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FISCAL
T 2014ANNUAL REPORT
Document #ANNRPT14.2014-05, Rev. A
©2014 STERIS Corporation.
All rights reserved. Printed in USA.
Corporate Information
EXECUTIVE OFFICERS
Kathleen L. Bardwell
Senior Vice President and
Chief Compliance Officer
Timothy L. Chapman
Senior Vice President and
Group President, Healthcare
Suzanne V. Forsythe
Vice President,
Human Resources
David A. Johnson
Senior Vice President,
Surgical Solutions
Robert E. Moss
Senior Vice President and
Group President,
STERIS Isomedix Services
and Life Sciences
Sudhir K. Pahwa
Senior Vice President,
Infection Prevention Technologies
Walter M Rosebrough, Jr.
President and Chief Executive Officer
Michael J. Tokich
Senior Vice President,
Chief Financial Officer
and Treasurer
J. Adam Zangerle
Vice President, General Counsel
and Secretary
EXECUTIVE OFFICES
5960 Heisley Road
Mentor, OH 44060-1834 USA
440-354-2600
www.steris.com
ANNUAL REPORT
Included in this Annual Report is a copy of
STERIS Corporation’s Form 10-K filed with
the Securities and Exchange Commission for
the year ended March 31, 2014. 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 30170
College Station, TX 77842-3170
800-622-6757
www.computershare.com/investor
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Suite 1800
950 Main Avenue
Cleveland, OH 44113-7214
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 2014 annual meeting will be
held on Wednesday, July 30, 2014, at 9:00 a.m.
Eastern time at its Executive Offices.
Portions of this Annual Report, other than the Form 10-K,
have not been filed with the SEC.
Product and service descriptions and financial information
herein are for illustration purposes only and do not modify
or alter product warranties, labeling, instructions, or other
technical literature, or the financial information contained
in the Form 10-K.
BOARD OF DIRECTORS
John P. Wareham1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. 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.
Walter M Rosebrough, Jr.3
President and Chief Executive Officer,
STERIS Corporation
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 Clinic Foundation
1 Compensation Committee Member
2 Audit Committee Member
3 Compliance Committee Member
4 Nominating and Governance
Committee Member
Dear Fellow Shareholders,
Fiscal 2014 was a year of achievement for the people of STERIS. We have made great strides toward
our strategic objectives over the past couple of years, and are excited about the direction we are
heading. Our Company is invigorated by the investments we are making to grow organically and
through acquisition, which enable us to provide even more value to our Customers, our people and
our shareholders.
Over the past two years, we have successfully integrated meaningful acquisitions into our business;
begun to generate the anticipated quality, delivery and cost improvements from significant in-
sourcing projects; continued to develop and launch new products; and developed plans to further
streamline our operations. Our people have done all this while generating record revenue and profits
in a challenging market.
For fiscal 2014, our 10% growth in adjusted revenue was primarily driven by strength in the United
States for all three business segments, as well as nice improvement in our Europe-Middle East-Africa
(EMEA) Healthcare business. We expanded adjusted operating profit 14%, despite the Medical Device
Excise Tax, and while investing in R&D and in-sourcing. Full year adjusted earnings per share were a
record $2.48.
Our Healthcare segment grew adjusted revenue 12% for the year, with strength in the United States
and in EMEA. V-PRO sterilizers, instrument washers and OR integration systems performed especially
well during the fiscal year, contributing to a 6% increase in Healthcare capital equipment revenue
(excluding SYSTEM 1E shipments in both years). Consumable revenue grew 17% and service revenue
grew 23% in Healthcare for the year, due in part to our acquisitions.
Many of the investments we are making fall in our Healthcare segment, and as a result, our
Healthcare operating margin improvement was somewhat lower than we might have expected in a
year of double-digit revenue growth. However, the Healthcare segment stands to benefit in the future
from the investments we have made in in-sourcing, new products coming out of R&D, and growth
and synergies that we expect from our recent acquisitions.
Our Life Sciences segment had another strong year of consumable growth, with solid improvement
in our formulated chemistries family driving an 8% increase in consumable revenue. That growth
was largely offset by a 4% decline in capital equipment revenue and a 2% decline in service revenue,
resulting in overall revenue growth of 1% for the segment. Once again, Life Sciences has done a good
job of managing product mix and expenses, and was able to generate meaningful improvement in
operating margins for the year despite this modest growth.
Isomedix revenue grew 8% for the year, reflecting the filling of capacity we have added the past
couple of years. Isomedix continues to benefit from increasing demand from our core medical
device Customers. Reflecting the strong revenue growth and capacity utilization, operating margins
expanded nicely in the segment to end the year at almost 30%. Our plans for fiscal 2015 include
additional investments to further expand Isomedix capacity, as volume has somewhat exceeded
our expectations.
From a business development perspective, after a bit of a hiatus following our purchase of US
Endoscopy and Spectrum in fiscal 2013, we picked up steam during the past several months. In the
third quarter of fiscal 2014, we acquired the assets of Florida Surgical Repair, an instrument repair
business based in Florida. Following that, we bought the assets of Life Systems, Inc., an endoscope
repair business located near St. Louis, Missouri. Both of these businesses have been integrated into
our Spectrum Specialty Services business in the Healthcare segment.
We also added Eschmann Holdings Ltd, a privately held company based in the United Kingdom,
during the fourth quarter of fiscal 2014. Eschmann designs and manufactures a range of surgical and
infection prevention products, has a direct sales and service channel in the UK, has a well-recognized
brand, and has distribution around the world. This business will be integrated into our Healthcare
segment.
Finally, on the first day of our new fiscal year, we announced a definitive agreement to purchase
Integrated Medical Systems International, Inc. (IMS). IMS brings strength in endoscope repair, surgical
instrument repair and management, as well as a larger sales and service presence, particularly in the
southern United States. We closed the acquisition of IMS in May, 2014.
We continue to make meaningful progress on our in-sourcing projects, and expect to generate about
$4 million in cost savings in fiscal 2015 as a result. That is a turnaround of about $10 million, as we
invested nearly $6 million in fiscal 2014. We expect to improve quality and delivery of our products
as a result of these projects, as well as generate additional savings into the foreseeable future. In
addition, we announced a targeted restructuring program in March, 2014 that includes the closing of
our Hopkins Production Facility, as well as other actions. We anticipate approximately $10 million in
annual cost savings as a result of these actions, which will be realized about half in fiscal 2015 and the
balance in fiscal 2016.
To fund our growth, we have added some additional debt to the balance sheet, but are very
comfortable with our current leverage. We continue to believe that we will be able to access funds
needed to support future growth opportunities. During fiscal 2014, we increased our dividend for the
eighth consecutive year to $0.21 per share, per quarter. With the stock reaching new all-time highs
during the year, our Total Shareholder Return was 21% and 150% for the twelve months and five years
ending March 31, respectively.
This past January one of our two founding executives, Ray Kralovic, passed away. Ray was the
inventor of the SYSTEM 1® Sterile Processing System, and was an inspiration to the innovative spirit of
STERIS and many entrepreneurs outside STERIS. He remained committed to STERIS long after he left
the Company, and was always available for help and advice. We will miss Ray’s dedication to STERIS,
and to innovation and entrepreneurism.
I want to thank the people of STERIS for their engagement and performance, the Board of Directors
for their counsel and direction, and my fellow shareholders for the honor and privilege of leading our
Company for nearly seven years.
Until next year,
Walt Rosebrough
President and Chief Executive Officer
June 2014
(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”).
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, 2014
OR
Transition Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-14643
STERIS Corporation
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
34-1482024
(IRS Employer Identification No.)
5960 Heisley Road,
Mentor, Ohio
(Address of principal executive offices)
44060-1834
(Zip Code)
440-354-2600
(Registrant’s telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
Common Shares, without par value
Name of Exchange on Which Registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of
such stock as of September 30, 2013: 2,507,582,546
The number of Common Shares outstanding as of May 23, 2014: 59,087,612
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2014 Annual Meeting – Part III
STERIS Corporation and Subsidiaries
Table of Contents
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
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
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 7A
Item 8
Item 9
Item 9A
Item 9B
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
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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 2014 ended on March 31, 2014.
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 help our Customers create a healthier and safer world
by providing innovative healthcare and life science product and service solutions around the globe.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 1,500 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.
Our Isomedix segment (“Isomedix”) provides ethylene oxide and 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.
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. The pharmaceutical industry has been impacted by
increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within
healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand
for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our
Customers to operate more efficiently, all which are driving increased demand for many of our products 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, and 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
3
fiscal years 2014, 2013, and 2012 is presented in note 12 to our Consolidated Financial Statements titled, “Business Segment
Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” (“MD&A”), of this Annual Report.
HEALTHCARE SEGMENT
Description of Business. Our Healthcare segment manufactures and sells capital equipment, accessory, consumables,
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:
(cid:127)
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.
(cid:127) 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.
(cid:127) 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.
(cid:127) Gastrointestinal endoscopy accessories for a variety of GI procedure areas including bleed management and procedure
irrigation, foreign body retrieval, polypectomy, and tissue acquisition.
(cid:127) 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.
(cid:127) Cleaning chemistries and sterility assurance products used in instrument cleaning and decontamination systems.
(cid:127) 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®, Roth Net®, Little Sister ®, and T-Series®.
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 SPD.
We offer remote equipment monitoring technology to anticipate potential failure modes and take corrective action thereby
improving Customers' equipment uptime.
In addition, we offer comprehensive instrument and endoscope repair solutions to Customers, either on site or at one of our
dedicated repair facilities. These solutions extend instrument and endoscope 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, 2014, 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, Cantel Medical, Ecolab, Getinge, Go Jo, Johnson & Johnson, Kimberly-
Clark, Skytron, and Stryker.
4
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:
(cid:127)
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.
(cid:127) Vaporized Hydrogen Peroxide (“VHP”®) generators used to decontaminate many high value spaces, from small
isolators to large pharmaceutical processing and laboratory animal rooms.
(cid:127) High-purity water equipment, which generates water for injection and pure steam.
(cid:127)
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.
(cid:127) 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, 2014, 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.
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, 2014, no Customer represented more than 10% of the segment’s revenues.
5
Because of a largely fixed cost structure, the loss of a single Customer could have a material impact on the segment’s
results of operations or cash flows but would not be expected to have a material impact on STERIS.
Competition. Isomedix operates in a highly regulated industry and competes in North America with Sterigenics
International, Inc., 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 and inorganic chemicals, fuel, and plastic components. These
raw materials and supplies are generally available from several suppliers and in sufficient quantities that we do not currently
expect any significant sourcing problems in fiscal 2015. We have longer-term supply contracts for certain materials for which
there are few suppliers. There is currently only a single supplier for ethylene oxide and radioisotope (cobalt-60) used by the
Isomedix segment, although we do have a longer-term supply contract for the latter.
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, 2014, we held 340 United States patents and 847 foreign patents and had 66 United States patent
applications and 304 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, 2014, we had a total of 1,081 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, 2014, 2013, and 2012, research and development expenses were $48.6 million, $41.3 million, and $36.0 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 AMSCO 3052 and 5052 washers, Prolystica HP and the OT 1000 series orthopedic surgical
table, and several gastrointestinal endoscopy accessories supporting a variety of procedural categories.
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.
6
If we fail to comply with any applicable regulatory requirements, sanctions could be imposed on us. For more information
about the risks we face regarding regulatory requirements, see Part I, Item 1A of this Annual Report titled, “Risk Factors, We
are subject to extensive regulatory requirements.”
We have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to
other regulatory sanctions. At the beginning of fiscal 2011 a consent decree, the terms of which had been previously agreed to
by the FDA and us, was approved by the Federal District Court for the Northern District of Ohio concerning our SYSTEM 1
processing system. See Part I, Item 1A of this Annual Report titled, “Risk Factors, We may be adversely affected by product
liability claims or other legal actions or regulatory or compliance matters, including the 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,
gastrointestinal 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, 2014, 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, 2014, we employed approximately 1,700 direct field sales and service
representatives within the United States and approximately 400 in international locations. Sales and service activities are
supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house
Customer service and field support departments. We also contract with distributors and dealers in select markets.
Customer training is important to our business. We provide a variety of courses at Customer locations, at our training and
education centers, and over the internet. Our training programs help Customers understand the science, technology, and
operation of our products. Many of our operator training programs are approved by professional certifying organizations and
offer continuing education credits to eligible course participants.
7
Seasonality. Our financial results have been, from time to time, subject to seasonal patterns. We cannot assure you that these
patterns will continue.
International Operations. We believe we have 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, Middle East and Africa ("EMEA"), Canada, and the Asia Pacific and Latin
American regions were 47%, 19%, 21%, and 13%, respectively, of our total international revenues for the year ended
March 31, 2014.
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, 2014, 2013 and 2012.
We conduct manufacturing in the United States, Canada, Mexico, Brazil, China and various European countries.
International cost of revenues have represented approximately one-fourth 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 2014, revenues were unfavorably
impacted by $2.1 million, or 0.1%, and income before taxes was favorably impacted by $0.3 million, or 0.2%, 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, 2014,
we had a backlog of $154.7 million. Of this amount, $110.3 million and $44.4 million related to our Healthcare and Life
Sciences segments, respectively. At March 31, 2013, we had backlog orders of $153.6 million. Of this amount $105.2 million
and $48.4 million related to our Healthcare and Life Sciences segments, respectively. A significant portion of the backlog
orders at March 31, 2014, 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 at
March 31, 2014. All executive officers serve at the pleasure of the Board of Directors.
Name
Kathleen L. Bardwell
Timothy L. Chapman
Suzanne V. Forsythe
David A. Johnson
Robert E. Moss
Sudhir K. Pahwa
Walter M Rosebrough, Jr.
Michael J. Tokich
J. Adam Zangerle
Age
58
52
60
52
69
61
60
45
47
Position
Senior Vice President and Chief Compliance Officer
Senior Vice President and Group President Healthcare
Vice President, Human Resources
Senior Vice President, Global Surgical Solutions
Senior Vice President and Group President, STERIS Isomedix Services
and Life Sciences
Senior Vice President, Infection Prevention Technologies
President and Chief Executive Officer
Senior Vice President, Chief Financial Officer and Treasurer
Vice President, General Counsel & Secretary
The following discussion provides a summary of each executive officer’s recent business experience:
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Kathleen L. Bardwell serves as Senior Vice President and Chief Compliance Officer. She assumed this role in February 2014.
From March 2008 to February 2014 she served as Vice President, Chief Compliance Officer.
Timothy L. Chapman serves as Senior Vice President and Group President, Healthcare. He assumed this role in 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 Surgical Solutions. He assumed this role in February 2014. From
July 2012 to February 2014 he served as Senior Vice President, Global Operations and Quality. 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.
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.
Sudhir K. Pahwa serves as Senior Vice President, Infection Prevention Technologies. He assumed this role in February 2014.
From December 2008 to February 2014 he served as Vice President and General Manager, Infection Prevention Technologies.
