FISCAL
2013ANNUAL REPORT
Dear Fellow Shareholders,
We entered fiscal 2013 with the anticipation that it would be a pivot year for STERIS,
with growth rates limited by our challenging comparisons due to the strong capital
equipment sales of SYSTEM 1E® units last year. Our year ended much better than
that, as our people exceeded our expectations for the year by growing revenue six
percent, completing four acquisitions, providing record earnings per share and
making significant working capital improvements. Our strength was not limited to
one segment – in fact, each business segment contributed to our growth.
Our largest segment, Healthcare, grew revenue six percent in total or four percent
organically, excluding the impact of SYSTEM 1® and SYSTEM 1E. Healthcare’s organic
growth stemmed from solid performance across the business with improvement
continuing to come from our newer products, including the V-PRO® maX low
temperature sterilization system, Vision® washers, Prolystica® cleaning chemistries,
and new integrated OR products. We are focused on introducing products that
increase efficiencies for our Customers, and in fact recently launched several new
products. Those include our iQ® 3600 OR integration system, a new line of steam
sterilizers, CS-iQ™ workflow management software, the AMSCO® 2500 washer, an
innovative orthopedic surgical table, and an ultraviolet surface disinfection system.
As with most companies, our European businesses were challenged during the year
by difficult market conditions, particularly in Southern Europe. However, our team was
able to offset revenue declines with cost savings so we did not see profit degradation.
We expect continued growth challenges in that region in the coming year but remain
cautiously optimistic for the longer run.
The Life Sciences team had an outstanding year, exceeding our expectations by
growing revenue eight percent. The team produced double-digit increases in capital
equipment and solid mid-single digit growth in both consumables and service. Their
profitability improved 14% with this increase in volume and favorable product mix.
And finally, the people of Isomedix delivered nine percent revenue growth in fiscal 2013
with six percent organic growth and the rest from our acquisition of Biotest in March
2012. You may recall that we have expanded capacity in Isomedix over the last year,
and that has had a near-term impact on our margins as we fill the new capacity. Even
with those expansions, Isomedix increased operating profit by over eight percent year-
over-year.
Turning to STERIS total profitability, our adjusted operating margin for the year came in
as we anticipated at just under 15%, a slight decline from the previous year. This was
due mainly to the cost of our annual incentive compensation program and the negative
impact of the Medical Device Excise Tax. Adjusted earnings per share grew five
percent to $2.34, which was above our expectation and included the impact of one
quarter of the Medical Device Excise Tax.
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One of the key drivers of operating margin improvement for us is our effort to create
a lean business, which is beginning to benefit us. As a result of the good work already
done, we are able to focus on several in-sourcing projects. We are pleased with the
progress we are making, and are beginning to see the benefits of these efforts. We
do not anticipate that we will see either meaningful savings or significant increased
cost in aggregate from these projects in fiscal 2014. However, beginning in fiscal 2015
and beyond, we anticipate saving $8 million to $10 million per year as a result of
these efforts.
When we look back on fiscal 2013, it was a milestone year for STERIS. We completed
the SYSTEM 1 transition and are very happy to have that behind us. We continued
to invest in new products and in quality processes to defend and grow our core
businesses. Simultaneously, our people executed on our strategy to expand into
adjacent markets with the purchase of US Endoscopy, Spectrum and TRE. And we
purchased the remaining interest in our OR integration partner, VTS Medical Systems.
These acquisitions are doing well in the aggregate, and our integration efforts are
on track.
As a result of these activities, we did leverage our balance sheet a bit more, taking on
an additional $280 million in debt. Even with this additional leverage, we are very com-
fortable with our balance sheet, and we have access to additional funds if needed to
support future growth opportunities. We substantially improved our working capital
management during the year, resulting in free cash flow in excess of our expectations.
We increased our dividend double digits for the seventh consecutive year to $0.19
per share per quarter. And last, but not least, our Total Shareholder Return was 34%
and 73% for 12 months and the past five years, respectively, which is above all
relevant standards.
I want to personally thank the people of STERIS for managing through such a busy
but exciting time in our evolution. Due to the careful execution of our strategies, our
people turned this year into one of growth and we anticipate carrying this momentum
into fiscal 2014 and beyond. I would also like to thank our Board of Directors for their
guidance and support.
I am honored to have the opportunity to lead your Company, and appreciate your
ongoing support.
Until next year,
Walt Rosebrough
President and Chief Executive Officer
June 2013
(Adjusted financials have been included in this document. Please refer to the reconciliation of adjusted results to GAAP
results contained at the end of this annual report under “Non-GAAP Financial Measures”).
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United States Securities and Exchange Commission
Washington, D. C. 20549
___________________________________________________________________
FORM 10-K
Annual Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended March 31, 2013
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 28, 2012:1,995,804,643
The number of Common Shares outstanding as of May 24, 2013: 58,945,494
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2013 Annual Meeting – Part III
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STERIS Corporation and Subsidiaries
Table of Contents
Page
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Part I
Business
Introduction
Information Related to Business Segments
Information with Respect to Our Business in General
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Financial Measures
Revenues-Defined
General Overview and Executive Summary
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
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Foreign Currency Risk
Commodity Risk
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
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Item 12
Item 13
Item 14
Item 15
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
6
9
15
15
17
19
20
21
22
22
22
22
23
24
24
26
39
42
42
43
48
48
48
50
50
50
50
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PART I
Throughout this Annual Report, STERIS Corporation and its subsidiaries together are called “STERIS,” “the Company,”
“we,” “us,” or “our,” unless otherwise noted. References in this Annual Report to a particular “year” or “year-end” mean our
fiscal year, which ends on March 31. For example, fiscal year 2013 ended on March 31, 2013.
ITEM 1.
BUSINESS
INTRODUCTION
STERIS Corporation is a leading provider of infection prevention and other procedural 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,
and connectivity solutions such as operating room (“OR”) integration; consumable products, such as detergents and skin care
products, gastrointestinal ("GI") endoscopy accessories, and other products; services, including equipment installation and
maintenance; and microbial reduction of medical devices, instrument and scope repair solutions, and laboratory testing
services.
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 6,000 employees
worldwide and operate in more than 60 countries. We have a direct sales force of approximately 600 and a service organization
of approximately 1,350 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 make a difference for our Customers and their patients by providing innovative
surgical, sterile processing, infection prevention and gastrointestinal solutions. 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 gamma 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 2013, 2012, and 2011 is presented in note 12 to our Consolidated Financial Statements titled, “Business Segment
3
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Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” (“MD&A”), of this Annual Report.
HEALTHCARE SEGMENT
Description of Business. Our Healthcare segment manufactures and sells capital equipment, accessory, consumable,
information support and service solutions to healthcare providers, including acute care hospitals and surgery and
gastrointestinal ("GI") 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 perioperative 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.
• Gastrointestinal endoscopy accessories for a variety of GI procedure areas including bleed management and procedure
irrigation, foreign body retrieval, polypectomy, and tissue acquisition.
• Connectivity solutions such as operating room (“OR”) integration, OR and sterile processing department ("SPD")
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 1E®, Amsco®, Hamo®, Reliance®, Cmax®, Harmony®,
Kindest Kare®, Alcare®, Verify®, Cal Stat®, and Roth Net®.
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 offer remote equipment monitoring technology to anticipate potential failure modes and take corrective
action thereby improving Customers' equipment uptime. We offer comprehensive instrument and scope repair solutions to
Customers, either on site or at one of our dedicated repair facilities. These solutions extend instrument and scope life and
reduce Customer's replacement costs. Finally, 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. These solutions also include 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, 2013, 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 3M, Belimed, Berchtold, Cantel Medical, Ecolab, Getinge, Go Jo, Johnson & Johnson,
Kimberly-Clark, Skytron, and Stryker.
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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,
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, 2013, 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 19 facilities located in North America. We sell
a comprehensive array of contract processing services using gamma irradiation (“Gamma”) and ethylene oxide (“EO”)
technologies as well as an array of laboratory testing services. 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 provide a wide range of processing services at our facilities. Gamma
is an irradiation process which utilizes cobalt-60. EO is a gaseous process. In addition, we offer an array of laboratory testing
services that complements the manufacturing of terminally sterilized products. 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 surgical 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’s services are offered to Customers throughout the footprint of its North
American network. For the year ended March 31, 2013, 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.
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Competition. Isomedix operates in a highly regulated industry and competes in North America with Sterigenics International,
Inc., and other smaller contract sterilization companies and manufacturers that sterilize products in-house.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Sources and Availability of Raw Materials. We purchase raw materials, sub-assemblies, components, and other supplies
needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials and
supplies used in our operations include stainless steel, organic chemicals, fuel, and plastic components. These raw materials and
supplies are available from several suppliers and in sufficient quantities that we do not currently expect any significant sourcing
problems in fiscal 2014. 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, 2013, we held 328 United States patents and 823 foreign patents and had 82 United States patent
applications and 282 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, 2013, we had a total of 1,123 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, 2013, 2012, and 2011, research and development expenses were $41.3 million, $36.0 million, and $34.3 million,
respectively. We incurred these expenses primarily for the research and development of commercial products.
We are focused on introducing products that increase efficiencies for our Customers, and in fact recently launched several
new products. Those include our iQ 3600 OR integration system, a new line of steam sterilizers, CS-iQ® workflow
management software, the AMSCO® 2500 washer, the OT 1000 series orthopedic surgical table, and an ultraviolet surface
disinfection system.
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.”
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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 Consent Decree,” and “Risk Factors,
Compliance with the Consent Decree may be more costly and burdensome than anticipated.” and see also Part I, Item 3, “Legal
Proceedings”, for further information on SYSTEM 1 and other regulatory issues and their potential impact. We believe that we
are currently compliant in all material respects with applicable regulatory requirements. However, there can be no assurance
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. Please refer to 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 continued 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, 2013, we had approximately 6,000 employees throughout the world. We believe we have good
relations with our employees.
Methods of Distribution. As of March 31, 2013, we employed approximately 1,500 direct field sales and service
representatives within the United States and approximately 450 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.
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International Operations. We believe we have opportunity to expand internationally, as we currently 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 43%, 22%, 22%,
and 13%, respectively, of our total international revenues for the year ended March 31, 2013.
Also see note 12 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A”,
for a geographic presentation of our revenues for the three years ended March 31, 2013, 2012 and 2011.
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 2013, revenues were unfavorably
impacted by $8.2 million, or 0.5%, and income before taxes was favorably impacted by $4.3 million, or 1.9%, as a result of
foreign currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or
the effect they will have on our operations.
Backlog. We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2013,
we had a backlog of $153.6 million. Of this amount, $105.2 million and $48.4 million related to our Healthcare and Life
Sciences segments, respectively. At March 31, 2012, we had backlog orders of $152.6 million. Of this amount $102.5 million
and $50.1 million related to our Healthcare and Life Sciences segments, respectively. A significant portion of the backlog
orders at March 31, 2013, 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, as well as other SEC filings related to the
Company, 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 Committee, the Compensation Committee, the
Nominating and 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
Suzanne V. Forsythe
David A. Johnson
Mark D. McGinley
Robert E. Moss
Walter M Rosebrough, Jr.
Michael J. Tokich
Age
59
64
51
59
51
56
68
59
44
Position
Vice President and Corporate Treasurer
Senior Vice President and Chief Technology Officer
Senior Vice President and Group President, Healthcare
Vice President-Human Resources
Senior Vice President, Global Operations and Quality
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.
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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.
Suzanne V. Forsythe serves as Vice President-Human Resources. She assumed this role in August 2011. She served as Senior
Director, Human Resources from April 2008 through August 2011.
David A. Johnson serves as Senior Vice President, Global Operations and Quality. He assumed this role in July 2012. From
April 2010 to July 2012 he served as Vice President, Global Operations and Continuous Improvement. From 2007 to April
2010 he served as Vice President Global Operations and Supply Chain at ConMed Corp., a global medical technology company
specializing in the development and sale of surgical and patient monitoring products and services.
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,
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 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, any 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 and the values of liabilities are determined on the basis of interest rates, the amount of gains or losses that will be
recognized in subsequent periods and the impact on the funded status of the plan and future minimum required contributions, if
any, might have a material adverse effect on our liquidity, value, financial conditions or result of operations.
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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
and 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.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 time how this situation may develop,
should the current conditions continue or worsen our business, performance, prospects, value, financial condition, bad debt
expense 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.
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-60, 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-60 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;
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•
•
•
•
•
•
•
•
•
utility or other mechanical failures;
unscheduled downtime;
labor difficulties;
inability to obtain or maintain any required licenses or permits;
disruption of communications;
data security, preservation and redundancy disruptions;
inability to hire or retain key management or employees;
disruption of supply or distribution; and
regulation of the safety, security or other aspects of our operations.
The occurrence of any of these or other events might disrupt or shut down operations, or otherwise adversely impact the
production or profitability of a particular facility, or our operations as a whole. Certain casualties also might cause personal
injury and loss of life, or severe damage to or destruction of property and equipment, and for casualties occurring at our
facilities, result in liability claims against us. Although we maintain property and casualty insurance and liability and similar
insurance of the types and in the amounts that we believe are customary for our industries, our insurance coverages have limits
and we are not fully insured against all potential hazards and risks incident to our business. Should any of the hazards or risks
occur, or should our insurance coverage be inadequate or unavailable, our business, performance, prospects, value, financial
condition, and results of operations might be adversely affected, both during and after the event.
We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks
associated with doing business outside the United States.
We maintain significant international operations, including operations in Canada, Europe, Asia 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
tax 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
initiated by competitive pressures as well as legislators, regulators and third-party payors. In an effort to attract Customers,
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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 also may occur as a result of recent healthcare legislation
and economic conditions. A loss of Customers or more significant pricing pressure also 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 will have a material impact on our profitability in the range of $8.0
million to $10.0 million. 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
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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 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 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
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FDA and us, a consent decree was agreed upon and approved by the Federal District Court for the Northern District of Ohio on
April 20, 2010 (the “Consent Decree”). As a consequence of these interactions and the Consent Decree, there are numerous
restrictions on us with respect to SYSTEM 1 and other liquid chemical sterilizing and disinfecting devices, components and
accessories. For example, we have discontinued all sales of our SYSTEM 1 processor and the provision of service, parts,
accessories and sterilant for the processor to U.S. Customers. 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.
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.
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 at a minimum through April, 2015, 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. In fiscal 2013 we consummated three such acquisitions: United States
Endoscopy Group, Inc., Spectrum Surgical Instruments Corp., and Total Repair Express, as well as buying out the interest of
our joint venture partner in VTS Medical Systems, LLC. Our success will also depend on our ability to integrate the businesses
acquired, retain key personnel and otherwise execute our strategies. Our success will also depend on our ability to develop
satisfactory working arrangements with our strategic partners in joint ventures or other affiliations, or to divest or realign
businesses. Competition for strategic business candidates may result in increases in costs and price for acquisition candidates
and market valuation issues may reduce the value available for divestiture of non-strategic businesses. These types of
transactions are also subject to a number of other risks and uncertainties, including:
•
•
•
•
•
•
delays in realizing the benefits of the transactions;
diversion of management's time and attention from other business concerns;
difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses;
difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture
difficulties;
adverse effects on existing business relationships with suppliers or Customers;
other events contributing to difficulties in generating future cash flows;
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36231_Steris_10K_WT.indd 16
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•
•
risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for
divested businesses; and
difficulties in obtaining 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.
If our continuing efforts to create a Lean business and in-source production to reduce costs are not successful, our
profitability may be hurt or our business otherwise might be adversely affected.
