SEC Filing | STERIS plc

1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 0-20165 STERIS CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-1482024 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5960 HEISLEY ROAD, 440-354-2600 MENTOR, OHIO 44060-1834 (Registrant's telephone number, (Address of principal executive offices) including area code) 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 [ X ] No [ ]. The number of Common Shares outstanding as of September 30, 1999: 67,497,700 ================================================================================

2 PART I FINANCIAL INFORMATION STERIS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) ================================================================================ SEPTEMBER 30, MARCH 31, 1999 1999 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 32,310 $ 23,680 Accounts receivable 219,389 230,346 Inventories 124,597 99,279 Current portion of deferred income taxes 21,910 21,910 Prepaid expenses and other assets 16,770 18,182 --------- --------- TOTAL CURRENT ASSETS 414,976 393,397 Property, plant, and equipment 408,037 372,386 Accumulated depreciation (127,698) (111,105) --------- --------- Net property, plant, and equipment 280,339 261,281 Intangibles 282,634 280,750 Accumulated amortization (75,933) (72,499) --------- --------- Net intangibles 206,701 208,251 Other assets 3,400 3,067 --------- --------- TOTAL ASSETS $ 905,416 $ 865,996 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term indebtedness $ 1,816 $ 2,200 Accounts payable 39,739 47,431 Accrued expenses and other 104,669 107,506 --------- --------- TOTAL CURRENT LIABILITIES 146,224 157,137 Long-term indebtedness 266,450 221,500 Deferred income taxes 2,810 2,810 Other long-term liabilities 48,845 48,612 --------- --------- TOTAL LIABILITIES 464,329 430,059 Shareholders' equity: Serial preferred shares, without par value, 3,000 shares authorized; no shares outstanding Common Shares, without par value, 300,000 shares authorized; issued and outstanding shares of 67,498 at September 30, 1999, and 67,956 at March 31, 1999, excluding 1,081 and 523 treasury shares, respectively 204,304 222,946 Retained earnings 243,606 219,863 Cumulative translation adjustment (6,823) (6,872) --------- --------- TOTAL SHAREHOLDERS' EQUITY 441,087 435,937 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 905,416 $ 865,996 ========= ========= See notes to consolidated condensed financial statements. 2

3 STERIS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) ================================================================================ THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------------------------------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net revenues $ 198,602 $ 191,125 $ 375,415 $ 364,900 Cost of goods and services sold 108,001 101,621 202,802 194,082 --------- --------- --------- --------- Gross profit 90,601 89,504 172,613 170,818 Costs and expenses: Selling, informational, and administrative 58,634 50,693 116,285 100,224 Research and development 5,715 6,074 11,923 12,103 --------- --------- --------- --------- 64,349 56,767 128,208 112,327 --------- --------- --------- --------- Income from operations 26,252 32,737 44,405 58,491 Interest expense (3,903) (2,325) (7,396) (4,719) Interest income and other 852 360 1,248 515 --------- --------- --------- --------- Income before income taxes 23,201 30,772 38,257 54,287 Income tax expense 8,793 12,001 14,514 21,171 --------- --------- --------- --------- Net income $ 14,408 $ 18,771 $ 23,743 $ 33,116 ========= ========= ========= ========= Net income per share - basic $ 0.21 $ 0.27 $ 0.35 $ 0.49 ========= ========= ========= ========= Net income per share - diluted $ 0.21 $ 0.27 $ 0.35 $ 0.47 ========= ========= ========= ========= See notes to consolidated condensed financial statements. 3

4 STERIS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) ================================================================================ SIX MONTHS ENDED SEPTEMBER 30 ------------------------------ 1999 1998 -------------- -------------- OPERATING ACTIVITIES Net income $ 23,743 $ 33,116 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 20,027 15,225 Deferred income taxes 0 (7,761) Other items (403) (1,776) Changes in operating assets and liabilities: Accounts receivable 11,521 12,037 Inventories (25,318) (20,329) Other assets 5,872 (2,135) Accounts payable and accruals (10,861) (1,533) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 24,581 26,844 INVESTING ACTIVITIES Purchases of property, plant, equipment, and patents (33,524) (31,458) Investment in businesses (6,259) (39,992) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (39,783) (71,450) FINANCING ACTIVITIES Payments on long-term obligations (1,134) (589) Borrowing under credit facility 45,000 50,000 Purchase of treasury shares (28,712) (2,495) Stock option and other equity transactions 8,241 5,594 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,395 52,510 Effect of exchange rate changes on cash and cash equivalents 437 1 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 8,630 7,905 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,680 17,172 ======== ======== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,310 $ 25,077 ======== ======== See notes to consolidated condensed financial statements. 4