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, Chief Financial Officer and Treasurer. He assumed this role in February
2014. He served as Senior Vice President and Chief Financial Officer from March 2008 to February 2014.
J. Adam Zangerle serves as Vice President, General Counsel & Secretary. He assumed this role in July 2013. From May 2007
to July 2013 he served as Associate General Counsel and Group General Counsel, Healthcare.
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 recovery has been
slow from the recent severe recession, which had a significant adverse effect on U.S. and global economies.
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 or utilization 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.
Global economic conditions, in Europe in particular, may have adverse effects on our business and financial condition.
Many of our global Customers are governmental entities or other entities that rely on government healthcare systems or
government funding. If government funding for healthcare becomes limited or restricted in countries in which we operate, our
Customers may be unable to pay their obligations on a timely basis or to make payment in full and it may become necessary to
9
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.
Should the current economic conditions continue or worsen, our business, performance, prospects, value, financial condition,
bad debt expense or results of operations may be adversely affected.
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.
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,
gastrointestinal endoscopy accessories, 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 or curtail our operations.
We purchase raw materials, fabricated and other components, and energy supplies from a variety of suppliers. Key
materials include stainless steel, organic and inorganic chemicals, fuel, cobalt-60, ethylene oxide, 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 have a limited number of suppliers. Some are
single-sourced, such as cobalt-60 and ethylene oxide, which are necessary to our Isomedix operations; the unavailability or
short supply of these products might disrupt or cause shutdowns of portions of our Isomedix operations or have other adverse
consequences. 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:
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explosions, fires, earthquakes, inclement weather, and other disasters;
utility or other mechanical failures;
unscheduled downtime;
labor difficulties;
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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, Mexico, 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:
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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,
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.
11
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. We
incurred $7.4 million in medical device excise taxes for fiscal 2014. In addition, we have been required to commit significant
resources to “Sunshine Act” compliance. 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
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”.
12
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:
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redesign, re-label, restrict, or recall products;
cease manufacturing and selling products;
seizure of product inventory;
comply with a court injunction restricting or prohibiting further marketing and sale of products or services;
comply with a consent decree, which could result in further regulatory constraints;
dedication of significant internal and external resources and costs to respond to and comply with legal and regulatory
issues and constraints;
respond to claims, litigation, and other proceedings brought by Customers, users, governmental agencies, and others;
disruption of product improvements and product launches;
discontinuation of certain product lines or services; or
other restrictions or limitations on product sales, use or operation, or other activities or business practices.
Some product replacements or substitutions may not be possible or may be prohibitively costly or time consuming.
Examples of the types of matters described above are the warning letter we received from the FDA on May 16, 2008
regarding our SYSTEM 1 sterile processing system, and the Consent Decree entered into on April 20, 2010. In summary, the
warning letter outlined the FDA's assertion that significant changes or modifications had been made in the design, components,
method of manufacture or intended use of the device, beyond the FDA's 1988 clearance of the device, such that the FDA
asserted a new premarket notification submission was required. After extensive discussion, negotiation and interaction between
FDA and us, a consent decree was agreed upon and approved by the Federal District Court for the Northern District of Ohio on
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
13
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. In fiscal 2014 we acquired the assets of Florida Surgical Repair, Inc.,
and Life Systems, Inc., and purchased the shares of Eschmann Holdings Ltd., and entered into an agreement to acquire the
shares of Integrated Medical Systems International, Inc. 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:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
delays in realizing or failure to realize anticipated benefits of the transactions;
diversion of management's time and attention from other business concerns;
difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses;
difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture
difficulties;
adverse effects on existing business relationships with suppliers or Customers;
other events contributing to difficulties in generating future cash flows;
risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for
divested businesses; and
difficulties in obtaining financing.
If we are unable to realize the anticipated operating efficiencies and synergies or other expected transaction benefits, our
business, prospects, performance, value, financial condition or results of operation may be adversely impacted.
Our acquisition activity and ability to grow organically may be adversely affected if we are unable to continue to access the
financial markets.
The Company’s recent acquisitions have been financed largely through borrowings under the Company’s bank credit
facilities and private placements. Additional acquisitions or other capital requirements will necessitate additional cash. To the
extent our existing sources of cash are insufficient to fund these or other future activities, we may need to raise additional funds
14
through new or expanded borrowing arrangements or the sale of equity securities. There can be no assurance that we will be
able to obtain additional funds beyond existing bank credit facilities on terms favorable to us, or at all.
If our cost reduction and restructuring efforts are ineffective, our profitability may be hurt or our business otherwise might
be adversely affected.
We have undertaken various cost reduction and restructuring activities, including the targeted restructuring activities
announced in March 2014. This latter restructuring involves primarily the closure of our Hopkins Production Facility in
Mentor, Ohio and the transfer of the System 1E manufacturing operations conducted there to other North American
manufacturing facilities. The Company has recorded a $20 million charge for the restructuring. The restructuring actions are
anticipated to result in annual savings of approximately $10 million with savings occurring equally in fiscal year 2015 and
fiscal year 2016. These efforts may not produce the full efficiencies and cost reduction benefits we expect or efficiencies and
benefits might be delayed. Implementation costs also might exceed expectations and further cost reduction measures might
become necessary, resulting in additional future charges. If these cost reduction and restructuring efforts are not properly
implemented or are unsuccessful, we might experience business disruptions or our business otherwise might be adversely
affected.
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 investments during fiscal
2013 and 2014 on these projects, and anticipate additional investments in fiscal 2015. There have been delays in the in-sourcing
projects and, as a result, we have not realized the expected savings due to a variety of reasons. These activities may not produce
the full efficiencies and cost reduction benefits that we expect or efficiencies and benefits might be further 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, unanticipated additional expense or our business otherwise
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 is a party 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.
15
ITEM 2. PROPERTIES
The following table sets forth the principal plants and other materially important properties of the Company and its
subsidiaries as of March 31, 2014. The Company believes that its facilities are adequate for operations and are maintained in
good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially
reasonable rates.
In the table below, “Contract Sterilization” refers to locations of the Isomedix segment. “Manufacturing,” “Warehousing,”
“Operations,” or “Sales Offices” refer to locations serving both the Healthcare and Life Sciences segments.
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
Montgomery, AL
Ontario, CA
San Diego, CA
Temecula, CA
Libertyville, IL (2 locations)
Northborough, MA
Brooklyn Park, MN
St. Louis, MO
South Plainfield, NJ
Whippany, NJ
Chester, NY
Groveport, OH
Mentor, OH (13 locations)
Spartanburg, SC
El Paso, TX (2 locations)
Grand Prairie, TX
Sandy, UT
Minneapolis, MN (2 locations)
Vega Alta, PR
Bordeaux, France
Quebec City, Canada
Whitby, Canada
Leicester, England
Mogi das Cruzes, Brazil
Tuusula, Finland
Lancing, England
West Sussex, England
St. Louis, MO
Reno, NV
U.S./INTL
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
INTL
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
Research and Development
Lobby, Showroom and Customer Service
Education Center
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Contract Sterilization
Manufacturing/Sales Office/Showroom
Manufacturing
Contract Sterilization
Manufacturing
Manufacturing/Sales Office
Manufacturing/Sales Office
Manufacturing/Administration Offices
Offices, Warehousing, Manufacturing
Warehousing/Distribution
Warehousing
16
Owned/Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
Mentor, OH (2 locations)
U.S./INTL
U.S.
U.S.
Use
Administrative Offices
Sales/Administration Offices
Stow, OH (2 locations)
Hillsborough, NJ
Lake Orion, MI
Keller, TX
Haywood, CA
Houston, TX
Costa Mesa, CA
Timonium, MD
Montgomery Village, MD
Melville, NY
Santa Clara, CA
Chesterfield, MO
Longwood, FL
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
Paris, France
Toussieu, France
Cologne, Germany
Calcutta, India
Segrate, Italy
Tokyo, Japan
Petaling Jaya, Malaysia
Guadalupe, Mexico
Moscow, Russia
Singapore (3 locations)
Madrid, Spain
United Arab Emirates
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
INTL
INTL
INTL
INTL
INTL
INTL
INTL
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/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales/Administration Offices
Sales Office
Sales/Administration Offices
Sales/Administration Offices
Sales Office
Sales/Administration Offices
Sales Office
Sales Office/Warehousing
Sales Office
Sales/Administration Offices/ Assembly
Sales Office/ Manufacturing
Sales Office
Warehousing
Sales Office
Showroom
Warehousing
Sales Office
Warehousing
Sales Office
Sales Office
Sales Office
Sales Office
Sales Office
Manufacturing
Sales Office
Sales Office, Warehousing
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
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
17
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further
believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our
consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can
be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings
(including without limitation the FDA-related matters discussed below). For certain types of claims, we presently maintain
insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that
we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse
outcomes of claims or legal proceedings against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our
SYSTEM 1 sterile processor and the STERIS® 20 sterilant used with the processor (sometimes referred to collectively in the
FDA letter and in this Item 3 as the “device”). Among other matters, the warning letter included the FDA's assertion that
significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the
device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within
FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission
resulted in violations of applicable law.
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 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 of Part I of this Annual Report on Form 10-K.
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 this Annual Report on Form 10-K:
“Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled: “We
may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the
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.
18
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.
19
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 2014
High
Low
Fiscal 2013
High
Low
March 31
December 31
September 30
June 30
$
$
$
49.92
39.90
$
48.50
42.74
$
46.10
40.46
41.76
$
37.18
$
36.33
$
34.80
32.23
29.91
46.59
38.85
31.83
28.77
Holders. As of March 31, 2014, there were approximately 1,295 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 2014, we paid cash dividends totaling $0.82 per outstanding common share ($0.19 per outstanding common share to
common shareholders of record on June 4, 2013, and $0.21 per outstanding common share to common shareholders of record
on the following dates: August 28, 2013, November 20, 2013 and February 26, 2014). 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).
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 2014 fiscal year:
(a)
Total Number of
Shares Purchased
—
50,507
—
$
50,507
(1) $
January 1-31
February 1-28
March 1-31
Total
(b)
Average Price Paid
Per Share
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans (2)
(d)
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Plans at Period End
—
44.21
—
44.21 (1)
—
50,507
—
50,507
$
$
89,172
86,939
86,939
86,939
(1) Does not include 77 shares purchased during the quarter at an average price of $46.84 per share by the STERIS
Corporation 401(k) Plan on behalf of certain executive officers of the Company who may be deemed to be affiliated
purchasers.
(2) On March 14, 2008 we announced that, the Board of Directors had authorized the repurchase of up to $300.0 million
of our common shares. As of March 31, 2014, $86.9 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 2014 share repurchase activity in note 14 to our consolidated financial
statements titled, “Repurchases of Common Shares.”
20
ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
2014 (1)
Statements of Income Data:
Years Ended March 31,
2012(1)(2)
2011(2)
2013(1)(2)
2010
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
$ 1,622,252
$ 1,501,902
$ 1,406,810
$ 1,207,448
$ 1,257,733
$
$
$
$
$
649,622
13,204
206,807
58,934
129,442
2.20
$
$
621,263
(565)
242,829
67,121
159,977
2.74
$
$
568,465
446,162
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
58,966
58,305
58,367
59,306
58,826
2.17
$
2.72
$
2.31
$
0.85
$
2.16
59,745
0.82
420,239
$
$
58,884
0.74
395,103
$
$
58,963
0.66
373,488
$
$
60,148
0.56
361,060
$
$
59,423
2.44
379,328
1,887,162
1,761,109
1,405,696
1,426,685
1,238,402
493,480
845,916
1,038,705
492,290
814,129
944,942
210,000
583,032
821,401
210,000
638,020
787,569
210,000
483,908
753,714
(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.
21
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:
(cid:127) what factors affect our business;
(cid:127) what our earnings and costs were;
(cid:127) why those earnings and costs were different from the year before;
(cid:127) where our earnings came from;
(cid:127)
how this affects our overall financial condition;
(cid:127) what our expenditures for capital projects were; and
(cid:127) 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 2014, 2013 and 2012, 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:
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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
22
that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe
revenues:
(cid:127) Revenues – Our revenues are presented net of sales returns and allowances.
(cid:127)
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 and endoscope repair services, and revenues
generated from contract sterilization offered through our Isomedix segment.
(cid:127)
(cid:127) 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.
(cid:127) 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.
(cid:127) 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 help our Customers create a healthier and safer world by providing innovative healthcare
and life science product and service solutions around the globe. 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. The pharmaceutical industry has been impacted by
increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within
healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand
for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our
Customers to operate more efficiently, all which are driving increased demand for many of our products and services.
We are also investing in several manufacturing in-sourcing projects for the purpose of improving quality, cost and delivery
of our products to our Customers.
Highlights. During fiscal year 2014, we 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 December 2013, we purchased the assets of Florida Surgical Repair ("FSR"), a provider of surgical
instrument and surgical equipment repair services. In February 2014, we purchased the assets of Life Systems, Inc. ("LSI"), a
provider of sales and service in the endoscopy repair and certified pre-owned equipment markets. In February 2014, we also
purchased the stock of Eschmann Holdings Ltd. ("Eschmann"), a provider of surgical and infection prevention solutions and
services used primarily in hospitals, surgery centers and dental offices in the United Kingdom.
In the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the
closure of our Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of
this plan we will transfer operations located at Hopkins to other North American locations. The plan also includes the
rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150
employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We
expect that these actions, combined with additional actions taken in prior years, will allow us to make substantial progress in
reducing our cost base.
Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to
$1,501.9 million for the year ended March 31, 2013. The fiscal 2013 period was positively impacted by the SYSTEM 1 Rebate
Program adjustment of $22.4 million. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted revenues of
$1,479.5 million for fiscal 2013, which exclude the impact of the SYSTEM 1 Rebate Program, 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).
Fiscal 2014 operating income was $206.8 million, a decrease of 14.8% over the fiscal 2013 operating income of $242.8
million. The primary drivers of the lower operating income was the positive impact of the $23.6 million SYSTEM 1 Rebate
23
Program adjustments recorded during fiscal 2013 and the $16.8 million SYSTEM 1 class action settlement adjustments
recorded during fiscal 2013. Fiscal 2014 operating income increased $4.4 million, or 2.2%, over adjusted fiscal 2013 operating
income of $202.4 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). The slight increase from last
year was due primarily to the increased revenues within all three business segments, mainly attributable to the contributions of
the fiscal 2013 and 2014 acquisitions, which was partially offset by the charges associated with the Fiscal 2014 Restructuring
Plan, the Medical Device Excise tax, increased spending for research and development, and investments in in-sourcing.
Cash flows from operations were $209.6 million and free cash flow was $128.0 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 by borrowing under our
revolving credit facility. With this additional leverage, we maintained a debt-to-total capital ratio of 32.2% at March 31, 2014.
We increased our dividend double digits for the eighth consecutive year to $0.21 per share per quarter.
Outlook. Since our fiscal 2014 acquisitions did not close until the third and fourth quarters of fiscal 2014, we expect to have
stronger top-line revenues from these acquisitions in fiscal 2015. Fluctuations in foreign currency rates can impact revenues
and costs outside of the United States, creating variability in our results for fiscal 2015 and beyond.
