1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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 0-20165
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STERIS CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 34-1482024
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5960 HEISLEY ROAD, MENTOR, OHIO 44060
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(Address of principal executive offices) (Zip Code)
(216) 354-2600
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(Registrant's telephone number 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 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 .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, without par value 34,229,122
- -------------------------------------- ------------------------------------
(Title of Class) (Outstanding at January 31, 1997)
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STERIS CORPORATION
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31 and March 31, 1996 3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months and nine months ended December 31, 1996 and 1995 4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended December 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
Signature 16
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PART I FINANCIAL INFORMATION
STERIS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
================================================================================
DECEMBER 31, MARCH 31,
1996 1996
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 34,822 $ 140,788
Marketable securities 6,120 9,193
Accounts receivable 147,877 129,312
Inventories 88,775 73,718
Current portion of deferred income taxes 8,963 5,219
Prepaid expenses and other assets 7,503 9,463
--------- ---------
TOTAL CURRENT ASSETS 294,060 367,693
Property, plant, and equipment 168,163 155,470
Accumulated depreciation (73,931) (61,724)
--------- ---------
Net property, plant, and equipment 94,232 93,746
Intangibles 197,488 156,391
Accumulated amortization (65,392) (52,683)
--------- ---------
Net intangibles 132,096 103,708
Deferred income taxes 32,690 28,757
Other assets 957 2,098
--------- ---------
TOTAL ASSETS $ 554,035 $ 596,002
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term indebtedness $ 1,352 $ 471
Accounts payable 35,654 31,308
Accrued income taxes 12,616 10,375
Accrued expenses and other 102,095 82,932
--------- ---------
TOTAL CURRENT LIABILITIES 151,717 125,086
Long-term indebtedness 43,095 102,572
Other liabilities 69,693 64,285
--------- ---------
TOTAL LIABILITIES 264,505 291,943
Shareholders' equity:
Serial preferred shares, without par
value, 3,000 shares authorized;
no shares outstanding
Common Shares, without par value, 100,000
shares authorized; issued and outstanding shares of
34,185 at December 31, 1996 and 32,995 at March
31, 1996 239,316 209,811
Retained earnings 53,597 100,119
Cumulative translation adjustment and other (3,383) (5,871)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 289,530 304,059
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 554,035 $ 596,002
========= =========
See notes to consolidated condensed financial statements.
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STERIS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
============================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- --------
Net revenue $ 151,005 $ 163,623 $ 417,363 $ 416,762
Cost of goods and services sold 91,231 101,323 256,978 259,853
--------- --------- --------- ---------
Gross profit 59,774 62,300 160,385 156,909
Cost and expenses:
Selling, general, and administrative 32,505 29,388 86,193 87,908
Research and development 5,425 4,651 15,598 12,712
Non-recurring items--Note E 0 0 90,831 0
--------- --------- --------- ---------
37,930 34,039 192,622 100,620
--------- --------- --------- ---------
Income (loss) from operations 21,844 28,261 (32,237) 56,289
Interest expense (192) (1,371) (2,140) (4,478)
Interest income and other 715 1,671 3,512 4,876
--------- --------- --------- ---------
Income (loss) before income taxes 22,367 28,561 (30,865) 56,687
Income tax expense 8,832 11,009 15,657 22,765
--------- --------- --------- ---------
Net income (loss) $ 13,535 $ 17,552 $ (46,522) $ 33,922
========= ========= ========= =========
Net income (loss) per share $ 0.38 $ 0.50 $ (1.39) $ 0.98
========= ========= ========= =========
Weighted average number of shares
outstanding used in computing
income (loss) per share 36,089 35,041 33,535 34,637
========= ========= ========= =========
See notes to consolidated condensed financial statements.
