UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2011 |
or
o | 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 | 34-1482024 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
5960 Heisley Road, Mentor, Ohio | 44060-1834 | |
(Address of principal executive offices) | (Zip code) | |
(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 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 o
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 pursuant to Rule 405 of Regulation S-T (§232.405 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 x No o
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 x | Accelerated Filer o | |
Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of common shares outstanding as of October 31, 2011: 57,966,176
1
STERIS Corporation and Subsidiaries
Form 10-Q
Index
Page | ||
2
PART 1—FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2011 | March 31, 2011 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 134,111 | $ | 193,016 | ||||
Accounts receivable (net of allowances of $9,510 and $9,085, respectively) | 236,765 | 272,248 | ||||||
Inventories, net | 185,223 | 167,344 | ||||||
Deferred income taxes, net | 41,763 | 56,715 | ||||||
Prepaid expenses and other current assets | 28,164 | 16,483 | ||||||
Total current assets | 626,026 | 705,806 | ||||||
Property, plant, and equipment, net | 378,112 | 370,402 | ||||||
Goodwill and intangibles, net | 335,489 | 318,810 | ||||||
Other assets | 32,633 | 31,667 | ||||||
Total assets | $ | 1,372,260 | $ | 1,426,685 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 71,451 | $ | 90,981 | ||||
Accrued payroll and other related liabilities | 30,518 | 52,251 | ||||||
Accrued SYSTEM 1 Rebate Program and class action settlement | 111,762 | 127,683 | ||||||
Accrued expenses and other | 88,083 | 73,831 | ||||||
Total current liabilities | 301,814 | 344,746 | ||||||
Long-term indebtedness | 210,000 | 210,000 | ||||||
Deferred income taxes, net | 28,031 | 26,662 | ||||||
Other liabilities | 55,412 | 56,612 | ||||||
Total liabilities | $ | 595,257 | $ | 638,020 | ||||
Commitments and contingencies (see note 10) | ||||||||
Serial preferred shares, without par value; 3,000 shares authorized; no shares issued or outstanding | — | — | ||||||
Common shares, without par value; 300,000 shares authorized; 70,040 shares issued; 57,966 and 59,122 shares outstanding, respectively | 242,849 | 241,343 | ||||||
Common shares held in treasury, 12,074 and 10,918 shares, respectively | (343,622 | ) | (305,808 | ) | ||||
Retained earnings | 856,213 | 816,846 | ||||||
Accumulated other comprehensive income | 20,441 | 35,188 | ||||||
Total shareholders’ equity | 775,881 | 787,569 | ||||||
Noncontrolling interest | 1,122 | 1,096 | ||||||
Total equity | 777,003 | 788,665 | ||||||
Total liabilities and equity | $ | 1,372,260 | $ | 1,426,685 | ||||
See notes to consolidated financial statements.
3
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Product | $ | 223,502 | $ | 197,092 | $ | 425,515 | $ | 274,364 | ||||||||
Service | 119,205 | 115,333 | 235,831 | 227,041 | ||||||||||||
Total revenues | 342,707 | 312,425 | 661,346 | 501,405 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Product | 138,805 | 110,736 | 256,238 | 217,312 | ||||||||||||
Service | 70,593 | 66,634 | 138,874 | 130,972 | ||||||||||||
Total cost of revenues | 209,398 | 177,370 | 395,112 | 348,284 | ||||||||||||
Gross profit | 133,309 | 135,055 | 266,234 | 153,121 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general, and administrative | 76,652 | 71,999 | 153,661 | 144,116 | ||||||||||||
Research and development | 8,915 | 8,043 | 17,672 | 16,652 | ||||||||||||
Restructuring expenses | 99 | 105 | 357 | 446 | ||||||||||||
Total operating expenses | 85,666 | 80,147 | 171,690 | 161,214 | ||||||||||||
Income (loss) from operations | 47,643 | 54,908 | 94,544 | (8,093 | ) | |||||||||||
Non-operating expenses, net: | ||||||||||||||||
Interest expense | 3,081 | 2,996 | 6,078 | 6,003 | ||||||||||||
Interest income and miscellaneous expense | (682 | ) | (188 | ) | (575 | ) | (350 | ) | ||||||||
Total non-operating expenses, net | 2,399 | 2,808 | 5,503 | 5,653 | ||||||||||||
Income (loss) before income tax expense (benefit) | 45,244 | 52,100 | 89,041 | (13,746 | ) | |||||||||||
Income tax expense (benefit) | 15,680 | 16,389 | 30,746 | (4,247 | ) | |||||||||||
Net income (loss) | $ | 29,564 | $ | 35,711 | $ | 58,295 | $ | (9,499 | ) | |||||||
Net income (loss) per common share | ||||||||||||||||
Basic | $ | 0.50 | $ | 0.60 | $ | 0.99 | $ | (0.16 | ) | |||||||
Diluted | $ | 0.50 | $ | 0.59 | $ | 0.98 | $ | (0.16 | ) | |||||||
Cash dividends declared per common share outstanding | $ | 0.17 | $ | 0.15 | $ | 0.32 | $ | 0.26 | ||||||||
See notes to consolidated financial statements.