5 STERIS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 A. - REPORTING ENTITY STERIS Corporation (the "Company" or "STERIS") develops, manufactures, and markets infection prevention, contamination prevention, microbial reduction, and therapy support systems, products, services, and technologies for healthcare, scientific, research, food, and industrial Customers throughout the world. The Company has over 4,700 Associates (employees) worldwide, including more than 1,900 direct sales, service, field, and Customer support personnel. Customer Support facilities are located in major global market centers with production operations in the United States, Australia, Canada, Germany, Finland, and Sweden. STERIS operates in a single business segment. B. - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X; they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Accordingly, the reader of these financial statements should refer to the audited consolidated financial statements of STERIS filed with the Securities and Exchange Commission as part of STERIS's Form 10-K for the year ended March 31, 1999. The accompanying consolidated condensed financial statements have been prepared in accordance with STERIS's customary accounting practices and have not been audited. Management believes that the financial information included herein reflects all adjustments necessary for a fair presentation of interim results and all such adjustments are of a normal and recurring nature. The interim results reported are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2000. The balance sheet at March 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated upon consolidation. 5

6 STERIS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) C. - EARNINGS PER SHARE Following is a summary, in thousands, of Common Shares and Common Share equivalents outstanding used in the calculations of earnings per share: THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------------------- --------------------------------- 1999 1998 1999 1998 -------------- --------------- -------------- -------------- Weighted average Common Shares outstanding - basic 67,455 68,326 67,478 68,222 Dilutive effect of stock options 1,020 2,429 1,288 2,496 -------------- --------------- -------------- --- -------------- Weighted average Common Shares and equivalents - diluted 68,475 70,755 68,766 70,718 ============== =============== ============== ============== D. - COMPREHENSIVE INCOME Comprehensive income amounted to $14,879 and $19,434, net of tax, for the quarters ended September 30, 1999 and 1998, respectively. Comprehensive income amounted to $23,792 and $33,117, net of tax, for the six months ended September 30, 1999 and 1998, respectively. The entire difference between net income and comprehensive income for the periods presented results from changes in the cumulative translation adjustment. E. - INVENTORIES Inventories were as follows: SEPTEMBER 30, MARCH 31, 1999 1999 --------------------- --------------------- Raw material $46,132 $36,878 Work in process 24,406 19,585 Finished goods 54,059 42,816 --------------------- --------------------- $124,597 $99,279 ===================== ===================== The increase in inventories during the period was due to an increase in costs to support product sales and anticipated future product sales. 6

7 STERIS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) F. - FINANCING On January 26, 1999, STERIS entered into a $400,000 Credit Facility. The Credit Facility includes an unsecured revolver of $250,000 which expires January 26, 2002. The remaining $150,000 is an unsecured 364 day facility expiring on January 25, 2000, which can be extended annually for 364 days. The $400,000 Credit Facility may be used for general corporate purposes and will bear interest at either KeyBank National Association's prime rate or at LIBOR plus a margin. The Credit Facility contains customary covenants which include maintenance of certain financial ratios. At September 30, 1999, the outstanding borrowings under the existing Credit Facility were $260,000. The Company has now repurchased 3.7 million Common Shares as a part of its previously announced open market buy-back program. No Common Shares were repurchased in the latest quarter. G. - CONTINGENCIES There are various pending lawsuits and claims arising out of the conduct of STERIS's business. In the opinion of management, the ultimate outcome of these lawsuits and claims will not have a material adverse effect on STERIS's consolidated financial position or results of operations. STERIS believes it presently maintains a prudent amount of product liability insurance coverage and associated deductible levels. H. - ACQUISITIONS Early in the second quarter fiscal 2000, the Company acquired the assets of Quality Sterilization Systems (QSS), a contract sterilization business located near Minneapolis, Minnesota. QSS primarily provides contract sterilization services for medical device manufacturers in the upper Midwest. Also, during the second quarter fiscal 2000, the Company completed the acquisition of privately held FoodLabs, Inc. FoodLabs, Inc., located in Manhattan, Kansas, provides analytical, product development, and consulting services to the food and agricultural industries, with a particular focus on food safety. These acquisitions have been accounted for as purchase transactions. 7