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STERIS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
===================================================================================================
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995
---------- --------
OPERATING ACTIVITIES
Net income (loss) $ (46,522) $ 33,922
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 10,872 14,911
Deferred taxes 51 7,392
Non-recurring items 53,261 0
Other items 5,581 2,481
Changes in operating assets and liabilities:
Accounts receivable (17,182) (20,501)
Inventories (3,078) 16,061
Other assets 1,697 (2,083)
Accounts payable and accruals 157 (9,883)
Accrued income taxes 2,242 4,793
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,079 47,093
INVESTING ACTIVITIES
Purchases of property, plant, equipment, and patents (12,231) (9,232)
Investment in businesses (82,482) (276)
Proceeds from notes receivable 8,438 0
Purchases of marketable securities (4,068) (9,749)
Proceeds from sales of marketable securities 7,147 9,464
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (83,196) (9,793)
FINANCING ACTIVITIES
Payments on notes payable (100,035) (982)
Borrowing under line of credit 40,000 0
Proceeds from exercise of stock options 26,086 9,544
Tax benefits from exercise of stock options 3,419 2,666
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (30,530) 11,228
Effect of exchange rate changes on cash and cash equivalents 681 1,217
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (105,966) 49,745
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 140,788 64,075
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,822 $ 113,820
========= =========
See notes to consolidated condensed financial statements
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STERIS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
PERIODS ENDED DECEMBER 31, 1996 AND 1995
A. - REPORTING ENTITY
STERIS Corporation ("STERIS") is a leading provider of infection prevention,
contamination control, and surgical support systems, products, services, and
technologies to healthcare, scientific, research and industrial Customers
throughout the world. The Company has approximately 4,000 Associates (employees)
worldwide, including more than 1,000 direct sales, service, and field support
personnel. Customer Support facilities are located in major global market
centers with manufacturing operations in the United States, Canada, Germany, and
Finland. STERIS operates in a single business segment.
On May 13, 1996, STERIS consummated a merger with Amsco International, Inc.
("Amsco") in a tax-free, stock-for-stock transaction (the "Amsco Merger"). See
Note D.
B. - BASIS OF PRESENTATION
The Amsco Merger has been accounted for by the pooling-of-interests method.
Accordingly, the accompanying consolidated condensed financial statements give
retroactive effect to the transaction and include the combined operations of
STERIS and Amsco for all periods presented. In addition, the historical
financial information of Amsco (previously reported on fiscal years ending
December 31) has been recast to conform to STERIS's annual reporting period
ending March 31.
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; 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 may wish to refer to the audited consolidated
financial statements of STERIS (Form 10-K for the year ended March 31, 1996) and
Amsco (Form 8-K/A dated May 13, 1996 and filed June 25, 1996 for the year ended
December 31, 1995) filed by STERIS with the Securities and Exchange Commission.
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, except as discussed in Note E, all such adjustments are of a normal and
recurring nature. The results for the nine months ended December 31, 1996, are
not necessarily indicative of the results to be expected for the fiscal year
ending March 31, 1997.
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C. - EARNINGS (LOSS) PER SHARE
The computations of earnings (loss) per common share and common share equivalent
give retroactive effect to the Amsco Merger and are based upon the weighted
average number of common shares outstanding and where applicable, the dilutive
effect of common share equivalents (consisting of stock options). Common share
equivalents were antidilutive for the nine month period ended December 31, 1996
and accordingly were excluded from the computation of earnings (loss) per common
share for such period. Following is a summary in thousands of common shares and
common share equivalents outstanding used in the calculations of earnings (loss)
per share.
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------- ------ ----- -----
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 34,161 32,757 33,535 32,364
Dilutive effect of stock options--
primary basis 1,928 2,284 0 2,273
------- ------ ----- -----
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS--
PRIMARY BASIS 36,089 35,041 33,535 34,637
Additional dilutive effect of stock
options--fully diluted basis 153 11 0 150
------- ------ ----- -----
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS--
FULLY DILUTED BASIS 36,242 35,052 33,535 34,787
======== ====== ====== ======
D. - MERGERS AND ACQUISITIONS
AMSCO MERGER
On May 1, 1996, the shareholders of both STERIS and Amsco approved the Amsco
Merger. The Amsco Merger was consummated on May 13, 1996. In accordance with the
merger agreement, each outstanding share of Amsco common stock was converted on
a tax-free basis into 0.46 of a common share of STERIS.
