 2012 to disallow deferrals of salary payable in 2012 and subsequent calendar years and of commissions and
other incentive compensation payable in respect of the 2013 and subsequent fiscal years. 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 $3,032 and $2,493 at March 31, 2012 and
March 31, 2011, 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 insurance
coverage for personal injury and property damage 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
SYSTEM 1 installed base in the U.S. for at least a two year period from that date.
On December 3, 2009, the FDA provided a notice (“notice”) to healthcare facility administrators and infection control
82
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 may 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. On February 2, 2010, the FDA notified healthcare facility
administrators and infection control practitioners that FDA's total recommended time period for transitioning from SYSTEM 1
in the U.S. was 18 months from that date.
On April 5, 2010, we received FDA clearance of the new liquid chemical sterilant processing system (SYSTEM 1E). Also
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 (later extended by FDA to August 2, 2012), subject to compliance with requirements for documentation of the Customer's
need for continued support and other conditions and limitations (the “Transition Plan”). 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 were users of SYSTEM 1 at the time
the Rebate Program was introduced and who return their units 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 provide credits for the return of 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 during the first quarter of fiscal 2011. Of the $110,004, $102,313 was attributable to the Customer Rebate
portion of the Program and was recorded as a reduction of revenues, and $7,691 was 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.
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 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
initially assumed that 100% of eligible Customers would elect to participate in the Rebate Program. As of March 31, 2012,
based upon actual experience to date, we estimate that approximately 83% of eligible Customers will ultimately 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 trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. Order and quote
data for fiscal 2011 and fiscal 2012 provide indications of the proportion of Customers that are expected to choose each of the
other rebate options. The per unit costs associated with disposal are estimated based on the service hours involved and existing
freight and disposal contracts. During the fourth quarter of fiscal 2012, based on actual experience to date, we adjusted a
portion of the original estimated liability related to the SYSTEM 1 Rebate Program. The total pre-tax adjustment was $17,403,
of which $15,306 was recorded as an increase to revenue for the Customer rebate portion, and $2,097 was recorded as a
reduction in cost of revenues related to the disposal liability. This adjustment results primarily from a decrease in the estimated
number of eligible Customers that will ultimately participate in the Rebate Program.
Our assumptions regarding the response of our Customers to the Rebate Program could be wrong and actual results could
83
be different from these estimates. Through March 31, 2012, Customers have utilized or committed to utilize rebates totaling
approximately $60,700 on orders placed since the initiation of the Rebate Program. If all eligible Customers holding the
remaining outstanding SYSTEM 1 units elect the maximum incentive rebate associated with the SYSTEM 1E processor rebate,
the total estimated rebate program would increase to approximately $93,000. Conversely, if all eligible Customers holding the
remaining outstanding SYSTEM 1 units elect the cash rebate option, the total estimated rebate program cost would decrease to
approximately $75,000.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions
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, 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 contained in this Annual Report on Form 10-K.
In December of 2010, we began shipping SYSTEM 1E units, after having received FDA clearance for the SYSTEM 1E
chemical indicator, which is used in conjunction with the SYSTEM 1E. We also submitted a 510(k) to FDA for an optional
spore-based indicator strip for use with SYSTEM 1E. Thereafter, as a result of discussions with FDA, we filed a de novo
submission requesting classification of this strip in accordance with Section 513(f)(2) of the Federal Food Drug & Cosmetic
Act. The de novo process is part of the initial classification for new devices. This spore-based monitoring strip received FDA
clearance on March 30, 2012. This new clearance does not affect the prior clearance of the SYSTEM 1E processor or the
SYSTEM 1E chemical indicator.
On February 5, 2010, a complaint was filed by a Customer that claimed 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 alleged statutory violations, breaches of various warranties, negligence, failure to warn, and unjust
enrichment and Plaintiff sought 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. Certification of a settlement class was
approved and final approval of the settlement was given by the court in the first quarter of fiscal 2012. During the third quarter
of fiscal 2011, we recorded in operating expenses a pre-tax charge of approximately $19,796 related to the settlement of these
proceedings. The assumptions regarding the amount of this charge included, 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. Estimates of the
actual settlement range from as low as $7,000 and as high as $22,000 depending on the options selected by the class members.