4
STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 58,295 | $ | (9,499 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, depletion, and amortization | 30,187 | 26,310 | ||||||
Deferred income taxes | 17,283 | (44,863 | ) | |||||
Share-based compensation expense | 3,811 | 6,385 | ||||||
Loss on the disposal of property, plant, equipment, and intangibles, net | 313 | 1,396 | ||||||
Other items | (1,166 | ) | 3,143 | |||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable, net | 36,545 | 13,551 | ||||||
Inventories, net | (15,955 | ) | (22,558 | ) | ||||
Other current assets | (11,525 | ) | 2,807 | |||||
Accounts payable | (20,363 | ) | (636 | ) | ||||
Accrued SYSTEM 1 Rebate Program and class action settlement | (15,921 | ) | 109,956 | |||||
Accruals and other, net | (20,967 | ) | (29,635 | ) | ||||
Net cash provided by operating activities | 60,537 | 56,357 | ||||||
Investing activities: | ||||||||
Purchases of property, plant, equipment, and intangibles, net | (34,445 | ) | (27,242 | ) | ||||
Proceeds from the sale of property, plant, equipment, and intangibles | — | 192 | ||||||
Acquisition of business, net of cash acquired | (22,269 | ) | — | |||||
Net cash used in investing activities | (56,714 | ) | (27,050 | ) | ||||
Financing activities: | ||||||||
Repurchases of common shares | (43,679 | ) | (16,627 | ) | ||||
Cash dividends paid to common shareholders | (18,928 | ) | (15,459 | ) | ||||
Stock option and other equity transactions, net | 3,172 | 3,290 | ||||||
Tax benefit from stock options exercised | 745 | 786 | ||||||
Net cash used in financing activities | (58,690 | ) | (28,010 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (4,038 | ) | 1,135 | |||||
(Decrease) increase in cash and cash equivalents | (58,905 | ) | 2,432 | |||||
Cash and cash equivalents at beginning of period | 193,016 | 214,971 | ||||||
Cash and cash equivalents at end of period | $ | 134,111 | $ | 217,403 | ||||
See notes to consolidated financial statements.
5
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Six Months Ended September 30, 2011 and 2010
(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, develops, manufactures and markets infection prevention, contamination control, microbial reduction, and surgical and critical care support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental Customers throughout the world. As used in this Quarterly 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 business segments in note 11 to our consolidated financial statements titled, “Business Segment Information.” Our fiscal year ends on March 31. References in this Quarterly 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:
Interim Financial Statements
We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (consisting of normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.
These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the Securities and Exchange Commission (“SEC”) on May 27, 2011. The Consolidated Balance Sheet at March 31, 2011 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Principles of Consolidation
We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts.
Use of Estimates
We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three and six month periods ended September 30, 2011 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2012.
Recently Adopted Accounting Pronouncements
In September 2011, the FASB issued an accounting standard update titled “Testing Goodwill for Impairment,” which allows an entity the option of performing a qualitative assessment to determine whether it is necessary to perform the current two-step annual impairment test. The guidance permits an entity to assess qualitative factors to determine if it is more-likely-than-not that the fair value of the reporting unit exceeds the carrying amount to determine if the two-step impairment test is required. The guidance does not change how goodwill is calculated or the requirement to test goodwill annually for
6
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
impairment. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this standard will not have an impact on our consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued new guidance titled "Comprehensive Income," which altered the presentation of comprehensive income. More specifically, the updated guidance permits an entity to present components of net income and other comprehensive income in either, one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The guidance now eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. These changes to the presentation of comprehensive income do not change the components that are recognized in net income or other comprehensive income under current accounting guidance. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this standard will not have an impact on our consolidated financial position, results of operations or cash flows.
In April 2011, the FASB issued new guidance titled "Fair Value Measurement," intended to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency regarding valuation inputs and investment categorization. This new guidance is effective for annual and interim periods beginning after December 15, 2011. The adoption of this standard will not have an impact on our consolidated financial position, results of operations or cash flows.
In December 2010, the FASB issued an accounting standard update titled “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts," amending Accounting Standards Codification (ASC) Topic 350, “Intangibles - Goodwill and Other.” This guidance amends the ASC requiring entities that have a reporting unit with zero or negative carrying value to assess whether qualitative factors indicate that it is more likely than not that an impairment of goodwill exists. If the entity concludes that it is more likely than not that an impairment exists, the entity must then measure the goodwill impairment. The new guidance, amending the ASC is effective for fiscal 2012 and will be applied during our annual goodwill impairment testing in the third quarter of fiscal 2012.
In October 2009, the FASB issued an accounting standard update titled “Multiple-Deliverable Revenue Arrangements,” amending Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition.” This guidance amends the ASC requiring entities to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, requiring arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The guidance also established a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. The guidance was adopted and applied prospectively for multiple element revenue arrangements that are new or materially modified beginning on or after April 1, 2011. The adoption of this guidance did not impact our financial position or results of operations.
Significant Accounting Policies
A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2011.
The Accrued SYSTEM 1 Rebate Program (the “Rebate Program”), initially recognized during the first quarter of fiscal 2011, is based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value of rebates to be provided upon their return. Rebates of $102,313 were recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated cost of $7,691 to facilitate the disposal of the returned SYSTEM 1 processors has been recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program include: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that will elect to participate in the Rebate Program, the proportion of Customers that will choose each rebate option, and the estimated per unit costs of disposal.
7
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we have assumed that 100% of these Customers will elect to participate in the Rebate Program. In order to estimate the portion of Customers that will choose each available rebate option, we first assessed trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments of SYSTEM 1 consumables during the period between the notice by FDA to healthcare facility administrators and infection control practitioners and the announcement of the Rebate Program, which indicated that a portion of our Customers had already transitioned away from the SYSTEM 1 technology during that period. The remaining 81% provides the best available indication of the portion of Customers projected to elect the rebate for the SYSTEM 1E processor. Order and quote data for fiscal 2011 provides indications of the proportion of Customers that are expected to choose each of the other rebate options. The per unit costs associated with disposal were estimated based on the service hours involved and quotes from our vendors using existing freight and disposal contracts.
2. Restructuring
The following summarizes our restructuring plans announced in prior fiscal years. We recognize restructuring expenses as incurred. In addition, we assess the property, plant and equipment associated with the related facilities for impairment. Additional information regarding our restructuring plans is included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011.
Fiscal 2010 Restructuring Plan
During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions.
Since the inception of the Fiscal 2010 Restructuring Plan, we have incurred pre-tax expenses totaling $8,375 related to these actions, of which $7,349 was recorded as restructuring expenses and $1,026 was recorded in cost of revenues. We also expect to incur an additional $2,100 by the end of fiscal 2012. These actions are intended to enhance profitability and improve efficiencies.