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Summarized operating results of the separate entities for the period prior to
the Amsco Merger follow (in thousands):
STERIS AMSCO COMBINED
------ ----- --------
Three months ended December 31, 1995:
Net revenue $24,156 $139,467 $163,623
Income from operations 5,534 22,727 28,261
Net income 3,472 14,080 17,552
Nine months ended December 31, 1995:
Net revenue $65,568 $351,194 $416,762
Income from operations 14,024 42,265 56,289
Net income 8,892 25,030 33,922
Retained earnings were increased by $2,966,000 as a result of net income
recorded by Amsco in the three month period ended March 31, 1996.
OTHER MERGERS AND ACQUISITIONS
In late December 1996, STERIS completed the acquisition of the assets of the
infection control and contamination control businesses of Calgon Vestal
Laboratories from Bristol-Myers Squibb Company. The acquisition expands STERIS's
consumable product lines for surface cleaning and decontamination. The
acquisition was accounted for using the purchase method of accounting.
During the fiscal second quarter 1996 STERIS acquired Surgicot, Inc., a
privately held manufacturer and supplier of biological and chemical sterile
process monitors, sterilization wraps and pouches, and other consumable
infection prevention products for the healthcare and scientific markets. The
acquisition was accounted for using the purchase method of accounting.
E. - NON-RECURRING ITEMS
Non-recurring charges of $81.3 million net of tax ($90.8 million pre-tax), or
$2.44 per share, were recorded in the 1997 fiscal first quarter for costs
connected to the Amsco Merger. The charges include transaction costs of $15.0
million and restructuring charges of $66.3 million net of tax ($75.8 million
pre-tax). The transaction costs are for legal, accounting, investment banking,
and related expenses. The restructuring charges are for (i) elimination of
redundant facilities and other assets ($27.0 million), (ii) satisfaction of
Amsco executive employment agreements and other employee severance ($19.3
million), (iii) write-off of goodwill related to Amsco's Finn-Aqua business
($29.5 million), and (iv) other merger-related items. Cash payments for the
first nine months of fiscal 1997 related principally to transaction costs and
executive employment agreements.
The effective income tax rate for the nine months ended December 31, 1996
differed from statutory rates principally because certain non-recurring items
that increased the net loss are non-deductible for tax purposes. Non-deductible
items include the write-off of goodwill related to
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Amsco's Finn-Aqua business and provisions for certain executive severance costs.
Also, additional tax valuation allowances were provided to reflect the effects
of merger activities.
F. - INVENTORIES
Inventories were as follows (in thousands):
DECEMBER 31, MARCH 31,
1996 1996
---------- ----------
Raw material $31,394 $24,746
Work in process 13,469 19,139
Finished goods 43,912 29,833
------- -------
$88,775 $73,718
======= =======
G. - FINANCING
Concurrent with the consummation of the Amsco Merger, STERIS entered into a two
and one-half year $125 million unsecured revolving Credit Facility. The Credit
Facility could provide credit to facilitate the integration of the operations of
STERIS or could be used for general corporate purposes. Loans under the Credit
Facility will bear interest, at STERIS's option, at either KeyBank National
Association's prime rate or LIBOR rates plus 0.25 percent to 0.35 percent. The
Credit Facility contains customary covenants which include maintenance of
certain financial ratios. Outstanding borrowing under the Credit Facility was
$40 million at December 31, 1996.
In July 1996, STERIS redeemed $99.4 million of Amsco's $100 million 4.5%/6.5%
Convertible Subordinated Notes which were convertible into STERIS common shares.
This transaction had no material effect on earnings per common and common
equivalent share.
H. - CONTINGENCIES
Product Liability Exposure. As of December 31, 1996, 11 product liability
lawsuits related to Amsco ethylene oxide ("EtO") sterilizers were pending. A
significant number of similar suits related to EtO have been either dismissed or
settled without a finding of liability. These settlements and the monetary
damages in one case where a verdict was returned against Amsco have been nominal
or have been covered by insurance, subject to applicable deductibles.