8 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders STERIS Corporation We have reviewed the accompanying consolidated condensed balance sheet of STERIS Corporation and subsidiaries as of September 30, 1999, and the related consolidated condensed statements of income for the three-month and six-month periods ended September 30, 1999 and 1998, and the consolidated condensed statements of cash flows for the six-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly we do not express such an opinion. Based upon our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of STERIS Corporation and subsidiaries as of March 31, 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended, not presented herein, and in our report dated April 26, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of March 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it is derived. Ernst & Young LLP Cleveland, Ohio October 27, 1999 8

9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Net revenue increased by 3.9% to $198.6 million in the second quarter fiscal 2000 from $191.1 million in the second quarter fiscal 1999. Net revenue increased by 2.9% to $375.4 million in the first six months of fiscal 2000 from $364.9 million in the same period in fiscal 1999. Health Care Group revenues in the fiscal second quarter increased 3.5% from the prior year period to $148.1 million, or 74.6% of total Company revenues. Scientific and Industrial Group revenues were $50.5 million in the second quarter, an increase of 5.1% from the prior year period. Health Care Group revenues in the first six months of fiscal 2000 increased 2.0% from the prior year period to $279.3 million, or 74.4% of total Company revenues. Scientific and Industrial Group revenues were $96.1 million in the first six months of fiscal 2000, an increase of 5.6% from the prior year period. Revenues from consumables and services were 56.7% of sales for the quarter, up from 53.5% in last year's second quarter. The costs of products and services sold increased by 6.3% to $108.0 million in the second quarter fiscal 2000 from $101.6 million in the second quarter fiscal 1999. The costs of products and services sold increased by 4.5% to $202.8 million for the first six months of fiscal 2000 from $194.1 million for the first six months of fiscal 1999. The cost of products and services sold as a percentage of net revenue was 54.4% for the second quarter fiscal 2000 compared to 53.2% for the same period in fiscal 1999. The increase in the cost of products and services sold as a percentage of net revenue reflects a change in the classification of certain service costs previously treated as general operating expenses. The change reduced gross margin by approximately 0.7% in the second quarter and 0.6% in the first half. Selling, informational, and administrative expenses increased by 15.7% to $58.6 million in the second quarter fiscal 2000 from $50.7 million in the second quarter fiscal 1999. Selling, informational, and administrative expenses increased by 16.0% to $116.3 million in the first six months of fiscal 2000 from $100.2 million in the first six months of fiscal 1999. The increase in expenses reflected higher payroll and marketing costs primarily incurred to support the expansion and reorientation of the U.S. Health Care field organization, the addition of production facilities which were acquired as a result of business combinations, as well as the costs related to the termination of the proposed acquisition of Isotron plc, which resulted in a charge of $0.5 million in the second quarter. The expenses as a percentage of net revenue increased to 29.5% in the second quarter fiscal 2000 from 26.5% in the second quarter fiscal 1999. Research and development expenses decreased by 5.9% to $5.7 million in the second quarter fiscal 2000 from $6.1 million in the second quarter fiscal 1999. Research and development expenses decreased by 1.5% to $11.9 million in the first six months fiscal 2000 from $12.1 million in the first six months fiscal 1999. Interest expense increased by 67.9% to $3.9 million in the second quarter fiscal 2000 from $2.3 million in the second quarter fiscal 1999. Interest expense increased by 56.7% to $7.4 million in the first six months fiscal 2000 from $4.7 million in the first six months fiscal 1999. The increase 9