The following tables summarize our total pre-tax restructuring expenses for the second quarter and first half of fiscal 2012 and fiscal 2011:
Three Months Ended September 30, 2011 | Fiscal 2010 Restructuring Plan (1) | ||
Severance, payroll, and other related costs | $ | (26 | ) |
Asset impairment and accelerated depreciation | 92 | ||
Total restructuring charges | $ | 66 | |
(1) | Includes $(33) in charges recorded in cost of revenues on Consolidated Statements of Income. |
Three Months Ended September 30, 2010 | Fiscal 2010 Restructuring Plan (1) | ||
Severance, payroll, and other related costs | $ | 23 | |
Other | 77 | ||
Total restructuring charges | $ | 100 | |
(1) | Includes $(5) in charges recorded in cost of revenues on Consolidated Statements of Income. |
8
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
Six Months Ended September 30, 2011 | Fiscal 2010 Restructuring Plan (1) | Fiscal 2008 Restructuring Plan | Total | ||||||
Severance, payroll, and other related costs | $ | (80 | ) | $ | — | $ | (80 | ) | |
Product rationalization | 335 | — | 335 | ||||||
Asset impairment and accelerated depreciation | 183 | — | 183 | ||||||
Lease termination obligation and other | — | (152 | ) | (152 | ) | ||||
Total restructuring charges | $ | 438 | $ | (152 | ) | $ | 286 | ||
(1) | Includes $(71) in charges recorded in cost of revenues on Consolidated Statements of Income. |
Six Months Ended September 30, 2010 | Fiscal 2010 Restructuring Plan | ||
Severance, payroll, and other related costs | $ | 6 | |
Asset impairment and accelerated depreciation | 356 | ||
Other | 84 | ||
Total restructuring charges | $ | 446 | |
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:
Fiscal 2010 Restructuring Plan | ||||||||||||||||
Fiscal 2012 | ||||||||||||||||
March 31, 2011 | Provision | Payments/ Impairments (1) | September 30, 2011 | |||||||||||||
Severance and termination benefits | $ | 1,993 | $ | (80 | ) | $ | (1,114 | ) | $ | 799 | ||||||
Product rationalization | — | 335 | (335 | ) | — | |||||||||||
Asset impairments | — | 183 | (183 | ) | — | |||||||||||
Lease termination obligations | 1,790 | — | 152 | 1,942 | ||||||||||||
Other | 193 | — | (86 | ) | 107 | |||||||||||
Total | $ | 3,976 | $ | 438 | $ | (1,566 | ) | $ | 2,848 | |||||||
3. Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as currently reported under U.S. GAAP and other comprehensive income. Other comprehensive income considers the effects of additional economic events that are not required to be recorded in determining net income, but rather are reported as a separate component of shareholders’ equity. The following table illustrates the components of our comprehensive income (loss):
9
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) | $ | 29,564 | $ | 35,711 | $ | 58,295 | $ | (9,499 | ) | |||||||
Change in cumulative foreign currency translation adjustment | (23,266 | ) | 21,101 | (13,953 | ) | 8,142 | ||||||||||
Amortization of pension and postretirement benefit plans costs, net of taxes | (270 | ) | (275 | ) | (540 | ) | (551 | ) | ||||||||
Unrealized (loss) gain on available for sale securities | (261 | ) | 129 | (254 | ) | 9 | ||||||||||
Total comprehensive income (loss) | $ | 5,767 | $ | 56,666 | $ | 43,548 | $ | (1,899 | ) | |||||||
4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
September 30, 2011 | March 31, 2011 | |||||||
Land and land improvements (1) | $ | 32,650 | $ | 30,194 | ||||
Buildings and leasehold improvements | 218,267 | 201,883 | ||||||
Machinery and equipment | 299,516 | 286,103 | ||||||
Information systems | 104,721 | 101,934 | ||||||
Radioisotope | 201,416 | 194,882 | ||||||
Construction in progress (1) | 28,391 | 40,665 | ||||||
Total property, plant, and equipment | 884,961 | 855,661 | ||||||
Less: accumulated depreciation and depletion | (506,849 | ) | (485,259 | ) | ||||
Property, plant, and equipment, net | $ | 378,112 | $ | 370,402 | ||||
(1) | Land is not depreciated. Construction in progress is not depreciated until placed in service. |
5. Inventories, Net
Inventories, net are stated at the lower of cost or market. We use the last-in, first-out (“LIFO”) and first-in, first-out cost methods. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
September 30, 2011 | March 31, 2011 | |||||||
Raw materials | $ | 60,762 | $ | 58,375 | ||||
Work in process | 26,143 | 16,928 | ||||||
Finished goods | 98,318 | 92,041 | ||||||
Inventories, net | $ | 185,223 | $ | 167,344 | ||||
6. Debt
Indebtedness was as follows:
10
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
September 30, 2011 | March 31, 2011 | |||||||
Private Placement | $ | 210,000 | $ | 210,000 | ||||
Credit facility | — | — | ||||||
Total long term debt | $ | 210,000 | $ | 210,000 | ||||
Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011.
7. Additional Consolidated Balance Sheets Information
Additional information related to our Consolidated Balance Sheets is as follows:
September 30, 2011 | March 31, 2011 | |||||||
Accrued payroll and other related liabilities: | ||||||||
Compensation and related items | $ | 11,855 | $ | 16,160 | ||||
Accrued vacation/paid time off | 7,089 | 6,379 | ||||||
Accrued bonuses | 800 | 13,925 | ||||||
Accrued employee commissions | 7,018 | 11,985 | ||||||
Other postretirement benefit obligations-current portion | 3,274 | 3,274 | ||||||
Other employee benefit plans' obligations-current portion | 482 | 528 | ||||||
Total accrued payroll and other related liabilities | $ | 30,518 | $ | 52,251 | ||||
Accrued expenses and other: | ||||||||
Deferred revenues | $ | 44,227 | $ | 34,396 | ||||
Self-insured risk reserves-current portion | 2,788 | 3,610 | ||||||
Accrued dealer commissions | 8,145 | 7,354 | ||||||
Accrued warranty | 9,066 | 7,509 | ||||||
Other | 23,857 | 20,962 | ||||||
Total accrued expenses and other | $ | 88,083 | $ | 73,831 | ||||
Other liabilities: | ||||||||
Self-insured risk reserves-long-term portion | $ | 10,233 | $ | 10,233 | ||||
Other postretirement benefit obligations-long-term portion | 18,713 | 20,526 | ||||||
Defined benefit pension plans obligations-long-term portion | 6,037 | 8,006 | ||||||
Other employee benefit plans obligations-long-term portion | 3,802 | 3,897 | ||||||
Accrued long-term income taxes | 6,906 | 9,140 | ||||||
Other | 9,721 | 4,810 | ||||||
Total other liabilities | $ | 55,412 | $ | 56,612 | ||||
8. Income Tax Expense (Benefit)
Income tax expense (benefit) includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for the three month periods ended September 30, 2011 and 2010 were 34.7% and 31.5%, respectively. The effective income tax rates for the six month periods ended September 30, 2011 and 2010 were 34.5% and 30.9%, respectively. Because the accrual established during the three and six month period ended September 30, 2010 in connection with the SYSTEM 1 Rebate Program was incurred in the United States at a higher effective tax rate, the projected mix of income before income taxes resulted in a lower operating tax rate.