Other civil, criminal, regulatory or other proceedings involving our products or services also 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” 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 Tax Expense” 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, 2012 and 2011, our commercial commitments totaled $38,264 and $34,330, respectively. Commercial
84
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 $6,261 and $7,740,
respectively, of the totals at March 31, 2012 and 2011 relate to letters of credit required as security under our self-insured risk
retention policies.
As of March 31, 2012 and 2011, we had minimum purchase commitments with suppliers for raw material purchases
totaling $27,440 and $40,455, 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 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
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,
2012, 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
2012
2011
2010
$ 1,013,102
226,658
164,257
1,404,017
2,793
$ 1,406,810
$
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
$
$
141,742
41,633
47,596
230,971
(8,655)
222,316
$
$
21,317
33,069
39,833
94,219
(9,007)
85,212
$
$
151,520
30,952
31,103
213,575
(9,863)
203,712
(1) Includes an increase of $15,306 in fiscal 2012 and a reduction of $102,313 in fiscal 2011, resulting from the SYSTEM 1 Rebate Program.
(2) Includes an increase of 17,403 in fiscal 2012, resulting from the SYSTEM 1 Rebate Program, and reductions of $110,004 in fiscal 2011,
resulting from the SYSTEM 1 Rebate Program, and $19,796, resulting from the class action settlement.
85
For the year ended March 31, 2012, pre-tax restructuring expenses of $644 are included in the operating results of the
Healthcare segment. 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.
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.
Years Ended March 31,
Assets:
Healthcare and Life Sciences
Isomedix
Total Reportable Segments
Corporate and other
Total Assets
2012
2011
$ 1,024,786
378,506
1,403,292
2,404
$ 1,405,696
$ 1,072,892
352,153
1,425,045
1,640
$ 1,426,685
Years Ended March 31,
2012
2011
2010
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
$
$
$
$
31,713
34,943
66,656
26
66,682
37,559
25,324
62,883
23
62,906
$
$
$
$
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
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
2012
2011
2010
$ 1,057,461
349,349
$ 1,406,810
$
882,281
325,167
$ 1,207,448
$
949,637
308,096
$ 1,257,733
86
Years Ended March 31,
Property, Plant, and Equipment, Net
United States
International
Property, Plant, and Equipment, Net
13. COMMON SHARES
2012
2011
$
$
331,590
54,819
386,409
$
$
318,110
52,292
370,402
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:
(shares in thousands)
Weighted average common shares outstanding—basic
Dilutive effect of common share equivalents
Weighted average common shares outstanding and common share
equivalents—diluted
Years Ended March 31,
2012
58,367
596
2011
59,306
842
2010
58,826
597
58,963
60,148
59,423
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:
Number of common share options
14. REPURCHASES OF COMMON SHARES
Years Ended March 31,
2012
2011
741
383
2010
1,138
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 1,851,510 of our common
shares during fiscal 2012 in the aggregate amount of $55,942, representing an average price of $30.21 per common share.
During fiscal 2011, we paid an aggregate amount of $29,462 for the repurchase of 925,848 of our common shares, representing
an average price of $31.82 per common share. We did not repurchase any shares under this authorization during fiscal 2010.
We obtained 22,927 of our common shares during fiscal 2012 in the aggregate amount of $808 in connection with stock-
based compensation award programs. We obtained 15,224 of our common shares during fiscal 2011 in the aggregate amount of
$503 in connection with these programs. At March 31, 2012, $118,460 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,
87
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 plan and agreements. Generally, one-fourth of
the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted
generally expire 10 years after the grant date, or earlier if the option holder is no longer employed by us. Restricted shares and
restricted share units may cliff vest after three or four year periods or vest in installments after the grant date. As of March 31,
2012, 4,565,334 shares remained 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,
selling, general and administrative expenses or research and development expenses in a manner consistent with the employee’s
compensation and benefits.