We have undertaken various activities to create a Lean business. One of those activities is in-sourcing. We have major
projects underway to in-source production that is currently provided by third parties. We have made capital investments during
fiscal 2013 on these projects, and anticipate additional investments in fiscal 2014. We expect to begin seeing meaningful
savings in aggregate in fiscal 2015. However, these activities may not produce the full efficiencies and cost reduction benefits
that we expect or efficiencies and benefits might be delayed. Implementation costs also might exceed expectations. If these in-
sourcing or other Lean activities are not properly implemented or are unsuccessful, we might experience business disruptions
or our business might be adversely affected.
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.
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.
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, 2013. 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.
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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
St. Louis, MO
Temecula, CA
San Diego, CA
Northborough, MA
Brooklyn Park, MN
South Plainfield, NJ
Libertyville, IL (2 locations)
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.
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
Chester, NY
Groveport, OH
Mentor, OH (10 locations)
Whippany, NJ
Vega Alta, PR
Spartanburg, SC
El Paso, TX (2 locations)
Grand Prairie, TX
Sandy, UT
Bordeaux, France
Quebec City, Canada
Whitby, Canada
Leicester, England
Mogi das Cruzes, Brazil
Tuusula, Finland
Minneapolis, MN (2 locations)
St. Louis, MO
Reno, NV
Mentor, OH (2 locations)
Pittsburgh, PA
Stow, OH (2 locations)
Hillsborough, NJ
Lake Orion, MI
Keller, TX
Haywood, CA
Houston, TX
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
Research and Development
Lobby, Showroom and Customer Service
Education Center
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Manufacturing/Sales Office/Showroom
Manufacturing
Contract Sterilization
Manufacturing
Manufacturing/Sales Office
Manufacturing/Sales Office
Contract Sterilization
Warehousing/Distribution
Warehousing
Administrative Offices
Sales Office
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
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
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
36231_Steris_10K_WT.indd 18
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United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
U.S./INTL
Location
U.S.
Costa Mesa, CA
Sales/Administration Offices
Use
Timonium, MD
Montgomery Village, MD
Melville, NY
Santa Clara, CA
Berchem, Belgium
Brussels, Belgium
Sao Paulo, Brazil
Mississauga, Canada
Beijing, China
Guangzhou, China
Shanghai, China
Basingstoke, England
Leicester, England
La Chapelle St. Mesmin, France
Orleans, France
Saint Jean d'illac, France
Cologne, Germany
Calcutta, India
Segrate, Italy
Tokyo, Japan
Petaling Jaya, Malaysia
Guadalupe, Mexico
Moscow, Russia
Singapore
Madrid, Spain
United Arab Emirates
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales Office
Sales Office
Sales/Administration Offices
Sales Office
Sales Office/Warehousing
Sales Office
Sales/Administration Offices/ Assembly
Sales Office
Sales Office
Warehousing
Sales Office
Showroom
Warehousing
Sales Office
Sales Office
Sales Office
Sales Office
Sales Office
Manufacturing
Sales Office
Sales Office
Sales Office
Sales Office
Owned/Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
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.
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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.
After ongoing discussions with the FDA, 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 provided the terms under which we temporarily continued 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 (the
“Transition Plan”),which included the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer
rebates in the form of cash or future purchase credits to 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 returned their units. In addition, we
provided 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 Rebate Program ended August 2, 2012. The costs associated with the Rebate
Program were lower than originally estimated because fewer Customers elected to participate in the Rebate Program than
anticipated.
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 3 and in various portions of Item 1A.
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.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical
indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and
other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do
not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have
reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not
currently believe that the impact of this event will have a material adverse effect on our financial results.
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 our Annual Report on Form 10-K for the
fiscal year ended March 31, 2013: “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 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.
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Additional information regarding our commitments and contingencies is included in Item 7, "MD&A" and in note 11 to
our consolidated financial statements titled, "Commitments and Contingencies".
ITEM 4. MINE SAFETY DISCLOSURES
None.
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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 2013
High
Low
Fiscal 2012
High
Low
March 31
December 31
September 30
June 30
$
$
$
41.76
34.80
$
37.18
32.23
$
36.33
29.91
32.38
$
32.68
$
36.76
$
27.70
27.08
27.66
31.83
28.77
36.57
33.14
Holders. As of March 31, 2013, there were approximately 1,302 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 2013, we paid cash dividends totaling $0.74 per outstanding common share ($0.17 per outstanding common share to
common shareholders of record on June 5, 2012, and $0.19 per outstanding common share to common shareholders of record
on the following dates: August 23, 2012, November 21, 2012 and February 27, 2013). 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 07, 2011 and $0.17 per outstanding common share to common shareholders of record on each of the following
record dates: August 23, 2011, November 23, 2011, and February 28, 2012).
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 2013 fiscal year:
(a)
Total Number of
Shares Purchased
—
—
—
— (1) $
$
(b)
Average Price P
aid
Per Share
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
—
—
—
— (1)
—
—
—
—
(d)
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Plans at Period End
111,630
111,630
111,630
111,630
(2)
$
$
January 1-31
February 1-28
March 1-31
Total
(1) Does not include 76 shares purchased during the quarter at an average price of $38.55 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, 2013, $111.6 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 2013 share repurchase activity in note 14 to our consolidated financial
statements titled, “Repurchases of Common Shares.”
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ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
2013(1)(2)
Statements of Income Data:
Years Ended March 31,
2011(1)(2)
2012(1)(2)
2010(1)
2009(1)
Revenues
Gross profit
Restructuring expenses
Income from continuing operations
Income taxes
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
$ 1,501,902
$ 1,406,810
$ 1,207,448
$ 1,257,733
$ 1,298,525
$
$
$
$
$
621,263
568,465
446,162
(565)
242,829
67,121
159,977
2.74
$
$
644
222,316
74,993
136,115
2.33
$
$
1,202
85,212
22,554
51,265
0.86
$
$
539,181
4,848
203,712
63,349
128,467
2.18
$
$
526,742
3,554
175,445
55,800
110,685
1.88
58,305
58,367
59,306
58,826
58,778
2.72
$
2.31
$
0.85
$
2.16
$
1.86
58,844
0.74
395,103
$
$
58,963
0.66
373,488
$
$
60,148
0.56
361,060
$
$
59,423
2.44
379,328
$
$
59,448
0.30
351,104
1,761,109
1,405,696
1,426,685
1,238,402
1,216,939
492,290
814,129
944,942
210,000
583,032
821,401
210,000
638,020
787,569
210,000
483,908
753,714
210,000
498,774
717,736
(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.
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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 2013, 2012 and 2011, 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:
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36231_Steris_10K_WT.indd 24
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• Revenues – Our revenues are presented net of sales returns and allowances.
•
Product Revenues – We define product revenues as revenues generated from sales of consumable and capital
equipment products.
Service Revenues – We define service revenues as revenues generated from parts and labor associated with the
maintenance, repair, and installation of our capital equipment, instrument repair services, and revenues generated from
contract sterilization offered through our Isomedix segment.
•
• Capital Revenues – We define capital revenues as revenues generated from sales of capital equipment, which includes
steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1 and 1E, washing
systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.
• Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family
of products, which includes SYSTEM 1 and 1E consumables, V-Pro consumables, gastrointestinal endoscopy
accessories, sterility assurance products, skin care products, cleaning consumables, and surgical instruments.
• Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and
service revenues.
GENERAL OVERVIEW AND EXECUTIVE SUMMARY
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. The aging population increases the demand
for medical procedures, which increases the consumption of single use medical devices and surgical kits processed by our
Isomedix segment.
We are actively pursuing opportunities to meet the changing needs of the global marketplace.
Highlights. We completed the transition from SYSTEM 1 and continued to invest in new products and in quality processes to
defend and grow our core business. Simultaneously, we continued the execution of our strategy to expand into adjacent markets
with acquisitions in the Healthcare segment. In August 2012, we purchased United States Endoscopy Group (“US
Endoscopy"), a leader in the design, manufacture and sale of therapeutic and diagnostic medical devices and support
accessories used in the gastrointestinal (GI) endoscopy markets worldwide. In October 2012, we acquired Spectrum Surgical
Instruments Corp (“Spectrum”) and Total Repair Express (“TRE”), providers of surgical instrument repair services and
instrument care products to hospitals and surgery centers in the United States. And in December 2012, we purchased the
remaining interest in our OR integration joint venture, VTS Medical Systems, LLC.
Revenues increased $95.1 million, or 6.8%, to $1,501.9 million for the year ended March 31, 2013, as compared to
$1,406.8 million for the year ended March 31, 2012. The fiscal 2013 and fiscal 2012 periods were impacted by the SYSTEM 1
Rebate Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted revenues for fiscal 2013, excluding the
impact of the SYSTEM 1 Rebate Program, increased $88.0 million, or 6.3%, to $1,479.5 million reflecting growth in all three
business segments (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). Reported and adjusted revenues for
fiscal 2013 include $86.5 million from acquisitions.
Fiscal 2013 operating income was $242.8 million, an increase of 9.2% over the fiscal 2012 operating income of $222.3
million. The primary drivers of the increase in operating income were the positive impact of the $23.6 million SYSTEM 1
Rebate Program adjustments recorded during fiscal 2013 and the $16.8 million SYSTEM 1 class action settlement adjustments
recorded during fiscal 2013. Excluding the SYSTEM 1 Rebate Program and class action settlement adjustments made in fiscal
2013, adjusted operating income during fiscal 2013 was $202.4 million, a decrease of 1.2% compared to $204.9 million for
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). The slight decline from last year was
due primarily to the cost associated with our annual incentive compensation plan and the negative impact of the Medical
Device Excise Tax.
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Cash flows from operations were $227.8 million and free cash flow was $140.4 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). As a result of the acquisition activity, we increased our leverage, issuing $200 million in
private placement debt towards the end of the year, as well as borrowing on our revolving credit facility. Even with this
additional leverage, we continue to maintain comfortable debt levels with debt-to-total capital of 34.3% at March 31, 2013. We
substantially improved our working capital management, resulting in free cash flow in excess of our expectations for the year.
In addition, we increased our dividend double digits for the seventh consecutive year to $0.19 per share per quarter.
Outlook. Since the first of our fiscal 2013 acquisitions did not close until the middle of the second quarter in fiscal 2013, we
will naturally have stronger top-line growth rates in the first half of fiscal 2014. Fluctuations in foreign currency rates can
impact revenues and costs outside of the United States, creating variability in our results for fiscal 2014 and beyond.
In fiscal 2014 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 free cash flow, and will use both to grow the business. We plan to
continue our efforts to in-source some of the production that we have traditionally out-sourced. We have come far enough with
our Lean approach that we expect to utilize the capacity we have created to shorten the supply chain and produce components
in-house.
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 were current users of SYSTEM 1 and who returned their units
had 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 provided credits for SYSTEM 1 service contracts and consumables in unbroken
packaging.
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 was attributable to the Customer Rebate portion of the Program and was recorded as a
reduction to revenue, and $7.7 million was attributable to the disposal liability of the SYSTEM 1 units to be returned and was
recorded in cost of revenues.
During fiscal 2012, based on the actual experience, we adjusted a portion of the original estimated liability related to the
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 resulted primarily from a decrease in the estimated number of eligible Customers that would
ultimately participate in the Rebate Program.
During fiscal 2013, we further adjusted the liability related to the Rebate Program. The total pre-tax adjustments amounted
to $23.7 million, of which $22.4 million was recorded as increases to revenue for the Customer rebate portion, and $1.3 million
was recorded as reductions to cost of revenues related to the disposal portion of the liability. These adjustments resulted
primarily from a lower number of eligible Customers electing to participate in the Rebate Program than previously estimated.
The remaining recorded accrual is $0.2 million as of March 31, 2013.
Fiscal 2011 operating expenses include a pre-tax charge of $19.8 million related to the initial recognition of 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). The claim submission deadline was December 31, 2012. As a result of the deadline passage during fiscal 2013, we
adjusted the liability related to the SYSTEM 1 class action settlement based on actual claims submitted.
International Operations. Since we conduct operations outside of the United States using various foreign currencies, our
operating results are impacted by foreign currency movements relative to the U.S. dollar. During fiscal 2013, our revenues were
unfavorably impacted by $8.2 million, or 0.5%, and income before taxes was favorably impacted by $4.3 million, or 1.9%, as a
result of foreign currency movements relative to the U.S. dollar.
NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We,
at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not
indicative of future results, in order to provide meaningful comparisons between the periods presented.
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These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an
alternative to the most directly comparable GAAP financial measures.
These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental
financial information used by management and the Board of Directors in their financial analysis and operational decision-
making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it
will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying
performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial
measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete
understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for
the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be
comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash
Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment,
and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our
ability to fund future debt principal repayments, growth outside of core operations, repurchase common shares, and pay cash
dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2013, 2012 and
2011:
(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
Years Ended March 31,
2012
$ 149,372
(66,682)
42
$ 82,732
2013
$ 227,815
(87,412)
34
$ 140,437
2011
$ 117,744
(77,442)
1,301
$ 41,603
To supplement our financial results presented in accordance with U.S. GAAP, we have sometimes referred to certain
measures of revenues, gross profit, gross profit percentage, 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 and the SYSTEM 1 class action settlement. These items had a significant impact on the fiscal 2013, 2012, and 2011
measures and the corresponding trend in each of these measures. We provide adjusted measures to give the reader a more
complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. These
measures are used by management and the Board of Directors in making comparisons to our historical operating results and
analyzing the underlying performance of our operations. The tables below provide a reconciliation of each of these measures to
its most directly comparable GAAP financial measure.
(dollars in thousands)
Reported revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted revenues
Reported capital equipment revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted capital equipment revenues
Reported United States revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted United States Revenues
Years Ended March 31,
2013
1,501,902
(22,367)
1,479,535
613,378
(22,367)
591,011
1,141,633
(22,367)
1,119,266
$
$
$
$
$
$
2012
1,406,810
(15,306)
1,391,504
626,959
(15,306)
611,653
1,057,460
(15,306)
1,042,154
$
$
$
$
$
$
2011
1,207,448
102,313
1,309,761
433,944
102,313
536,257
882,281
102,313
984,594
$
$
$
$
$
$
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Reported Healthcare revenues
Impact of the SYSTEM 1 Rebate Program
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 selling, general and administrative
Impact of the SYSTEM 1 class action settlement
Adjusted selling, general and administrative
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,074,790
(22,367)
1,052,423
521,806
(22,367)
499,439
621,263
(23,640)
597,623
$
$
$
$
$
$
1,013,102
(15,306)
997,796
545,596
(15,306)
530,290
568,465
(17,403)
551,062
$
$
$
$
$
$
835,832
102,313
938,145
357,465
102,313
459,778
446,162
110,004
556,166
41.4 %
(1.0)%
40.4 %
40.4 %
(0.8)%
39.6 %
37.0%
5.5%
42.5%
242,829
$
222,316
$
85,212
(40,422)
202,407
153,343
(40,422)
112,921
67,121
(15,765)
51,356
337,694
16,782
354,476
$
$
$
$
$
$
$
(17,403)
204,913
141,742
(17,403)
124,339
74,993
(6,780)
68,213
309,552
—
309,552
$
$
$
$
$
$
$
129,800
215,012
21,317
129,800
151,117
22,554
50,183
72,737
325,468
(19,800)
305,668
30.6%
5.1%
35.7%
Reported effective income tax rate
29.6 %
35.5 %
Impact of the SYSTEM 1 Rebate Program and class action
settlement
Adjusted effective income tax rate
(2.1)%
27.5 %
(0.3)%
35.2 %
RESULTS OF OPERATIONS
In the following subsections, we discuss our earnings and the factors affecting them. We begin with a general overview of
our operating results and then separately discuss earnings for our operating segments.