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax
11
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
planning alternatives.
As of March 31, 2011, we had $9,594 in unrecognized tax benefits, of which $4,975 would favorably impact the effective tax rate if recognized. As of September 30, 2011, we had $6,017 in unrecognized tax benefits, of which $1,397 would favorably impact the effective tax rate if recognized. The decrease in unrecognized tax benefits for the six months ended September 30, 2011 is primarily due to a decrease in unrecognized tax benefits relating to prior years. We believe that it is reasonably possible that unrecognized tax benefits could decrease by up to $877 within 12 months of September 30, 2011, primarily as a result of settlements with tax authorities. As of September 30, 2011, we have recognized a liability for interest of $218 and penalties of $81.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state, and local, as well as foreign, jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2010 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2007. We do not expect the results of these examinations to have a material adverse affect on our consolidated financial statements.
9. Benefit Plans
We provide defined benefit pension plans for certain current and former manufacturing and plant administrative personnel throughout the world as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. In addition to providing pension benefits to certain employees, we sponsor an unfunded postretirement welfare benefits plan for certain United States former employees, including the same former employees who receive pension benefits under the United States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree medical coverage, including prescription drug coverage. Additional information regarding our defined benefit pension plans and other postretirement benefits plan is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011.
Components of the net periodic benefit cost for our defined benefit pension plans and other postretirement medical benefits plan were as follows:
Defined Benefit Pension Plans | Other Postretirement Benefits Plan | |||||||||||||||||||||||
U.S. Qualified | International | |||||||||||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Service cost | $ | 51 | $ | 47 | $ | 119 | $ | 130 | $ | — | $ | — | ||||||||||||
Interest cost | 609 | 654 | 69 | 84 | 248 | 292 | ||||||||||||||||||
Expected return on plan assets | (821 | ) | (758 | ) | (70 | ) | (91 | ) | — | — | ||||||||||||||
Recognized losses | 267 | 267 | — | — | 106 | 97 | ||||||||||||||||||
Amortization of prior service cost | — | — | — | — | (816 | ) | (816 | ) | ||||||||||||||||
Net periodic benefit cost (income) | $ | 106 | $ | 210 | $ | 118 | $ | 123 | $ | (462 | ) | $ | (427 | ) | ||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits Plan | |||||||||||||||||||||||
U.S. Qualified | International | |||||||||||||||||||||||
Six Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Service cost | $ | 103 | $ | 95 | $ | 238 | $ | 259 | $ | — | $ | — | ||||||||||||
Interest cost | 1,219 | 1,309 | 138 | 168 | 496 | 584 | ||||||||||||||||||
Expected return on plan assets | (1,642 | ) | (1,517 | ) | (140 | ) | (182 | ) | — | — | ||||||||||||||
Recognized losses | 533 | 534 | — | — | 212 | 194 | ||||||||||||||||||
Amortization of prior service cost | — | — | — | — | (1,631 | ) | (1,631 | ) | ||||||||||||||||
Net periodic benefit cost (income) | $ | 213 | $ | 421 | $ | 236 | $ | 245 | $ | (923 | ) | $ | (853 | ) | ||||||||||
We contribute amounts to the defined benefit pension plans at least sufficient to meet the minimum requirements as stated
12
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
in applicable employee benefit laws and local tax laws. We record liabilities for the difference between the fair value of the plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement benefits plans) on our accompanying Consolidated Balance Sheets.
10. 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 10 as the “device”). Among other matters, the warning letter included the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission resulted in violations of applicable law. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed response contending that the assertions in the warning letter were not correct. On November 4, 2008, we received a letter from the FDA (dated November 3, 2008) in which the FDA stated without elaboration that, after reviewing our response, it disagreed with our position and that a new premarket notification submission was required. After discussions with the FDA regarding the November 3rd letter, we received an additional letter on November 6, 2008 from the FDA. The November 6th letter stated that the intent of the November 3rd letter was to inform us of the FDA's preliminary disagreement with our response to the warning letter and, before finalizing a position, the FDA reiterated that it wanted to meet with us to discuss the Company's response, issues related to the warning letter and next steps to resolve any differences between the Company and the FDA. We thereafter met with the FDA and, on January 20, 2009, we announced that we had submitted to the FDA a new liquid chemical sterilant processing system for 510(k) clearance, and we communicated to Customers that we would continue supporting the existing SYSTEM 1 installed base in the U.S. for at least a two year period from that date.
On December 3, 2009, the FDA provided a notice (“notice”) to healthcare facility administrators and infection control practitioners describing FDA's “concerns about the SYSTEM 1 Processor, components and accessories, and FDA recommendations.” In the notice, among other things, FDA stated its belief that the SYSTEM 1 device had been significantly modified, that FDA had not cleared or approved the modified device, and that FDA had not determined whether the SYSTEM 1 was safe or effective for its labeled claims. The notice further stated that use of a device that does not properly sterilize or disinfect a medical or surgical device poses risks to patients and users, including the transmission of pathogens, exposure to hazardous chemicals and affect the quality and functionality of reprocessed instruments. The notice stated that FDA was aware of reports of malfunctions of the SYSTEM 1 that had the potential to cause or contribute to serious injuries to patients, such as infections, or injuries to healthcare staff, such as burns. Included in FDA's December 3, 2009 notice was a recommendation from FDA that if users had acceptable alternatives to meet sterilization and disinfection needs, they should transition to that alternative as soon as possible. After its December 3, 2009 notice, we engaged in extensive discussions with the FDA regarding a comprehensive resolution of this matter. On February 2, 2010, the FDA notified healthcare facility administrators and infection control practitioners that FDA's total recommended time period for transitioning from SYSTEM 1 in the U.S. was 18
13
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
months from that date.