As of December 31, 1996, 13 product liability lawsuits unrelated to EtO, such as
lawsuits related to Amsco non-EtO sterilizers, surgical tables and operating
room lights, were pending. Plaintiffs request all forms of damage, including
compensatory, special, exemplary and punitive damages. A significant number of
similar suits have been either dismissed or settled without a finding of
liability. Most of these settlements have been nominal, and the monetary
damages in those cases where a verdict was returned against Amsco have been
covered by insurance, subject to applicable deductibles.
STERIS presently anticipates having sufficient primary and excess insurance
coverage for each policy year to cover existing asserted claims for compensatory
damages, subject to applicable and customary deductibles. STERIS continues to
defend itself vigorously in all of the above
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actions. Although there can be no assurance that the outcome of any of these
pending lawsuits will be favorable to STERIS, STERIS believes that pending
litigation will not have a material adverse effect on STERIS's business or
financial condition.
FDA Regulation. As disclosed in the Amsco financial statements that are included
in the STERIS 8-K/A filed with the SEC on June 25, 1996, Amsco was notified by
the US Food and Drug Administration ("FDA") on January 20, 1995 that the FDA
applied its Application Integrity Policy ("AIP") to Amsco. Consequently, all
Amsco pre-market submissions would not be reviewed by FDA until Amsco completed
certain corrective actions to the satisfaction of FDA, including audits of
certain previously cleared 510(k) notifications. FDA's AIP has never been
applied to STERIS nor has the review of any STERIS pre-market submission been
delayed because of the AIP.
On December 24, 1996, FDA terminated the application of AIP to Amsco, and
agreed to resume scientific review of Amsco pre-market submissions. This
determination was based on the agency's review of corrective action plans,
FDA's inspection of the Amsco subsidiary in Erie, Pennsylvania, and the
withdrawal of certain 510(k)s. Additionally, based on audits of past Amsco
data, STERIS agreed to either supplement certain existing pre-market
notifications or file new pre-market notifications.
STERIS believes that it is currently in conformity in all material respects
with all FDA-related regulatory requirements. It is, however, possible that the
FDA would disagree with this belief and seek to apply one or more of the
remedies available to it under applicable law which could have a material
adverse effect on STERIS. STERIS is committed to maintaining compliance with
all applicable FDA regulations.
Environmental Matters. Amsco has been identified by the EPA as one of
approximately 50 potential responsible parties ("PRPs") within the meaning of
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
(the "Superfund Act") with respect to a Superfund Act site near Erie,
Pennsylvania (the "Site"). In 1992, the EPA issued a unilateral administrative
order (the "Administrative Order") to 37 PRPs, including Amsco, to complete the
remediation of the Site. Amsco, together with 19 other named PRPs, have formed a
group to coordinate efforts to respond to the EPA's unilateral Administrative
Order. It is estimated that the work needed to complete the remediation of the
Site will cost between $10 million and $13 million.
Although STERIS believes that the resolution of Amsco's liability with respect
to the Site will not have a material adverse effect on STERIS, there can be no
assurance that the ultimate liability will not exceed current expectations.
Other Litigation. There are other 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.
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I. - SUBSEQUENT EVENT
On January 30, 1997 the Company announced that its Board of Directors had
authorized the periodic repurchase of up to three million STERIS common shares
in the open market. To date, the Company has repurchased 200,000 STERIS common
shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF DISCUSSION
- -------------------
The Amsco Merger has been accounted by the pooling-of-interests method.
Accordingly, the accompanying consolidated condensed financial statements give
retroactive effect to the transaction and include the combined operations of
STERIS and Amsco for all periods presented. In addition, the historical
financial information of Amsco (previously reported on fiscal years ending
December 31) has been recast to conform to STERIS's annual reporting period
ending March 31.