In fiscal 2015 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 plan to continue our efforts to in-source some of the production that we have traditionally out-sourced. Because
we continue to take advantage of our Lean business model, we expect to utilize the capacity we have created to shorten the
supply chain and produce certain 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 and fiscal 2013, based on the actual experience at the time, we adjusted a portion of the original
estimated liability related to the Rebate Program. The total fiscal 2012 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. The total fiscal 2013 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.
In fiscal 2011 we recorded 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). As
a result of the passage of the claim submission deadline during fiscal 2013, we adjusted the liability related to the SYSTEM 1
class action settlement by $16.8 million 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 2014, our revenues were
unfavorably impacted by $2.1 million, or 0.1%, and income before taxes was favorably impacted by $0.3 million, or 0.2%, 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.
24
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 and 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, 2014, 2013
and 2012:
(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,
2013
$ 227,815
(87,412)
34
$ 140,437
2014
$ 209,631
(86,367)
4,774
$ 128,038
2012
$ 149,372
(66,682)
42
$ 82,732
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 and fiscal 2012
measures and the corresponding trend in each of these measures. We provide adjusted measures to give the reader a more
complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. These
measures are used by management and the Board of Directors in making comparisons to our historical operating results and
analyzing the underlying performance of our operations. The tables below provide a reconciliation of each of these measures to
its most directly comparable GAAP financial measure.
(dollars in thousands)
Reported revenues
Impact of the SYSTEM 1 Rebate Program
Adjusted revenues
Reported capital 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,
2014
1,622,252
—
1,622,252
603,579
—
603,579
1,244,730
—
1,244,730
$
$
$
$
$
$
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
$
$
$
$
$
$
25
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,180,051
—
1,180,051
515,380
—
515,380
649,622
—
649,622
$
$
$
$
$
$
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
40.0%
—%
40.0%
41.4 %
(1.0)%
40.4 %
40.4 %
(0.8)%
39.6 %
206,807
$
242,829
$
222,316
—
206,807
109,714
—
109,714
58,934
—
58,934
380,970
—
380,970
$
$
$
$
$
$
$
(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
Reported effective income tax rate
Impact of the SYSTEM 1 Rebate Program and class action
settlement
Adjusted effective income tax rate
31.3%
—%
31.3%
29.6 %
(2.1)%
27.5 %
35.5 %
(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.
26
FISCAL 2014 AS COMPARED TO FISCAL 2013
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2014
to the year ended March 31, 2013:
(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,
2014
2013
Change
Percent
Change
$
1,622,252
$
1,501,902
$
120,350
8.0 %
603,579
407,883
610,790
613,378
353,984
534,540
(9,799)
53,899
76,250
(1.6)%
15.2 %
14.3 %
1,244,730
377,522
1,141,633
360,269
103,097
17,253
9.0 %
4.8 %
Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to
$1,501.9 million for the year ended March 31, 2013. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted
revenues for fiscal 2013, which exclude the impact of the $22.4 million SYSTEM 1 Rebate Program adjustments (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 $9.8 million, or 1.6%, to $603.6 million, during fiscal 2014 as compared to fiscal
2013. Capital equipment revenues for the fiscal year ended 2013 were favorably impacted by adjustments related to the
SYSTEM 1 Rebate Program of $22.4 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). Fiscal 2014
capital equipment revenues increased $12.6 million, or 2.1% over fiscal 2013 adjusted capital equipment revenues of $591.0
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). This increase was primarily driven by growth in
the U.S. and the EMEA region, offset by declines in other international regions. Consumable revenues increased $53.9 million,
or 15.2%, during fiscal 2014 from fiscal 2013. This increase was driven by growth within the Healthcare segment due in large
part to our recent acquisitions, and growth within the Life Sciences business segment and reflects growth in all regions. Service
revenues for fiscal 2014 increased $76.3 million, or 14.3%, over fiscal 2013 primarily driven by the recent acquisitions of the
instrument repair businesses, other service offerings, and growth of $14.6 million, or 8.1%, within the Isomedix segment in
fiscal 2014 over fiscal 2013. Isomedix revenues were favorably impacted by increased demand from our medical device
Customers and the filling of recently added capacity.
United States revenues for fiscal 2014 were $1,244.7 million, an increase of $103.1 million, or 9.0%, over fiscal 2013
revenues of $1,141.6 million. The fiscal 2013 period was favorably impacted by the SYSTEM 1 Rebate Program adjustments
of $22.4 million. United States revenues for fiscal 2014 increased $125.5 million, or 11.2%, over the adjusted United States
revenues for fiscal 2013 of $1,119.3 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional
information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). 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 results reflect growth in all three business segments.
International revenues for fiscal 2014 were $377.5 million, an increase of 4.8% over the fiscal 2013 revenues of $360.3
million. This increase reflects revenue growth in the Latin American and EMEA regions, partially offset by declines in Canada
and the Asia Pacific regions.
Gross Profit. The following table compares our gross profit for the year ended March 31, 2014 to the year ended March 31,
2013:
27
(dollars in thousands)
Gross profit:
Product
Service
Total gross profit
Gross profit percentage:
Product
Service
Total gross profit percentage
Years Ended March 31,
2013
2014
Change
Percent
Change
$
$
425,286
224,336
649,622
$
$
416,463
204,800
621,263
$
$
8,823
19,536
28,359
2.1%
9.5%
4.6%
42.0%
36.7%
40.0%
43.1%
38.3%
41.4%
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 $28.4 million and gross profit percentage
decreased to 40.0% for fiscal 2014 as compared to 41.4% for fiscal 2013. Our gross profit increased $52.0 million, or 8.7%
over our adjusted fiscal 2013 gross margin, which excludes the $23.6 million impact of the SYSTEM 1 Rebate Program (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 for fiscal 2014 include the negative impact of restructuring (50 basis points), inflation (80 basis points), and
the Medical Device Excise Tax (40 basis points), and the positive impact of the following: pricing (40 basis points), volume (40
basis points) and our recent acquisitions.
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2014 to the year
ended March 31, 2013:
(dollars in thousands)
Operating expenses:
Selling, general, and administrative
Research and development
Restructuring expenses
Total operating expenses
NM - Not meaningful
Years Ended March 31,
2013
2014
Change
Percent
Change
$
$
380,970
48,641
13,204
442,815
$
$
337,694
41,305
(565)
378,434
$
$
43,276
7,336
13,769
64,381
12.8%
17.8%
NM
17.0%
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 12.8% during fiscal 2014 over fiscal 2013. 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). The impact of the class action settlement aside, the
increase in SG&A in fiscal 2014 over fiscal 2013 is primarily attributable to the addition of operating expenses incurred with
our acquired businesses. In addition, we recorded a fair value adjustment of $1.0 million related to a deferred payment of
purchase price for the 2012 purchase of Sercon Industria E Comercio De Aparelhos Medicos Hospitalares LTDA (“Sercon”).
Research and development expenses increased $7.3 million during fiscal 2014, as compared to fiscal 2013. The majority of
the increase is attributable to expenses for research and development incurred within the operations of the businesses acquired
in fiscal 2013 and fiscal 2014. 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. During fiscal 2014, our investments in research and
development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination
technologies, surgical products and accessories, and devices and support accessories used in gastrointestinal endoscopy
procedures.
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
28
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.
Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring
plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014
Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations.
We believe that by closing the operations at Hopkins we will be able to more effectively utilize our existing North American
manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the
elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the
impairment of related assets and inventory and severance and outplacement costs. We anticipate that these restructuring actions
will result in annual savings of approximately $10.0 million. We expect to incur restructuring charges of approximately $1.0
million in fiscal 2015, as additional costs associated with the plan are incurred.
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.
The following tables summarize our total pre-tax restructuring expenses for fiscal 2014 and fiscal 2013:
(dollars in thousands)
Severance and other compensation related costs
Asset impairment and accelerated depreciation
Lease termination obligation and other
Product rationalization
Total restructuring charges
Year Ended March 31, 2014
Fiscal 2014
Restructuring
Plan (1)
Fiscal 2010
Restructuring
Plan
$
$
7,363 $
3,621
1,103
8,144
20,231 $
127 $
990
—
—
1,117 $
Total
7,490
4,611
1,103
8,144
21,348
(1) Includes $8.1 million in charges recorded in cost of revenues on Consolidated Statements of Income.
(dollars in thousands)
Severance and other compensation related costs
Lease termination obligation and other
Total restructuring charges
Year Ended
March 31, 2013
Fiscal 2010
Restructuring
Plan
$
$
(918)
353
(565)
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
summarizes our restructuring liability balances and activity:
Fiscal 2014 Restructuring Plan
Fiscal 2014
(dollars in thousands)
Severance and termination benefits
Lease termination obligations and other
Total
$
$
March 31,
2013
Provision
— $
—
— $
6,429
1,589
8,018
$
Payments/
Impairments (1)
$
(40) $
—
(40) $
March 31,
2014
6,389
1,589
7,978
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
29
Fiscal 2010 Restructuring Plan
Fiscal 2013
(dollars in thousands)
Severance and termination benefits
Lease termination obligations
Other
Total
March 31,
2012
Provision (1)
$
$
659
947
76
1,682
$
$
Payments/
Impairments (2)
730
(791)
(429)
(490) $
$
(918) $
—
353
(565) $
March 31,
2013
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.
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, 2014 to the year ended March 31, 2013:
(dollars in thousands)
Non-operating expenses, net:
Interest expense
Interest income and miscellaneous expense
Non-operating expenses, net
Years Ended March 31,
2014
2013
Change
$
$
18,770
(339)
18,431
$
$
15,675
56
15,731
$
$
3,095
(395)
2,700
Interest expense during fiscal 2014 increased due to higher outstanding borrowings due to acquisitions. Interest income
and miscellaneous expense are 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, 2014 and March 31, 2013:
(dollars in thousands)
Income tax expense
Effective income tax rate
Years Ended March 31,
2014
2013
Change
$
58,934
$
67,121
$
(8,187)
31.3%
29.6%
Percent
Change
(12.2)%
The effective income tax rate for fiscal 2014 was 31.3% as compared to 29.6% for fiscal 2013. 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. The effective tax rate in 2014 includes the benefit from the
recognition of previously unrecognized tax benefits due to the settlement of a federal tax examination. 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, 2014 to the year ended March 31, 2013:
30
(dollars in thousands)
Revenues:
Healthcare
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total Revenues
Years Ended March 31,
2014
2013
Change
Percent
Change
$
$
1,180,051
246,122
194,183
1,620,356
1,896
1,622,252
$
$
1,074,790
244,421
179,550
1,498,761
3,141
1,501,902
$
$
105,261
1,701
14,633
121,595
(1,245)
120,350
9.8 %
0.7 %
8.1 %
8.1 %
(39.6)%
8.0 %
Healthcare segment revenues increased $105.3 million, or 9.8% to $1,180.1 million for the year ended March 31, 2014, as
compared to $1,074.8 million for the prior fiscal year. Healthcare revenues for fiscal 2014 increased $127.7 million, or 12.1%,
compared to adjusted Healthcare revenues for fiscal 2013, which exclude the impact of the $22.4 million adjustment related to
the SYSTEM 1 Rebate Program (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 addition of
consumable and service revenues from our recent acquisitions combined with growth in other product and service offerings
drove total growth in capital equipment, consumable and service revenues of 3.2%, 17.1% and 23.3%, respectively. At
March 31, 2014, the Healthcare segment’s backlog amounted to $110.3 million, increasing $5.1 million, or 4.9%, compared to
the backlog of $105.2 million at March 31, 2013.
Life Science segment revenues increased $1.7 million or 0.7% to $246.1 million for the year ended March 31, 2014, as
compared to the prior fiscal year, driven by growth in consumable revenues of 8.4%, which was offset by declines in capital
equipment and service revenues of 3.7% and 1.7%, respectively. At March 31, 2014, the Life Sciences segment’s backlog
amounted to $44.4 million, decreasing $4.0 million, or 8.3%, compared to the backlog of $48.4 million at March 31, 2013. The
March 31, 2014 backlog is consistent with historic levels.
Isomedix segment revenues increased $14.6 million or 8.1% to $194.2 million for the year ended March 31, 2014, as
compared to the prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers
and positive churn.
The following tables compare our business segment and Corporate and other operating results for the year ended March 31,
2014 to the year ended March 31, 2013:
(dollars in thousands)
Operating income (loss):
Healthcare
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total operating income (loss)
Years Ended March 31,
2013
2014
Change
Percent
Change
$
$
109,714
50,049
55,186
214,949
(8,142)
206,807
$
$
153,343
47,453
51,455
252,251
(9,422)
242,829
$
$
(43,629)
2,596
3,731
(37,302)
1,280
(36,022)
(28.5)%
5.5 %
7.3 %
(14.8)%
(13.6)%
(14.8)%
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 decreased $43.6 million, or 28.5% to $109.7 million for the year ended
March 31, 2014, as compared to $153.3 million for the prior fiscal year. The Healthcare segment’s operating income for fiscal
2014 decreased $3.2 million, or 2.8%, compared to adjusted fiscal 2013 Healthcare operating income of $112.9 million, which
excludes the $40.4 million impact of the adjustment related to the SYSTEM 1 Rebate Program and class action settlement (see
subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-
31
GAAP financial measures to the most comparable GAAP measures). The decline in adjusted Healthcare operating income
reflects the negative impact of the Fiscal 2014 Restructuring Plan, the Medical Device Excise Tax and investments in in-
sourcing. Healthcare operating income was favorably impacted by increased revenues driven largely by our recent acquisitions
and a reduction in warranty costs.
The Life Science segment's operating income increased $2.6 million, or 5.5% to $50.0 million for the year ended
March 31, 2014, as compared to $47.5 million for the prior fiscal year. The segment's operating margins were 20.3% and
19.4%, respectively, for the years ended March 31, 2014 and March 31, 2013. The improvement was primarily attributable to
higher revenues and favorable product mix.
The Isomedix segment's operating income increased $3.7 million or 7.3% to $55.2 million for the year ended March 31,
2014, as compared to $51.5 million for the prior fiscal year, reflecting the benefits of increased revenues. The segment's
operating margins were 28.4% and 28.7%, respectively, for the years ended March 31, 2014 and March 31, 2013.
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-
32
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 the EMEA region.
Gross Profit. The following table compares our gross profit for the year ended March 31, 2013 to the year ended March 31,
2012:
(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
33
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
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:
Year Ended
March 31,
2013
Fiscal 2010
Restructuring
Plan
$
$
(918)
353
(565)
(dollars in thousands)
Severance and other compensation related costs
Lease termination obligation and other
Total restructuring charges
34
(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
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
35
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:
(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 in fiscal 2013, 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 the 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
36
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:
(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 an 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.