On April 5, 2010, we received FDA clearance of the new liquid chemical sterilant processing system (SYSTEM 1E). Also in April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19, 2010, a Complaint and Consent Decree were filed in the U.S. District Court for the Northern District of Ohio, and on April 20, 2010, the Court approved the Consent Decree. In general, the Consent Decree addresses regulatory matters regarding SYSTEM 1, restricts further sales of SYSTEM 1 processors in the U.S., defines certain documentation and other requirements for continued service and support of SYSTEM 1 in the U.S., prohibits the sale of liquid chemical sterilization or disinfection products in the U.S. that do not have FDA clearance, describes various process and compliance matters, and defines penalties in the event of violation of the Consent Decree.
The Consent Decree also provides that we may continue to support our Customers' use of SYSTEM 1 in the U.S., including the sale of consumables, parts and accessories and service for a transition period, not to extend beyond August 2, 2011 (later extended by FDA to February 2, 2012), subject to compliance with requirements for documentation of the Customer's need for continued support and other conditions and limitations (the “Transition Plan”). Our Transition Plan includes the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer rebates to qualifying Customers. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who were users of SYSTEM 1 at the time of the Rebate Program was introduced and who return their units have the option of either a pro-rated cash rebate or a rebate toward the future purchase of new STERIS capital equipment (including SYSTEM 1E) or consumable products. In addition, we provide credits for the return of SYSTEM 1 consumables in unbroken packaging and within shelf life and for the unused portion of SYSTEM 1 service contracts. As a result, we recorded a pre-tax liability of $110,004 related to the SYSTEM 1 Rebate Program during the first quarter of fiscal 2011. Of the $110,004, $102,313 is attributable to the Customer Rebate portion of the Program and was recorded as a reduction of revenues, and $7,691 is attributable to the disposal liability of the SYSTEM 1 units to be returned and was recorded as an increase in cost of revenues. This also resulted in a $110,004 reduction in operating income.
Recording the obligations associated with the Rebate Program requires the use of estimates and assumptions. The use of estimates and assumptions involves judgments with respect to factors that may impact the ultimate outcome and may be beyond management's control. The amount recognized during the first quarter of fiscal 2011 is based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value of rebates to be provided upon their return. Rebates of $102,313 are recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated cost of $7,691 to facilitate the return and disposal of the processors has been recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program include: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that will elect to participate in the Rebate Program, the proportion of Customers that will choose each rebate option, and the estimated per unit costs of disposal.
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we have assumed that 100% of eligible Customers will elect to participate in the Rebate Program. In order to estimate the portion of Customers that will choose each available rebate option, we first assessed trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments of SYSTEM 1 consumables during the period between the notice by FDA to healthcare facility administrators and infection control practitioners and the announcement of the Rebate Program, which indicated that a portion of our Customers have already transitioned away from the SYSTEM 1 technology during that period. The remaining 81% provides the best available indication of the portion of Customers projected to elect the rebate for the SYSTEM 1E processor. Order and quote data for fiscal 2011 provides indications of the proportion of Customers that are expected to choose each of the other cash and rebate options. The per unit costs associated with disposal were estimated based on the service hours involved and quotes from our vendors using exiting freight and disposal contracts.
Our assumptions regarding the response of our Customers to the Rebate Program could be wrong and actual results could be different from these estimates. For example, if all Customers elected the maximum incentive rebate associated with the SYSTEM 1E processor rebate, the total estimated rebate liability of $102,313 would increase to approximately $111,000. Conversely, if all Customers elected the cash rebate option, the total estimated rebate liability would decrease to approximately $52,000.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory, administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in
14
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
respect of the Consent Decree, the Transition Plan, SYSTEM 1, or otherwise with respect to regulatory or compliance matters, as described in this note 10 or in various portions of Item 1A. of Part I contained in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011.
In December of 2010, we began shipping SYSTEM 1E units, after having received FDA clearance for the SYSTEM 1E chemical indicator, which is used in conjunction with the SYSTEM 1E. We also submitted a 510(k) to FDA for an optional spore-based indicator strip for use with SYSTEM 1E. Thereafter, as a result of discussions with FDA, we filed a de novo submission requesting classification of this strip in accordance with Section 513(f)(2) of the Federal Food Drug & Cosmetic Act. The de novo process is part of the initial classification for new devices. This spore-based monitoring strip is an optional accessory and is not required for the proper use of SYSTEM 1E. These actions do not affect the prior clearance of the SYSTEM 1E processor or the SYSTEM 1E chemical indicator. There is no assurance regarding the outcome or timing of the de novo submission.
On February 5, 2010, a complaint was filed by a Customer that claimed to have purchased two SYSTEM 1 devices from STERIS, Physicians of Winter Haven LLC d/b/a Day Surgery Center v. STERIS Corp., Case No. 1:1-cv-00264-CAB (N.D. Ohio). The complaint alleged statutory violations, breaches of various warranties, negligence, failure to warn, and unjust enrichment and Plaintiff sought class certification, damages, and other legal and equitable relief including, without limitation, attorneys' fees and an order requiring STERIS to replace, recall or adequately repair the product and/or to take appropriate regulatory action. On February 7, 2011 we entered into a settlement agreement in which we agreed, among other things, to provide various categories of economic relief for members of the settlement class and not object to plaintiff's counsel's application to the court for attorneys' fees and expenses up to a specified amount. Certification of a settlement class was approved and final approval of the settlement was given by the court in the first quarter of fiscal 2012. During the third quarter of fiscal 2011, we recorded in operating expenses a pre-tax charge of approximately $19,796 related to the settlement of these proceedings. The assumptions regarding the amount of this charge included, among others, the portion of class members participating in the settlement and their choice of the categories of economic relief available for such members. These assumptions may be incorrect and the costs of the settlement may be higher or lower than the charge recorded. Estimates of the actual settlement range from as low as $7,000 and as high as $22,000 depending on the options selected by the class members.