The following weighted-average assumptions were used for options granted during fiscal 2012, fiscal 2011, and fiscal 2010:
Risk-free interest rate
Expected life of options
Expected dividend yield of stock
Expected volatility of stock
Fiscal 2012
Fiscal 2011
Fiscal 2010
2.41%
5.7 years
1.78%
29.78%
2.68%
5.7 years
1.59%
30.13%
1.89%
5.5 years
1.49%
27.96%
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical
experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the
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 2.08%, 2.27%, and 2.39% percent was
applied in fiscal 2012, 2011, and 2010, respectively. This rate is calculated based upon historical activity and represents an
estimate of the granted options 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, 2011
Granted
Exercised
Forfeited
Canceled
Outstanding at March 31, 2012
Exercisable at March 31, 2012
Number of
Options
3,274,395
325,051
(262,380)
(11,084)
(13,380)
3,312,602
2,462,599
$
$
$
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
25.95
35.62
22.73
27.25
23.24
27.16
26.05
5.21
4.27
$
$
16,273
13,848
We estimate that 840,057 of the non-vested stock options outstanding at March 31, 2012 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $31.62 closing price of
our common shares on March 31, 2012 over the exercise price of the stock option, multiplied by the number of options
outstanding or outstanding and exercisable, as applicable. 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.
88
The total intrinsic value of stock options exercised during the years ended March 31, 2012, 2011, and 2010 was $2,846,
$6,669, and $6,546, respectively. Net cash proceeds from the exercise of stock options were $5,723, $12,730, and $14,047 for
the years ended March 31, 2012, 2011, and 2010, respectively. The tax benefit from stock option exercises was $1,514, $2,525,
and $2,467 for the years ended March 31, 2012, 2011, and 2010, respectively.
The weighted average grant date fair value of stock option grants was $9.31, $8.80, and $5.69 for the years ended March
31, 2012, 2011, and 2010, 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 the outstanding SARS as of
March 31, 2012 and 2011 was $854 and $996, respectively. The fair value of each outstanding SAR is revalued at each
reporting date and the related liability and expense are adjusted appropriately.
A summary of the non-vested restricted share activity is presented below:
Non-vested at March 31, 2011
Granted
Vested
Canceled
Non-vested at March 31, 2012
Number of
Restricted
Shares
Weighted-Average
Grant Date
Fair Value
400,951
235,670
(91,084)
(12,510)
533,027
$
$
29.70
35.62
30.52
33.20
32.10
Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that
vested during fiscal 2012 was $2,780.
Cash settled restricted share units carry generally the same terms and vesting requirements as stock 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, 2012 and 2011 was $1,313 and $1,214, 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, 2012, there was a total of $11,509 in 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 2.34 years.
16. FINANCIAL AND OTHER GUARANTEES
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those
warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the
estimated cost of product warranties at the time product revenues are 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 amounts as necessary.
Changes in our warranty liability during the periods presented are as follows:
89
Balance, Beginning of Year
Warranties issued during the period
Settlements made during the period
Balance, End of Year
2012
2011
2010
$
$
7,509 $
19,944
(16,264)
11,189 $
6,070 $
11,185
(9,746)
7,509 $
7,573
8,706
(10,209)
6,070
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 within “Accrued expenses and other.” The liability recorded for such deferred service revenue was $43,252 and $28,230
as of March 31, 2012 and March 31, 2011, respectively. Such deferred revenue is then amortized on a straight-line basis over
the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity
related to the liability for deferred service contract revenues is 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 economically hedge price changes in commodities that impact raw materials included in our cost of revenues. We
do not use 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. At March 31, 2012, we held foreign currency forward contracts to buy
106.3 million Mexican pesos and 7.3 million Canadian dollars. At March 31, 2012, we held commodity swap contracts to buy
465,000 pounds of nickel.