RESULTS OF OPERATIONS
- ---------------------
The results of the third quarter and first nine months of fiscal 1997 are
compared to the combination of STERIS and Amsco independent results in the
prior year. The prior year results include STERIS third quarter and first nine
months of fiscal 1996 and combine Amsco's fourth quarter and last nine months
for the period ended December 31, 1995. The prior year totals reflect pooling-
of-interest accounting associated with STERIS's acquisition of Amsco in
May 1996.
Net revenue decreased by 7.7% to $151.0 million in the third quarter fiscal 1997
from the pooled $163.6 million in the third quarter fiscal 1996. Infection
Prevention revenues increased by 0.3% in the third quarter fiscal 1997 to $80.4
million from $80.2 million for the comparable fiscal 1996 period. Surgical
Support revenues decreased by 18.8% to $30.1 million in the third fiscal 1997
quarter from $37.1 million for the comparable 1996 period. Scientific,
Management Services and Other revenue decreased by 12.6% to $40.5 million in
the third quarter fiscal 1997 from $46.4 million in the third quarter fiscal
1996. Some of the factors contributing to the decrease in net revenue for the
third quarter fiscal 1997 compared to the same period in fiscal 1996 were the
following: (1) the learning curve demands associated with the October 1996
implementation of STERIS's newly consolidated domestic sales organization; (2)
a new sales compensation program that eliminated specific ties to calendar year
results; (3) the discontinuation of the Amsco December fiscal year; and (4) the
mid week holidays in late December 1996.
Net revenues increased by 0.1% to $417.4 million in the first nine months of
fiscal 1997 from $416.8 million in the same period fiscal 1996. Infection
Prevention revenues increased by 3.4% to $222.9 million in the first nine
months of fiscal 1997 from $215.5 million in the same period in fiscal 1996.
Surgical Support sales decreased by 1.2% to $90.8 million in the nine months of
fiscal 1997 from $91.9 million in the same period fiscal 1996. Scientific,
Management Services
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and Other revenue decreased by 5.1% to $103.7 million in the first nine months
of fiscal 1997 from $109.3 million in the same period in fiscal 1996. The
decrease in sales for the Scientific, Management Services and Other revenue
category was principally due to lower equipment sales which declined by 10.0%
for the nine month period.
Revenues for the fiscal third quarter increased 9.0% from this year's second
fiscal quarter which were 8.3% ahead of the first fiscal quarter. Since
completing the acquisition of Amsco, the Company has reported increasing
quarterly revenues of $127.9 million, $138.5 million, and $151.0 million in the
first, second and third fiscal quarters, respectively.
The costs of products and services sold decreased in the third quarter fiscal
1997 by 10.0% to $91.2 million from $101.3 million in the third quarter fiscal
1996. The cost of products and services sold decreased for the first nine months
of fiscal 1997 by 1.1% to $257.0 million from $259.9 million for the first nine
months of fiscal 1996. The cost of products and services sold as a percentage of
net revenue was 60.4% for the third quarter for fiscal 1997 compared to 61.9%
for the same period in fiscal 1996. The decrease in the cost of products and
services sold as a percentage of net revenue for the third quarter fiscal 1997
and the nine months ended December 31, 1996 resulted principally from cost
savings from the effects of restructuring, the implementation of cost control
measures and changes in the mix of products sold. Accessories, consumables and
supplies, generally STERIS's highest margin products, increased as a percentage
of net revenue from 13.4% for the third quarter fiscal 1996 to 20.9% for
the comparable fiscal 1997 period. Accessories, consumables and supplies as a
percentage of net revenue increased from 13.6% for the nine months ended
December 1995 to 19.1% for the comparable fiscal 1997 period.