Other civil, criminal, regulatory or other proceedings involving our products or services also could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011: “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.”, the “Risk Factor” titled: “Our business may be adversely affected as a result of the U.S. Food and Drug Administration notices to healthcare administrators and device manufacturers, and related matters,” and the “Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.”
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state, and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates.
We describe income taxes further in Note 8 to our consolidated financial statements titled, “Income Tax Expense”, and in our Annual Report on Form 10-K for the year ended March 31, 2011 filed with the SEC on May 27, 2011.
11. 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 infrastructure capital equipment, accessory, consumable, information support and service solutions to healthcare providers, including acute care hospitals and surgery and gastrointestinal centers.
15
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
These solutions aid our Customers in improving the safety, quality, productivity and utility consumption of their surgical, sterile processing, gastrointestinal, and emergency environments.
In May 2011, we acquired the stock of a privately held company with operations located near Sao Paulo, Brazil for approximately $30,000, including cash of $22,269 and contingent consideration that is expected to be paid over the next three years. The acquired company 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) and will be integrated into our Healthcare segment. The total purchase price has been allocated to net assets and intangible assets based on the valuation of assets acquired and liabilities assumed. Intangibles, including Customer relationships, technology, trademarks and tradename, and non-compete arrangements total approximately $8,000. The residual purchase price, after allocations to net assets and intangibles, of approximately $11,000 has been allocated to goodwill. The allocation of the purchase price for this acquisition is not final and may be subsequently adjusted.
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.
Our Isomedix segment operates through a network of facilities located in North America. We sell a comprehensive array of contract sterilization services using gamma irradiation and ethylene oxide (“EO”) technologies. We offer 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 expense 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 three and six month periods ended September 30, 2011, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011.
Financial information for each of our segments is presented in the following tables:
16
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Healthcare (1) | $ | 243,176 | $ | 220,114 | $ | 466,400 | $ | 323,880 | ||||||||
Life Sciences | 58,915 | 53,513 | 111,783 | 100,127 | ||||||||||||
Isomedix | 39,999 | 37,964 | 82,002 | 75,640 | ||||||||||||
Total reportable segments | 342,090 | 311,591 | 660,185 | 499,647 | ||||||||||||
Corporate and other | 617 | 834 | 1,161 | 1,758 | ||||||||||||
Total revenues | $ | 342,707 | $ | 312,425 | $ | 661,346 | $ | 501,405 | ||||||||
Operating income (loss): | ||||||||||||||||
Healthcare (2) | $ | 27,994 | $ | 38,063 | $ | 54,262 | $ | (39,849 | ) | |||||||
Life Sciences | 11,064 | 9,435 | 20,523 | 15,730 | ||||||||||||
Isomedix | 11,215 | 10,024 | 24,174 | 20,608 | ||||||||||||
Total reportable segments | 50,273 | 57,522 | 98,959 | (3,511 | ) | |||||||||||
Corporate and other | (2,630 | ) | (2,614 | ) | (4,415 | ) | (4,582 | ) | ||||||||
Total operating income (loss) | $ | 47,643 | $ | 54,908 | $ | 94,544 | $ | (8,093 | ) | |||||||
(1) | Includes a reduction of $102,313 resulting from the SYSTEM 1 Rebate Program in the six months ended September 30, 2010. |
(2) | Includes a reduction of $110,004 resulting from the SYSTEM 1 Rebate Program in the six months ended September 30, 2010. |
12. Common Shares
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:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
Denominator (shares in thousands): | ||||||||||||
Weighted average common shares outstanding—basic | 58,744 | 59,356 | 59,000 | 59,377 | ||||||||
Dilutive effect of common share equivalents | 636 | 693 | 741 | — | ||||||||
Weighted average common shares outstanding and common share equivalents—diluted | 59,380 | 60,049 | 59,741 | 59,377 | ||||||||
The denominator in the computation of earnings per share for the six months ended September 30, 2010 does not include the potentially dilutive effect of common share equivalents because the numerator is a net loss. Inclusion would result in an antidilutive effect.
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:
17
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
(shares in thousands) | (shares in thousands) | |||||||||||
Number of common share options | 585 | 561 | 445 | 471 | ||||||||
13. Repurchases of Common Shares
During the first half of fiscal 2012, we repurchased 1,504,397 of our common shares for an aggregate amount of $45,942, representing an average price of $30.54 per common share. This includes certain September 2011 repurchases that were not settled until October 2011. We also obtained 21,329 of our common shares during the first half of fiscal 2012 in connection with stock based compensation award programs. At September 30, 2011, $128,460 of STERIS common shares remained authorized for repurchase pursuant to a March 2008 Board Authorization. Also, 12,073,580 common shares were held in treasury at September 30, 2011.
14. Share-Based Compensation
We maintain a long-term incentive plan that makes available common shares for grants, at the discretion of the Compensation Committee of the Board of Directors to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, and stock appreciation rights. Stock options provide the right to purchase our common shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or earlier if the option holder is no longer employed by us. Restricted shares and restricted share units may cliff vest after three or four year periods or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date. As of September 30, 2011, 4,558,792 shares remained available for grant under the long-term incentive plan.