Balance Sheet Location
Prepaid & Other
Accrued expenses and other
Asset Derivatives
Liability Derivatives
Fair Value
at March 31, 2012
Fair Value
at March 31, 2011
Fair Value
at March 31, 2012
Fair Value
at March 31, 2011
$
$
12
$
— $
1,483
$
— $
— $
863
$
—
41
Consolidated Statements
of Income
Selling, general and
administrative
Cost of revenues
Amount of gain (loss) recognized in income
Years Ended March 31,
2012
2011
2010
$
$
(1,115) $
(1,544) $
1,696
306
$
$
541
826
Foreign currency forward contracts
Commodity swap contracts
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 assets and
liabilities 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 tables show the fair value of our financial assets and liabilities at March 31, 2012, and 2011:
90
Fair Value Measurements at March 31, 2012
Quoted Prices
in Active Markets
for Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
Carrying Value
March 31, 2012
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
Forward and swap contracts (1)
Investments (2)
Liabilities:
Forward and swap contracts (1)
Deferred compensation plans (2)
Long term debt (3)
Contingent consideration obligations (4)
$
$
$
$
150,821
12
3,032
863
3,032
210,000
6,892
$
150,821
—
3,032
— $
3,032
—
—
— $
12
—
$
863
—
243,999
—
—
—
—
—
—
—
6,892
Fair Value Measurements at March 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
Carrying Value
March 31, 2011
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
Forward and swap contracts (1)
Investments (2)
Liabilities:
Forward and swap contracts (1)
Deferred compensation plans (2)
Long term debt (3)
Contingent consideration obligations (4)
$
$
$
$
193,016
1,483
2,493
41
2,493
210,000
4,984
$
193,016
—
2,493
— $
2,493
—
—
— $
1,483
—
$
41
—
237,167
—
—
—
—
—
—
—
4,984
(1) 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.
(2) We provide a domestic non-qualified deferred compensation plan covering certain employees, which formerly allowed 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. The Plan has been amended to disallow deferral elections of salary in
respect of 2012 and subsequent calendar years and of commissions and other incentive compensation in respect fiscal year
2013 and subsequent periods. We hold investments, primarily comprised of mutual funds, 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. Subject to plan terms, employees who made deferrals are entitled to receive distributions of their
hypothetical account balances (amounts deferred, together with earnings (losses)).
(3) We estimate the fair value of our long-term debt using discounted cash flow analysis, based on our current incremental
borrowing rates for similar types of borrowing arrangements.
(4) Contingent consideration obligations arise from prior business acquisitions. The fair values are based on discounted cash
flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual
nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are
classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as
appropriate based on the contractual payment dates.
91
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended March 31, 2012 are
summarized as follows:
Balance at March 31, 2010
Additions
Balance at March 31, 2011
Additions
(Gains)Losses
Foreign currency translation adjustments (a)
Balance at March 31, 2012
(a) Reported in other comprehensive income (loss)
19. SUBSEQUENT EVENTS
Contingent
Consideration
$
$
$
—
4,984
4,984
4,484
(2,454)
(122)
6,892
We have evaluated subsequent events through the date the financial statements were filed with the SEC, noting no events
that require adjustment of, or disclosure in, the consolidated financial statements for the period ended March 31, 2012 that have
not been disclosed.