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FISCAL 2013 AS COMPARED TO FISCAL 2012
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2013
to the year ended March 31, 2012:
(dollars in thousands)
Total revenues
Revenues by type:
Capital equipment revenues
Consumable revenues
Service revenues
Revenues by geography:
United States revenues
International revenues
Years Ended March 31,
2013
2012
Change
Percent
Change
$
1,501,902
$
1,406,810
$
95,092
6.8 %
613,378
353,984
534,540
626,959
301,171
478,680
(13,581)
52,813
55,860
(2.2)%
17.5 %
11.7 %
1,141,633
360,269
1,057,460
349,350
84,173
10,919
8.0 %
3.1 %
Revenues increased $95.1 million, or 6.8%, to $1,501.9 million for the year ended March 31, 2013, as compared to $1,406.8
million for the year ended March 31, 2012. The fiscal 2013 and fiscal 2012 periods were impacted by the SYSTEM 1 Rebate
Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted revenues for the year ended March 31, 2013,
excluding the impact of the adjustment related to the SYSTEM 1 Rebate Program, were $1,479.5 million, a 6.3% increase over
adjusted revenues for 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). The increase reflects
growth in all three business segments.
Capital equipment revenues decreased by $13.6 million, or 2.2%, to $613.4 million, during fiscal 2013 as compared to fiscal
2012. Capital equipment revenues for the fiscal years ended 2013 and 2012 were favorably impacted by adjustments related to
the SYSTEM 1 Rebate Program of $22.4 million and $15.3 million, respectively. Adjusted capital equipment revenues for
fiscal 2013 were $591.0 million, a 3.4% decrease over adjusted capital equipment revenues for fiscal 2012. This decrease was
primarily driven by the expected post-transition decline in SYSTEM 1E unit sales (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). Consumable revenues increased $52.8 million, or 17.5%, during 2013 from fiscal 2012, as
increases within the Healthcare segment, driven largely by recent acquisitions, and the Life Sciences business segment more
than offset the anticipated decline in SYSTEM 1 consumable volume. Service revenues for fiscal 2013 increased $55.9 million,
or 11.7%, over fiscal 2012 primarily driven by the recent acquisition of the instrument repair businesses and other service
offerings.
United States revenues for fiscal 2013 were $1,141.6 million, an increase of $84.2 million, or 8.0%, over fiscal 2012
revenues of $1,057.5 million. The fiscal 2013 and 2012 periods were impacted by the SYSTEM 1 Rebate Program adjustments
of $22.4 million and $15.3 million, respectively. Adjusted United States revenues for fiscal 2013 were $1,119.3 million, an
increase of $77.1 million, or 7.4%, over adjusted United States revenues for 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). The increase is driven by higher consumable and service revenues attributable, in part, to our
recent acquisitions but also attributable to increased revenues from other products. These increases were partially offset by the
decline in capital equipment revenues driven primarily by the expected post-transition decline in SYSTEM 1E unit sales.
International revenues for fiscal 2013 were $360.3 million, an increase of 3.1% over the fiscal 2012 revenues of $349.4
million. This increase reflects revenue growth in the Asia Pacific and Latin American regions and Canada, partially offset by
declines in Europe.
Gross Profit. The following table compares our gross profit for the year ended March 31, 2013 to the year ended March 31,
2012:
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(dollars in thousands)
Gross profit:
Product
Service
Total gross profit
Gross profit percentage:
Product
Service
Total gross profit percentage
Years Ended March 31,
2012
2013
Change
Percent
Change
$
$
416,463
204,800
621,263
$
$
376,134
192,331
568,465
$
$
40,329
12,469
52,798
10.7%
6.5%
9.3%
43.1%
38.3%
41.4%
40.5%
40.2%
40.4%
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 $52.8 million and gross profit percentage
increased to 41.4% for fiscal 2013 as compared to 40.4% for fiscal 2012. The most significant driver of this increase results
from the change brought about by SYSTEM 1 Rebate Program which had a $23.6 million positive impact in fiscal 2013 as
compared to a $17.4 million positive impact in fiscal 2012. Excluding the impact of the SYSTEM 1 Rebate Program, fiscal
2013 adjusted gross profit and gross profit percentage were $597.6 million and 40.4%, respectively, while fiscal 2012 adjusted
gross profit and gross profit percentage were $551.1 million and 39.6%, 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). Other key factors impacting gross margin and the gross margin percentage of fiscal 2013 include
the negative impact of the loss of sterliant and capital equipment revenues due to the SYSTEM 1 and SYSTEM 1E transition
(70 basis points) and the Medical Device Excise Tax (20 basis points) and the positive impact of the following; acquisitions (80
basis points), pricing (60 basis points), volume from other products (30 basis points) and foreign currency fluctuations (30 basis
points).
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2013 to the year
ended March 31, 2012:
(dollars in thousands)
Operating expenses:
Selling, general, and administrative
Research and development
Restructuring expenses
Total operating expenses
NM - Not meaningful
Years Ended March 31,
2012
2013
Change
Percent
Change
$
$
337,694
41,305
(565)
378,434
$
$
309,552
35,953
644
346,149
$
$
28,142
5,352
(1,209)
32,285
9.1%
14.9%
NM
9.3%
Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs,
fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A
increased 9.1% during fiscal 2013 over fiscal 2012. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class
action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A
expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 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). Fiscal 2012 operating expenses reflect lower costs for our annual incentive
compensation plan since fiscal 2012 bonuses were not paid as performance targets for fiscal 2012 were not met. Fiscal 2013
SG&A includes transaction costs and incremental amortization of acquired intangible assets associated with the recent
acquisitions. SG&A also increased due to the operating expenses incurred within the operations of recently acquired
businesses.
Research and development expenses increased $5.4 million during fiscal 2013, as compared to fiscal 2012. The majority of
the increase is attributable to expenses for research and development incurred by the recently acquired US Endoscopy.
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 continue to emphasize new product development,
product improvements, and the development of new technological platform innovations. During fiscal 2013, our investments in
research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing
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combination technologies, surgical products and accessories, and the areas 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. 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 2013, and 2012:
(dollars in thousands)
Severance and other compensation related costs
Lease termination obligation and other
Total restructuring charges
(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,
2013
Fiscal 2010
Restructuring
Plan
$
$
(918)
353
(565)
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
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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:
(dollars in thousands)
Severance and termination benefits
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2013
March 31,
2012
Provision (1)
Payments/
Impairments (2)
March 31,
2013
$
$
659
947
76
$
(918) $
730
$
—
353
(791)
(429)
1,682
$
(565) $
(490) $
471
156
—
627
(1) Includes curtailment benefit of $0.9 million related to International defined benefit plan. Additional information is
included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
(dollars in thousands)
Severance and termination benefits
Product rationalization
Asset impairments and accelerated depreciation
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2012
March 31,
2011
Provision (1)
Payments/
Impairments (2)
March 31,
2012
$
1,993
$
(776) $
(558) $
—
—
1,790
193
335
1,103
139
4
$
3,976
$
805
$
(335)
(1,103)
(982)
(121)
(3,099) $
659
—
—
947
76
1,682
(1) Includes curtailment benefit of $1.3 million related to International defined benefit plan. Additional information is
included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest
earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table
compares our non-operating expense (income), net for the year ended March 31, 2013 to the year ended March 31, 2012:
(dollars in thousands)
Non-operating expenses, net:
Interest expense
Interest income and miscellaneous expense
Non-operating expenses, net
Years Ended March 31,
2013
2012
Change
$
$
15,675
56
15,731
$
$
12,065
(857)
11,208
$
$
3,610
913
4,523
Interest expense during fiscal 2013 periods increased due to higher outstanding borrowings due to acquisitions. Interest
income and miscellaneous expense is immaterial.
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, 2013 and March 31, 2012:
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(dollars in thousands)
Income tax expense
Effective income tax rate
Years Ended March 31,
2013
2012
Change
$
67,121
$
74,993
$
(7,872)
29.6%
35.5%
Percent
Change
(10.5)%
The effective income tax rate for fiscal 2013 was 29.6% as compared to 35.5% for fiscal 2012. The effective tax rate in
fiscal 2013 was impacted by a U.S. tax benefit resulting from European restructuring. Specifically, a U.S. tax deduction was
taken relating to the rationalization of operations in Switzerland. 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 and Corporate and other revenues for the year ended March 31, 2013 to the year ended March 31, 2012:
(dollars in thousands)
Revenues:
Healthcare
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total Revenues
Years Ended March 31,
2013
2012
Change
Percent
Change
$
$
1,074,790
244,421
179,550
1,498,761
3,141
1,501,902
$
$
1,013,102
226,658
164,257
1,404,017
2,793
1,406,810
$
$
61,688
17,763
15,293
94,744
348
95,092
6.1%
7.8%
9.3%
6.7%
12.5%
6.8%
Healthcare segment revenues increased $61.7 million, or 6.1% to $1,074.8 million for the year ended March 31, 2013, as
compared to $1,013.1 million for the prior fiscal year. Adjusted Healthcare revenues, excluding the impact of the adjustments
in each fiscal year related to the SYSTEM 1 Rebate Program, were $1,052.4 million, representing an increase of 5.5%
compared to $997.8 million for 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). The increase
in adjusted Healthcare revenues are attributable to the addition of consumable and service revenues from our recent
acquisitions as well as organic growth in capital equipment, consumable and service revenues. These increases were partially
offset by the expected post-transition decline in SYSTEM 1E unit sales and the decline in SYSTEM 1 consumable volumes. At
March 31, 2013, the Healthcare segment’s backlog amounted to $105.2 million, increasing $2.7 million, or 2.6%, compared to
the backlog of $102.5 million at March 31, 2012.
Life Science segment revenues increased $17.8 million or 7.8% to $244.4 million for the year ended March 31, 2013, as
compared to prior fiscal year, driven by growth in capital equipment, consumable and service revenues of 12.7%, 5.8% and
4.5%, respectively. The demand for capital equipment reflects replacement product purchases by our pharmaceutical
Customers. At March 31, 2013, the Life Sciences segment’s backlog amounted to $48.4 million, decreasing $1.7 million, or
3.4%, compared to the backlog of $50.1 million at March 31, 2012.
Isomedix segment revenues increased $15.3 million or 9.3% to $179.6 million for the year ended March 31, 2013, as
compared to prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers, as
well as the acquisition of Biotest in March 2012. With lab operations in Minneapolis, Minnesota, Biotest provides validation
services to our Customers.
The following tables compare our business segment and Corporate and other operating results for the year ended March 31,
2013 to the year ended March 31, 2012:
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(dollars in thousands)
Operating Income (loss):
Healthcare
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total Operating Income (loss)
Years Ended March 31,
2012
2013
Change
Percent
Change
$
$
153,343
47,453
51,455
252,251
(9,422)
242,829
$
$
141,742
41,633
47,596
230,971
(8,655)
222,316
$
$
11,601
5,820
3,859
21,280
(767)
20,513
8.2%
14.0%
8.1%
9.2%
8.9%
9.2%
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations,
which results in the full allocation of all distribution and research and development expenses, and the partial allocation of
corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in
relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one
manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the
revenues, 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.
The Healthcare segment's operating income increased $11.6 million, or 8.2% to $153.3 million for the year ended
March 31, 2013, as compared to $141.7 million for the prior fiscal year. Adjusted Healthcare operating income, excluding the
impact of the SYSTEM 1 Rebate Program and class action settlement, was $112.9 million as compared to adjusted $124.3
million during the prior fiscal 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 decline
in adjusted Healthcare operating income reflects the impact of the expected post-transition decline in SYSTEM 1E unit sales,
decline in SYSTEM 1 consumable volumes, the negative impact of the Medical Device Excise Tax, and expenses related to the
recent acquisitions. Also, fiscal 2012 operating expenses reflect lower costs for our annual compensation plan since fiscal 2012
bonuses were not paid as performance targets for fiscal 2012 were not met.
The Life Science segment's operating income increased $5.8 million, or 14.0% to $47.5 million for the year ended
March 31, 2013, as compared to $41.6 million for the prior fiscal year. The segment's operating margins were 19.4% and
18.4%, respectively, for the years ended March 31, 2013 and March 31, 2012. The improvement was primarily attributable to
higher revenues.
The Isomedix segment's operating income increased $3.9 million or 8.1% to $51.5 million for the year ended March 31,
2013, as compared to $47.6 million for the prior fiscal year, reflecting the benefits of increased revenues and improved
operating efficiencies. The segment's operating margins were 28.7% and 29.0%, respectively, for the years ended March 31,
2013 and March 31, 2012.
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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
1,057,460
349,350
882,281
325,167
175,179
24,183
44.5 %
(2.8)%
3.3 %
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 in 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). 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 in fiscal 2012.
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, although 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%.
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International revenues for fiscal 2012 were $349.4 million, an increase of $24.2 million, or 7.4%, as compared to fiscal
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,
2011
2012
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 a recent special FDA 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:
Years Ended March 31,
2011
2012
Change
Percent
Change
Selling, general, and administrative
$
309,552
$
325,468
$
Research and development
Restructuring expenses
Total Operating Expenses
35,953
644
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 were not 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
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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 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
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(dollars in thousands)
Severance and other compensation related costs
Asset impairment and accelerated depreciation
Lease termination costs
Other
Total Restructuring Charges
Fiscal 2010
Restructuring
Plan(1)
Year Ended March 31, 2011
Fiscal 2008
Restructuring
Plan
Total
$
454
559
595
33
$
— $
(289)
—
—
454
270
595
33
$
1,641
$
(289) $
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:
(dollars in thousands)
Severance and other compensation related costs
Product rationalization
Asset impairments
Lease termination obligations
Other
Total
(dollars in thousands)
Severance and other compensation related costs
Asset impairments
Lease termination obligations
Other
Total
(dollars in thousands)
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
$
(776) $
(558) $
—
—
1,790
193
335
1,103
139
4
(335)
(1,103)
(982)
(121)
659
—
—
947
76
3,976
$
805
$
(3,099) $
1,682
Fiscal 2010 Restructuring Plan
Fiscal 2011
March 31,
2010
Provision
Payments/
Impairments
March 31,
2011
1,894
$
—
1,200
509
454
559
595
33
$
(355) $
(559)
(5)
(349)
3,603
$
1,641
$
(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
$
$
— $
(102) $
(289)
—
—
(254)
(289) $
(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:
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36231_Steris_10K_WT.indd 38
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(dollars in thousands)
Non-Operating Expenses:
Interest expense
Interest and miscellaneous income
Non-Operating Expenses, Net
Years Ended March 31,
2011
2012
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,
2011
2012
22,554
74,993
$
$
Change
Percent
Change
$
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 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
$ 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
Percent
Change
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 reflected 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
revenues also increased with growth of 1.7%. These increases were partially offset by a decrease in Healthcare consumable
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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 was 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 reflected 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 was 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,
2011
2012
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
operating income of $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.
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LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes significant components of our cash flows for the years ended March 31, 2013, 2012 and
2011:
(dollars in thousands)
Operating activities:
Net income
Non-cash items
Change in 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, equipment, and
intangibles
Equity Investments
Investments in businesses, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from the issuance of long-term obligations
Proceeds under credit facilities, net
Repurchases of common shares
Deferred financing fees and debt issuance costs
Cash dividends paid to common shareholders
Stock option and other equity transactions, net
Tax benefit from stock options exercised
Net cash provided by (used in ) in financing activities
Debt-to-total capital ratio
Free cash flow
Years Ended March 31,
2012
2013
2011
$
$
$
$
$
$
$
159,977
97,877
(68,812)
38,773
227,815
(87,412)
34
—
(399,676)
(487,054)
200,000
82,290
(8,002)
(1,924)
(43,195)
23,019
2,058
254,246
34.3%
140,437
$
$
$
$
$
$
$
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)
—
—
(29,965)
—
(33,228)
12,730
2,525
(47,938)
21.1%
41,603
Net Cash Provided By Operating Activities –The net cash provided by our operating activities was $227.8 million for the
year ended March 31, 2013 compared to $149.4 million for the year ended March 31, 2012 and $117.7 million for the year
ended March 31, 2011. The following discussion summarizes the significant changes in our operating cash flows for the years
ended March 31, 2013, 2012 and 2011:
• Net cash provided by operating activities increased 52.5% in fiscal 2013 compared to fiscal 2012. The increase is
attributable to lower accounts receivable and inventory levels, and the cash benefit from a tax deduction related to the
closure of our Swiss manufacturing operations.