The fair value of share-based compensation awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during the first half of fiscal 2012 and fiscal 2011:
Fiscal 2012 | Fiscal 2011 | |||||
Risk-free interest rate | 2.41 | % | 2.68 | % | ||
Expected life of options | 5.65 | 5.65 | ||||
Expected dividend yield of stock | 1.78 | % | 1.59 | % | ||
Expected volatility of stock | 29.78 | % | 30.13 | % | ||
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.08% percent and 2.27% percent was applied in fiscal 2012 and 2011, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
18
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
A summary of share option activity is as follows:
Number of Options | Weighted Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||
Outstanding at March 31, 2011 | 3,274,395 | $ | 25.95 | |||||||||||
Granted | 324,051 | 35.65 | ||||||||||||
Exercised | (147,578 | ) | 22.31 | |||||||||||
Forfeited | (8,847 | ) | 27.88 | |||||||||||
Canceled | (19,525 | ) | 21.99 | |||||||||||
Outstanding at September 30, 2011 | 3,422,496 | $ | 27.04 | 5.64 | $ | 11,235 | ||||||||
Exercisable at September 30, 2011 | 2,494,681 | $ | 25.84 | 4.63 | $ | 9,442 | ||||||||
We estimate that 910,825 of the non-vested stock options outstanding at September 30, 2011 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $29.27 closing price of our common shares on September 30, 2011 over the exercise price of the stock option, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of our common shares.
The total intrinsic value of stock options exercised during the first half of fiscal 2012 and fiscal 2011 was $1,927 and $2,018, respectively. Net cash proceeds from the exercise of stock options were $3,172 and $3,290 for the first half of fiscal 2012 and fiscal 2011, respectively. The tax benefit from stock option exercises was $745 and $786 for the first half of fiscal 2012 and fiscal 2011, respectively.
The weighted average grant date fair value of stock option grants was $9.84 and $8.80 for the first half of fiscal 2012 and fiscal 2011, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of September 30, 2011 and 2010 was $807 and $971, respectively. The fair value of each outstanding SAR is revalued at each reporting date and the related liability and expense are adjusted appropriately.
A summary of the non-vested restricted share activity is presented below:
Number of Restricted Shares | Weighted-Average Grant Date Fair Value | ||||||
Non-vested at March 31, 2011 | 400,951 | $ | 29.70 | ||||
Granted | 230,215 | 35.73 | |||||
Vested | (69,698 | ) | 30.89 | ||||
Canceled | (8,225 | ) | 32.85 | ||||
Non-vested at September 30, 2011 | 553,243 | $ | 32.02 | ||||
Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that vested during the first half of fiscal 2012 was $2,153.
Cash settled restricted share units carry generally the same terms and vesting requirements as stock settled restricted share units except that they are settled in cash upon vesting and therefore, are classified as liabilities. The fair value of outstanding cash-settled restricted share units as of September 30, 2011 and 2010 was $1,239 and $1,192, 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.
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
As of September 30, 2011, there was a total of $15,171 in unrecognized compensation cost related to nonvested share-based compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average period of 2.52 years.
15. 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 first six months of fiscal 2012 were as follows:
Fiscal 2012 | |||
Balance, March 31, 2011 | $ | 7,509 | |
Warranties issued during the period | 5,051 | ||
Settlements made during the period | (3,494 | ) | |
Balance, September 30, 2011 | $ | 9,066 | |
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 $18,973 and $17,551 as of September 30, 2011 and March 31, 2011, respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenues is excluded from the table presented above.
16. Forward and Swap Contracts
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We also enter into commodity swap contracts to hedge price changes in commodities that impact raw materials included in our cost of revenues. We do not use derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income.
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance Sheet | Fair Value at | Fair Value at | Fair Value at | Fair Value at | ||||||||||||
Location | September 30, 2011 | March 31, 2011 | September 30, 2011 | March 31, 2011 | ||||||||||||
Prepaid & Other | $ | 9 | $ | 1,483 | $ | — | $ | — | ||||||||
Accrued expenses and other | $ | — | $ | — | $ | 3,897 | $ | 41 | ||||||||
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share amounts)
Location of gain (loss) recognized in income | Amount of gain (loss) recognized in income | |||||||||
Six Months Ended | ||||||||||
September 30, | ||||||||||
2011 | 2010 | |||||||||
Foreign currency forward contracts | Selling, general and administrative | $ | (2,520 | ) | $ | 715 | ||||
Commodity swap contracts | Cost of revenues | $ | (1,576 | ) | $ | (176 | ) | |||
17. 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 September 30, 2011:
Fair Value Measurements at September 30, 2011 Using | ||||||||||||||||
Carrying Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
September 30, 2011 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 134,111 | $ | 134,111 | $ | — | $ | — | ||||||||
Forward and swap contracts (1) | 9 | — | 9 | — | ||||||||||||
Investments (2) | 2,586 | 2,586 | — | — | ||||||||||||
Liabilities: | ||||||||||||||||
Forward and swap contracts (1) | $ | 3,897 | $ | — | $ | 3,897 | $ | — | ||||||||
Deferred compensation plans (2) | 2,586 | 2,586 | — | — | ||||||||||||
Long term debt (3) | 210,000 | — | 247,962 | — | ||||||||||||
(1) | The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates. |
(2) | We provide a domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options. We hold investments to satisfy the future obligations of the plan. Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying investments. Employees making deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). |
(3) | 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. |
18. Subsequent Events
We have evaluated subsequent events through the date the financial statements were filed with the SEC, noting no events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended September 30, 2011. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2011 Annual Report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
STERIS Corporation
We have reviewed the consolidated balance sheet of STERIS Corporation and subsidiaries, as of September 30, 2011, and the related consolidated statements of income for the three and six month periods ended September 30, 2011 and 2010, and consolidated statements of cash flows for the six month periods ended September 30, 2011 and 2010. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of STERIS Corporation and subsidiaries as of March 31, 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated May 27, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
November 8, 2011
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Introduction
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), we explain the general financial condition and the results of operations for STERIS including:
• | what factors affect our business; |
• | what our earnings and costs were in each period presented; |
• | why those earnings and costs were different from prior periods; |
• | where our earnings came from; |
• | how this affects our overall financial condition; |
• | what our expenditures for capital projects were; and |
• | where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchase common shares, pay cash dividends and fund future working capital needs. |
As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the second quarter and first half of fiscal 2012 and fiscal 2011. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in STERIS.