92
20. QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
Fiscal 2012 (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 2011 (2)
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,
$ 263,211
127,038
390,249
$ 239,403
115,812
355,215
$ 223,502
119,205
342,707
$ 202,013
116,626
318,639
149,781
76,243
226,024
164,225
42.1%
(877)
44,171
0.77
0.76
$
$
$
145,976
71,233
217,209
138,006
38.9%
1,164
33,649
0.58
0.58
$
$
$
138,805
70,593
209,398
133,309
38.9%
99
29,564
0.50
0.50
$
$
$
$ 256,852
120,908
377,760
$ 212,622
115,661
328,283
$ 197,092
115,333
312,425
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
$
$
$
117,433
68,281
185,714
132,925
41.7%
258
28,731
0.48
0.48
77,272
111,708
188,980
106,576
64,338
170,914
18,066
9.6 %
341
(45,210)
(0.76)
(0.76)
$
$
$
$
$
$
$
The fiscal 2012 quarter ended March 31 includes the impact of the SYSTEM 1 Rebate Program as a $15,306 increase
(1)
in product revenues and a $2,097 decrease in product cost of revenues.
The fiscal 2011 quarter ended June 30 includes the impact of the SYSTEM 1 Rebate Program as a $102,313 reduction
(2)
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 class action settlement as a $19,796 increase in selling, general and administrative expenses.
93
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Description
(in thousands)
Year ended March 31, 2012
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 class action
settlement
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 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
Balance at
Beginning
of Period
Charges
to Costs
and
Expenses
Charges
to Other
Accounts
Deductions
Balance at
End of
Period
$
$
9,085
10,122
2,901
5,304 (2)
$
1,520 (3) $
(114) (3)
11,421
1,360
(435)
(2,078) (4) $
—
(504)
11,428
15,312
11,842
$
13,037
$
1,205
$
(792)
$
(2,674)
$
10,776
127,683
(17,403) (5)
—
(41,215)
69,065
$
$
9,238
10,557
2,016
(638) (2)
$
26 (3)
203 (3)
$
(2,195) (4)
—
$
9,085
10,122
9,880
970
2,240
(1,669)
11,421
$
13,130
$
2,952
$
—
$
(3,045)
$
13,037
—
129,800 (6)
—
(2,117)
127,683
$
$
10,728
15,025
948
(5,205) (2)
$
101 (3) $
737 (3)
(2,539) (4) $
—
9,238
10,557
9,956
741
75
(892)
9,880
$
15,277
$
753
$
—
$
(2,900)
$
13,130
(1)
(2)
(3)
(4)
(5)
(6)
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 rates and acquired reserves.
Uncollectible accounts written off, net of recoveries.
Adjustments were classified as follows: $15,306 as an increase to revenues and $2,097 as a decrease to cost of
revenues.
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.
94
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 Annual Report on Form 10-K. Based on this evaluation, the PEO and PFO have
determined that, as of the end of the period covered by this Annual Report on Form 10-K, 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, 2012 based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation under this framework, management
concluded that the internal control over financial reporting was effective as of March 31, 2012.
The effectiveness of our internal controls over financial reporting as of March 31, 2012 has been audited by our
independent registered public accounting firm, Ernst & Young LLP. Management's Annual Report on Internal Control over
Financial Reporting 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, 2012, 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
On May 29, 2012, the Compensation Committee of the Company's Board of Directors approved a new Executive
Severance Plan - the STERIS Corporation Senior Executive Severance Plan (“Plan”) and authorized providing notices of
termination of “Change in Control” Agreements currently in effect with all named executive officers and certain other
Company executives. The Plan will initially cover the following named executive officers of the Company: Walter M
Rosebrough, Jr., Timothy L. Chapman, Robert E. Moss and Michael J. Tokich, as well as certain other Company executives.
Also on May 29, 2012, all of the named executive officers were notified that their Change in Control agreements will be
terminated. As a result, unless terminated earlier pursuant to a specific provision, these agreements will expire and will not
apply to any Change of Control (as defined in those agreements) occurring after March 31, 2014.