Selling, general, and administrative expenses increased in the third quarter
fiscal 1997 by 10.6% to $32.5 million from $29.4 million in the third quarter
fiscal 1996. The expenses as a percentage of net revenue increased to 21.5% in
the third quarter fiscal 1997 from 18.0% for the same period in fiscal 1996. The
increase was primarily attributable to the expansion of the sales, service, and
Customer support operations of the Company and the inclusion of acquired
companies' selling, general and administrative expenses. Selling, general, and
administrative expenses decreased in the first nine months of fiscal 1997 by
1.9% to $86.2 million from $87.9 million in the same period fiscal 1996. Lower
costs were the result of the Amsco Merger. The cost reductions included reduced
depreciation and amortization charges on assets that were written-down and
lower personnel costs resulting from employee severance.
Research and development expenses increased in the third quarter fiscal 1997 by
16.6% to $5.4 million from $4.7 million in the third quarter fiscal 1996.
Research and development expenses increased in the first nine months of fiscal
1997 by 22.7% to $15.6 million from $12.7 million for the same period fiscal
1996. Research and development expenses as a percentage of net revenue were 3.6%
for the third quarter fiscal 1997 compared to 2.8% for the third quarter fiscal
1996 and 3.7% for the first nine months of fiscal 1997 compared to 3.1% for the
same period in fiscal 1996. The increases were due to additional product and
application development expenditures.
Non-recurring charges of $81.3 million net of tax ($90.8 million pre-tax), or
$2.44 per share, were recorded in the 1997 fiscal first quarter for costs
connected to the Amsco
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Merger. The charges include transaction costs of $15.0 million and
restructuring charges of $66.3 million net of tax ($75.8 million pre-tax). The
transaction costs are for legal, accounting, investment banking, and related
expenses. The restructuring charges are for (i) elimination of redundant
facilities and other assets ($27.0 million), (ii) satisfaction of Amsco
executive employment agreements and other employee severance ($19.3 million),
(iii) write-off of goodwill related to Amsco's Finn-Aqua business ($29.5
million), and (iv) other merger-related items. Cash payments for the first nine
months of fiscal 1997 related principally to transaction costs and executive
employment agreements.
Interest expense decreased in the third quarter fiscal 1997 by 86.0% to $0.2
million from $1.4 million in the third quarter fiscal 1996. Interest expense
decreased in the first nine months of fiscal 1997 by 52.2% to $2.1 million from
$4.5 million for the same period fiscal 1996. The decrease was due primarily to
the July 1996 redemption of approximately $100 million of Amsco 4.5%/6.5%
Convertible Subordinated Notes.
Interest income and other decreased in the third quarter fiscal 1997 by 57.3% to
$0.7 million from $1.7 million in the third quarter fiscal 1996. Interest income
and other decreased in the first nine months of fiscal 1997 by 28.0% to $3.5
million from $4.9 million for the same period fiscal 1996. The decrease in
interest income was due primarily to lower cash, cash equivalents, and
marketable security balances, with the lower balances resulting from the cash
redemption of the aforementioned Amsco Convertible Subordinated Notes.
Third quarter fiscal 1997 income decreased by 22.9% to $13.5 million ($.38 per
share) from $17.6 million ($.50 per share) in the third quarter fiscal 1996.
Excluding the effect of non-recurring items, income for the first nine months of
fiscal 1997 increased by 2.5% to $34.8 million ($.98 per share) from $33.9
million ($.98 per share) in the same period fiscal 1996. Such income as a
percentage of revenue increase from 7.6% in the first fiscal 1997 quarter to
8.3% to 9.0% for the second and third quarters of fiscal 1997, respectively.
Approximately one million additional shares were used in the earnings per share
calculation in the current fiscal year compared to the prior fiscal year.
The effective income tax rate for the nine months ended December 31, 1996
differed from statutory rates principally because certain non-recurring items
that increased the net loss are non-deductible for tax purposes. Non-deductible
items include the write-off of goodwill related to Amsco's Finn-Aqua business
and provisions for certain executive severance costs. Also, additional tax
valuation allowances were provided to reflect the effects of merger activities.
As a result of the foregoing factors, the net loss for the first nine months
ended fiscal 1997 was $46.5 million, compared to net income of $33.9 million in
the same period fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had $40.9 million in cash, cash equivalents and marketable
securities as of December 31, 1996, compared to $150.0 million of the same at
March 31, 1996. The decrease was primarily a result of the pay down of debt and
acquisitions of businesses.