• 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 Used In Investing Activities – The net cash used in our investing activities was $487.1 million for the year ended
March 31, 2013, compared to $101.3 million for the year ended March 31, 2012 and $97.0 million for the year ended March
31, 2011. The following discussion summarizes the significant changes in our investing cash flows for the years ended
March 31, 2013, 2012 and 2011:
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•
Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $87.4 million during fiscal
2013, $66.7 million during fiscal 2012 and $77.4 million during fiscal 2011. Fiscal 2013 capital expenditures were higher
than fiscal 2012 and fiscal 2011 as a result of investments in our manufacturing centers and higher purchases of
radioisotope (cobalt-60). Fiscal 2012 capital expenditures were lower than fiscal 2011 as consolidation projects in the
United States and Europe were completed. Fiscal 2011 capital expenditures include 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 2013, 2012 and 2011 proceeds relate to
minor disposals.
• Equity investments – During fiscal 2011, we invested $16.9 million in VTS Medical Systems, LLC ("VTS") designed to
bring the latest high-definition video, touch-screen integration, and communication technology into hospital operating
rooms.
•
Investments in business, net of cash acquired – During fiscal 2013, we used $399.7 million of cash for the acquisitions of
US Endoscopy, Spectrum, TRE and the remaining VTS interests not already owned by us. For more information on these
acquisitions refer to note 4 to our consolidated financial statements titled, "Business Acquisitions". 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 Provided By (Used In) Financing Activities – Net cash provided by financing activities was $254.2 million for
the year ended March 31, 2013, compared to net cash used in financing activities of $88.1 million and $47.9 million for the
years ended March 31, 2012 and March 31, 2011, respectively. The following discussion summarizes the significant changes in
our financing cash flows for the years ended March 31, 2013, 2012 and 2011:
•
•
Proceeds from the issuance of long-term obligations – During fiscal year 2013 we issued $200 million of senior notes in a
private placement, which are long-term obligations. 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.”
Proceeds under credit facility, net – At the end of fiscal 2013, $82.3 million of debt, was outstanding under our revolving
credit facility.
• Repurchases of common shares – During fiscal 2013, we paid for the repurchase of 204,349 commons shares at an average
purchase price of $33.42 and obtained common shares in connection with our stock-based compensation award programs
in the amount $1.2 million. 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. 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 2013, we paid cash dividends totaling $43.2 million or $0.74
per outstanding common share. 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.
•
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee
stock option programs. During fiscal 2013, fiscal 2012 and fiscal 2011, we received cash proceeds totaling $23.0 million
$5.7 million, and $12.7 million, respectively, under these programs.
• Tax benefit from stock options exercised – For the years ended March 31, 2013, 2012 and 2011, our income taxes were
reduced by $2.1 million, $1.5 million, and $2.5 million, respectively, as a result of deductions allowed for stock options
exercised.
Cash Flow Measures. Free cash flow was $140.4 million in fiscal 2013 compared to $82.7 million in fiscal 2012. Our free
cash flow increased in fiscal 2013 as a result of a decrease in cash needed to fund operating assets and liabilities and the cash
benefit from a tax deduction related to the closure of our Swiss manufacturing operations (see subsection of MD&A titled,
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"Non-GAAP Financial Measures", for additional information and related reconciliation of non-GAAP financial measures to the
most comparable GAAP measures). Our debt-to-total capital ratio was 34.3% at March 31, 2013 and 20.4% at March 31, 2012.
Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated from
operations, and our existing credit facilities for short-term 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. To the extent that our
existing sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional
borrowings 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, 2013, approximately 96% 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, 2013 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, 2013
Amounts
Outstanding
March 31, 2013
Amounts
Available
$
410,000
400,000
810,000
$
$
— $
—
— $
410,000
82,290
492,290
$
$
—
317,710
317,710
(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 of senior notes, of which $60.0 million are still outstanding, 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 $60.0 million in outstanding notes, $40.0 million have a maturity of 10 years at an annual
interest rate of 5.25%, and the remaining $20.0 million have a maturity of 12 years at an annual interest rate of 5.38%.
• 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 have a maturity of five years at an annual
interest rate of 5.63%, another $85.0 million have a maturity of 10 years at an annual interest rate of 6.33%, and the
remaining $35.0 million have a maturity of 12 years at an annual interest rate of 6.43%.
•
•
In December 2012, 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. Of the $100.0 million of notes, $47.5 million have a maturity of 10 years at
an annual interest rate of 3.20%, an additional $40.0 million have a maturity of 12 years at an annual interest rate of
3.35%, and the remaining $12.5 million have a maturity of 15 years at an annual interest rate of 3.55%. These borrowings
were used primarily for the repayment of existing credit facility debt. The agreements related to these notes contain a
financial covenant, including limitations on debt.
In February 2013, we issued $100.0 million of senior notes to certain institutional investors in a private placement that was
not required to be registered with the SEC. Of the $100.0 million of notes, $47.5 million have a maturity of nine years and
10 months at an annual interest rate of 3.20%, an additional $40.0 million have a maturity of 11 years and 10 months at an
annual interest rate of 3.35%, and the remaining $12.5 million have a maturity of 14 years and 10 months at an annual
interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The
agreements related to these notes contain a financial covenant, including limitations on debt.
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• 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 our previous credit agreement. The Credit
Agreement initially provided a $300.0 million credit facility and was amended in October 2012, to increase the credit
facility to $400.0 million (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, 2013, we had $317.7 million of funding available under the Credit Agreement. The Credit Agreement
includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. At March 31, 2013, there
were no letters of credit outstanding under the Credit Agreement.
At March 31, 2013, 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 2013, our capital expenditures amounted to $87.4 million. We use cash provided by operating
activities and our cash and cash equivalent balances to fund capital expenditures. We expect fiscal 2014 capital expenditures to
be comparable to fiscal 2013 levels with continued investment in projects intended to improve quality, reduce operating costs
and add value to the current product offering.
CONTRACTUAL AND COMMERICAL COMMITMENTS
At March 31, 2013, we had commitments under non-cancelable operating leases totaling $45.2 million.
Our contractual obligations and commercial commitments as of March 31, 2013 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.
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Payments due by March 31,
(in thousands)
2014
2015
2016
2017
2018 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
14,621
15,403
—
4,101
$
— $ 20,000
8,934
11,598
—
3,943
12,802
11,246
—
4,017
$
— $ 402,290
4,018
9,161
—
21,126
4,803
11,950
—
3,858
$ 492,290
45,178
59,358
—
37,045
(4,101)
(4,017)
(3,943)
(3,858)
(21,126)
(37,045)
3,271
—
299
$ 103,594
3,043
—
165
$ 27,256
2,840
—
167
$ 43,539
2,467
—
—
$ 19,220
9,699
—
—
$ 425,168
21,320
118
631
$ 618,895
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 $0.1 million. The actual amount of unrecognized tax benefits
is $9.4 million. Of this amount, we anticipate non-cash settlement of $9.3 million within the next 12 months. Due to the high
degree of uncertainty regarding the timing of future cash outflows associated with these remaining tax positions, we are unable
to estimate when cash settlements may occur. Related to the unrecognized tax benefits included in the table above, we have
also recorded a liability for potential interest and penalties of $0.01 million.
(in thousands)
Commercial Commitments:
Performance and surety bonds
Amount of Commitment Expiring March 31,
2014
2015
2016
2017
2018 and
thereafter
Totals
$ 32,104
$ 6,187
$
67
$
35
$ 1,450
$ 39,843
Letters of credit as security for self-insured risk
retention policies
Total Commercial Commitments
5,961
—
$ 38,065
$ 6,187
$
—
67
$
—
35
—
5,961
$ 1,450
$ 45,804
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.
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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.
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 38.6% and 37.7% of total inventories at March 31, 2013 and 2012, respectively. Inventory
costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have
been $18.9 million and $18.2 million higher than those reported at March 31, 2013 and 2012, 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.
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Purchase Accounting and Goodwill. Assets and liabilities of the business acquired are accounted for at their estimated fair
values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible
assets acquired is recorded as goodwill. We supplement management expertise with valuation specialists 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 may 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, 2012. Based on this evaluation, we
determined that there was no impairment of the recorded goodwill amounts and we do not believe that any of our reporting
units are at a significant risk of failing goodwill impairment testing.
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 and Class Action Settlement. The SYSTEM 1 Rebate Program (the “Rebate Program”) was
initially recognized during the first quarter of fiscal 2011. The rebate portion of the Rebate Program was recognized as contra-
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revenue consistent with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the
returned SYSTEM 1 processors portion of the Rebate Program were recognized as cost of revenues. Both components were
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 Rebate Program ended August 2, 2012. Customers utilized rebates totaling approximately $66.6 million on orders
placed since the initiation of the Rebate Program. The costs associated with the Rebate Program were lower than originally
estimated because fewer Customers elected to participate in the Rebate Program than anticipated. The remaining recorded
accrual is $0.2 million as of March 31, 2013.
The SYSTEM 1 class action settlement was initially recognized during the third quarter of fiscal 2011. The claim
submission deadline was December 31, 2012. As a result, during fiscal 2013 we adjusted the liability related to the SYSTEM 1
class action settlement. The pretax adjustments amounted to $16.8 million, and were recorded as reductions to operating
expenses.
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. The obligation covered by insurance contracts will remain on the balance
sheet as we remain liable to the extent insurance carriers do not meet their obligation. Estimated amounts receivable under the
contracts are included in Part II, Item 8. titled, "Financial Data and Supplementary Data", in our consolidated balance sheets.
Our accrual for self-insured risk retention as of March 31, 2013 and 2012 was $14.1 million and $10.8 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, 2013 and 2012, we had accrued $12.7 million and $11.2 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.
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We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled
primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation.
Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of
our federal income tax returns.
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 former manufacturing and plant administrative personnel
as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain
businesses. As of March 31, 2013, we sponsored defined benefit pension plans for eligible participants in the United States. In
addition, as of March 31, 2013, 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 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,
2013 projected benefit obligations and the fiscal 2013 net periodic benefit costs is as follows:
Funding Status
Assumptions used to determine March 31, 2013
benefit obligations:
Discount rate
Assumptions used to determine fiscal 2013
net periodic benefit costs:
Discount rate
Expected return on plan assets
NA – Not applicable.
U.S. Defined
Benefit Pension
Plan
Funded
Other Post-
Retirement Plan
Unfunded
3.50%
3.00%
4.25%
8.00%
3.75%
n/a
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 2013 benefit costs by $0.2 million. The projected benefit obligations at March 31, 2013 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 2013 net periodic benefit costs by approximately $0.05 million and would have increased the projected benefit
obligations by approximately $3.4 million at March 31, 2013.
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 of 8% 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, 2013:
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(dollars in thousands)
Effect on total service and interest cost components
Effect on postretirement benefit obligation
100 Basis Point
Increase
Decrease
$
$
6
152
(6)
(145)
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.
Share-Based Compensation. We measure the estimated fair value for 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 $8.9 million in fiscal 2013, $7.9 million in fiscal 2012 and $10.2 million in fiscal
2011. Note 15 to our consolidated financial statements titled, “Share-Based Compensation,” contains additional information
about our 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 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," "deliver," "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 herein and in the
Company's other securities filings. Many of these important factors are outside STERIS's 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, transition,
cost reductions, business strategies, earnings or revenue trends or future financial results (including without limitation
regulatory matters related to SYSTEM 1E or its accessories). References to products, the consent decree, the transition or
rebate program, or the class action settlement, are summaries only and should not be considered the specific terms of the
decree, settlement, program or product clearance or literature. Unless legally required, the Company does not undertake to
update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will
not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the
forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing or costs that leads to
erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or
applications, or 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
48
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limitation those relating to FDA warning notices or letters, government investigations, the SYSTEM 1E device, the outcome of
any pending FDA requests, inspections or 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 Company
performance, results, prospects or value, (d) the potential of international unrest, economic downturn or effects of currencies,
tax assessments, adjustments or anticipated rates, raw material costs or availability, benefit or retirement plan costs, or other
regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the
Company's products and services, (f) the possibility that anticipated growth, cost savings, new product acceptance, performance
or approvals, including without limitation SYSTEM 1E and accessories thereto, or other results may not be achieved, or that
transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with our business,
industry or initiatives including, without limitation, the consent decree, and the transition from the SYSTEM 1 processing
system and adjustments to related reserves or those matters described in this Form 10-K for the year ended March 31, 2013 and
other securities filings, may adversely impact Company performance, results, prospects or value, (g) the possibility that
anticipated financial results or benefits of recent acquisitions will not be realized or will be other than anticipated, (h) the effect
of the contraction in credit availability, as well as the ability of our Customers and suppliers to adequately access the credit
markets when needed, and (i) those risks described in our securities filings including this Annual Report on Form 10-K for the
year ended March 31, 2013.
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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, 2013, we had $410.0 million in fixed rate senior notes outstanding. As of March 31, 2013, we had $82.3
million in outstanding borrowings under our revolving credit facility. Borrowings under the revolving credit facility are
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 19 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,
2013, we held foreign currency forward contracts to buy 79.7 million Mexican pesos and 12.5 million Canadian dollars. At
March 31, 2013, we held commodity swap contracts to buy 103 thousand pounds of nickel.
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 a certain commodity that impacts raw materials included in our
cost of revenues.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive 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
52
53
54
55
56
57
58
91
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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,
2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended March 31, 2013, 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, 2013, 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 30, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 30, 2013
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STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31,
Current assets:
Assets
Cash and cash equivalents
Accounts receivable (net of allowances of $10,043 and $11,428, 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;
58,759 and 57,733 shares outstanding, respectively
Common shares held in treasury, 11,281 and 12,307 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.
2013
2012
142,008
275,937
144,443
21,195
30,357
613,940
431,952
704,424
10,793
1,761,109
79,374
54,316
253
84,894
218,837
492,290
44,924
58,078
814,129
$
$
$
$
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
—
—
239,648
(321,801)
1,031,183
(4,088)
944,942
2,038
946,980
1,761,109
$
244,091
(350,718)
914,401
13,627
821,401
1,263
822,664
1,405,696
$
$
$
$
$
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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
2013
2012
2011
$
967,362
534,540
1,501,902
$
928,129
478,681
1,406,810
$
743,838
463,610
1,207,448
550,899
329,740
880,639
621,263
337,694
41,305
(565)
378,434
242,829
15,675
56
15,731
227,098
67,121
159,977
2.74
2.72
0.74
$
$
$
$
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
$
$
$
$
See notes to consolidated financial statements.
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STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended March 31,
Net income
Unrealized gain on available for sale securities
Amortization of pension and postretirement benefit plans costs, net of
taxes of $2,706, $4,102 and $1,473, respectively)
Change in cumulative foreign currency translation adjustment
Total other comprehensive income (loss)
Comprehensive income
2013
2012
2011
$
159,977
$
136,115
112
70
51,265
192
(4,082)
(7,279)
(1,024)
(13,745)
(17,715)
(14,352)
(21,561)
$
142,262
$
114,554
$
23,029
22,197
73,462
See notes to consolidated financial statements.