Under the Plan, a participant who terminates employment with the Company for Good Reason (as defined), or whose
employment is terminated by the Company other than for Cause (as defined) will be entitled to severance benefits. Generally,
severance benefits will consist of severance pay equal to the participant's annual base salary, payable over twelve months,
incentive compensation (bonus) for the fiscal year in which the termination occurs based upon financial performance targets
achieved (and prorated to reflect the participant's actual period of participation), and reimbursement for continuing medical and
dental coverage for up to twelve months under the Company's plans. Payment of severance benefits is contingent on the
participant's execution of a release of claims against the Company. If the termination is in conjunction with a Change in
Control (as defined) and within specified time frames, the severance pay amount will equal two times the participant's annual
base salary, also payable over a twelve month period. The Plan or a participant's participation in the Plan may be terminated by
the Company upon twelve months notice, with some limitations. An executive who is covered by both an agreement or other
arrangement providing benefits in the nature of severance and by the Plan, will be entitled to receive benefits under whichever
provides for greater benefits, but not both.
95
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 2012 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” of the Proxy Statement.
The table below presents information concerning all equity compensation plans and individual equity compensation
arrangements in effect as of our fiscal year ended March 31, 2012.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
($)
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
3,312,602
—
3,312,602
96
27.16
—
27.16
4,565,334
—
4,565,334
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.
97
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, 2012 and 2011.
Consolidated Statements of Income – Years ended March 31, 2012, 2011, and 2010.
Consolidated Statements of Cash Flows – Years ended March 31, 2012, 2011, and 2010.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2012, 2011, and 2010.
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
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 for the fiscal year ended
March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).
Exhibit Description
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 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 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 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 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).*
98
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
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 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 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 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 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 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 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 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 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 for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation 2006 Long-Term Equity Incentive Plan (as Amended and Restated Effective July
28, 2011) (filed as Exhibit A to Schedule 14A (Definitive Proxy Statement) filed June 7, 2011
(Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees. (filed as
Exhibit 10.22 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643),
and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.23 to
Form 10-K for the fiscal year ended March 31, 2011(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 for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and
incorporated herein by reference.*
99
10.26
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
10.42
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit
10.2 to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock 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 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).*
Amendment No. 1 to STERIS Corporation Deferred Compensation Plan Document (as Amended and
Restated Effective January 1, 2009) dated November 4, 2011 (filed as Exhibit 10.1 to Form 10-Q for
the fiscal quarter ended December 31, 2011 (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 for
the fiscal 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 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 Exhibit 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).
Agreement dated November 4, 2011 between STERIS Corporation and Bank of America, N.A.
providing Transfer and Advised Line for Letters of Credit (filed as Exhibit 10.2 to Form 10-Q for the
fiscal quarter ended December 31, 2011 (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 for the fiscal quarter ended
December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
100
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
21.1
23.1
24.1
31.1
31.2
32.1
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 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 for the fiscal quarter ended December 31, 2003 (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 July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation
[For 2003 Senior Notes] (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September
30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation (filed
as Exhibit 10.42 to Form 10-K for the fiscal year ended March 31, 2011 (Commission File No.
1-14643), and incorporated herein by reference).
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 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 for the fiscal quarter ended September 30, 2008 (Commission File
No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation
[For 2008 Senior Notes] (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September
30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated December 7, 2010 by PeriOptimum, Inc. and STERIS Corporation (filed
as Exhibit 10.45 to Form 10-K for the fiscal year ended March 31, 2011 (Commission File No.
1-14643), and incorporated herein by reference).
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.
EX-101
Instance Document.
EX-101
Schema Document.
EX-101
Calculation Linkbase Document.
EX-101
Definition Linkbase Document.
EX-101
Labels Linkbase Document.
EX-101
Presentation Linkbase Document.
* 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.
101
(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
SIGNATURES
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.
Date: May 29, 2012
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 29, 2012
Walter M Rosebrough, Jr.
/S/ MICHAEL J. TOKICH
Senior Vice President and Chief Financial Officer
May 29, 2012
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 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
May 29, 2012
*
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 29, 2012
By:
/s/ MARK D. MCGINLEY
Mark D. McGinley,
Attorney-in-Fact for Directors
103
SUBSIDIARIES OF STERIS CORPORATION
STERIS Corporation has no parent company. As of March 31, 2012, its direct and indirect subsidiaries(1) were as follows:
Exhibit 21.1
Albert Browne Limited
American Sterilizer Company
Biotest Laboratories, Inc.