10 was due to the additional borrowing under the Credit Facility principally for purchases of property, plant, and equipment, acquisition of businesses, and repurchase of Common Shares. Net income for the second quarter of fiscal 2000 decreased by 23.2% to $14.4 million ($.21 per share) from $18.8 million ($.27 per share) in the same period fiscal 1999. Net income for the first six months of fiscal 2000 decreased by 28.3% to $23.7 million ($.35 per share) from $33.1 million ($.47 per share) in the same period fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company had $32.3 million in cash and cash equivalents as of September 30, 1999, compared to $23.7 million of the same at March 31, 1999. The increase was primarily attributable to cash received from operating activities and borrowings, offset by purchases of property, plant, and equipment, acquisition of businesses, and repurchase of Common Shares. Accounts receivable decreased by 4.8% to $219.4 million as of September 30, 1999, compared to $230.3 million at March 31, 1999. The decrease reflected seasonal changes in revenues and increased collections. Inventory increased by 25.5% to $124.6 million as of September 30, 1999, compared to $99.3 million at March 31, 1999. The increase in inventories during the period was due to an increase in costs to support product sales and anticipated future product sales. Prepaid expenses and other assets decreased by 7.8% to $16.8 million as of September 30, 1999, compared to $18.2 million at March 31, 1999. Property, plant, and equipment increased by 9.6% to $408.0 million as of September 30, 1999, compared to $372.4 million at March 31, 1999. The increase was due to investments in manufacturing equipment, informational technology systems, and contract services operations. Intangibles increased by 0.7% to $282.6 million as of September 30, 1999, compared to $280.8 million at March 31, 1999. Current liabilities decreased by 7.0% to $146.2 as of September 30, 1999, compared to $157.1 million at March 31, 1999. Long-term indebtedness increased by 20.3% to $266.5 million as of September 30, 1999, compared to $221.5 at March 31, 1999. The increase was due primarily to fund purchases of property, plant, and equipment, business acquisitions, and the repurchase of Common Shares. Other long-term liabilities increased by 0.5% to $48.8 million as of September 30, 1999, compared to $48.6 million at March 31, 1999. On January 26, 1999, STERIS entered into a $400 million Credit Facility. The Credit Facility includes an unsecured revolver of $250 million which expires January 26, 2002. The remaining $150 million is an unsecured 364 day facility expiring on January 25, 2000, which can be extended annually for 364 days. The $400 million Credit Facility may be used for general corporate purposes and will bear interest at either KeyBank National Association's prime rate or at LIBOR plus a margin. The Credit Facility contains customary covenants which include maintenance of certain financial ratios. At September 30, 1999, the outstanding borrowings under the existing Credit Facility were $260 million. 10

11 The Company has no material commitments for capital expenditures. The Company believes that its cash requirements will increase due to increased sales requiring more working capital, accelerated research and development, and potential acquisitions or investments in complementary businesses. However, the Company believes that its available cash, cash flow from operations, and sources of credit will be adequate to satisfy its capital needs for the foreseeable future. CONTINGENCIES - ------------- For a discussion of contingencies, see Note G to the consolidated condensed financial statements. SEASONALITY - ------------ Historical data indicates that financial results were subject to recurring seasonal fluctuations. A number of factors have contributed to the seasonal patterns, including sales promotion and compensation programs, Customer buying patterns of capital equipment, and international business practices. Sales and profitability of certain of the acquired and consolidated product lines have historically been disproportionately weighted toward the latter part of each quarter and each fiscal year. Various changes in business practices resulting from the integration of acquired businesses into STERIS may alter the historical patterns of the previously independent businesses. YEAR 2000 DATE CONVERSION An issue affecting STERIS and most other companies is how computer systems and applications recognize and process date-sensitive information. Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. Without corrective actions, this could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has investigated the impact of the year 2000 issue on its products and does not anticipate any effect on the performance of its products. The Company is in the process of assessing and implementing necessary changes for all areas of the Company's business which could be impacted; these include such areas as business computer systems, technical infrastructure, plant floor equipment, building infrastructure, end-user computing, and suppliers. The Company has initiated a project to prepare its computer systems for the year 2000 and is addressing the year 2000 issues. The Company's year 2000 program activities include the identification of affected hardware and software, the development of a plan for remediating those systems in the most effective manner, the execution of that plan, which includes continuous testing, and the monitoring of the program's success. Although various locations are at differing stages of readiness with respect to the various focus areas, the identification and plan development phases of the project are completed. The Company has substantially completed the program, and continuous review and testing are being conducted to help ensure that compliance is achieved and maintained as the year 2000 approaches. 11