Accounts receivable increased by 14.4% to $147.9 million as of December 31,
1996, compared to $129.3 million at March 31, 1996. The increase was
attributable to the acquisition of Amsco and the integration of certain Amsco
products into STERIS invoicing systems and the resulting delays among
Customers regarding remittance of funds, as well as an increase in receivables
from international Customers.
Page 13
14
Inventory increased by 20.4% to $88.8 million as of December 31, 1996, compared
to $73.7 million at March 31, 1996. The increase was primarily attributable to
inventories of businesses acquired in the second and third fiscal quarters that
were accounted for under the purchase method of accounting.
Property, plant, and equipment increased by 8.2% to $168.2 million as of
December 31, 1996, compared to $155.5 million at March 31, 1996. The increase
was due primarily to the increases resulting from acquired businesses that were
accounted using the purchase method of accounting, the investment in
information systems, plant and equipment for an additional packaging plant for
the production of sterilant and decontaminant and facility renovations,
partially offset by the write-down of assets resulting from the Amsco Merger.
Intangibles increased by 26.3% to $197.5 million as of December 31, 1996,
compared to $156.4 million at March 31, 1996. The change resulted primarily
because of an increase related to goodwill and intangibles of acquired
companies, offset by the write-down of goodwill related to the Finn-Aqua
business, resulting from the Amsco Merger.
Deferred income taxes increased by 13.7% to $32.7 million as of December 31,
1996, compared to $28.8 million at March 31, 1996. The increase was due
primarily to the recognition of costs resulting from the Amsco acquisition and
Merger.
Current liabilities increased by 21.3% to $151.7 million as of December 31,
1996, compared to $125.1 million at March 31, 1996. The increase in current
liabilities was primarily a result of the Amsco Merger.
Other liabilities were $69.7 million as of December 31, 1996, compared to $64.3
million of the same at March 31, 1996.
Concurrent with the consummation of the Amsco Merger, STERIS entered into a two
and one-half year $125 million unsecured revolving Credit Facility. The Credit
Facility could provide credit to facilitate the integration of the operations of
STERIS and the acquired businesses or could be used for general corporate
purposes. Loans under the Credit Facility will bear interest, at STERIS's
option, at either KeyBank National Association's prime rate or LIBOR rates plus
0.25 percent to 0.35 percent. The Credit Facility contains customary covenants
which include maintenance of certain financial ratios. Outstanding borrowing
under the Credit Facility was $40 million at December 31, 1996.
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 H to the consolidated condensed
financial statements.
Page 14
15
SEASONALITY
- -----------
Historical data indicates that Amsco's results were subject to recurring
seasonal fluctuations particularly in the December ending quarter. The
historically higher sales and profitability in the December ending quarter were
in part due to the Amsco sales compensation programs, Customer promotions and
Customer buying patterns, and the close of the Amsco fiscal year. The change
to a March 31 ending fiscal year and the related combined Company sales
compensation programs and Customer promotions may alter these historical
patterns. In addition, Amsco's sales and profitability within each quarter were
disproportionately weighted towards the last month of the quarter, and
generally towards the last days of such month.
Page 15
16
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
- ------ -----------------
Reference is made to Part I, Item 2., Note H of this Report on Form 10-Q, which
is incorporated herein by reference.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
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/ Michael A. Keresman, III
-------------------------------------
Michael A. Keresman, III
Chief Financial Officer and
Senior Vice President
(Principal Financial Officer)
February 14, 1997
Page 16
5
9-MOS
MAR-31-1997
DEC-31-1996
34,822
6,120
147,877
0
88,775
294,060
168,163
(73,931)
554,035
151,717
0
239,316
0
0
50,214
554,035
417,363
417,363
256,978
256,978
0
0
2,140
(30,865)
15,657
(46,522)
0
0
0
(46,522)
(1.39)
(1.39)