37
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes significant components of our cash flows for the years ended March 31, 2014, 2013 and
2012:
(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
Investments in businesses, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from the issuance of long-term obligations
Payments on long-term obligations
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
Excess 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,
2013
2012
2014
$
$
$
$
$
$
$
129,442
107,138
(245)
(26,704)
209,631
(86,367)
4,774
(67,059)
(148,652)
$
$
$
$
— $
(70,000)
71,190
(25,469)
(43)
(48,385)
15,660
2,841
(54,206)
32.2%
128,038
$
$
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
Net Cash Provided By Operating Activities –The net cash provided by our operating activities was $209.6 million for the
year ended March 31, 2014 compared to $227.8 million for the year ended March 31, 2013 and $149.4 million for the year
ended March 31, 2012. The following discussion summarizes the significant changes in our operating cash flows for the years
ended March 31, 2014, 2013 and 2012:
(cid:127) Net cash provided by operating activities decreased 8.0% in fiscal 2014 compared to fiscal 2013. The decrease is primarily
attributable to payments made in connection with our annual incentive compensation program which did not occur in fiscal
2013. In addition, the fiscal 2013 period reflected strong improvements in working capital management.
(cid:127) 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 Used In Investing Activities – The net cash used in our investing activities was $148.7 million for the year ended
March 31, 2014, compared to $487.1 million for the year ended March 31, 2013 and $101.3 million for the year ended March
31, 2012. The following discussion summarizes the significant changes in our investing cash flows for the years ended
March 31, 2014, 2013 and 2012:
(cid:127)
Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $86.4 million during fiscal
2014, $87.4 million during fiscal 2013 and $66.7 million during fiscal 2012. Fiscal 2014 capital expenditures were
essentially flat as compared to fiscal 2013. Fiscal 2013 capital expenditures were higher than fiscal 2012 as a result of
investments in our manufacturing centers and higher purchases of radioisotope (cobalt-60).
38
(cid:127)
(cid:127)
Proceeds from the sale of property, plant, equipment, and intangibles – During the third quarter of fiscal 2014 we sold our
former Pieterlen, Switzerland manufacturing facility in conjunction with our 2010 Restructuring Plan. Total proceeds and
net loss on the sale were $4.7 million and $0.8 million, respectively. Proceeds from fiscal 2013 and 2012 proceeds relate
to minor disposals.
Investments in business, net of cash acquired – During fiscal 2014, we used $64.4 million of cash for the acquisitions of
the assets of FSR and LSI, and the capital stock of Eschmann. For more information on these acquisitions refer to note 4 to
our consolidated financial statements titled, "Business Acquisitions". During fiscal 2014, we also used $3.2 million in cash
for a deferred purchase price payment related to the fiscal 2012 Brazil acquisition described below. During fiscal 2013, we
used $399.7 million of cash for the acquisitions of the capital stock of United States Endoscopy Group Inc., and Spectrum
Surgical Instruments Corp, the assets of Total Repair Express, and the remaining VTS Medical Systems, LLC interests not
already owned by us. 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 privately held Biotest
with lab operations in Minneapolis, Minnesota which provides validation services to our Customers and is a natural
extension of our Isomedix segment.
Net Cash Provided By (Used In) Financing Activities – Net cash used by financing activities was $54.2 million for the
year ended March 31, 2014, compared to net cash provided by financing activities of $254.2 million, and net cash used by
financing activities of $88.1 million for the years ended March 31, 2013 and March 31, 2012, respectively. The following
discussion summarizes the significant changes in our financing cash flows for the years ended March 31, 2014, 2013 and 2012:
(cid:127)
(cid:127)
(cid:127)
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.”
Payments on long term obligations- During the second quarter of fiscal 2014 we repaid $30.0 million for the senior notes
issued in August 2008, which matured in August 2013. During the third quarter of fiscal 2014 we repaid $40.0 million for
the senior notes issued in December 2003, which matured in December 2013.
Proceeds under credit facilities, net – At the end of fiscal 2014, $153.5 million of debt was outstanding under our credit
facilities.
(cid:127) Repurchases of common shares – During fiscal 2014, we paid for the repurchase of 565,887 commons shares at an average
purchase price of $43.63 and obtained common shares in connection with our stock-based compensation award programs
in the amount $0.8 million. During fiscal 2013, we paid for the repurchase of 204,349 common 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 of $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. We provide additional information about our common share repurchases in note 14 to our
consolidated financial statements titled, “Repurchases of Common Shares.”
(cid:127) Cash dividends paid to common shareholders – During fiscal 2014, we paid cash dividends totaling $48.4 million or $0.82
per outstanding common share. 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.
(cid:127)
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee
stock option programs. During fiscal 2014, fiscal 2013 and fiscal 2012, we received cash proceeds totaling $14.2 million
$23.0 million, and $5.7 million, respectively, under these programs. In fiscal 2014, we also issued $1.5 million of STERIS
restricted stock in conjunction with the LSI acquisition.
(cid:127) Excess Tax benefit from stock options exercised – For the years ended March 31, 2014, 2013 and 2012, our income taxes
were reduced by $2.8 million, $2.1 million, and $1.5 million, respectively, as a result of excess deductions allowed for
stock options exercised.
Cash Flow Measures. Free cash flow was $128.0 million in fiscal 2014 compared to $140.4 million in fiscal 2013. Our free
cash flow decreased in fiscal 2014 primarily due to payments made in connections with our annual incentive compensation in
fiscal 2014, which did not occur in fiscal 2013, and due to higher working capital requirements, specifically in accounts
receivable (see subsection of MD&A titled, "Non-GAAP Financial Measures", for additional information and related
reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Our debt-to-total capital ratio was
32.2% at March 31, 2014 and 34.3% at March 31, 2013.
39
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, 2014, approximately 94% 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, 2014 are summarized in the following table:
(dollars in thousands)
Sources of Credit
Maximum
Amounts
Available
Reductions in
Available Credit
Facility for Other
Financial
Instruments
March 31, 2014
Amounts
Outstanding
March 31, 2014
Amounts
Available
Private placement
Credit Agreement and Swing Line Facility (1)
Total Sources of Credit
$
340,000
415,000
755,000
$
$
—
—
—
340,000
153,480
493,480
—
261,520
261,520
(1)
Our $400.0 million 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:
(cid:127)
In December 2003, we issued $100.0 million of senior notes, of which $20.0 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 meet certain financial covenants, including limitations on debt and a minimum consolidated net
worth requirement. The remaining outstanding $20.0 million of senior notes have a maturity of 12 years at an annual
interest rate of 5.38%.
(cid:127) On August 15, 2008, we issued $150.0 million of senior notes, of which $120.0 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 meet certain financial covenants, including limitations on debt and a minimum consolidated net
worth requirement. Of the $120.0 million remaining in outstanding notes, $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%.
(cid:127)
(cid:127)
In December 2012, 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 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 require us to meet
certain financial covenants regarding 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 require us to meet certain financial covenants regarding limitations on debt.
(cid:127) 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
40
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.
(cid:127) On December 6, 2013 we executed an agreement with PNC Bank, National Association (the “Bank”), providing for the
extension of a $15.0 million line of credit (the “Swing Line Facility”) to the Company. Borrowings under the Swing Line
Facility are evidenced by a promissory note issued by the Company (the “Note”). The Company may borrow, repay and
reborrow from time to time under the Swing Line Facility until its maturity date. The maturity date is the earlier of (i)
December 5, 2014, or such later date as may be designated by the Bank, or (ii) the date on which the Bank is no longer a
lender under the Credit Agreement, as amended, or a replacement credit agreement. The maturity date may be accelerated
in the case of certain defaults. Borrowings bear interest at a rate per annum from time to time equal to the sum of the Daily
LIBOR Rate (as defined in the Note) and the Applicable Margin (calculated as provided in the Note) and the interest is
payable monthly.
At March 31, 2014, we had $261.5 million of funding available under the Credit Agreement and Swing Line Facility. The
Credit Agreement includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. At
March 31, 2014, there were no letters of credit outstanding under the Credit Agreement.
At March 31, 2014, 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 and research and development advances. During fiscal 2014, our capital expenditures amounted to $86.4 million.
We use cash provided by operating activities and our cash and cash equivalent balances to fund capital expenditures. We expect
fiscal 2015 capital expenditures to be comparable to fiscal 2014 levels with continued investment in projects intended to
improve quality, provide expansion, reduce operating costs and add value to the current product offering.
CONTRACTUAL AND COMMERICAL COMMITMENTS
At March 31, 2014, we had commitments under non-cancelable operating leases totaling $48.4 million.
Our contractual obligations and commercial commitments as of March 31, 2014 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.
41
Payments due by March 31,
(in thousands)
2015
2016
2017
2018
2019 and
thereafter
Total
Contractual Obligations:
Debt
Operating leases
Purchase obligations
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
Other obligations
Total Contractual Obligations
$ 12,980
16,425
13,985
4,069
$ 20,000
13,261
14,377
3,975
$
— $ 140,500
6,263
11,350
3,755
9,475
14,809
3,866
$ 320,000
3,023
—
20,428
$ 493,480
48,447
54,521
36,093
(4,069)
(3,975)
(3,866)
(3,755)
(20,428)
(36,093)
2,950
186
$ 46,526
2,765
165
$ 50,568
2,414
167
$ 26,865
2,147
—
$ 160,260
8,714
—
$ 331,737
18,990
518
$ 615,956
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.”
(in thousands)
Commercial Commitments:
Performance and surety bonds
Amount of Commitment Expiring March 31,
2015
2016
2017
2018
2019 and
thereafter
Totals
$ 39,147
$ 3,591
$
115
$
15
$
756
$ 43,624
Letters of credit as security for self-insured risk
retention policies
Total Commercial Commitments
5,961
—
—
$ 45,108
$ 3,591
$
115
$
—
15
—
5,961
$
756
$ 49,585
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS
The following subsections describe our most critical accounting policies, estimates, and assumptions. Our accounting
policies are more fully described in note 1 to our consolidated financial statements titled, “Nature of Operations and Summary
of Significant Accounting Policies.”
Estimates and Assumptions. Our discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements that were prepared in accordance with United States generally accepted accounting principles.
We make certain estimates and assumptions that we believe to be reasonable when preparing these financial statements. These
estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict and are beyond
management’s control. As a result, actual amounts could be materially different from these estimates. We periodically review
these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit Committee of the
Company’s Board of Directors.
Revenue Recognition. We recognize revenue for products when ownership passes to the Customer, which is based on contract
or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as
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,
42
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 34.6% and 38.6% of total inventories at March 31, 2014 and 2013, respectively. Inventory
costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have
been $19.5 million and $18.9 million higher than those reported at March 31, 2014 and 2013, 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, and
contractual obligations. Actual amounts could differ from the original estimates.
We review our restructuring-related accruals on a quarterly basis and changes to plans are appropriately recognized in the
Consolidated Statements of Income in the period the change is identified. Note 2 to our consolidated financial statements titled,
“Restructuring,” summarizes our restructuring plans.
Purchase Accounting and Goodwill. Assets and liabilities of the business acquired are accounted for at their estimated fair
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 with the exception of indefinite lived intangible assets. 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.
43
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 and indefinite lived intangible asset impairment evaluation as of October 31, 2013.
Based on this evaluation, we determined that there was no impairment of the recorded amounts and we do not believe that any
of our reporting units are at a significant risk of failing goodwill impairment testing.
We evaluate indefinite lived intangible assets annually, or when evidence of potential impairment exists. We evaluate
several qualitative indicators and assumptions, and trends that influence the valuation of the assets to determine if any evidence
of potential impairment exists.
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-
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
44
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 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 reduced the liability related to the SYSTEM 1
class action settlement by $16.8 million. The adjustment was recorded as a reduction 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 the "Other assets" line, of our consolidated balance sheets. Our accrual for self-insured risk retention
as of March 31, 2014 and 2013 was $14.4 million and $14.1 million, respectively.
We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based
upon recent claims experience.
Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgments to
estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual
results are not consistent with these assumptions and judgments, we could be exposed to additional costs in subsequent periods.
Warranty Reserves. We generally offer a limited one-year parts and labor warranty on our capital equipment. The specific
terms and conditions of warranties 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, 2014 and 2013, we had accrued $7.8 million and $12.7 million,
respectively, for warranty exposures.
Contingencies. We are, and will likely continue to be, involved in a number of legal proceedings, government investigations,
and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of
our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings,
investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal
injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable.
We consider many factors in making these assessments, including the professional judgment of experienced members of
management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of
such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material
adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of
proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our
estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Part I,
Item 3, “Legal Proceedings” for additional information.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled
primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation.
Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of
our federal income tax returns.
Additional information regarding our commitments and contingencies is included in note 11 to our consolidated financial
statements titled, “Commitments and Contingencies.”
45
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, 2014, we sponsored a defined benefit pension plan for eligible participants in the United States. In
addition, as of March 31, 2014, 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,
2014 projected benefit obligations and the fiscal 2014 net periodic benefit costs is as follows:
Funding Status
Assumptions used to determine March 31, 2014
benefit obligations:
Discount rate
Assumptions used to determine fiscal 2014
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
4.00%
3.50%
3.50%
7.75%
3.00%
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 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 2014 benefit costs by $0.2 million.
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
decreased the fiscal 2014 net periodic benefit costs by approximately $0.05 million and would have increased the projected
benefit obligations by approximately $3.0 million at March 31, 2014.
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 7% 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, 2014:
(dollars in thousands)
Effect on total service and interest cost components
Effect on postretirement benefit obligation
100 Basis Point
Increase
Decrease
$
$
3
90
(3)
(88)
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
46
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 stock option compensation awards. This model involves assumptions
that are judgmental and affect share-based compensation expense.
Share-based compensation expense was $11.1 million in fiscal 2014, $8.9 million in fiscal 2013 and $7.9 million in fiscal
2012. 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. 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
limitation those relating to FDA warning notices or letters, government investigations, 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, 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 those matters described in this Form 10-K for the year ended March 31, 2014 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 or our restructuring efforts will not be realized or will be other than anticipated, (h) the effects of
47
contractions 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, 2014.
48
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, 2014, we had $340.0 million in fixed rate senior notes outstanding. As of March 31, 2014, we had $153.5
million in outstanding borrowings under our Credit Agreement and Swing Line Facility. Borrowings under the Credit
Agreement and Swing Line Facility are exposed to changes in interest rates. 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-fourth 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,
2014, we held foreign currency forward contracts to buy 68 million Mexican pesos, 10 million Canadian dollars and 3 million
Euros, and contracts to sell 18 million Mexican pesos.
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 or only a single supplier. 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 or unavailable
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 sources of supply for many 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 may also enter into commodity swap contracts to hedge price changes in a certain commodity that impacts
raw materials included in our cost of revenues.
49
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
51
52
53
54
55
56
57
90
50
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,
2014 and 2013, 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, 2014. 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, 2014 and 2013, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended March 31, 2014, 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, 2014, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework), and our report dated May 29, 2014 expressed an unqualified opinion thereon.
Cleveland, Ohio
May 29, 2014
/s/ ERNST & YOUNG LLP
51
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31,
Current assets:
Assets
Cash and cash equivalents
Accounts receivable (net of allowances of $10,922 and $10,043, 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
Liabilities and equity
Current liabilities:
Accounts payable
Accrued payroll and other related liabilities
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;
58,968 and 58,759 shares outstanding, respectively
Common shares held in treasury, 11,072 and 11,281 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.