12 The Company has implemented year 2000 compliant systems in a number of areas, including order entry systems. In a number of instances, the Company has replaced non-compliant systems with newer systems which will significantly improve functionality as well as appropriately interpret the calendar year 2000 and beyond. Although the timing of these actions may have been influenced by the year 2000 issue, in virtually all instances they involved capital expenditures that would have occurred in the normal course of business. While the Company is implementing a year 2000 vendor compliance program, the Company has little direct control over whether its suppliers will make the appropriate modifications to their systems and applications on a timely basis. As part of the year 2000 program, contingency plans are being formalized as the target date for completion approaches. Business disruption scenarios have been identified and continue to be reviewed and appropriate strategies are being evaluated in the development of these various plans. The Company continues to develop contingency plans (e.g., the selection of alternative suppliers) to address the potential business disruption scenarios that are being identified. Operating expenses include costs incurred in preparing systems and applications for the year 2000. The Company expects to incur internal staff costs as well as outside services (including consultants) and other expenses related to the conversion and testing of the systems and applications. These costs, which are expensed as incurred, have been immaterial to date. The year 2000 costs include internal modification and testing costs as well as costs associated with supply chain risk assessment and contingency planning. Based on assessments completed to date and compliance plans in process, the Company believes that it has an effective program in place to resolve the year 2000 challenges in a timely manner and the Company does not expect that the year 2000 issues will have a material effect on its business operations or results of operations. However, satisfactory completion of the program may not prevent business disruptions resulting from actions of critical suppliers and Customers. Such disruptions would impair the Company's ability to obtain necessary materials for production or sell products to Customers. If such disruptions occurred, the Company may experience lost or delayed sales and profits depending on the duration of the disruptions. Key aspects of the program are addressing potential uncertainties but the Company's ability to be fully confident of conditions related to third parties is limited. Currently, the Company cannot reasonably estimate the amount of potential lost or delayed sales and profits. EURO - ---- On January 1, 1999, eleven of the fifteen member countries of the European Monetary Union (EMU) began a three-year transition phase during which a common currency called the Euro was adopted as their legal currency. The Euro began trading on currency exchanges and is available for non-cash transactions. During the transition period, parties may pay for goods and services using either the Euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. The conversion rates between the existing legacy currencies and the Euro were fixed on January 1, 1999. The legacy currencies will remain legal tender for cash transactions between January 1, 1999, and January 1, 2002, at which time all legacy currencies will be withdrawn from circulation and the new Euro denominated bills and coins will be used for cash transactions. 12

13 The Company has several operations within the eleven participating countries that will be utilizing the Euro as their local currency in 1999. Additionally, the Company's operations in other European countries and elsewhere in the world will be conducting business transactions with Customers and suppliers that will be denominated in the Euro. Euro denominated bank accounts have been established to accommodate Euro transactions. The Company's exposure to changes in foreign exchange rates may also be reduced as a result of the Euro conversion. The Company has established plans to review strategic and tactical areas arising from the Euro conversion. Over the past several periods, these plans have focused on aspects of the Euro conversion that required adjustment or compliance by January 1, 1999, and for conducting Euro-denominated business during 1999. These aspects included transacting business in the Euro, the competitive impact on product pricing, and adjustments to billing systems to handle parallel currencies. The Company has determined that these systems have the capability to handle Euro transactions and is currently in a position to transact business in Euros. Continuing analysis and development efforts will help ensure that the implementation of the Euro meets the timetable and regulations established by the EMU. Based on current estimates, the Company does not expect the costs incurred to address the Euro will have a material impact on its financial condition or results of operations. FORWARD-LOOKING INFORMATION - --------------------------- This Form 10-Q contains statements concerning certain trends and other forward-looking information affecting or relating to the Company and its industry that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. There are many important factors that could cause actual results to differ materially from those in the forward-looking statements. Many of these important factors are outside STERIS's control. Changes in market conditions, including competitive factors and changes in government regulations, could cause actual results to differ materially from the Company's expectations. No assurance can be provided as to any future financial results. Other potentially negative factors that could cause actual results to differ materially from those in the forward-looking statements include (a) the possibility that the continuing integration of acquired businesses will take longer than anticipated, (b) the potential for increased pressure on pricing that leads to erosion in profit margins, (c) the possibility that market demand will not develop for new technologies, products, and applications, (d) the potential effects of fluctuations in foreign currencies where the Company does a sizable amount of business, (e) the possibility that the Company's activities related to changes in its sales force will take longer or incur greater expense than anticipated and (f) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company's products and services. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - --------------------------------------------------------- A discussion of market risk exposures is included in Part II, Item 7a, "Quantitative and Qualitative Disclosure about Market Risk," of the Company's 1999 Annual Report and Form 10-K. There were no material changes during the six months ended September 30, 1999. 13