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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, net of effects of acquisitions:
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
Acquisition of business, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from the issuance of long-term obligations
Proceeds under credit facilities, net
Deferred financing fees and debt issuance costs
Repurchases of common shares
Cash dividends paid to common shareholders
Stock option and other equity transactions, net
Tax benefit from stock options exercised
Net cash provided by (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
2013
2012
2011
$
159,977
$
136,115
$
51,265
69,035
23,751
8,917
62,906
22,093
7,858
294
664
(4,120)
(4,667)
21,866
28,015
(8,889)
(12,536)
(68,812)
10,317
227,815
(87,412)
34
—
(399,676)
(487,054)
200,000
82,290
(1,924)
(8,002)
(43,195)
23,019
2,058
254,246
(3,820)
(8,813)
150,821
142,008
$
(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
$
See notes to consolidated financial statements.
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STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common Shares
Treasury Shares
Number
Amount
Number
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
Total
Equity
Balance at March 31, 2010
59,227
$
237,165
10,813
$
(295,251)
$ 798,809
$
12,991
$
780
$ 754,494
Comprehensive income:
Net income
Other comprehensive
income
Repurchases of common
shares
—
—
(952)
Equity compensation programs
847
Tax benefit of stock options
exercised
Cash dividends – $.56 per
common share
Change in noncontrolling
interest
—
—
—
—
—
—
1,653
2,525
—
—
—
—
952
(847)
—
—
—
—
—
(29,965)
19,408
—
—
—
51,265
—
—
—
—
(33,228)
—
—
22,197
—
—
—
—
—
—
—
—
—
—
—
51,265
22,197
(29,965)
21,061
2,525
(33,228)
316
316
Balance at March 31, 2011
59,122
$
241,343
10,918
$
(305,808) $
816,846
$
35,188
$
1,096
$
788,665
Comprehensive income:
Net income
Other comprehensive loss
Repurchases of common
shares
—
—
(1,887)
Equity compensation programs
498
Tax benefit of stock options
exercised
Cash dividends – $0.66 per
common share
Change in noncontrolling
interest
—
—
—
—
—
—
1,234
1,514
—
—
—
—
—
—
1,887
(56,751)
(498)
11,841
—
—
—
—
—
—
136,115
—
—
—
—
(38,560)
—
—
(21,561)
—
—
—
—
—
—
—
—
—
—
—
136,115
(21,561)
(56,751)
13,075
1,514
(38,560)
167
167
Balance at March 31, 2012
57,733
$
244,091
12,307
$
(350,718) $
914,401
$
13,627
$
1,263
$
822,664
Comprehensive income:
Net income
Other comprehensive loss
Repurchases of common
shares
—
—
(257)
—
—
—
—
—
257
—
—
(8,002)
Equity compensation programs
1,283
(6,501)
(1,283)
36,919
Tax benefit of stock options
exercised
Cash dividends – $0.74 per
common share
Change in noncontrolling
interest
—
—
—
2,058
—
—
—
—
—
—
—
—
159,977
—
—
—
—
—
(43,195)
—
(17,715)
—
—
—
—
—
—
—
—
—
—
—
159,977
(17,715)
(8,002)
30,418
2,058
(43,195)
775
775
Balance at March 31, 2013
58,759
$
239,648
11,281
$
(321,801) $ 1,031,183
$
(4,088) $
2,038
$
946,980
See notes to consolidated financial statements.
36231_Steris_10K_WT.indd 59
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57
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 procedural 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 titled, "Business Segment Information". 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,
2013
2012
2011
Cash paid during the year for:
Interest
Income taxes
Cash received during the year for income tax refunds
$ 14,115
38,475
1,096
$
$ 12,496
52,213
408
12,496
64,372
3,067
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.
58
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Accounts Receivable. Accounts receivable are presented at their face amount, less allowances for sales returns and
uncollectible accounts. Accounts receivable consist of amounts billed and currently due from Customers and amounts earned
but unbilled. We generally obtain and perfect security interest in products sold in the United States when we have a concern
with the Customer's risk profile.
We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by
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 38.6% and 37.7% of total inventories at March 31, 2013 and 2012, respectively.
Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories
would have been $18,944 and $18,158 higher than those reported at March 31, 2013 and 2012, 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
2-20
2-20
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
$585 and $705 for the years ended March 31, 2013 and 2012, respectively.
Total interest expense for the years ended March 31, 2013, 2012, and 2011 was $15,675, $12,065, and $12,000,
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
59
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
value. We generally amortize identifiable intangible assets over periods ranging from 5 to 20 years using the straight-line
method. Our intangible assets also include indefinite-lived assets including certain trademarks and tradenames that were
acquired in fiscal 2013. These assets will be tested periodically for impairment.
Investments. Investments in marketable securities are stated at fair value and are included in "Other assets" on the
Consolidated Balance Sheets. Unrealized gains and losses on marketable securities 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 may 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, was 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 was 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 was recognized as cost of revenues. Both components were 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 Rebate Program ended August 2, 2012. Customers utilized rebates totaling approximately $66,600 on orders placed
since the initiation of the Rebate Program. The costs associated with the Rebate Program were lower than originally estimated
because fewer Customers elected to participate in the Rebate Program than anticipated. The remaining recorded accrual is $210
as of March 31, 2013.
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 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-
60
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in
other comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date.
We provide additional information about our pension and other post-retirement welfare benefits plans in note 10 to our
consolidated financial statements titled, “Benefit Plans.”
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 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 $6,880, $5,857, and $6,013 of
advertising costs during the years ended March 31, 2013, 2012, and 2011, 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
61
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent
financial reporting period in which the threshold is no longer met.
We describe income taxes further in note 9 to our consolidated financial statements titled, “Income Taxes.”
Medical Device Excise Tax. The Medical Device Excise Tax became effective January 1, 2013. The excise tax was mandated
by the 2010 health care reform legislation and assesses a 2.3% tax on the sale or use of certain medical devices that are sold or
manufactured in the United States. Many of our products are subject to the excise tax. The tax is included in cost of revenues in
the period of sale.
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 February 2013, the FASB issued an accounting standards update titled "Presentation of Comprehensive Income:
Reclassification Out of Accumulated Other Comprehensive Income," amending Accounting Standards Codification ASC Topic
220, "Comprehensive Income". This amended guidance requires an entity to report information about the amounts reclassified
out of accumulated other comprehensive income (AOCI) by component. In addition, for significant items reclassified from
AOCI to net income in their entirety, during the same reporting period, entities are required to report the effect on the line items
on the face of the statement where net income is presented, or in the notes. For significant items that are not classified to net
income in their entirety, entities are required to cross-reference to other disclosures that provide additional information about
those amounts. The standards update is effective prospectively for fiscal periods beginning after December 15, 2012, with early
adoption permitted. We anticipate adoption of the new standard during the first quarter of our fiscal year 2014. The anticipated
adoption of this standard is not expected to impact our consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued an accounting standards update titled "Testing Indefinite-Lived Intangible Assets" for
Impairment," amending certain sections of Subtopic 350-30 Intangibles-Goodwill and Other-General Intangibles Other than
Goodwill. This amended guidance allows an entity to first assess qualitative factors to determine if it is more likely than not
that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on its qualitative assessment
an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying
amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing
is not required. The standards update is effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012, with early adoption permitted. The anticipated adoption of this standard is not expected to impact our
consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued an accounting standard update titled "Presentation of Comprehensive Income," amending
Accounting Standards Codification ASC Topic 220, "Comprehensive Income." This guidance requires that all non-owner
changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. This guidance became effective retrospectively for the interim periods and annual periods
beginning after December 15, 2011. As required by the standard, Consolidated Statements of Comprehensive Income have been
presented. The adoption of this standard did not have an impact on our consolidated financial position, results of operations or
cash flows.
62
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 $8,176 related to these
actions, of which $7,072 was recorded as restructuring expenses and $1,104 was recorded in cost of revenues. We do not expect
to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability
and improve efficiencies.
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.
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 2013, fiscal 2012 and fiscal 2011:
Year Ended March 31, 2013
Severance and other compensation related costs
Lease termination obligation and other
Total restructuring charges
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
$
$
(918)
353
(565)
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.
63
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Year Ended March 31, 2011
Severance and other compensation related costs
Asset impairment and accelerated depreciation
Lease termination obligation and other
Other
Total restructuring charges
Fiscal 2010
Restructuring
Plan (1)
Fiscal 2008
Restructuring
Plan
Total
$
$
454 $
559
595
33
— $
(289)
—
—
454
270
595
33
1,641 $
(289) $
1,352
(1) Includes $150 in charges recorded in cost of revenues on 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 termination benefits
Lease termination obligations
Other
Total
Fiscal 2010 Restructuring Plan
Fiscal 2013
March 31,
2012
Provision (1)
Payments/
Impairments (2)
March 31,
2013
$
$
659
947
76
$
(918) $
730
$
—
353
(791)
(429)
1,682
$
(565) $
(490) $
471
156
—
627
(1) Includes curtailment benefit of $922 related to International defined benefit plan. Additional information is included in
note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
Fiscal 2010 Restructuring Plan
Fiscal 2012
March 31,
2011
Provision (1)
Payments/
Impairments (2)
March 31,
2012
Severance and termination benefits
$
1,993
$
(776) $
(558) $
Product rationalization
Asset impairments and accelerated depreciation
Lease termination obligations
Other
Total
—
—
1,790
193
335
1,103
139
4
(335)
(1,103)
(982)
(121)
659
—
—
947
76
$
3,976
$
805
$
(3,099) $
1,682
(1) Includes curtailment benefit of $1,336 related to International defined benefit plan. Additional information is included in
note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
3. 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 2013. 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 2013 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, 2013 and 2012 were as follows:
64
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Balance at March 31, 2011
Goodwill acquired or allocated
Foreign currency translation adjustments
Balance at March 31, 2012
Goodwill acquired or allocated
Foreign currency translation adjustments
Balance at March 31, 2013
$
Healthcare
Segment
Life Sciences
Segment
STERIS
Isomedix Services
Segment
Total
$
175,845
$
33,447
$
79,896
$
289,188
13,971
(184)
189,632
187,937
(3,901)
373,668
$
—
401
33,848
—
(1,085)
32,763
2,473
—
82,369
666
—
$
83,035
$
16,444
217
305,849
188,603
(4,986)
489,466
The fiscal 2013 increase in goodwill associated with the Healthcare segment resulted from the acquisitions of United States
Endoscopy Group, Inc., Spectrum Surgical Instruments Corp, Total Repair Express, and the remaining interest in VTS Medical
Systems, LLC, as described in Note 4 to our consolidated financial statements titled, "Business Acquisitions". The decrease
associated with Life Science segment resulted from foreign currency fluctuations.
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.
Information regarding our intangible assets is as follows:
Customer relationships
Non-compete agreements
Patents and technology
Trademarks and tradenames
Other
Total
March 31, 2013
March 31, 2012
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
60,759
$
21,302
$
25,595
$
3,773
169,589
49,780
12
3,177
33,612
10,852
12
3,518
43,218
16,953
12
19,124
3,121
25,979
9,125
12
$
283,913
$
68,955
$
89,296
$
57,361
Certain trademarks and tradenames acquired in fiscal 2013 are indefinite-lived assets. Total amortization expense for finite-
lived intangible assets was $13,068, $7,726, and $6,617 for the years ended March 31, 2013, 2012, and 2011, respectively.
Based upon the current amount of intangible assets subject to amortization, the amortization expense for each of the five
succeeding fiscal years is estimated to be as follows:
Estimated amortization expense
$
18,132
$
17,027
$
16,952
$
15,969
$
15,894
2014
2015
2016
2017
2018
The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31,
2013 foreign currency exchange rates.
4. BUSINESS ACQUISTIONS
United States Endoscopy Group, Inc.
In August 2012, we completed the acquisition of all the outstanding shares of capital stock of United States Endoscopy
Group, Inc. (“US Endoscopy”). The purchase price was approximately $270,000, plus a working capital adjustment of $2,145,
65
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
which adjustment was paid during the third quarter of fiscal year 2013. In addition, we purchased all real estate used in the US
Endoscopy business for approximately $7,000, including properties owned by two US Endoscopy affiliates. We did not assume
any existing debt in connection with the purchases. The purchases were financed by a combination of cash on hand and
borrowings under our existing credit facility. US Endoscopy is being integrated into the Healthcare segment.
We recorded acquisition related costs of $4,006, before tax, which are reported in selling, general and administrative
expenses. We anticipate that the acquisition will qualify for a joint election tax benefit under Section 338(h)(10) of the Internal
Revenue Code, which allows goodwill and intangibles to be fully deductible for tax purposes. The intangible assets acquired
consist of trademarks, trade names and developed technologies, which will be amortized on a straight line basis over thirteen to
fifteen years, with the exception of the US Endoscopy trade name which has an indefinite life.
Spectrum Surgical Instruments Corp and Total Repair Express
In October 2012, we purchased two privately-owned businesses: Spectrum Surgical Instruments Corp ("Spectrum") and
Total Repair Express ("TRE"), providers of surgical instrument repair services and instrument care products to hospitals and
surgery centers in the United States. The aggregate purchase price of approximately $110,000, including contingent
consideration, was financed with borrowings under the existing credit facility. The purchase price remains subject to a working
capital adjustment as of March 31, 2013. The instrument repair business is being integrated into the Healthcare business
segment.
We recorded acquisition related costs of $2,283, before tax, which are reported in selling, general and administrative
expenses. We anticipate that the acquisition of Spectrum will qualify for a joint election tax benefit under Section 338(h)(10) of
the Internal Revenue Code, which allows goodwill and intangibles to be fully deductible for tax purposes. The intangible assets
acquired consist of trademarks, customer relationships and non-compete arrangements, which will be amortized on a straight
line basis over one to fifteen years with the exception of the Spectrum tradename which has an indefinite life.
VTS Medical Systems, LLC
In December 2012, we purchased the remaining interests in our VTS Medical Systems, LLC ("VTS") joint venture. The
joint venture began in fiscal 2009, and we increased our ownership of the joint venture to just under 50% during fiscal 2011.
The fair value of our equity interest held in VTS immediately before the date of acquisition was $22,034, which approximated
fair value. With this final investment, VTS is now a wholly-owned subsidiary of STERIS and is being integrated into the
Healthcare business segment. We purchased the remaining interests for a total of approximately $19,000, comprised of cash at
closing and deferred cash payments to be paid over a ten year period.
We recorded acquisition related costs of $27, before tax, which are reported in selling, general and administrative expenses.
We consolidated VTS for the first time in the third quarter of fiscal 2013.
The Consolidated Financial Statements include the operating results of USE, Spectrum, TRE and VTS from the date of
acquisitions. Pro-forma results of operations for fiscal 2013 and 2012 periods have not been presented because the effects of the
acquisition were not material to our financial results.
The table below summarizes the allocation of the purchase price to the net assets acquired based on fair values at the
acquisition dates for our fiscal 2013 acquisitions. For VTS, the table below includes the net assets included in the consolidated
balance sheet including the allocation of the purchase price, based on estimated fair values at the closing date.
66
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Cash
Accounts receivable
Inventory
Property, plant and equipment
Other assets
Intangible assets
Goodwill
Total Assets
Accounts payable
Other Liabilities
Total Liabilities
Net Assets
USE (1)
Spectrum/TRE (1)
VTS (1)
$
767
$
424
$
8,291
7,228
12,457
913
144,000
111,261
284,917
(2,167)
(3,243)
(5,410)
10,795
5,107
5,091
530
41,600
51,125
114,672
(5,528)
(3,088)
(8,616)
1,442
689
3,838
1,576
56
6,930
25,551
40,082
(1,454)
152
(1,302)
$
279,507
$
106,056
$
38,780
(1) Purchase price allocation is still preliminary as of March 31, 2013, as valuations of intangible assets acquired have not been
finalized.