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.
Sercon Indústria E Comércio De Aparelhos Médicos E Hospitalares Ltda.
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 Latino America Participações Ltda.
STERIS Latin America, Inc.
STERIS Limited
STERIS Mauritius Limited
STERIS Mexico, S. de R.L. de C.V.
STERIS Netherlands Holdings B.V.
STERIS Personnel Services, Inc.
STERIS Personnel Services Mexico, S.de RL.de C.V.
STERIS NV
STERIS SEA Sdn. Bhd.
104
United Kingdom
Pennsylvania
Minnesota
United Kingdom
Vermont
Delaware
Delaware
Delaware
Canada
Delaware
Delaware
Brazil
Delaware
Brazil
Delaware
Nevada
France
Sweden
Delaware
Hong Kong
China
Barbados
Brazil
British Virgin
Delaware
Canada
Canada
United Kingdom
Hong Kong
Costa Rica
Germany
Russia
Delaware
Switzerland
Netherlands
Spain
Delaware
India
Delaware
Puerto Rico
Japan
Brazil
Delaware
United Kingdom
Republic of
Mexico
Netherlands
Delaware
Mexico
Belgium
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.
China
Singapore
Italy
France
France
Delaware
The names of one or more subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute at the end of
fiscal 2012 a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X have been excluded.
(1)
105
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statement of STERIS Corporation and subsidiaries
(STERIS) of our reports dated May 29, 2012, with respect to the consolidated financial statements and schedule of STERIS, and
the effectiveness of internal control over financial reporting of STERIS, included in this Annual Report (Form 10-K) of STERIS
for the year ended March 31, 2012:
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
333-176167
Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan (As
Amended and Restated Effective July 28, 2011)
/s/ Ernst & Young LLP
Cleveland, Ohio
May 29, 2012
106
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 the 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 equivalent functions):
a. 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
b. 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 29, 2012
/S/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
107
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 the 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 equivalent functions):
a. 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
b. 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 29, 2012
/S/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President and Chief Financial Officer
108
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, 2012, 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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
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.
Name:
Title:
Name:
Title:
/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
Dated: May 29, 2012
109
This Page is Not Part of STERIS's Form 10-K Filing
Non-GAAP Financial Measures
(In thousands, except per share data)
The Company has referred to certain adjusted financial measures regarding the fiscal 2012 and fiscal 2011 results
of operations excluding certain items to provide meaningful comparative analysis between the periods. These
financial measures are considered to be "non-GAAP financial measures" under Securities Exchange Commission
rules. The following table provides the amounts used in these adjusted financial measures and a reconciliation of
these amounts to their nearest GAAP financial measure.
Twelve Months Ended
March 31,
2012
2011
Revenues
Impact of SYSTEM 1 Rebate Program
Adjusted revenues
Operating income
Impact of SYSTEM 1 Rebate Program and class action
settlement
SYSTEM 1E inventory reserve
Restructuring
Adjusted operating income
Net income
Impact of SYSTEM 1 Rebate Program and class action
settlement, net of tax
SYSTEM 1E inventory reserve, net of tax
Restructuring, net of tax
Adjusted net income
Net income per diluted share
Impact of SYSTEM 1 Rebate Program and class action
settlement, net of tax
SYSTEM 1E inventory reserve, net of tax
Restructuring, net of tax
Adjusted net income per diluted share
Healthcare revenues
Impact of SYSTEM 1 Rebate Program
Adjusted Healthcare revenues
Healthcare capital revenues
Impact of SYSTEM 1 Rebate Program
SYSTEM 1E capital revenues
Adjusted Healthcare capital revenue growth
(Unaudited)
$
$
$
1,406,810
(15,306)
1,391,504
1,207,448
102,313
1,309,761
$
$
222,316
$
85,212
(17,403)
2,857
653
208,423
$
129,800
-
1,352
216,364
$
$
136,115
$
51,265
(10,623)
1,748
(63)
127,178
$
79,617
-
865
131,747
$
$
2.31
$
0.85
(0.18)
0.03
-
2.16
$
1.32
-
0.01
2.19
$
$
1,013,102
(15,306)
997,796
$
$
$
835,832
102,313
938,145
$
$
545,596
(15,306)
(61,237)
469,053
357,465
102,313
(20,348)
439,430
$
$
Note: Per share amounts may not calculate precisely due to rounding .