14 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - ------ ----------------- Reference is made to Part I, Item 1., Note G of this Report on Form 10-Q, which is incorporated herein by reference. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - ------ ----------------------------------------- On July 29, 1999, the Company issued 100,000 Common Shares, without par value, to the shareholders of FoodLabs, Inc. in exchange for all of the issued and outstanding capital stock of FoodLabs, Inc. The Company issued its Common Shares in reliance on the exemption from registration provided by Rule 505 promulgated under the Securities Act of 1933, as amended (the "1933 Act"). The offering of the Common Shares satisfied the terms and conditions of Rules 501 and 502 under the 1933 Act, and the Common Shares had an aggregate offering price not exceeding $5 million and were issued to 35 or fewer purchasers. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- (a) Exhibits -------- EXHIBIT NUMBER EXHIBIT DESCRIPTION -------------- ------------------- 15.1 Letter Re: Unaudited Interim Financial Information 27.1 Financial Data Schedule (b) Reports on Form 8-K Current report on form 8-K, filed August 31, 1999, in connection with the announcement by the Company that it had allowed its recommended cash offer to purchase Isotron plc to lapse. 14

15 SIGNATURE Pursuant to the requirements 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. STERIS Corporation (Registrant) /s/ Les C. Vinney ----------------- Les C. Vinney Senior Vice President and Chief Financial Officer (Principal Financial Officer) November 12, 1999 15

1 EXHIBIT 15.1 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION We are aware of the incorporation by reference in the Registration Statements and related Prospectuses of our report dated October 27, 1999, relating to the unaudited consolidated condensed interim financial statements of STERIS Corporation and Subsidiaries that are included in its Form 10-Q for the quarter ended September 30, 1999: Registration Number Description Filing Date ------------------- --------------------------------------------------------------------- --------------------------- 333-65155 Form S-8 Registration Statement -- STERIS Corporation Long Term October 1, 1998 Incentive Stock Plan 333-55839 Form S-8 Registration Statement -- Nonqualified Stock Option June 2, 1998 Agreement between STERIS Corporation and John Masefield and the Nonqualified Stock Option Agreement between STERIS Corporation and Thomas J. DeAngelo 333-32005 Form S-8 Registration Statement -- STERIS Corporation 1997 Stock July 24, 1997 Option Plan 333-06529 Form S-3 Registration Statement -- STERIS Corporation June 21, 1996 333-01610 Post-effective Amendment to Form S-4 on Form S-8 -- STERIS May 16, 1996 Corporation 33-91444 Form S-8 Registration Statement -- STERIS Corporation 1994 Equity April 24, 1995 Compensation Plan 33-91442 Form S-8 Registration Statement -- STERIS Corporation 1994 April 24, 1995 Nonemployee Directors Equity Compensation Plan 33-55976 Form S-8 Registration Statement -- STERIS Corporation 401(k)Plan December 21, 1992 33-55258 Form S-8 Registration Statement -- STERIS Corporation Amended and December 4, 1992 Restated Non-Qualified Stock Option Plan Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Ernst & Young LLP Cleveland, Ohio November 12, 1999

5 1,000 6-MOS MAR-31-2000 SEP-30-1999 32,310 0 219,389 0 124,597 414,976 408,037 (127,698) 905,416 146,224 0 0 0 204,304 236,783 905,416 375,415 375,415 202,802 202,802 0 0 (7,396) 38,257 14,514 23,743 0 0 0 23,743 0.35 0.35

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