2014
2013
152,802
313,686
155,146
16,084
37,027
674,745
454,410
747,715
10,292
1,887,162
102,430
58,774
93,302
254,506
493,480
59,053
38,877
845,916
$
$
$
$
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
85,147
218,837
492,290
44,924
58,078
814,129
—
—
246,186
(324,202)
1,112,240
4,481
1,038,705
2,541
1,041,246
1,887,162
$
239,648
(321,801)
1,031,183
(4,088)
944,942
2,038
946,980
1,761,109
$
$
$
$
$
52
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
2014
2013
2012
$ 1,011,462
610,790
1,622,252
$
967,362
534,540
1,501,902
$
928,129
478,681
1,406,810
586,176
386,454
972,630
649,622
380,970
48,641
13,204
442,815
206,807
18,770
(339)
18,431
188,376
58,934
129,442
2.20
2.17
0.82
$
$
$
$
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
$
$
$
$
See notes to consolidated financial statements.
53
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 $(1,798), $2,706, $4,102 and respectively
Change in cumulative foreign currency translation adjustment
Total other comprehensive income (loss)
Comprehensive income
2014
2013
2012
$
129,442
$
159,977
136,115
275
2,756
5,538
8,569
112
70
(4,082)
(7,279)
(13,745)
(17,715)
(14,352)
(21,561)
$
138,011
$
142,262
$
114,554
See notes to consolidated financial statements.
54
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
Acquisition of business, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from the issuance of long-term obligations
Payments on long-term obligations
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
Excess tax benefit from stock options exercised
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2014
2013
2012
$
129,442
$
159,977
$
136,115
75,649
15,176
11,100
5,279
69,035
23,751
8,917
62,906
22,093
7,858
294
664
(66)
(4,120)
(4,667)
(28,794)
2,767
(5,482)
19,377
(245)
(14,572)
209,631
(86,367)
4,774
(67,059)
(148,652)
—
(70,000)
71,190
(43)
(25,469)
(48,385)
15,660
2,841
(54,206)
4,021
10,794
142,008
152,802
$
21,866
28,015
(8,889)
(12,536)
(68,812)
10,317
227,815
(6,517)
11,833
385
(9,120)
(58,618)
(13,560)
149,372
(87,412)
34
(399,676)
(487,054)
(66,682)
42
(34,635)
(101,275)
200,000
—
82,290
(1,924)
(8,002)
(43,195)
23,019
2,058
254,246
(3,820)
(8,813)
150,821
142,008
$
—
—
—
—
(56,751)
(38,560)
5,723
1,514
(88,074)
(2,218)
(42,195)
193,016
150,821
$
See notes to consolidated financial statements.
55
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, 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
Comprehensive income:
Net income
Other comprehensive
income
Repurchases of common
shares
Equity compensation programs
and other
Tax benefit of stock options
exercised
Cash dividends – $0.82 per
common share
Change in noncontrolling
interest
—
—
(624)
833
—
—
—
—
—
—
3,697
2,841
—
—
—
—
624
(833)
—
—
—
—
—
(25,469)
23,068
—
—
—
129,442
—
—
—
—
(48,385)
—
—
8,569
—
—
—
—
—
—
—
—
—
—
—
129,442
8,569
(25,469)
26,765
2,841
(48,385)
503
503
Balance at March 31, 2014
58,968
$
246,186
11,072
$
(324,202) $ 1,112,240
$
4,481
$
2,541
$ 1,041,246
See notes to consolidated financial statements.
56
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. Income attributable to non-controlling interests is reported in the "Interest income and
miscellaneous expense" line of our Consolidated Statements of Income and is not material.
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,
2014
2013
2012
Cash paid during the year for:
Interest
Income taxes
Cash received during the year for income tax refunds
$ 19,268
52,888
3,076
$
$ 14,115
38,475
1,096
12,496
52,213
408
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.
57
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We offer preventative maintenance agreements to our Customers with contract terms of one to five years which require us
to maintain and repair our products during this time. Amounts received under these Customer contracts are initially recorded as
deferred service revenues and then recognized as service revenues ratably over the contract term.
Accounts Receivable. Accounts receivable are presented at their face amount, less allowances for sales returns and
uncollectible accounts. Accounts receivable consist of amounts billed and currently due from Customers and amounts earned
but unbilled. We generally obtain and perfect security interest in products sold in the United States when we have a concern
with the Customer's risk profile.
We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by
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 34.6% and 38.6% of total inventories at March 31, 2014 and 2013, respectively.
Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories
would have been $19,450 and $18,944 higher than those reported at March 31, 2014 and 2013, 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
$415 and $585 for the years ended March 31, 2014 and 2013, respectively.
58
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Total interest expense for the years ended March 31, 2014, 2013, and 2012 was $18,770, $15,675, and $12,065,
respectively.
Identifiable Intangible Assets. Our identifiable intangible assets include product technology rights, trademarks, licenses, and
Customer relationships. We record these assets at cost, or when acquired as part of a business acquisition, at estimated fair
value. We generally amortize identifiable intangible assets over periods ranging from 5 to 20 years using the straight-line
method. Our intangible assets also include indefinite lived assets including certain trademarks and tradenames that were
acquired in fiscal 2013 and 2014. These assets are tested at least annually 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.
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.
59
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and
post-retirement benefit plans in our consolidated balance sheets. This amount is measured as the difference between the fair
value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-
retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in
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 $8,606, $6,880, and $5,857 of
advertising costs during the years ended March 31, 2014, 2013, and 2012, 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
60
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do
not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent
financial reporting period in which the threshold is no longer met.
We describe income taxes further in note 9 to our consolidated financial statements titled, “Income Taxes.”
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. We incurred Medical Device Excise taxes of $7,390 during fiscal year 2014.
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 recognize restructuring expenses as incurred. Asset impairment and accelerated depreciation expenses
primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the related facilities
and machinery and equipment to their estimated fair value. In addition, the remaining useful lives of other property, plant, and
equipment associated with the related operations are reevaluated based on the respective restructuring plan, which may result 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 was effective prospectively for fiscal periods beginning after December 15, 2012, with
early adoption permitted. We adopted the new standard during the first quarter of our fiscal year 2014. The adoption of this
standard did not 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 was effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012, with early adoption permitted. The adoption of this standard did not impact our consolidated
financial position, results of operations or cash flows.
2. RESTRUCTURING
The following summarizes our restructuring plans announced in current and 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.
61
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring
plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014
Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations.
We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American
manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the
elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the
impairment of related assets and inventory and severance and outplacement costs.
We have incurred pre-tax expenses totaling $20,231 related to these actions, of which $12,087 was recorded as restructuring
expenses and $8,144 was recorded in cost of revenues, with restructuring expenses of $18,247, $635, and $1,349 related to the
Healthcare, Life Sciences and Isomedix segments, respectively. 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 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 $9,294 related to
these actions, of which $8,190 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.
The following tables summarize our total pre-tax restructuring expenses for fiscal 2014, fiscal 2013 and fiscal 2012:
Year Ended March 31, 2014
Severance and other compensation related costs
Asset impairment and accelerated depreciation
Lease termination obligation and other
Product rationalization
Total restructuring charges
Fiscal 2014
Restructuring
Plan (1)
Fiscal 2010
Restructuring
Plan
Total
$
$
7,363 $
3,621
1,103
8,144
20,231 $
127 $
990
—
—
7,490
4,611
1,103
8,144
1,117 $ 21,348
(1) Includes $8,144 in charges recorded in cost of revenues on Consolidated Statements of Income.
Year Ended March 31, 2013
Severance and other compensation related costs
Lease termination obligation and other
Total restructuring charges
Fiscal 2010
Restructuring
Plan
$
$
(918)
353
(565)
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
62
Fiscal 2010
Restructuring
Plan (1)
Other
Plans
Total
$
$
(776) $
335
1,103
143
805 $
— $
—
—
(152)
(152) $
(776)
335
1,103
(9)
653
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(1) Includes $(9) 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 tables
summarizes our restructuring liability balances and activity:
Fiscal 2014 Restructuring Plan
Fiscal 2014
Severance and termination benefits
Lease termination obligations and other
Total
$
$
— $
—
— $
6,429
1,589
8,018
March 31,
2013
Provision
$
Payments/
Impairments (1)
$
(40) $
—
(40) $
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
Fiscal 2010 Restructuring Plan
Fiscal 2013
Severance and termination benefits
Lease termination obligations
Other
Total
$
$
659
947
76
1,682
$
$
March 31,
2012
Provision (1)
Payments/
Impairments (2)
730
(791)
(429)
(490) $
$
(918) $
—
353
(565) $
March 31,
2014
6,389
1,589
7,978
March 31,
2013
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.
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 2014. 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 2014 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, 2014 and 2013 were as follows:
Balance at March 31, 2012
Goodwill acquired or allocated
Foreign currency translation adjustments
Balance at March 31, 2013
Goodwill acquired or allocated
Foreign currency translation adjustments
Healthcare
Segment
Life Sciences
Segment
STERIS
Isomedix Services
Segment
Total
$
189,632
$
33,848
$
82,369
$
305,849
187,937
(3,901)
373,668
22,783
3,215
—
(1,085)
32,763
—
1,547
666
—
83,035
—
—
188,603
(4,986)
489,466
22,783
4,762
Balance at March 31, 2014
$
399,666
$
34,310
$
83,035
$
517,011
63
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The fiscal 2014 increase in goodwill associated with the Healthcare segment resulted from the acquisitions of the assets of
Florida Surgical Repair, Inc., and Life Systems, Inc., and the capital stock of Eschmann Holdings, Ltd., as described in Note 4
to our consolidated financial statements titled, "Business Acquisitions". The increase associated with the Life Science segment
resulted from foreign currency fluctuations.
The fiscal 2013 increase in goodwill associated with the Healthcare segment resulted from the acquisitions of the capital
stock of United States Endoscopy Group, Inc., and Spectrum Surgical Instruments Corp, the assets of 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.
Information regarding our intangible assets is as follows:
Customer relationships
Non-compete agreements
Patents and technology
Trademarks and tradenames
Other
Total
March 31, 2014
March 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
87,747
$
26,808
$
60,759
$
3,766
173,287
55,006
13
3,315
46,111
12,868
13
3,773
169,589
49,780
12
21,302
3,177
33,612
10,852
12
$
319,819
$
89,115
$
283,913
$
68,955
Certain trademarks and tradenames totaling $28,400 acquired in fiscal 2014 and 2013 are indefinite-lived assets. Total
amortization expense for finite-lived intangible assets was $18,612, $13,068, and $7,726 for the years ended March 31, 2014,
2013, and 2012, 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
$
19,243
$
19,005
$
18,410
$
18,322
$
93,176
2015
2016
2017
2018
2019 and
thereafter
The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31,
2014 foreign currency exchange rates.
4. BUSINESS ACQUISTIONS
Fiscal Year 2014
Florida Surgical Repair, Inc.
On December 31, 2013, we purchased the assets and assumed certain liabilities of Florida Surgical Repair, Inc. ("FSR"), a
provider of surgical instrument and surgical equipment repair services to hospitals and surgery centers in Florida. The purchase
price was approximately $5,779, subject to a customary working capital adjustment. FSR has been integrated into the
Healthcare business segment. The purchase price has been allocated to the net assets acquired based on fair values at the
acquisition date. The intangible assets acquired consist of Customer relationships, which will be amortized on a straight line
basis over nine years. We recorded an immaterial amount of acquisition related costs which are reported in selling, general and
administrative expenses.
Life Systems, Inc.
On February 4, 2014, we purchased the assets and assumed certain liabilities of Life Systems, Inc. ("LSI"), a provider of
sales and service in the endoscope repair and certified pre-owned equipment markets, which is located in St. Louis, Missouri.
The purchase price was approximately $24,500, subject to a customary working capital adjustment, which included $1,500
in restricted stock granted to one of the sellers. LSI will be integrated into the Healthcare business segment. The purchase price
has been allocated to the net assets acquired based on fair values at the acquisition date.
64
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We recorded acquisition related costs of approximately $255, before tax, which are reported in selling, general and
administrative expenses. The intangible assets acquired consist of Customer relationships, which will be amortized on a
straight line basis over thirteen years.
Eschmann Holdings Ltd.
On February 10, 2014, we purchased the capital stock of Eschmann Holdings Ltd. ("Eschmann"), a provider of surgical and
infection prevention solutions and services used primarily in hospitals, surgery centers and dental offices in the United
Kingdom.
The purchase price was approximately 25 million British pounds sterling (approximately $36,648 at the acquisition date).
We paid 22 million British pounds sterling at the closing date and expect to pay an additional 3 million British pounds sterling
of deferred consideration in the first quarter of fiscal 2015. The purchase price remains subject to a customary working capital
adjustment. Eschmann will be integrated into the Healthcare business segment. The purchase price has been allocated to the net
assets acquired based on fair values at the acquisition date.
We recorded acquisition related costs of approximately $602, before tax, which are reported in selling, general and
administrative expenses. The intangible assets acquired consist of tradenames, developed technology, and Customer
relationships, which will be amortized on a straight line basis over six to thirteen years, with the exception of the Eschmann
tradename which has an indefinite life.
Fiscal Year 2013
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,
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. US Endoscopy has been integrated into the Healthcare segment.
We recorded acquisition related costs of $4,109, before tax, which are reported in selling, general and administrative
expenses. We have made 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 our Credit Agreement (as hereinafter defined). The purchase price remained
subject to a working capital adjustment as of March 31, 2013. The instrument repair business has been integrated into the
Healthcare business segment.
We recorded acquisition related costs of $2,388, before tax, which are reported in selling, general and administrative
expenses. We have made a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code with regard to the
acquisition of Spectrum, 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 became a wholly-owned subsidiary of STERIS and has been 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 payable over a ten year period.
65
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We recorded an immaterial amount of acquisition related costs which are reported in selling, general and administrative
expenses. We consolidated VTS for the first time in the third quarter of fiscal 2013.
Each of these fiscal 2013 and 2014 acquisitions were funded with cash on hand and/or credit facility borrowings. The
Consolidated Financial Statements include the operating results of of each acquisition from the respective acquisition dates.
Pro-forma results of operations for fiscal 2014 and 2013 periods have not been presented because the effects of the acquisitions
were not material to our financial results.
The table below summarizes the preliminary allocation of the purchase price to the net assets acquired based on fair values
at the acquisition dates for our fiscal 2014 and fiscal 2013 acquisitions.
Cash
Accounts receivable
Inventory
Property, plant and equipment
Other assets
Intangible assets
Goodwill
Total Assets
Accounts payable
Current liabilities
Non-current liabilities
Total Liabilities
Fiscal Year 2014
FSR
LSI
$
— $
Eschmann
(1)
2,545
— $
Fiscal Year 2013
Spectrum/
TRE
VTS
USE
$
767
$
424
$
1,442
388
402
98
11
2,765
2,131
5,795
(16)
—
—
(16)
2,341
2,727
301
117
4,462
16,230
26,178
(1,649)
(29)
—
(1,678)
5,336
10,017
6,262
475
21,128
9,277
55,040
(2,507)
(11,850)
(4,035)
(18,392)
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
45,600
46,513
114,060
(5,528)
(2,973)
—
(8,501)
689
3,838
1,576
1,997
6,930
25,551
42,023
(1,454)
(82)
(1,707)
(3,243)
Net Assets
$
5,779
$
24,500
$
36,648
$ 279,507
$ 105,559
$
38,780
(1) Purchase price allocation is still preliminary as of March 31, 2014, as valuations 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
2014
60,328
24,449
102,928
(19,450)
(13,109)
155,146
$
$
2013
54,456
24,300
96,616
(18,944)
(11,985)
144,443
$
$
66
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
2014
33,601
256,879
360,977
100,349
258,547
35,016
1,045,369
(590,959)
454,410
$
$
2013
36,355
242,885
331,953
96,567
237,516
36,032
981,308
(549,356)
431,952
$
$
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
Depreciation and depletion expense was $57,037, $55,085 and $52,980, for the years ended March 31, 2014, 2013, and
2012, respectively.