5. INVENTORIES, NET
Inventories, net consisted of the following:
March 31,
Raw materials
Work in process
Finished goods
LIFO reserve
Reserve for excess and obsolete inventory
Inventories, net
2013
2012
$
$
54,456
24,300
96,616
(18,944)
(11,985)
144,443
$
$
56,525
25,236
109,422
(18,158)
(15,313)
157,712
67
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
6. PROPERTY, PLANT AND EQUIPMENT
Information related to the major categories of our depreciable assets is as follows:
March 31,
Land and land improvements (1)
Buildings and leasehold improvements
Machinery and equipment
Information systems
Radioisotope
Construction in progress (1)
Total property, plant, and equipment
Less: accumulated depreciation and depletion
Property, plant, and equipment, net
2013
2012
$
$
36,355
242,885
331,953
96,567
237,516
36,032
981,308
(549,356)
431,952
$
$
33,099
230,823
301,665
110,130
210,899
22,811
909,427
(523,018)
386,409
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
Depreciation and depletion expense was $55,085, $52,980 and $47,772, for the years ended March 31, 2013, 2012, and
2011, respectively.
Rental expense for operating leases was $15,664, $14,635, and $16,904 for the years ended March 31, 2013, 2012, and
2011, 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, 2013 were as
follows:
2014
2015
2016
2017
2018 and thereafter
Total Minimum Lease Payments
Operating
Leases
14,621
12,802
8,934
4,803
4,018
45,178
$
$
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign
currencies have been calculated based upon March 31, 2013 foreign currency exchange rates.
7. DEBT
Indebtedness was as follows:
March 31,
Private Placement
Credit facility
Total long term debt
2013
2012
410,000
82,290
492,290
$
$
210,000
—
210,000
$
$
68
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
In February 2013, we issued $100,000 of senior notes in a 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, $47,500 have a
maturity of nine years and 10 months at an annual interest rate of 3.20%, an additional $40,000 have a maturity of 11 years and
10 months at an annual interest rate of 3.35%, and the remaining $12,500 have a maturity of 14 years and 10 months at an
annual interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The
agreements governing these notes contain a financial covenant, including limitations on debt.
In December 2012, we issued $100,000 in senior notes in a 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, $47,500 have a
maturity of 10 years at an annual interest rate of 3.20%, an additional $40,000 have a maturity of 12 years at an annual interest
rate of 3.35%, and the remaining $12,500 have a maturity of 15 years at an annual interest rate of 3.55%. These borrowings
were used primarily for the repayment of existing credit facility debt. The agreements governing these notes contain a financial
covenant, including limitations on debt.
On August 15, 2008, we issued $150,000 of senior notes in a 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 in senior 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 these notes contain financial covenants, including limitations on
debt and a minimum consolidated net worth requirement.
In December 2003, we issued $100,000 of senior notes, of which $60,000 currently remain outstanding, in a private
placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities
Act of 1933. Of the outstanding notes, $40,000 have a maturity of 10 years at an annual interest rate of 5.25%, and the
remaining $20,000 have a maturity of 12 years at an annual interest rate of 5.38%. The agreements governing these notes
contain financial covenants, including limitations on debt and a minimum consolidated net worth requirement.
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 our previous credit agreement. The Credit Agreement initially
provided a $300,000 credit facility, and was amended in October 2012 to increase the credit facility to $400,000 (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 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. As
of March 31, 2013, $82,290 of indebtedness was outstanding under the Credit Agreement.
At March 31, 2013, 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:
69
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
2014
2015
2016
2017
2018 and thereafter
Total
8. ADDITIONAL CONSOLIDATED BALANCE SHEETS INFORMATION
Additional information related to our Consolidated Balance Sheets is as follows:
March 31,
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
9. INCOME TAXES
$
70,000
—
20,000
—
402,290
$
492,290
2013
2012
$
$
$
$
$
$
12,078
6,739
22,342
9,656
3,271
230
54,316
40,422
3,726
8,545
12,734
19,467
84,894
11,552
21,278
6,890
5,349
9,670
3,339
58,078
$
$
$
$
$
$
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
Income from continuing operations before income taxes was as follows:
Years Ended March 31,
United States operations
Non-United States operations
2013
175,743
51,355
227,098
$
$
2012
170,776
40,332
211,108
$
$
2011
30,088
43,731
73,819
$
$
70
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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
2013
2012
2011
$
22,259
$
33,129
$
46,036
4,893
13,516
40,668
26,550
(10)
(87)
26,453
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
Total Provision for Income Taxes
$
67,121
$
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
U.S. Tax Benefit resulting from European Restructuring
All other, net
Total Provision for Income Taxes
2013
35.0 %
3.6 %
2.1 %
(0.5)%
(1.4)%
(1.3)%
(7.8)%
(0.1)%
29.6 %
2012
2011
35.0 %
(0.7)%
2.8 %
(0.2)%
(0.3)%
(1.6)%
0.0 %
0.5 %
35.0 %
1.8 %
1.5 %
(0.6)%
(3.7)%
(4.4)%
0.0 %
1.0 %
35.5 %
30.6 %
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:
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
71
2013
2012
$
1,527
$
9,594
9,244
(700)
—
—
(553)
(156)
9,362
3
(4,488)
—
—
(3,582)
—
$
1,527
$
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $9,362 at
March 31, 2013 and $1,242 at March 31, 2012. In addition, we believe that it is reasonably possible that unrecognized tax
benefits may decrease by up to $9,355 within 12 months of March 31, 2013, primarily as a result of audit settlements and the
lapse of statute of limitations.
For the years ended March 31, 2013 and 2012, current income tax expense includes (benefit) expense of $(659) and $(631)
for interest, and (benefit) expense of $(33) and $(16) for penalties, respectively. In total, as of March 31, 2013 and 2012, we
have recognized a liability for interest of $276 and $936 and penalties of $31 and $64, 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
2012 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, 2013 and 2012 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)
2013
2012
$
$
$
9,556
19,628
13,757
89
8,537
3,696
8,770
1,727
2,807
39
68,606
12,428
56,178
47,809
27,240
1,040
3,818
79,907
(23,729) $
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
At March 31, 2013, we had federal operating loss carryforwards of $1,449, which can be utilized subject to certain
limitations, and foreign operating loss carry forwards of $50,469. Substantially all of the foreign carryforwards have a definite
expiration period and will expire if unused between fiscal years 2014 and 2020. In addition, we have recorded tax benefits of
$964 related to state operating loss carryforwards. At March 31, 2013, we had $75 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 $12,428 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 2013 by $586.
72
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
At March 31, 2013, cumulative undistributed earnings of international operations amounted to approximately $207,800.
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, 2013, we had a current prepaid income tax position. This was mainly due to the timing of U.S. Federal
income tax estimated payments and a prior year overpayment carryforward.
10. BENEFIT PLANS
We provide defined benefit pension plans for certain 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. These actions resulted in workforce reductions that resulted in curtailments and complete settlement of the
plan as the vested benefits of affected employees were substantially 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, 2013 and
2012, 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.
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Change in Benefit Obligations:
Benefit Obligations at Beginning of Year
Service cost
Interest cost
Actuarial loss
Benefits and expenses
Employee contributions
Curtailments/settlements
Impact of foreign currency exchange rate changes
Benefit Obligations at End of Year
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year
Actual return (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
2013
2012
2013
2012
2013
2012
$ 51,319
150
2,092
4,227
(4,355)
—
—
—
53,433
$ 48,560
205
2,438
4,482
(4,366)
—
—
—
51,319
$ 5,103
84
76
—
—
—
(5,263)
—
—
$ 9,777
334
195
506
20
317
(6,576)
530
5,103
$ 24,894
—
867
2,140
(3,353)
—
—
—
24,548
$ 23,800
—
991
3,512
(3,409)
—
—
—
24,894
42,391
3,962
4,545
—
(4,355)
—
—
46,543
42,023
2,566
2,168
—
(4,366)
—
—
42,391
$ (6,890) $ (8,928) $
4,150
—
70
(70)
—
(4,150)
—
—
— $
—
—
8,308
—
(104)
—
3,353
3,409
317
—
—
317
(3,353)
(3,409)
20
—
(4,890)
—
—
—
182
—
4,150
—
(953) $(24,548) $(24,894)
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
2013
2012
2013
2012
2013
2012
$
$
— $
(6,890)
(6,890) $
— $
(8,928)
(8,928) $
— $
—
— $
— $
(953)
(953) $
(3,271) $
(21,277)
(24,548) $
(3,255)
(21,639)
(24,894)
The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other
comprehensive (loss) income at March 31, 2013 was $(38,141) and $29,632, respectively. During fiscal 2014, 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
$
$
1,458
—
— $
—
891
(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, 2013 and 2012:
Aggregate fair value of plan assets
$
46,543
$
42,391
$
Aggregate accumulated benefit obligations
53,433
51,319
— $
—
4,150
$
46,543
$
46,541
4,820
53,433
56,139
U.S. Qualified
International
Total
2013
2012
2013
2012
2013
2012
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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, 2013 and 2012:
Aggregate fair value of plan assets
$
46,543
$
42,391
$
Aggregate projected benefit obligations
53,433
51,319
— $
—
4,150
$
46,543
$
46,541
5,103
53,433
56,422
U.S. Qualified
International
Total
2013
2012
2013
2012
2013
2012
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:
Pension Plans
U.S. Qualified
International
Other Post-retirement Plan
2013
2012
2011
2013
2012
2011
2013
2012
2011
Service cost
Interest cost
$
150
$
205
$
190
$
2,092
2,438
2,617
$
84
76
$
334
195
531
334
$ — $ — $ —
1,169
867
991
Expected return on plan
assets
(3,337)
(3,304)
(3,033)
Prior service cost recognition
—
—
—
Net amortization and deferral
1,333
1,066
1,068
238
—
405
—
842
—
$
238
$
405
$
842
$ (922) $(1,064) $
(100)
—
—
60
(982)
(209)
—
—
320
(1,384)
(356)
—
— (3,263)
725
—
(1,671)
—
—
(3,263)
388
(1,706)
—
$ (1,671) $ (1,847) $ (1,706)
—
(3,263)
425
(1,847)
—
509
(95)
414
Net periodic benefit cost
Curtailments/settlements
Total benefit cost
Recognized in other
comprehensive (income)
loss before tax:
Net loss 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)
—
—
—
—
$ 3,602
$ 5,220
$ 1,393
$ — $
818
$(1,031) $ 2,140
$ 3,512
$
683
(1,333)
(1,066)
(1,068)
(159)
—
—
—
—
—
87
—
—
95
—
3,263
3,263
3,263
(725)
(425)
(388)
—
—
—
2,269
4,154
325
(159)
905
(936)
4,678
6,350
3,558
$ 2,507
$ 4,559
$ 1,167
$(1,081) $ (159) $ (522) $ 3,007
$ 4,503
$ 1,852
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:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Discount Rate:
U.S. qualified pension plan
Switzerland pension plan
Other post-retirement plan
Rate of Compensation Increase:
Switzerland pension plan
2013
2012
3.50%
n/a
3.00%
4.25%
2.25%
3.75%
n/a
2.50%
The following table presents significant assumptions used to determine the net periodic benefit costs for the years
ended March 31:
Discount Rate:
U.S. qualified pension plan
Switzerland pension plan
Other post-retirement plan
Expected Return on Plan Assets:
U.S. qualified pension plan
Switzerland pension plan
Rate of Compensation Increase:
Switzerland pension plan
2013
2012
2011
4.25%
2.25%
3.75%
8.00%
3.25%
5.25%
2.75%
4.50%
8.00%
3.25%
5.75%
3.00%
5.00%
8.00%
4.00%
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
2013
2012
2011
8.0%
7.0%
4.5%
8.0%
8.0%
4.5%
10.0%
10.0%
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, 2013:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Effect on total service and interest cost components
Effect on other post-retirement benefit obligation
One-Percentage
Point
Increase
Decrease
$
$
6
152
(6)
(145)
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, 2013 and the actual allocation of plan assets at March 31, 2013 and 2012
for these plans:
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
2013
2012
60%
40%
0%
100%
100%
100%
60.9%
38.4%
0.7%
100%
n/a
n/a
59.3%
39.9%
0.8%
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 for our U.S. defined
benefit plan are managed by outside investment managers pursuant to investment policy guidelines established by the Company
for the plan. 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, 2013 and
2012, 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, 2013 and 2012 by asset category is as follows:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(In thousands)
Total
Fair Value Measurements at March 31, 2013
U.S. Qualified Pension Plan
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Cash and Short Term Securities
$
344
$
— $
344
$
Equity Securities
Mutual Funds
Debt Securities
Mutual Funds
Total Plan Assets
28,353
28,353
17,846
17,846
—
—
$
46,543
$
46,199
$
344
$
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
Mutual Funds
Other Investments
16,886
—
16,886
—
—
—
—
—
—
—
—
—
4,150
—
—
—
—
—
4,150
Total Plan Assets
$ 42,391
$
42,038
$
353
$
— $
4,150
$
— $
4,150
$
—
—
—
—
—
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, 2013, we do not expect to make additional
contributions to the U.S. qualified defined benefit pension plan in fiscal 2014.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2013, the following benefit
payments are expected to be made to plan participants:
2014
2015
2016
2017
2018
2019-2023
Other Post-Retirement Benefit Plan
Defined Pension Plan
Gross
Benefit
Payments
Medicare
Reimbursement
Total
$
4,101
$
3,271
$
— $
3,043
2,840
2,467
2,177
7,522
—
—
—
—
—
4,017
3,943
3,858
3,758
17,368
78
3,271
3,043
2,840
2,467
2,177
7,522
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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. Benefits are subject
to a per capita per month cost cap and any costs above the cap become the responsibility of the retiree. The subsidy is applied to
reduce the retiree responsibility. As a result, the expected future subsidy no longer reduces our accumulated post-retirement
benefit obligation and net periodic benefit cost. We collected subsidies totaling approximately $400 and $420, during fiscal
2013 and fiscal 2012, respectively, which reduced the retiree responsibility for costs in excess of the caps established in the
post-retirement benefit plan.
Defined Contribution Plans. We maintain a 401(k) defined contribution plan for eligible United States employees and a
similar savings plan for Canadian employees. We provide a match on a specified portion of an employee’s contribution. The
United States plan assets are held in trust and invested as directed by the plan participants. The Canadian plan assets are held by
insurance companies. The aggregate fair value of plan assets was $362,850 at March 31, 2013. At March 31, 2013, the plan
held 780,044 STERIS common shares with a fair value of $32,458. We paid dividends of $592, $545, and $498 to the plan and
participants on STERIS common stock held by the plan for the years ended March 31, 2013, 2012, and 2011, respectively. We
contributed $7,974, $7,771, and $7,990, to the defined contribution plan for the years ended March 31, 2013, 2012, and 2011,
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 and $237 in fiscal 2012, and fiscal 2011, 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 $3,139 and $3,032 at March 31, 2013 and March 31, 2012,
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
79
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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.
After ongoing discussions with the FDA, 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 provided the terms under which we temporarily continued 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, (the
“Transition Plan”), which included the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer
rebates in the form of cash or future purchase credits to 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 returned their units. In addition, we
provided 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 Rebate Program ended August 2, 2012. Customers utilized rebates totaling
approximately $66,600 on orders placed since the initiation of the Rebate Program. The costs associated with the Rebate
Program were lower than originally estimated because fewer Customers elected to participate in the Rebate Program than
anticipated. The remaining recorded accrual is $210 as of March 31, 2013.