This Page is Not Part of STERIS’s Form 10-K Filing
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
Performance Graph. The following gr aph shows the cu mulative performance for our co mmon shares
over the last five years as of March 31 of each y ear compared with the performance of the Standard &
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
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 Mar ch 31, 2007 in our co mmon shares and in each of the nam ed indices. The past
$100 invested as of March 31, 2007 in our common shares and in each of the named indices. The past
performance shown in this graph does not necessarily guarantee future performance.
performance shown in this graph does not necessarily guarantee future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among STERIS Corporation, the S&P 500 Index, and the Dow Jones US Medical Supplies Index
Among STERIS Corporation, the S&P 500 Index, and the Dow Jones US Medical Supplies Index
$160
$160
$140
$140
$120
$120
$100
$100
$80
$80
$60
$60
$40
$40
$20
$20
$0
$0
3/07 3/08 3/09 3/10 3/11 3/12
3/07 3/08 3/09 3/10 3/11 3/12
STERIS Corporation
STERIS Corporation
S&P 500
S&P 500
Dow Jones US Medical Supplies
Dow Jones US Medical Supplies
*$100 invested on 3/31/07 in stock or index, including reinvestment of dividends.
*$100 invested on 3/31/07 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
Fiscal year ending March 31.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2012 Dow Jones & Co. All rights reserved.
Copyright© 2012 Dow Jones & Co. All rights reserved.
STERIS Corporation
STERIS Corporation
S&P 500
S&P 500
Dow Jones US Medical Supplies
Dow Jones US Medical Supplies
3/07
3/07 3/08
100.00 101.
100.00
100.00 94.
100.00
100.00
100.00 108.18
3/09
3/08
90
101.90
94.92
92 58.
108.18
3/09
3/10
89.25 139.
89.25
58.77
77 88.
86.20
86.20 112.
3/10
24
139.24
02
88.02
112.36
36 105.74
3/11
3/11 3/12
145.38 136.
145.38
101.79
101.79
105.74
3/12
00
136.00
110.48
110.48
105.74
105.74
Corporate Information
BOARD OF DIRECTORS
John P. Wareham 1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. Breeden 2, 4
Chairman and Chief Executive Officer,
Breeden Capital Management LLC;
Chairman, Richard C. Breeden & Co., LLC
Cynthia L. Feldmann 2
Formerly President and Founder,
Jetty Lane Associates
Jacqueline B. Kosecoff, Ph.D. 3, 4
Managing Partner,
Moriah Partners, LLC
David B. Lewis 2, 4
Partner and Former Chairman,
Lewis & Munday
Kevin M. McMullen 1
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, 4
Managing Partner,
Freudenberg and Co.
Loyal W. Wilson 1, 2
Managing Director,
Primus Capital Partners, Inc.,
Managing Partner,
Primus Venture Partners, L.P.
Michael B. Wood, M.D. 1, 3
Retired President and CEO,
Mayo Clinic Foundation
1 Compensation Committee Member
2 Audit Committee Member
3 Compliance Committee Member
4 Nominating and Governance
Committee Member
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, 2012. 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 2012 annual meeting will
be held on Thursday, July 26, 2012,
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.
FISCAL
2012
A N N U A L R E P O R T
Document #ANNRPT12.2012-05, Rev. A
©2012 STERIS Corporation.
All rights reserved.