Rental expense for operating leases was $17,643, $15,664, and $14,635 for the years ended March 31, 2014, 2013, and
2012, 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, 2014 were as
follows:
2015
2016
2017
2018
2019 and thereafter
Total Minimum Lease Payments
Operating
Leases
16,425
13,261
9,475
6,263
3,023
48,447
$
$
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign
currencies have been calculated based upon March 31, 2014 foreign currency exchange rates.
7. DEBT
Indebtedness was as follows:
March 31,
Private Placement
Credit Agreement and Swing Line Facility
Total long term debt
2014
2013
$
$
340,000
153,480
493,480
$
$
410,000
82,290
492,290
67
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 financial covenants regarding limitations on debt.
In December 2012, 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 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 financial
covenants regarding limitations on debt.
On August 15, 2008, we issued $150,000 of senior notes, of which $120,000 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 $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
require us to meet certain 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 $20,000 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. The remaining $20,000 have a maturity of 12 years at an annual interest rate of 5.38%. The agreements related to
these notes require us to meet certain 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.
On December 6, 2013 we executed an agreement with PNC Bank, National Association (the “Bank”), providing for the
extension of a $15,000 line of credit (the “Swing Line Facility”) to the Company. Borrowings under the Swing Line Facility
are evidenced by a promissory note issued by the Company (the “Note”). The Company may borrow, repay and reborrow from
time to time under the Swing Line Facility until its maturity date. The maturity date is the earlier of (i) December 5, 2014, or
such later date as may be designated by the Bank, or (ii) the date on which the Bank is no longer a lender under the Company’s
Third Amended and Restated Credit Agreement dated April 13, 2012, as amended, or a replacement credit agreement. The
maturity date may be accelerated in the case of certain defaults. Borrowings bear interest at a rate per annum from time to time
equal to the sum of the Daily LIBOR Rate (as defined in the Note) and the Applicable Margin (calculated as provided in the
Note) and the interest is payable monthly.
68
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
As of March 31, 2014, a total $153,480 of indebtedness was outstanding under the Credit Agreement and Swing Line
Facility.
At March 31, 2014, 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:
2015
2016
2017
2018
2019 and thereafter
Total
$
12,980
20,000
—
140,500
320,000
$
493,480
69
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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:
2014
2013
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 and distributor commissions, fees and rebates
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
$
$
$
$
$
$
19,418
6,172
18,451
11,322
2,950
461
58,774
39,441
4,656
10,017
7,765
31,423
93,302
10,689
18,393
691
6,013
—
3,091
38,877
$
$
$
$
$
$
12,078
6,739
22,342
9,656
3,271
230
54,316
40,422
3,726
8,545
12,734
19,720
85,147
11,552
21,278
6,890
5,349
9,670
3,339
58,078
Income from continuing operations before income taxes was as follows:
Years Ended March 31,
United States operations
Non-United States operations
2014
122,245
66,131
188,376
$
$
2013
175,743
51,355
227,098
$
$
2012
170,776
40,332
211,108
$
$
70
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
2014
2013
2012
$
24,016
$
22,259
$
33,129
5,991
16,449
46,456
10,501
1,473
504
12,478
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
Total Provision for Income Taxes
$
58,934
$
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
Increase (decrease) in valuation allowances
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
2014
35.0 %
(5.1)%
2.6 %
1.5 %
(2.0)%
(0.1)%
(1.2)%
(0.6)%
1.2 %
31.3 %
2013
2012
35.0 %
3.6 %
2.1 %
1.1 %
(0.5)%
(2.5)%
(1.3)%
(7.8)%
(0.1)%
29.6 %
35.0 %
(0.7)%
2.8 %
0.2 %
(0.2)%
(0.5)%
(1.6)%
0.0 %
0.5 %
35.5 %
Unrecognized Tax Benefits. We classify uncertain tax positions and related interest and penalties as long-term liabilities
within “Other liabilities” in our accompanying Consolidated Balance Sheets, unless they are expected to be paid within 12
months, in which case, the uncertain tax positions would be classified as current liabilities within “Accrued income taxes.” We
recognize interest and penalties related to unrecognized tax benefits within “Income tax expense” in our accompanying
Consolidated Statements of Income.
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
71
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
2014
2013
Unrecognized Tax Benefits Balance at April 1
$
9,362
$
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
—
—
—
—
(9,244)
(118)
$
— $
1,527
9,244
(700)
—
—
(553)
(156)
9,362
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0 at
March 31, 2014 and $9,362 at March 31, 2013.
For the years ended March 31, 2014 and 2013, current income tax expense includes (benefit) expense of $(276) and $(659)
for interest, and (benefit) expense of $(31) and $(33) for penalties, respectively. In total, as of March 31, 2014 and 2013, we
have recognized a liability for interest of $0 and $276 and penalties of $0 and $31, 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
2013 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 2009. 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 effect 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, 2014 and 2013 were as follows:
March 31,
Deferred Tax Assets:
Post-retirement benefit accrual
Compensation
Net operating loss carryforwards
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)
72
2014
2013
$
8,171
22,008
12,518
6,681
3,689
5,265
2,191
408
965
61,896
12,541
49,355
9,556
19,628
13,757
8,626
3,696
8,770
1,727
2,807
39
68,606
12,428
56,178
50,265
36,367
921
4,771
92,324
(42,969) $
47,809
27,240
1,040
3,818
79,907
(23,729)
$
$
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
At March 31, 2014, we had federal operating loss carryforwards of $993, which can be utilized subject to certain
limitations, and foreign operating loss carry forwards of $48,062. Substantially all of the foreign carryforwards have a definite
expiration period and will expire if unused between fiscal years 2015 and 2021. In addition, we have recorded tax benefits of
$941 related to state operating loss carryforwards. At March 31, 2014, 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 $12,541 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 2014 by $113.
At March 31, 2014, cumulative undistributed earnings of international operations amounted to approximately $222,069.
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, 2014, 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 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 was 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, 2014 and
2013, 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.
73
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 (gain) loss
Benefits and expenses
Curtailments/settlements
Benefit Obligations at End of Year
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits and expenses paid
Curtailments/settlements
Fair Value of Plan Assets at End of Year
Funded Status of the Plans
Defined Benefit Pension Plans
U.S. Qualified
2014
2013
International
2013
Other
Postretirement
Benefits Plan
2014
2013
$
$ 53,433
160
1,799
(1,916)
(4,270)
—
49,206
$ 51,319
150
2,092
4,227
(4,355)
—
53,433
5,103
84
76
—
—
(5,263)
$ 24,548
—
683
(654)
(3,235)
—
— 21,342
$ 24,894
—
867
2,140
(3,353)
—
24,548
46,543
6,340
—
—
(4,270)
—
48,613
42,391
3,962
4,545
—
(4,355)
—
46,543
$
(593) $ (6,890) $
—
—
4,150
—
—
—
3,235
3,353
70
—
(70)
—
(3,235)
(3,353)
—
—
(4,150)
—
—
—
—
— $(21,342) $(24,548)
Amounts recognized in the consolidated balance sheets consist of the following:
Current liabilities
Noncurrent liabilities
Pension Plans
U.S. Qualified
Other Post-retirement Plan
2014
2013
2014
2013
$
$
— $
(593)
(593) $
— $
(6,890)
(6,890) $
(2,949) $
(18,393)
(21,342) $
(3,271)
(21,277)
(24,548)
The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other
comprehensive (loss) income at March 31, 2014 was $(30,304) and $26,369, respectively. During fiscal 2015, 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
$
$
1,106
—
— $
—
721
(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, 2014 and 2013:
Aggregate fair value of plan assets
Aggregate accumulated benefit obligations
74
U.S. Qualified
2014
2013
$
48,613
$ 46,543
49,206
53,433
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, 2014 and 2013:
Aggregate fair value of plan assets
Aggregate projected benefit obligations
U.S. Qualified
2014
2013
$
48,613
$
46,543
49,206
53,433
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
Service cost
Interest cost
Expected return on plan assets
Prior service cost recognition
Net amortization and deferral
Net periodic benefit cost
Curtailments/settlements
Total benefit cost
Recognized in other
comprehensive (income) loss
before tax:
Net loss (gain) occurring during
year
Amortization of prior service
credit (cost)
Amortization of net (loss) gain
Total recognized in other
comprehensive loss (income)
Total recognized in total
benefits cost and other
comprehensive loss (income)
2014
$
160
1,799
(3,442)
—
1,458
(25)
—
(25) $
2013
150
2,092
(3,337)
—
1,333
238
—
238
$
$
2012
205
2,438
(3,304)
—
1,066
405
—
405
$
$
$
$
2013
2012
2014
2013
2012
$
334
195
(209)
$ — $
—
84
683
991
76
—
(100)
—
— (3,263)
(3,263)
—
891
425
—
—
(1,689)
(1,847)
320
60
—
(982)
(1,384)
—
(922) $ (1,064) $ (1,689) $ (1,671) $ (1,847)
— $
867
—
(3,263)
725
(1,671)
—
$ (4,814) $ 3,602
$ 5,220
$
— $
818
$
(654) $
2,140
$
3,512
—
—
—
—
(1,458)
(1,333)
(1,066)
(159)
—
87
3,263
(891)
3,263
(725)
3,263
(425)
(6,272)
2,269
4,154
(159)
905
1,718
4,678
6,350
$ (6,297) $ 2,507
$ 4,559
$ (1,081) $
(159) $
29
$
3,007
$
4,503
Assumptions Used in Calculating Benefit Obligations and Net Periodic Benefit Cost. The following table presents
significant assumptions used to determine the projected benefit obligations at March 31:
Discount Rate:
U.S. qualified pension plan
Other post-retirement plan
2014
2013
4.00%
3.50%
3.50%
3.00%
The following table presents significant assumptions used to determine the net periodic benefit costs for the years
ended March 31:
75
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
Expected Return on Plan Assets:
U.S. qualified pension plan
Switzerland pension plan
Rate of Compensation Increase:
Switzerland pension plan
2014
2013
2012
3.50%
n/a
3.00%
7.75%
n/a
4.25%
2.25%
3.75%
8.00%
3.25%
5.25%
2.75%
4.50%
8.00%
3.25%
n/a
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
2014
2013
2012
7.0%
7.0%
4.5%
8.0%
7.0%
4.5%
8.0%
8.0%
4.5%
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, 2014:
Effect on total service and interest cost components
Effect on other post-retirement benefit obligation
One-Percentage
Point
Increase
Decrease
$
$
3
90
(3)
(88)
Plan Assets. Our United States defined benefit pension plan is funded. The following table presents the targeted asset
allocation of plan assets at March 31, 2014 and the actual allocation of plan assets at March 31, 2014 and 2013 for this plan:
76
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
U.S. Qualified Plan:
Equity securities
Debt securities
Cash
Total
Long-Term
Target
Allocation
Percentage
Percentage of Plan
Assets March 31
2014
2013
35%
65%
0%
100%
34.1%
65.2%
0.7%
100%
60.9%
38.4%
0.7%
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 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 may be rebalanced. For the purpose of the above analysis, debt and
equity securities include fixed income and equity security mutual funds, respectively. At March 31, 2014 and 2013, the plan's
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, 2014 and 2013 by asset category is as follows:
Fair Value Measurements at March 31, 2014
U.S. Qualified Pension Plan
Fair Value Measurements at March 31, 2013
U.S. Qualified Pension Plan
Quoted
Prices in
Active Mar
kets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservab
le
Inputs
(Level 3)
Quoted
Prices in
Active Mar
kets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservab
le
Inputs
(Level 3)
Total
(In thousands)
Total
Cash and Short Term
Securities
Equity Securities
$
339
$
— $
339
$
Mutual Funds
16,596
16,596
Debt Securities
Mutual Funds
Total Plan Assets
31,678
31,678
$ 48,613
$ 48,274
$
339
$
—
—
—
—
—
—
$
344
$
— $
344
$
28,353
28,353
17,846
17,846
—
—
$ 46,543
$ 46,199
$
344
$
—
—
—
—
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, 2014, we do not expect to make additional
contributions to the U.S. qualified defined benefit pension plan in fiscal 2015.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2014, the following benefit
payments are expected to be made to plan participants:
77
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
2015
2016
2017
2018
2019
2020-2025
Defined Pension Plan
Other Post-Retirement
Benefit Plan
$
4,069
$
3,975
3,866
3,755
3,644
16,784
2,950
2,765
2,414
2,147
1,841
6,873
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 $316 and $400, during fiscal
2014 and fiscal 2013, 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, a 401(k)
defined contribution plan for eligible Puerto Rico 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 $424,297 at March 31, 2014. At March 31, 2014, the U.S. plan held 740,073 STERIS common shares with a fair
value of $35,338. We paid dividends of $622, $592, and $545 to the plan and participants on STERIS common stock held by
the plan for the years ended March 31, 2014, 2013, and 2012, respectively. We contributed $9,956, $7,974, and $7,771, to the
defined contribution plans for the years ended March 31, 2014, 2013, and 2012, 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. There were no
Employee contributions made to this plan in fiscal 2014 or fiscal 2013. Employee contributions to this plan were $443 in fiscal
2012. 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 $3,397 and $3,139 at
March 31, 2014 and March 31, 2013, 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.
78
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
11. COMMITMENTS AND CONTINGENCIES
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims,
which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our
business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings,
investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal
injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed
malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure
(e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking
equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation),
financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further
believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our
consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can
be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings
(including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance
coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe
are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of
claims or legal proceedings against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our
SYSTEM 1® sterile processor and the STERIS 20 sterilant used with the processor (sometimes referred to collectively in the
FDA letter and in this note 11 as the “device”). Among other matters, the warning letter included the FDA's assertion that
significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the
device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within
FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission
resulted in violations of applicable law.
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 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 and in various portions of Item 1A. of Part I of this Annual Report on Form 10-K.
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.
79
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 of this Annual Report on Form 10-K:
“Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled “We
may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the
Warning Letter and Consent Decree” and the "Risk Factor” titled “Compliance with the Consent Decree may be more costly
and burdensome than anticipated.”
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and
other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled
primarily through the completion of audits within each individual jurisdiction or the closing of 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 Taxes” in this Annual Report on Form 10-K.
Additional information regarding our contingencies is included in Item 7 of Part II titled, “Management’s Discussion and
Analysis of Financial Conditions and Results of Operations,” and in Item 3 of Part I titled, “Legal Proceedings” contained in
this Annual Report on Form 10-K.