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 and in various portions of Item 1A. of Part I of this Annual Report on Form 10-K for the year ended
March 31, 2013.
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. The claim
submission deadline was December 31, 2012. As a result during fiscal 2013, we adjusted the liability related to the SYSTEM 1
class action settlement. The pretax adjustments amounted to $16,782, and were recorded as reductions to operating expenses.
The remaining recorded accrual is $43 as of March 31, 2013 and is based on actual claims submitted through March 31, 2013.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical
indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and
other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do
not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have
reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not
currently believe that the impact of this event will have a material adverse effect on our financial results.
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.
80
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
For additional information regarding these matters, see the following portions in this Annual Report on Form 10-K for the
fiscal year ended March 31, 2013: “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 statutes of limitation. Changes in
applicable tax law or other events may also require us to revise past estimates. 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, 2013 and 2012, our commercial commitments totaled $45,804 and $38,264, respectively. Commercial
commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies,
and other potential cash outflows resulting from an event that requires payment by us. Approximately $5,961 and $6,261,
respectively, of the totals at March 31, 2013 and 2012 relate to letters of credit required as security under our self-insured risk
retention policies.
As of March 31, 2013 and 2012, we had minimum purchase commitments with suppliers for raw material purchases
totaling $59,358 and $27,440, respectively.
12. BUSINESS SEGMENT INFORMATION
We operate and report in three 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 and gastrointestinal 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
materials processing services using gamma irradiation, and ethylene oxide (“EO”) technologies. We provide microbial
reduction services based on Customer specifications 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 reportable segments are the same as those for the consolidated Company. For the year ended
March 31, 2013, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
Revenues:
Healthcare (1)
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total revenues (1)
Operating income:
Healthcare (2)
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total operating income (2)
2013
2012
2011
$
$
$
$
1,074,790
244,421
179,550
1,498,761
3,141
1,501,902
153,343
47,453
51,455
252,251
(9,422)
242,829
$
$
$
$
1,013,102
226,658
164,257
1,404,017
2,793
1,406,810
141,742
41,633
47,596
230,971
(8,655)
222,316
$
$
$
$
835,832
215,437
152,242
1,203,511
3,937
1,207,448
21,317
33,069
39,833
94,219
(9,007)
85,212
(1) Includes an increase of $22,367 in fiscal 2013, 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 $23,640 in fiscal 2013, an increase of $17,403 in fiscal 2012 and a reduction of $110,004 in fiscal 2011, resulting
from SYSTEM 1 Rebate Program, and an increase of $16,782 in fiscal year 2013 and a reduction of $19,796 in fiscal 2011, resulting from the
class action settlement.
For the year ended March 31, 2013, pre-tax restructuring expenses of $(565) are included in the operating results of the
Healthcare segment. 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.
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. Corporate and
other includes assets directly attributable to the Defense and Industrial business unit, as well as certain unallocated amounts
related to being a publicly traded company. Total assets associated with the Healthcare segment have increased substantially
during fiscal 2013, as a result of several business acquisitions as described in Note 4 to our consolidated financial statements
titled, "Business Acquisitions".
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.
March 31,
Assets:
Healthcare and Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total assets
2013
2012
$
$
1,357,368
400,171
1,757,539
3,570
1,761,109
$
$
1,024,786
378,506
1,403,292
2,404
1,405,696
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
2013
2012
2011
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
$
$
$
$
44,201
43,198
87,399
13
87,412
41,622
27,396
69,018
17
69,035
$
$
$
$
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
Financial information for each of our United States and international geographic areas is presented in the following table.
Revenues are based on the location of these operations and their Customers. Property, plant and equipment, net are those assets
that are identified within the operations in each geographic area.
Years Ended March 31,
Revenues:
United States
International
Total Revenues
March 31,
Property, Plant, and Equipment, Net
United States
International
Property, Plant, and Equipment, Net
13. COMMON SHARES
2013
2012
2011
$ 1,141,633
360,269
$ 1,501,902
$ 1,057,461
349,349
$ 1,406,810
$
882,281
325,167
$ 1,207,448
2013
2012
$
$
377,320
54,632
431,952
$
$
331,590
54,819
386,409
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:
Years Ended March 31,
2012
2011
2013
Denominator (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
58,305
539
58,844
58,367
596
58,963
59,306
842
60,148
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:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
2012
2011
2013
(shares in thousands)
Number of common share options
14. REPURCHASES OF COMMON SHARES
649
741
383
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 204,349 of our common
shares during fiscal 2013 in the aggregate amount of $6,830, representing an average price of $33.42 per common share. During
fiscal 2012, we paid an aggregate amount of $55,942 for the repurchase of 1,851,510 of our common shares, 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 obtained 52,893 of our common shares during fiscal 2013 in the aggregate amount of $1,172 in connection with stock
based compensation award programs. We obtained 22,927 of our common shares during fiscal 2012 in the aggregate amount of
$808 in connection with these 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, 2013, $111,630 of STERIS common shares remained authorized for
repurchase pursuant to the most recent Board approved repurchase authorization (the March 2008 Board Authorization). Also,
11,280,510 common shares were held in treasury at March 31, 2013.
15. SHARE-BASED COMPENSATION
We maintain a long-term incentive plan that makes available common shares for grants, at the discretion of the
Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options,
restricted shares, restricted share units, and stock appreciation rights. Stock options provide the right to purchase our common
shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of
the stock options granted become exercisable for each full year of employment following the 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, unless the option
holder has attained age 55 and has at least five years of service upon termination. Restricted shares and restricted share units
generally may cliff vest after a three or four year period or vest in tranches of one-fourth of the number granted for each full
year of employment after the grant date. As of March 31, 2013, 3,949,453 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 or selling, general and
administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during fiscal 2013, fiscal 2012 and fiscal 2011:
Risk-free interest rate
Expected life of options
Expected dividend yield of stock
Expected volatility of stock
Fiscal 2013
Fiscal 2012
Fiscal 2011
1.21%
5.8 years
2.15%
31.24%
2.41%
5.7 years
1.78%
29.78%
2.68%
5.7 years
1.59%
30.13%
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 1.83%, 2.08% and 2.27% was applied in
fiscal 2013, 2012 and 2011, 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, 2012
Granted
Exercised
Forfeited
Canceled
Outstanding at March 31, 2013
Exercisable at March 31, 2013
Number of
Options
3,312,602
300,440
(945,181)
(6,758)
(3,970)
2,657,133
1,920,940
$
$
$
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
27.16
30.26
24.65
30.85
19.95
28.40
27.48
5.46
4.48
$
$
35,088
27,149
We estimate that 728,201 of the non-vested stock options outstanding at March 31, 2013 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $41.61 closing price of
our common shares on March 31, 2013 over the exercise prices of the stock options, 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.
The total intrinsic value of stock options exercised during the years ended March 31, 2013, 2012 and 2011 was $10,071,
$2,846 and $6,669, respectively. Net cash proceeds from the exercise of stock options were $23,019, $5,723 and $12,730 for
the years ended March 31, 2013, 2012 and 2011, respectively. The tax benefit from stock option exercises was $2,058, $1,514
and $2,525 for the years ended March 31, 2013, 2012 and 2011, respectively.
The weighted average grant date fair value of stock option grants was $7.32, $9.31 and $8.80 for the years ended March 31,
2013, 2012 and 2011, 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 the employee is not required to make payment to exercise and therefore, are classified
as liabilities. The fair value of the outstanding SARS as of March 31, 2013 and 2012 was $1,253 and $854, respectively. The
fair value of outstanding SARs is revalued at each reporting date and the related liability and expense are adjusted
appropriately.
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
A summary of the non-vested restricted share activity is presented below:
Non-vested at March 31, 2012
Granted
Vested
Canceled
Non-vested at March 31, 2013
Number of
Restricted
Shares
Weighted-Average
Grant Date
Fair Value
533,027
338,411
(120,508)
(13,587)
737,343
$
$
32.10
31.62
26.28
33.32
32.81
Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that
vested during fiscal 2013 was $3,167.
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, 2013 and 2012 was $1,405 and $1,313, 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, 2013, there was a total of $15,816 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 2.49 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:
Years Ended March 31,
Balance, Beginning of Year
Warranties issued during the period
Settlements made during the period
Balance, End of Year
2013
2012
2011
$
11,189 $
7,509 $
16,111
19,944
6,070
11,185
(14,566)
(16,264)
(9,746)
$
12,734 $
11,189 $
7,509
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 $35,258, $43,252 and
$28,230 as of March 31, 2013, 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.
86
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
17. FORWARD AND SWAP CONTRACTS
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from
transactions denominated in foreign currencies, including inter-company transactions. We also enter into commodity swap
contracts to hedge price changes in a certain commodity that impacts 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, 2013, we held foreign currency forward contracts to buy 79.7 million
Mexican pesos and 12.5 million Canadian dollars. At March 31, 2013, we held commodity swap contracts to buy 103 thousand
pounds of nickel.
Balance Sheet Location
Prepaid & Other
Accrued expenses and other
Asset Derivatives
Liability Derivatives
Fair Value at
March 31, 2013
Fair Value at
March 31, 2012
Fair Value at
March 31, 2013
Fair Value at
March 31, 2012
$
$
161
$
— $
$
12
— $
— $
128
$
—
863
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of
Income:
Location of gain (loss) recognized in
income
Amount of gain (loss)
recognized in income
Years Ended March 31,
2013
2012
2011
Foreign currency forward contracts
Commodity swap contracts
Selling, general and administrative
Cost of revenues
$
$
161
$
(217) $
(1,115) $
(1,544) $
1,696
306
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 table shows the fair value of our financial assets and liabilities at March 31, 2013 and
March 31, 2012:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Fair Value Measurements at March 31, 2013 and March 31, 2012 Using
Carrying Value
Quoted Prices
in Active Markets
for Identical Assets
Level 1
Significant Other
Observable Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
2013
2012
2013
2012
2013
2012
2013
2012
Assets:
Cash and cash equivalents (1)
Forward and swap contracts (2)
Investments (3)
Liabilities:
Forward and swap contracts (2)
Deferred compensation plans (3)
Long term debt (4)
Contingent consideration
obligations (5)
$ 142,008 $ 150,821
12
3,032
161
3,139
$ 135,277 $ 150,047
—
3,032
—
3,139
$
6,731 $
161
—
774
12
—
$
128 $
3,218
492,290
863
3,097
210,000
$
— $
3,218
—
3,097
— $
128 $
—
— 531,856
863
—
243,999
$
$
— $
—
—
— $
—
—
—
—
—
—
—
—
5,453
6,953
—
—
—
—
5,453
6,953
(1) Money market fund holdings are classified as level two as active market quoted prices are not available.
(2) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount
that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(3) We maintain a domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral
of compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to
various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to
satisfy the future obligations of the plan. Changes in the value of the investment accounts are recognized each period based on
the fair value of the underlying investments. Employees making deferrals are entitled to receive distributions of their
hypothetical account balances (amounts deferred, together with earnings (losses)).
(4) We estimate the fair value of our long-term debt using discounted cash flow analyses, based on our current incremental
borrowing rates for similar types of borrowing arrangements.
(5) 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at March 31, 2013 are summarized
as follows:
Balance at March 31, 2011
Additions
(Gains) Losses
Foreign currency translation adjustments (1)
Balance at March 31, 2012
Additions
(Gains) Losses
Foreign currency translation adjustments (1)
Balance at March 31, 2013
(1) Reported in other comprehensive income (loss).
Contingent
Consideration
$
$
$
4,984
4,484
(2,454)
(61)
6,953
1,412
(2,452)
(460)
5,453
19. 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
$
$
810 $
(5,184)
286
(4,088) $
14,555 $
(1,102)
174
13,627 $
28,907
6,177
104
35,188
Year Ended March 31,
2012
2013
2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
20. QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
Fiscal 2013 (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 2012 (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,
$ 278,237
149,979
428,216
$ 243,722
136,683
380,405
$ 231,650
124,671
356,321
$ 213,753
123,207
336,960
158,587
91,861
250,448
177,768
41.5%
5
41,381
0.71
0.70
$
$
$
139,683
87,600
227,283
153,122
40.3%
(386)
48,097
0.82
0.82
$
$
$
127,147
76,053
203,200
153,121
43.0%
(48)
40,145
0.69
0.68
$
$
$
125,482
74,226
199,708
137,252
40.7%
(136)
30,354
0.52
0.52
$
$
$
$ 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
$
$
$
117,433
68,281
185,714
132,925
41.7 %
258
28,731
0.48
0.48
$
$
$
The fiscal 2013 quarter ended September 30, includes the impact of the SYSTEM 1 Rebate Program as a $20,400
(1)
increase in product revenues and a $1,100 decrease in product cost of revenues. The fiscal 2013 quarter ended December 31,
includes the impact of a $15,800 adjustment to the SYSTEM 1 class action settlement as a decrease in selling, general and
administrative expenses. The fiscal 2013 quarter ended March 31, includes the impact of the SYSTEM 1 Rebate Program as a
$1,967 increase in product revenues and a $173 decrease in product cost of revenues and the impact of a $982 adjustment to the
SYSTEM 1 class action settlement as a decrease in selling, general and administrative expenses.
(2)
in product revenues and a $2,097 decrease in product cost of revenues.
The fiscal 2012 quarter ended March 31, includes the impact of the SYSTEM 1 Rebate Program as a $15,306 increase
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Description
(in thousands)
Year ended March 31, 2013
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, 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
Balance at
Beginning
of Period
Charges
to Costs
and
Expenses
Charges
to Other
Accounts
Deductions
Balance at
End of
Period
$
$
11,428
15,313
(91)
(3,140)
(2)
$
(49)
(188)
(3) $
(3)
(1,245) (4) $
—
11,842
3,279
(569)
(2,124)
10,043
11,985
12,428
$
10,776
$
2,387
$
3,185
$
(2,248)
$
14,100
69,065
(40,422)
(5)
—
(28,390)
253
$
$
9,085
10,122
11,421
2,901
5,304
1,360
$
(2)
1,520
(114)
(3)
(3)
$
(2,078) (4)
—
$ 11,428
15,313
(435)
(504)
11,842
$
13,037
$
1,205
$
(792)
$
(2,674)
$
10,776
127,683
(17,403)
(6)
—
(41,215)
69,065
$
$
9,238
10,557
2,016
(638)
(2)
$
26
203
(3) $
(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
(7)
—
(2,117)
127,683
(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: $22,367 as an increase to revenues, $1,273 as a decrease to cost of revenues,
and $16,782 as a decrease to selling, general and administrative expenses.
Adjustments were classified as follows: $15,306 as an increase to revenues and $2,097 as a decrease to cost of
revenues.
91
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(7)
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.
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.
CHANGES IN INTERNAL CONTROLS
During the quarter ended March 31, 2013, 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.
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). 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, 2013 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, 2013.
We acquired United States Endoscopy Group, Inc., Spectrum Surgical Instruments Corp, Total Repair Express and VTS
Medical Systems, LLC during fiscal 2013. Our assessment of and conclusion on the effectiveness of internal control over
financial reporting as of March 31, 2013 did not include the internal controls of these entities. Total assets of the acquired
businesses (inclusive of acquired intangible assets and goodwill) represented approximately 25 percent of our consolidated
assets as of March 31, 2013 and approximately 6 percent of our consolidated net sales for the year ended March 31, 2013.
The independent registered public accounting firm that audited the financial statements has issued an attestation report on
internal control over financial reporting. The report is below.