As of March 31, 2014 and 2013, our commercial commitments totaled $49,585 and $45,804, 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 of the March 31,
2014 and 2013 totals relate to letters of credit required as security under our self-insured risk retention policies.
As of March 31, 2014 and 2013, we had minimum purchase commitments with suppliers for raw material purchases
totaling $54,521 and $59,358, 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, 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 capital equipment, formulated cleaning chemistries, and service solutions
to pharmaceutical companies, and private and public research facilities around the globe.
Our Isomedix segment operates through a network of facilities located in North America. We sell a comprehensive array of
contract sterilization services using gamma irradiation and ethylene oxide (“EO”) technologies as well as an array of laboratory
testing services. 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, 2014, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues.
80
STERIS CORPORATION AND SUBSIDIARIES
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 (loss):
Healthcare (2)
Life Sciences
Isomedix
Total reportable segments
Corporate and other
Total operating income (2)
2014
2013
2012
$
$
$
$
1,180,051
246,122
194,183
1,620,356
1,896
1,622,252
109,714
50,049
55,186
214,949
(8,142)
206,807
$
$
$
$
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
(1) Includes an increase of $22,367 in fiscal 2013, and an increase of $15,306 in fiscal 2012, resulting from the SYSTEM 1 Rebate Program.
(2) Includes an increase of $23,640 in fiscal 2013, and an increase of $17,403 in fiscal 2012, resulting from SYSTEM 1 Rebate Program, and
an increase of $16,782 in fiscal year 2013, resulting from the class action settlement.
For the year ended March 31, 2014, pre-tax restructuring expenses of $19,364, $635, and $1,349 are included in the
operating results of the Healthcare, Life Sciences and Isomedix segments, respectively. For the years ended March 31, 2013,
and 2012, pre-tax restructuring expenses of $(565) and $644, respectively, are included in the operating results of the
Healthcare segment.
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 2014, 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
2014
2013
$
$
1,476,471
408,528
1,884,999
2,163
1,887,162
$
$
1,357,368
400,171
1,757,539
3,570
1,761,109
81
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
2014
2013
2012
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
$
$
$
$
47,043
39,310
86,353
14
86,367
46,315
29,318
75,633
16
75,649
$
$
$
$
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
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
2014
2013
2012
$ 1,244,730
377,522
$ 1,622,252
$ 1,141,633
360,269
$ 1,501,902
$ 1,057,461
349,349
$ 1,406,810
2014
2013
$
$
396,233
58,177
454,410
$
$
377,320
54,632
431,952
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,
2013
2012
2014
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
58,966
779
59,745
58,305
539
58,844
58,367
596
58,963
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:
82
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Years Ended March 31,
2013
2012
2014
(shares in thousands)
Number of common share options
14. REPURCHASES OF COMMON SHARES
327
649
741
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 565,887 of our common
shares during fiscal 2014 in the aggregate amount of $24,691, representing an average price of $43.63 per common share.
During fiscal 2013, we paid an aggregate amount of $6,830 for the repurchase of 204,349 of our common shares, 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.
We obtained 58,529 of our common shares during fiscal 2014 in the aggregate amount of $778 in connection with stock
based compensation award programs. We obtained 52,893 of our common shares during fiscal 2013 in the aggregate amount of
$1,172 in connection with these programs. We obtained 22,927 of our common shares during fiscal 2012 in the aggregate
amount of $808 in connection with these programs. At March 31, 2014, $86,939 of STERIS common shares remained
authorized for repurchase pursuant to the most recent Board approved repurchase authorization (the March 2008 Board
Authorization). Also, 11,071,728 common shares were held in treasury at March 31, 2014.
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, stock appreciation rights, and common share grants. 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 and has not met specific age and service requirements. Restricted shares and restricted share units generally cliff vest
after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant
date for grantees who have met specific age and service requirements. As of March 31, 2014, 3,386,347 shares remained
available for grant under the long-term incentive plan.
The fair value of share-based stock option 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 2014, fiscal 2013 and fiscal 2012:
Risk-free interest rate
Expected life of options
Expected dividend yield of stock
Expected volatility of stock
Fiscal 2014
Fiscal 2013
Fiscal 2012
.95%
5.7 years
2.22%
31.22%
1.21%
2.41%
5.8 years
5.7 years
2.15%
31.24%
1.78%
29.78%
83
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 1.44%, 1.83% and 2.08% was applied in
fiscal 2014, 2013 and 2012, 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, 2013
Granted
Exercised
Forfeited
Canceled
Outstanding at March 31, 2014
Exercisable at March 31, 2014
Number of
Options
2,657,133
322,710
(536,532)
(44,175)
(2,150)
2,396,986
1,735,631
$
$
$
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
28.40
45.26
26.03
36.37
25.39
31.06
28.37
5.5 years
4.5 years
$
$
40,002
33,644
We estimate that 654,707 of the non-vested stock options outstanding at March 31, 2014 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $47.75 closing price of
our common shares on March 31, 2014 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, 2014, 2013 and 2012 was $10,253,
$10,071 and $2,846, respectively. Net cash proceeds from the exercise of stock options were $14,160, $23,019 and $5,723 for
the years ended March 31, 2014, 2013 and 2012, respectively. The tax benefit from stock option exercises was $2,841, $2,058
and $1,514 for the years ended March 31, 2014, 2013 and 2012, respectively.
The weighted average grant date fair value of stock option grants was $10.59, $7.32 and $9.31 for the years ended
March 31, 2014, 2013 and 2012, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that
they may be settled in cash or stock upon exercise. Those settled in cash are classified as liabilities. The fair value of the
outstanding SARS as of March 31, 2014 and 2013 was $1,432 and $1,253, respectively. The fair value of cash settled
outstanding SARs is revalued at each reporting date and the related liability and expense are adjusted appropriately.
A summary of the non-vested restricted share activity is presented below:
Non-vested at March 31, 2013
Granted
Vested
Canceled
Non-vested at March 31, 2014
Number of
Restricted
Shares
Number of Restricted
Share Units
Weighted-Average
Grant Date
Fair Value
737,343
296,666
(61,725)
(41,266)
931,018
— $
33,196
(17,470)
(750)
14,976
$
32.81
45.07
37.33
35.26
36.60
Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that
vested during fiscal 2014 was $2,956.
84
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Restricted share units carry generally the same terms and vesting requirements as restricted stock except that they may be
settled in stock or cash upon vesting. Those that are settled in cash are classified as liabilities. The fair value of outstanding
cash-settled restricted share units as of March 31, 2014 and 2013 was $1,259 and $1,405, 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, 2014, there was a total of $20,392 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 2.23 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
2014
2013
2012
$
12,734 $
11,189 $
7,509
3,538
16,111
19,944
(8,507)
(14,566)
(16,264)
$
7,765 $
12,734 $
11,189
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 $31,079, $35,258
and $43,252 as of March 31, 2014, 2013 and 2012, respectively. Such deferred revenue is then amortized on a straight-line
basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The
activity related to the liability for deferred service contract revenues is excluded from the table presented above.
17. FORWARD AND SWAP CONTRACTS
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from
transactions denominated in foreign currencies, including inter-company transactions. We may 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, 2014, we held foreign currency forward contracts to buy 68 million
Mexican pesos, 10 million Canadian dollars and 3 million Euros, and contracts to sell 18 million Mexican pesos.
Balance Sheet Location
Prepaid & Other
Accrued expenses and other
Asset Derivatives
Liability Derivatives
Fair Value at
March 31, 2014
Fair Value at
March 31, 2013
Fair Value at
March 31, 2014
Fair Value at
March 31, 2013
$
$
167
$
— $
$
161
— $
— $
67
$
—
128
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of
Income:
85
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Location of gain (loss) recognized in
income
Amount of gain (loss)
recognized in income
Years Ended March 31,
2014
2013
2012
Foreign currency forward contracts
Commodity swap contracts
Selling, general and administrative
Cost of revenues
$
$
(1,175) $
(57) $
161
$
(217) $
(1,115)
(1,544)
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, 2014 and
March 31, 2013:
Fair Value Measurements at March 31, 2014 and March 31, 2013 Using
Carrying Value
Quoted Prices
in Active Markets
for Identical Assets
Level 1
Significant Other
Observable Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
2014
2013
2014
2013
2014
2013
2014
2013
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)
$ 152,802 $ 142,008
161
3,139
167
3,397
$ 137,189 $ 135,277
—
3,139
—
3,397
$ 15,613 $ 6,731
161
—
167
—
$
67 $
3,495
493,480
128
3,218
492,290
$
— $
3,495
—
3,218
— $
67 $
—
— 511,690
128
—
531,856
$
$
— $
—
—
— $
—
—
—
—
—
—
—
—
9,887
5,453
—
—
—
—
9,887
5,453
(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 frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the
deferral of payment of previously earned 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 who made 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
86
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at March 31, 2014 are summarized
as follows:
Balance at March 31, 2012
Additions
(Gains) Losses
Foreign currency translation adjustments (1)
Balance at March 31, 2013
Additions
Payments
(Gains) Losses
Foreign currency translation adjustments (1)
Balance at March 31, 2014
Contingent
Consideration
$
$
$
6,953
1,412
(2,452)
(460)
5,453
5,083
(24)
(374)
(251)
9,887
(1) Reported in other comprehensive income (loss).
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 on available for sale securities
Total
$
$
6,348 $
(2,428)
561
4,481 $
810 $
(5,184)
286
(4,088) $
14,555
(1,102)
174
13,627
Year Ended March 31,
2013
2014
2012
87
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
20. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Foreign Currency
Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of
tax, for the years ended March 31, 2014 and March 31, 2013 were as follows:
Gain (Loss) on
Available for Sale
Securities (1)
Defined Benefit Plans
(2)
Foreign Currency
Translation (3)
Total Accumulated
Other
Comprehensive
Income
(Loss)
Beginning Balance
$
286
$
174
$ (5,184) $ (1,102) $
810
2014
2013
2014
2013
2014
2013
$ 14,555
2014
2013
$ (4,088) $ 13,627
Other Comprehensive Income
(Loss) before reclassifications
Amounts reclassified from
Accumulated Other
Comprehensive Income (Loss)
Net current-period Other
Comprehensive Income (Loss)
143
132
275
7
4,470
(2,650)
5,901
(14,550)
10,514
(17,193)
105
(1,714)
(1,432)
(363)
805
(1,945)
(522)
112
2,756
(4,082)
5,538
(13,745)
8,569
(17,715)
Balance March 31, 2014
$
561
$
286
$ (2,428) $ (5,184) $ 6,348
$
810
$ 4,481
$ (4,088)
Details of amounts reclassified from Accumulated Other Comprehensive Income (Loss) are as follows:
(1) Realized gain (loss) on available for sale securities is reported in the interest income and miscellaneous expense line of the
Consolidated Statements of Income.
(2) Amortization (gain) of defined benefit pension items is reported in the selling, general and administrative expense line of the
Consolidated Statements of Income.
(3) Realized gain (loss) on intra-entity foreign currency transactions that are of long term investment nature are reported in the
selling, general and administrative expense line of the Consolidated Statements of Income.
21. SUBSEQUENT EVENTS
On April 1, 2014 the Company announced a definitive agreement to acquire Integrated Medical Systems International
("IMS"), for a purchase price of $165,000, subject to a customary working capital adjustment, plus $10,000 for the purchase of
certain real estate. IMS has facilities located in Alabama, Florida, and Maryland and provides a variety of services including;
endoscope repair, surgical instrument management and sterile processing consulting. IMS will be integrated into our Healthcare
segment as part of our Specialty Services business.
The transaction closed on May 9, 2014 and was financed through credit facility borrowings.
We anticipate that the acquisition of IMS 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.
88
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
22. QUARTERLY RESULTS (UNAUDITED)
Quarters Ended
Fiscal 2014
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 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
March 31,
December 31,
September 30,
June 30,
$ 300,609
164,678
465,287
$ 252,616
152,935
405,551
$ 235,309
148,453
383,762
$ 222,928
144,724
367,652
178,125
102,667
280,792
184,495
39.7%
12,326
38,876
0.66
0.65
$
$
$
144,884
96,892
241,776
163,775
40.4%
808
28,506
0.48
0.48
$
$
$
133,629
95,627
229,256
154,506
40.3%
18
29,743
0.50
0.50
$
$
$
129,538
91,268
220,806
146,846
39.9%
52
32,317
0.55
0.54
$
$
$
$ 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
$
$
$
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.
89
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Description
(in thousands)
Year ended March 31, 2014
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, 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
Balance at
Beginning
of Period
Charges
to Costs
and
Expenses
Charges
to Other
Accounts
Deductions
Balance at
End of
Period
$
$
10,043
11,985
12,428
3,266
1,067
508
(2)
$
14,100
$
4,000
$
$
(37)
57
(3) $
(3)
227
(2,350) (4) $
—
(622)
10,922
13,109
12,541
(68)
$
(3,588)
$
14,444
253
—
—
(245)
8
$
$
11,428
15,313
(91)
(3,140)
(2)
$
(49)
(188)
(3)
(3)
$
(1,245) (4)
—
$ 10,043
11,985
11,842
3,279
(569)
(2,124)
12,428
$
10,776
$
2,387
$
3,185
$
(2,248)
$
14,100
69,065
(40,422)
(5)
—
(28,390)
253
$
$
9,085
10,122
2,901
5,304
(2)
$
1,520
(114)
(3) $
(3)
(2,078) (4) $
—
11,428
15,313
11,421
1,360
(435)
(504)
11,842
$
13,037
$
1,205
$
(792)
$
(2,674)
$
10,776
127,683
(17,403)
(6)
—
(41,215)
69,065
(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.
90
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, 2014, 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, 2014 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, 2014.
We acquired the assets of FSR and LSI and the stock of Eschmann during fiscal 2014. Our assessment of and conclusion
on the effectiveness of internal control over financial reporting as of March 31, 2014 did not include the internal controls of
these entities. Total assets of the acquired businesses (inclusive of acquired intangible assets and goodwill) represented
approximately 5 percent of our consolidated assets as of March 31, 2014 and less than 1 percent of our consolidated net sales
for the year ended March 31, 2014.
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, 2014, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, 1992 framework (the COSO criteria). STERIS Corporation and subsidiaries’ management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on STERIS Corporation and subsidiaries’ internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
91
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 Eschmann Holdings Limited (“EHL”), Life Systems, Inc. (“LSI”), and Florida Surgical Repair (“FSR”) which were
acquired in fiscal 2014 and are included in the March 31, 2014 consolidated financial statements of STERIS Corporation and
subsidiaries, and constituted approximately 5% of total assets, as of March 31, 2014 and less than 1% 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 EHL, LSI and FSR which were acquired in fiscal 2014.
In our opinion, STERIS Corporation and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2014, 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, 2014 and 2013 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, 2014 of STERIS Corporation and subsidiaries, and our report dated May 29, 2014 expressed an
unqualified opinion thereon.