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, 2013,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO criteria”). STERIS Corporation and subsidiaries' management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on STERIS Corporation and subsidiaries' internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
92
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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.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's
assessment of the conclusions on the effectiveness of internal control over financial reporting did not include the internal
controls of United States Endoscopy Group, Inc. (“USE”), Spectrum Surgical Instruments Corp (“Spectrum”) Total Repair
Express (“TRE”), and VTS Medical Systems, LLC (“VTS”) which were acquired in fiscal 2013 and are included in the March
31, 2013 consolidated financial statements of STERIS Corporation and subsidiaries, and constituted 25% of total assets, as of
March 31, 2013 and 6% of total revenues for the year then ended. Our audit of internal control over financial reporting of
STERIS Corporation and subsidiaries also did not include an evaluation of the internal control over financial reporting of USE,
Spectrum, TRE and VTS which were acquired in fiscal 2013.
In our opinion, STERIS Corporation and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2013, 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, 2013 and 2012 and the related
consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended March
31, 2013 of STERIS Corporation and subsidiaries, and our report dated May 30, 2013 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
May 30, 2013
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ITEM 9B. OTHER INFORMATION
The Company and Walter M Rosebrough, Jr., the Company's President and CEO, have executed an agreement effective
May 29, 2013, which terminates Mr. Rosebrough's Employment Agreement dated September 7, 2007, and expressly does not
terminate his employment with the Company. This termination agreement, which was executed at Mr. Rosebrough's request,
makes his employment status the same as the Company's other named executive officers, none of whom have employment
agreements. The agreement expressly provides that Mr. Rosebrough and the Company have no further rights or obligations
under the Employment Agreement.
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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 2013 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 1 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, 2013.
Plan Category
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)
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
2,657,133
—
2,657,133
28.40
—
28.40
3,949,453
—
3,949,453
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
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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.
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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, 2013 and 2012.
Consolidated Statements of Income – Years ended March 31, 2013, 2012, and 2011.
Consolidated Statements of Comprehensive Income –Years ended March 31, 2013, 2012, and 2011.
Consolidated Statements of Cash Flows – Years ended March 31, 2013, 2012, and 2011.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2013, 2012, and 2011.
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
Exhibit Description
1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November
6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K for the fiscal year ended March 31, 2000
(Commission File No. 1-14643), and incorporated herein by reference).
Amended and Restated Regulations of STERIS Corporation, as amended on July 26, 2007 (filed as Exhibit
3.2 to Form 10-Q for the fiscal quarter ended June 30, 2007 (Commission File No. 1-14643), and
incorporated herein by reference).
Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K 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).*
97
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10.7
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
STERIS Corporation 1998 Long-Term Incentive Stock Plan (filed as Exhibit 10.8 to Form 10-K for fiscal
year ended March 31, 1999 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal year ended
March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed July
28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
Amendment No. 1 to STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.11 to
Form 10-K for the fiscal year ended March 31, 2007 (Commission File No. 1-14643), and incorporated
herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.3 to Form 8-
K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Directors (filed as Exhibit 10.5 to Form 8-K
filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Unit Agreement for Employees (filed as Exhibit 10.5 to
Form 10-Q 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).*
98
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10.24
10.25
10.26
10.27
10.28
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.*
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 (filed as Exhibit 10.27 to Form
10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by
reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees.(filed as Exhibit 10.28 to Form
10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by
reference).*
10.29
Amendment to Nonqualified Stock Option Agreement (filed as Exhibit 10.11 to Form 10-Q for the fiscal
quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
10.30
10.31
10.32
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.12 to
Form10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and
incorporated herein by reference).*
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.13 to Form10-Q for the
fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by
reference).*
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.14 to Form 10-Q for the
fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by
reference).*
10.33
Form of Career Restricted Stock Unit Agreement for Nonemployee Directors.*
10.34
Form of Nonqualified Stock Option Agreement for Nonemployee Directors.*
10.35
10.36
10.37
10.38
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).*
99
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10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
STERIS Corporation Management 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).*
Employment 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).*
STERIS Corporation Senior Executive Severance Plan effective June 1, 2012 (filed as Exhibit 10.3 to Form
10-Q for the fiscal quarter ended June 30, 2012 (Commission No. 1-14643), and incorporated herein by
reference.*
Form of Indemnification Agreement between STERIS Corporation and each of its directors and certain
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).
Third Amended and Restated Credit Agreement, dated as of April 13, 2012, among STERIS Corporation,
KeyBank National Association, as agent for the lenders from time to time party thereto, and such lenders
(filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission File No.
1-14643), and incorporated herein by reference).
Third Amended and Restated Guaranty of Payment, dated as of April 13, 2012, entered into by American
Sterilizer Company, STERIS Inc., Isomedix Operations, Inc., and STERIS Isomedix Services, in favor of
KeyBank National Association, as agent for the benefit of the lenders (filed as Exhibit 10.2 to Form 10-Q
for the fiscal quarter ended June 30, 2012 (Commission File No. 1-14643), and incorporated herein by
reference.
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by United States
Endoscopy Group, Inc. and dated October 9, 2012 (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter
ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
Amendment No. 1 dated October 12, 2012 to Third Amended and Restated Credit Agreement, dated as of
April 13, 2012, among STERIS Corporation, KeyBank National Association as agent for the lenders from
time to time party thereto and such lenders (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended
December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by Spectrum Surgical
Instruments Corp. and dated October 29, 2012 (filed as Exhibit 10.6 to Form 10-Q for the fiscal quarter
ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
100
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10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
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).
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 October 10, 2012 by United States Endoscopy Group, Inc. and STERIS
Corporation (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2012
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS
Corporation (filed as Exhibit 10.7 to Form 10-Q for the fiscal quarter ended December 31, 2012
(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 October 10, 2012 by United States Endoscopy Group, Inc. and STERIS
Corporation (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2012
(Commission File No. 1-14643), and incorporated herein by reference).
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS
Corporation (filed as Exhibit 10.8 to Form 10-Q for the fiscal quarter ended December 31, 2012
(Commission File No. 1-14643), and incorporated herein by reference).
Form of Note Purchase Agreements dated as of December 4, 2012, between STERIS Corporation and
certain institutional investors (filed as Exhibit 10.9 to Form 10-Q for the fiscal quarter ended December 31,
2012 (Commission File No. 1-14643), and incorporated herein by reference).
Subsidiary Guaranty dated as of December 4, 2012, by certain subsidiaries of STERIS Corporation (filed as
Exhibit 10.10 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No.
1-14643), and incorporated herein by reference).
Stock Purchase Agreement dated July 16, 2012 by and among STERIS Corporation, United States
Endoscopy Group, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to Form 8-K filed August 15,
2012 (Commission No. 1-14643), and incorporated herein by reference).
Stock Purchase Agreement dated October 16, 2012 between STERIS Corporation, Richard J. and Michelle
A. Schultz, individually and as trustees of certain trusts, such trusts and Spectrum Surgical Instruments
Corp. (filed as Exhibit 10.5 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File
No. 1-14643), and incorporated herein by reference).
21.1
Subsidiaries of STERIS Corporation.
101
36231_Steris_10K_WT.indd 103
5/31/13 3:30 PM
23.1
24.1
31.1
31.2
32.1
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.
102
36231_Steris_10K_WT.indd 104
5/31/13 3:30 PM
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 30, 2013
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 30, 2013
Walter M Rosebrough, Jr.
/S/ MICHAEL J. TOKICH
Senior Vice President and Chief Financial Officer
May 30, 2013
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 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
*
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 30, 2013
By:
/S/ MICHAEL J. TOKICH
Michael J. Tokich,
Attorney-in-Fact for Directors
103
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EXHIBIT 21.1
SUBSIDIARIES OF STERIS CORPORATION
STERIS Corporation has no parent company. As of March 31, 2013, its direct and indirect subsidiaries(1) were as follows:
Albert Browne Limited
American Sterilizer Company
Biotest Laboratories, Inc.
CLBV Limited
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.
Spectrum Surgical Instruments Corp.
SterilTek Holdings, Inc.
SterilTek, Inc.
STERIS
STERIS AB
STERIS Asia Pacific, Inc.
STERIS-Austar Pharmaceutical Systems Hong Kong Limited
STERIS-Austar Pharmaceutical Systems (Shanghai) Limited
STERIS (Barbados) Corp.
STERIS Brasil Servicos Administrativos Ltda.
STERIS (BVI) I Limited
STERIS Brazil Holdings, LLC
STERIS Canada Corporation
STERIS Canada Inc.
STERIS CH Limited
STERIS China Holdings Limited
STERIS Corporation de Costa Rica, S.A.
STERIS Deutschland GmbH
STERIS Enterprises LLC
STERIS Europe, Inc.
STERIS GmbH
STERIS Holdings B.V.
STERIS Iberia, S.A.
STERIS Inc.
STERIS (India) Private Limited
STERIS Isomedix Services, Inc.
STERIS Isomedix Puerto Rico, Inc.
STERIS Japan Inc.
STERIS Latin America, Inc.
STERIS Limited
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
104
United Kingdom
Pennsylvania
Minnesota
United Kingdom
Delaware
Delaware
Delaware
Canada
Delaware
Delaware
Brazil
Delaware
Brazil
Ohio
Delaware
Nevada
France
Sweden
Delaware
Hong Kong
China
Barbados
Brazil
British Virgin Islands
Delaware
Canada
Canada
United Kingdom
Hong Kong
Costa Rica
Germany
Russia
Delaware
Switzerland
Netherlands
Spain
Delaware
India
Delaware
Puerto Rico
Japan
Delaware
United Kingdom
Republic of Mauritius
Mexico
Netherlands
Delaware
Mexico
Belgium
36231_Steris_10K_WT.indd 106
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STERIS SEA Sdn. Bhd.
STERIS (Shanghai) Trading Co. Ltd.
STERIS Singapore Pte. Ltd.
STERIS Specialty Services, Inc.
STERIS S.r.l.
STERIS Surgical Technologies
STERIS Surgical Technologies Holdings
Strategic Technology Enterprises, Inc.
United States Endoscopy Group, Inc.
VTS Medical Systems, LLC
Malaysia
China
Singapore
Delaware
Italy
France
France
Delaware
Ohio
Delaware
(1) The names of one or more subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute at the
end of fiscal 2013 a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X have been excluded.
36231_Steris_10K_WT.indd 107
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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 30, 2013, 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, 2013:
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 30, 2013
36231_Steris_10K_WT.indd 108
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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 financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. 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 30, 2013
/S/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
107
36231_Steris_10K_WT.indd 109
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CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, Michael J. Tokich, certify that:
1.
I have reviewed this annual report on Form 10-K of STERIS Corporation;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. 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 30, 2013
/S/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President and Chief Financial Officer
108
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5/31/13 3:30 PM
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, 2013, 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 30, 2013
36231_Steris_10K_WT.indd 111
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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 2013 and fiscal 2012 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,
2013
2012
Revenues
Impact of SYSTEM 1 Rebate Program
Adjusted revenues
(Unaudited)
$
$
$
1,501,902
(22,367)
1,479,535
1,406,810
(15,306)
1,391,504
$
Operating income
Impact of SYSTEM 1 Rebate Program and class action
settlement
Amortization of inventory "step up" to fair value
S1E inventory reserve
Amortization and impairment of purchased intangible assets
Gain from fair value adjustment of acquisition related
contingent consideration
Acquisition related transaction and integration costs
Restructuring
Adjusted operating income
Net income
Impact of SYSTEM 1 Rebate Program and class action
settlement, net of tax
Amortization of inventory "step up" to fair value, net of tax
S1E inventory reserve
Amortization and impairment of purchased intangible assets,
net of tax
Gain from fair value adjustment of acquisition related
contingent consideration, net of tax
Acquisition related transaction and integration costs
Tax benefit, European restructuring
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
S1E inventory reserve, net of tax
Restructuring, net of tax
Inventory "step up" to fair value, net of tax
Amortization and impairment of purchased intangible assets,
net of tax
Gain from fair value adjustment of acquisition related
contingent consideration, net of tax
Tax benefit, European restructuring
Acquisition related transaction and integration expenses, net
of tax
Adjusted net income per diluted share
$
242,829
$
222,316
(40,422)
1,593
-
(17,403)
1,194
2,857
12,477
7,298
(2,483)
6,314
(565)
219,743
$
(2,454)
-
653
214,461
$
$
159,977
$
136,115
(24,657)
(11,138)
972
-
7,611
764
1,828
4,671
(1,515)
3,852
(8,118)
(345)
137,777
$
(1,571)
-
-
418
131,087
$
$
2.72
$
2.31
(0.42)
-
(0.01)
0.02
0.13
(0.03)
(0.14)
(0.18)
0.03
-
0.01
0.08
(0.03)
-
$
0.07
2.34
$
-
2.22
Healthcare revenues
Impact of SYSTEM 1 Rebate Program
Adjusted Healthcare revenues
$
$
1,074,790
(22,367)
1,052,423
$
1,013,102
(15,306)
997,796
$
Note: Per share amounts may not calculate precisely due to rounding .
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[THIS PAGE INTENTIONALLY LEFT BLANK]
36231_Steris_10K_WT.indd 113
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This Page is Not Part of STERIS’s Form 10-K Filing
Performance Graph. The following graph shows the cumulative performance for our common shares over the last five years
as of March 31 of each year compared with the performance of the Standard & Poor’s 500 Index and the Dow Jones U.S.
Medical Supplies Index as of the same date. The graph assumes $100 invested as of March 31, 2008 in our common shares
and in each of the named indices. The past performance shown in this graph does not necessarily guarantee future
performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among STERIS Corporation, the S&P 500 Index, and the Dow Jones US Medical Supplies Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
03/08
03/09
03/10
03/11
03/12
03/13
STERIS Corporation
S&P 500 Index
Dow Jones US Medical Supplies Index
*$100 invested on 3/31/08 in stock or index, including reinvestment of dividends.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2013 Dow Jones & Co. All rights reserved.
STERIS Cor por ation
S&P 500 Index
Dow Jo nes US Medical Supplies Index
03/08
100.00
100.00
100.00
03/09
87.58
61.91
79.69
03/10
136.64
92.72
103.86
03/11
142.67
107.23
113.39
03/12
133.46
116.39
117.65
03/13
179.53
132.64
139.36
36231_Steris_10K_WT.indd 114
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Corporate Information
BOARD OF DIRECTORS
John P. Wareham1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. Breeden2,4
Chairman and Chief Executive Officer,
Breeden Capital Management LLC;
Chairman, Richard C. Breeden & Co.,
LLC
Cynthia L. Feldmann2
Former President and Founder,
Jetty Lane Associates
Jacqueline B. Kosecoff, Ph.D.3,4
Managing Partner,
Moriah Partners, LLC
David B. Lewis2,4
Partner and Former Chairman,
Lewis & Munday
Kevin M. McMullen1
Chairman of the Board,
Chief Executive Officer and
President, OMNOVA Solutions Inc.
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
Suzanne V. Forsythe
Vice President,
Human Resources
David A. Johnson
Senior Vice President,
Global Operations and Quality
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.3
President and Chief Executive Officer,
STERIS Corporation
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
Mohsen M. Sohi, D.Sc.3,4
Chief Executive Officer,
Freudenberg and Co.
Loyal W. Wilson1,2
Managing Director,
Primus Capital Partners, Inc.,
Managing Partner,
Primus Venture Partners, L.P.
Michael B. Wood, M.D.1,3
Retired President and Chief Executive
Officer, Mayo Foundation
1 Compensation Committee Member
2 Audit Committee Member
3 Compliance Committee Member
4 Nominating and Governance
Committee Member
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, 2013. 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 2013 annual meeting will be
held on Thursday, July 25, 2013, 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.
Document #ANNRPT13.2013-05, Rev. A
©2013 STERIS Corporation.
All rights reserved. Printed in USA.