Cleveland, Ohio
May 29, 2014
/s/ ERNST & YOUNG LLP
92
ITEM 9B. OTHER INFORMATION
On May 23, 2014 the Company received a warning letter from the FDA regarding an inspection that the FDA concluded on
January 8, 2014 at our STERIS Isomedix Services facility located in Libertyville, Illinois. The facility primarily provides
microbial reduction services for certain medical device Customers. Among other matters, the FDA warning letter asserts that
certain processes and procedures observed during the inspection did not conform to current Good Manufacturing Practices for
medical devices as required by Title 21 CFR Part 820 and, as a result, that certain devices processed at the subject facility are
adulterated within the meaning of the Federal Food, Drug and Cosmetic Act. Since the inspection, STERIS has provided
detailed responses to the FDA regarding its corrective actions, and will continue to work diligently to remediate the FDA’s
concerns. We do not believe that this inspection was a result of Customer complaints and there have been no reports of patient
injury. We do not expect this situation to have a material adverse effect on our operations or financial condition.
The Company and Timothy L. Chapman, the Company’s Senior Vice President and Group President, Healthcare, have
agreed that Mr. Chapman’s employment with the Company will terminate effective June 1, 2014. Mr. Chapman has been on a
personal leave of absence since January 13, 2014.
93
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 2014 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, 2014.
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
2,396,986
—
2,396,986
31.06
—
31.06
3,386,347
—
3,386,347
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.
94
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This Annual Report on Form 10-K incorporates by reference the information relating to principal accounting fees and
services appearing under the caption “Independent Registered Public Accounting Firm” of the Proxy Statement.
95
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, 2014 and 2013.
Consolidated Statements of Income – Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Comprehensive Income –Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Cash Flows – Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2014, 2013, and 2012.
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).
STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed
as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File
No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal
year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by
reference).*
STERIS Corporation 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).*
96
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 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 Nonqualified Stock Option Agreement for Employees (filed as
Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors
(filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File
No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees (filed as
Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation 2006 Long-Term Equity Incentive Plan (as Amended and Restated
Effective July 28, 2011) (filed as Exhibit A to Schedule 14A (Definitive Proxy Statement) filed
June 7, 2011 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees. (filed as
Exhibit 10.22 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No.
1-14643), and incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.23
to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1
to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and
incorporated herein by reference.*
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).*
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).*
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).*
97
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Form of Career Restricted Stock Unit Agreement for Nonemployee Directors (filed as Exhibit
10.33 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643),
and incorporated by reference).*
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit
10.34 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643),
and incorporated by reference).*
STERIS Corporation 2006 Long-Term Equity Incentive Plan (as Amended and Restated
Effective March 13, 2014).*
Description of Non-Employee Director Compensation Arrangements (filed as Exhibit 10.1 to
Form 10-Q for the fiscal quarter ended September 30, 2013 (Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K
filed September 1, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated
Effective January 1, 2009) (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
Amended and Restated Adoption Agreement related to STERIS Corporation Deferred
Compensation Plan (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended
December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
Amendment No. 1 to STERIS Corporation Deferred Compensation Plan Document (as Amended
and Restated Effective January 1, 2009) dated November 4, 2011 (filed as Exhibit 10.1 to Form
10-Q for the fiscal quarter ended December 31, 2011 (Commission File No. 1-14643), and
incorporated herein by reference).*
STERIS Corporation 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).*
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.
98
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
10.54
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).
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).
99
10.55
10.56
10.57
10.58
10.59
10.60
21.1
23.1
24.1
31.1
31.2
32.1
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).
Letter Agreement - Committed Line of Credit dated December 6, 2013 between STERIS
Corporation and PNC Bank, National Association (filed as Exhibit 10.1 to Form 10-Q for the
fiscal quarter ended December 31, 2013 (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).
Stock Purchase Agreement dated March 31, 2014 by and among STERIS Corporation, Integrated
Medical Systems International, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to
Form 8-K filed May 9, 2014 (Commission No. 1-14643), and incorporated herein by reference).
Subsidiaries of STERIS Corporation.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Certification of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a).
Certification of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14
(a).
Certification of the Principal Executive Officer and the Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101
Instance Document.
EX-101
Schema Document.
EX-101
Calculation Linkbase Document.
EX-101
Definition Linkbase Document.
EX-101
Labels Linkbase Document.
EX-101
Presentation Linkbase Document.
* A management contract or compensatory plan or arrangement required to be filed as an exhibit
hereto.
100
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.
STERIS CORPORATION
(Registrant)
Date: May 29, 2014
/S/ MICHAEL J. TOKICH
By:
Michael J. Tokich
Senior Vice President, Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE
TITLE
DATE
/S/ WALTER M ROSEBROUGH, JR.
President, Chief Executive Officer and Director
May 29, 2014
Walter M Rosebrough, Jr.
/S/ MICHAEL J. TOKICH
Senior Vice President, Chief Financial Officer and
Treasurer
Michael J. Tokich
*
John P. Wareham
*
Richard C. Breeden
*
Cynthia L. Feldmann
*
David B. Lewis
*
Jacqueline B. Kosecoff
*
Kevin M. McMullen
*
Mohsen M. Sohi
*
Loyal W. Wilson
*
Michael B. Wood
Chairman and Director
Director
Director
Director
Director
Director
Director
Director
Director
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
*
The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the
Powers of Attorney executed by the above-named directors of the Registrant and filed with the Securities and Exchange
Commission on behalf of such directors.
Date: May 29, 2014
By:
/S/ J. ADAM ZANGERLE
J. Adam Zangerle,
Attorney-in-Fact for Directors
101
EXHIBIT 21.1
SUBSIDIARIES OF STERIS CORPORATION
STERIS Corporation has no parent company. As of March 31, 2014, its direct and indirect subsidiaries(1) were as follows:
Albert Browne Limited
American Sterilizer Company
Biotest Laboratories, Inc.
CLBV Limited
Eschmann Holdings Limited
Eschmann Holdings Pte Limited
Hausted, Inc.
HSTD LLC
HTD Holding Corp.
Isomedix Corporation
Isomedix Inc.
Isomedix Operations Inc.
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 Luxembourg Holding S.à r.l.
STERIS Luxembourg Finance S.à r.l.
STERIS Mauritius Limited
102
United Kingdom
Pennsylvania
Minnesota
United Kingdom
United Kingdom
Singapore
Delaware
Delaware
Delaware
Canada
Delaware
Delaware
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
Luxembourg
Luxembourg
Republic of Mauritius
STERIS Mexico, S. de R.L. de C.V.
STERIS Netherlands Holdings B.V.
STERIS Personnel Services, Inc.
STERIS Personnel Services Mexico, S.de RL.de C.V.
STERIS NV
STERIS SEA Sdn. Bhd.
STERIS (Shanghai) Trading Co. Ltd.
STERIS Singapore Pte. Ltd.
STERIS S.r.l.
STERIS Surgical Technologies
STERIS UK Holding Limited
Strategic Technology Enterprises, Inc.
United States Endoscopy Group, Inc.
Mexico
Netherlands
Delaware
Mexico
Belgium
Malaysia
China
Singapore
Italy
France
United Kingdom
Delaware
Ohio
(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 2014 a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X have been excluded.
103
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements of STERIS Corporation and subsidiaries
(STERIS) of our reports dated May 29, 2014, 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, 2014.
Registration
Number
Description
333-32005
Form S-8 Registration Statement - STERIS Corporation 1997 Stock Option Plan
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)
Cleveland, Ohio
May 29, 2014
/s/ Ernst & Young LLP
104
Exhibit 24.1
STERIS CORPORATION
POWER OF ATTORNEY
FORM 10-K
Each of the undersigned hereby makes, constitutes, and appoints Walter M Rosebrough, Jr., Michael J. Tokich, J. Adam
Zangerle, Ronald E. Snyder, Dennis P. Patton, and each of them, his or her true and lawful attorney, with full power
of substitution, for and in his or her name, place, and stead, to affix, as attorney-in-fact, his or her signature in any and
all capacities, to the Annual Report on Form 10-K of STERIS Corporation for its fiscal year ended March 31, 2014,
and any and all amendments thereto to be filed with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Exchange Act of 1934, as amended, with power to file said Form 10-K and such
amendments, and any and all other documents that may be required in connection therewith, with the Securities and
Exchange Commission, hereby granting unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts and things requisite or appropriate in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or
any of them may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 24th
day of April 2014.
/s/ RICHARD C. BREEDEN
Richard C. Breeden, Director
/s/ JACQUELINE B. KOSECOFF
Jacqueline B. Kosecoff, Director
/s/ KEVIN M. MCMULLEN
Kevin M. McMullen, Director
/s/ JOHN P. WAREHAM
John P. Wareham, Chairman of the Board
/s/ MICHAEL B. WOOD
Michael B. Wood, Director
/s/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
/s/ CYNTHIA L. FELDMANN
Cynthia L. Feldmann, Director
/s/ DAVID B. LEWIS
David B. Lewis, Director
/s/ MOHSEN M. SOHI
Mohsen M. Sohi, Director
/s/ LOYAL W. WILSON
Loyal W. Wilson, Director
/s/ WALTER M ROSEBROUGH, JR
Walter M Rosebrough, Jr.
President and Chief Executive Officer
(Principal Executive Officer), Director
105
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 29, 2014
/S/ WALTER M ROSEBROUGH, JR.
Walter M Rosebrough, Jr.
President and Chief Executive Officer
106
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 29, 2014
/S/ MICHAEL J. TOKICH
Michael J. Tokich
Senior Vice President, Chief Financial Officer and Treasurer
107
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, 2014, 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.
/S/ WALTER M ROSEBROUGH, JR.
Name:
Title:
Walter M Rosebrough, Jr.
President and Chief Executive Officer
/S/ MICHAEL J. TOKICH
Name:
Title:
Michael J. Tokich
Senior Vice President, Chief Financial Officer and Treasurer
Dated: May 29, 2014
108
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 2014 and fiscal 2013 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,
2014
2013
Revenues
Impact of SYSTEM 1 Rebate Program
Adjusted revenues
Operating income
Impact of SYSTEM 1 Rebate Program and class action settlement
Amortization of inventory and property "step up" to fair value
Amortization and impairment of purchased intangible assets
Loss (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 and property "step up" to fair value, net of tax
Amortization and impairment of purchased intangible assets, net of tax
Loss (gain) from fair value adjustment of acquisition related contingent consideration, net of tax
Acquisition related transaction and integration costs, net of tax
Tax benefit, European restructuring
Tax benefit, Canadian adjustment
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
Restructuring, net of tax
Amortization of Inventory and property "step up" to fair value, net of tax
Amortization and impairment of purchased intangible assets, net of tax
Loss (gain) from fair value adjustment of acquisition related contingent consideration, net of tax
Tax benefit, European restructuring
Tax benefit, Canadian adjustment
Acquisition related transaction and integration expenses, net of tax
Adjusted net income per diluted share
Healthcare revenues
Impact of SYSTEM 1 Rebate Program
Adjusted Healthcare revenues
Healthcare capital equipment revenues
Impact of SYSTEM 1 Rebate Program Adjustment
SYSTEM 1E capital equipment revenues
Adjusted revenues
Note: Per share amounts may not calculate precisely due to rounding.
(Unaudited)
$
$
1,622,252
-
$
1,622,252
1,501,902
(22,367)
1,479,535
$
$
$
$
$
$
$
206,807
-
620
17,013
697
3,585
21,348
250,070
129,442
-
496
10,401
425
2,187
(10,474)
2,378
13,022
147,877
2.17
-
0.22
0.01
0.17
0.01
(0.18)
0.04
0.04
2.48
242,829
(40,422)
1,593
12,477
(2,483)
6,314
(565)
219,743
159,977
(24,657)
972
7,611
(1,515)
3,852
(8,118)
-
(345)
137,777
2.72
(0.42)
(0.01)
0.02
0.13
(0.03)
(0.14)
-
0.07
2.34
$
$
$
$
$
$
$
1,180,051
-
$
1,180,051
$
$
1,074,790
(22,367)
1,052,423
$
$
515,380
-
(2,990)
512,390
521,806
(22,367)
(16,094)
483,345
$
$
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, 2009 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
$300
$250
$200
$150
$100
$50
$0
03/09
03/10
03/11
03/12
03/13
03/14
STERIS Corporation
S&P 500 Index
Dow Jones US Medical Supplies Index
*$100 invested on 3/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
Copyright© 2014 Standard and Poor’s, Inc. Used with permission. All rights reserved.
Copyright© 2014 Dow Jones, Inc. Used with permission. All rights reserved.
STERIS Corporation
S&P 500 Index
Dow Jones US Medical Supplies Index
3/09
100.00
100.00
100.00
3/10
156.02
149.77
130.34
3/11
162.90
173.20
142.30
3/12
152.38
187.99
147.64
3/13
204.99
214.24
174.88
3/14
239.61
261.07
187.57
Corporate Information
EXECUTIVE OFFICERS
Kathleen L. Bardwell
Senior Vice President and
Chief Compliance Officer
Timothy L. Chapman
Senior Vice President and
Group President, Healthcare
Suzanne V. Forsythe
Vice President,
Human Resources
David A. Johnson
Senior Vice President,
Surgical Solutions
Robert E. Moss
Senior Vice President and
Group President,
STERIS Isomedix Services
and Life Sciences
Sudhir K. Pahwa
Senior Vice President,
Infection Prevention Technologies
Walter M Rosebrough, Jr.
President and Chief Executive Officer
Michael J. Tokich
Senior Vice President,
Chief Financial Officer
and Treasurer
J. Adam Zangerle
Vice President, General Counsel
and Secretary
EXECUTIVE OFFICES
5960 Heisley Road
Mentor, OH 44060-1834 USA
440-354-2600
www.steris.com
ANNUAL REPORT
Included in this Annual Report is a copy of
STERIS Corporation’s Form 10-K filed with
the Securities and Exchange Commission for
the year ended March 31, 2014. 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 30170
College Station, TX 77842-3170
800-622-6757
www.computershare.com/investor
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Suite 1800
950 Main Avenue
Cleveland, OH 44113-7214
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 2014 annual meeting will be
held on Wednesday, July 30, 2014, at 9:00 a.m.
Eastern time at its Executive Offices.
Portions of this Annual Report, other than the Form 10-K,
have not been filed with the SEC.
Product and service descriptions and financial information
herein are for illustration purposes only and do not modify
or alter product warranties, labeling, instructions, or other
technical literature, or the financial information contained
in the Form 10-K.
BOARD OF DIRECTORS
John P. Wareham1
Chairman of the Board
STERIS Corporation
Retired Chairman of the Board
and Chief Executive Officer,
Beckman Coulter, Inc.
Richard C. 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.
Walter M Rosebrough, Jr.3
President and Chief Executive Officer,
STERIS Corporation
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 Clinic Foundation
1 Compensation Committee Member
2 Audit Committee Member
3 Compliance Committee Member
4 Nominating and Governance
Committee Member
I
F
S
C
A
L
2
0
1
4
A
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N
U
A
L
R
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P
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FISCAL
T 2014ANNUAL REPORT
Document #ANNRPT14.2014-05, Rev. A
©2014 STERIS Corporation.
All rights reserved. Printed in USA.