Financial Measures
In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We sometimes use the following financial measures in the context of this report: backlog; debt-to-total capital; net debt-to-total capital; and days sales outstanding. We define these financial measures as follows:
• | Backlog – We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements. |
• | Debt-to-total capital – We define debt-to-total capital as total debt divided by the sum of total debt and shareholders’ equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth. |
• | Net debt-to-total capital – We define net debt-to-total capital as total debt less cash (“net debt”) divided by the sum of net debt and shareholders’ equity. We also use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth. |
• | Days sales outstanding (“DSO”) – We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters’ revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect. |
We, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the United States. Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies. Additional information regarding these financial measures, including reconciliations of each non- GAAP financial measure, is available in the subsection of MD&A titled, "Non-GAAP Financial Measures."
Revenues – Defined
As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
• | Revenues – Our revenues are presented net of sales returns and allowances. |
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• | Product Revenues – We define product revenues as revenues generated from sales of capital equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, washing systems, VHP® technology, water stills, and pure steam generators; integrated OR; surgical lights and tables; and the consumable family of products, which includes SYSTEM 1 and 1E consumables, sterility assurance products, skin care products, and cleaning consumables. |
• | Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment, as well as revenues generated from contract sterilization offered through our Isomedix segment. |
• | Capital Revenues – We define capital revenues as revenues generated from sales of capital equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1 and 1E, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR. |
• | Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products, which includes SYSTEM 1 and 1E consumables, sterility assurance products, skin care products, and cleaning consumables. |
• | Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues. |
• | Acquired Revenues – We define acquired revenues as base revenues generated from acquired businesses or assets and additional volumes driven through acquired businesses or assets. We will use such measure for up to a year after acquisition. |
General Company Overview and Executive Summary
Our mission is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products, and services. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. In addition, each of our core industries is experiencing specific trends that could increase demand. Within healthcare, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. The aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits processed by our Isomedix segment.
Beyond our core markets, infection-control issues are a growing global concern, and emerging threats are prominent in the news. We are actively pursuing new opportunities to adapt our proven technologies to meet the changing needs of the global marketplace.
In May 2011, we acquired the stock of a privately held company with operations located near Sao Paulo, Brazil for approximately $30 million, including contingent consideration obligations. The acquired company 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).
During fiscal 2011, we recorded a pre-tax liability related to the SYSTEM 1 Rebate Program. The Rebate Program reduced Healthcare revenues by $102.3 million, increased Healthcare cost of revenues by $7.7 million, decreased gross margin and operating margin by $110.0 million and decreased net income by $70.3 million. The accrual of these estimated rebates and costs increased current liabilities by $110.0 million and did not have a material impact on free cash flow during that period.
Fiscal 2012 second quarter revenues were $342.7 million representing an increase of 9.7% over prior year reflecting increases in the all three reportable business segments. Our gross margin percentage for the fiscal 2012 second quarter decreased to 38.9%, or 430 basis points, from 43.2% in the fiscal 2011 second quarter. The decline in gross margin is primarily due to continued reduction in SYSTEM 1 consumable volume, shipments of lower gross margin SYSTEM 1E units, an unfavorable impact from currency fluctuations and higher raw material costs. The gross margin also was negatively impacted by a higher portion of revenues being derived from capital equipment which generally generate lower margins than consumable products and services. Fiscal 2012 first half revenues were $661.3 million representing an increase of 31.9% over the prior year period. The fiscal 2011 period was negatively impacted by the SYSTEM 1 Rebate Program. When compared to adjusted revenues in the prior year period, excluding the $102,313 negative impact of the SYSTEM 1 Rebate Program, fiscal 2012 first
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half revenues represent an increase of 9.5% (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 gross margin percentage for the fiscal 2012 first half was 40.3%. The fiscal 2011 first half gross margin percentage of 30.5% was negatively impacted by the SYSTEM 1 Rebate Program. Adjusted gross margin percentage for the fiscal 2011 first half was 43.6% (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). Compared to adjusted gross margin percentage for the fiscal 2011 period, the 330 basis point decrease is driven primarily by sales of lower margin SYSTEM 1E units, lower SYSTEM 1 consumable volume, the unfavorable impact of foreign currency fluctuations and higher raw material costs. Fiscal 2012 second quarter operating income was $47.6 million compared with $54.9 million for the fiscal 2011 second quarter. Fiscal 2012 first half operating income was $94.5 million compared with an operating loss of $8.1 million for the first half of fiscal 2011. Excluding the impact of recording the SYSTEM 1 Rebate Program liability, adjusted operating income for the fiscal 2011 first half was $101.9 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).
Free cash flow was $26.1 million in the first six months of fiscal 2012 compared to $29.3 million in the prior year first six months, reflecting higher capital spending levels and the use of cash to fund SYSTEM 1 Rebate Program obligations. Our debt-to-total capital ratio was 21.3% at September 30, 2011 and 21.1% at March 31, 2011. During the first six months of fiscal 2012, we declared and paid cash dividends of $0.32 per common share.
Inventory was $185.2 million at September 30, 2011 which reflects an increase from the March 31, 2011 balance of $167.3 million. The higher inventory level is primarily driven by inventory held in support of the SYSTEM 1 Transition Plan. Inventory has declined $9.8 million since the end of the first quarter of fiscal 2012.
Additional information regarding our fiscal 2012 second quarter and first half financial performance is included in the subsection below titled “Results of Operations.”
Matters Affecting Comparability
SYSTEM 1 Rebate Program. 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 users of SYSTEM 1 at the time the rebate program was introduced and who return their units have the option of either a pro-rated cash value or rebate toward the future purchase of new STERIS capital equipment or consumable products. In addition, we provide credits for SYSTEM 1 consumables in unbroken packaging and within shelf life and for the unused portion of prepaid SYSTEM 1 services contracts.
During the first quarter of fiscal 2011, we recorded a pre-tax liability related to the SYSTEM 1 Rebate Program. Of the $110.0 million recorded, $102.3 million is attributable to the Customer Rebate portion of the Program and was recorded as a reduction to revenue, and $7.7 million is attributable to the disposal liability of the SYSTEM 1 units to be returned and was recorded in cost of revenues.
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 the second quarter of fiscal 2012, our revenues were favorably impacted by $3,894 million, or 1.2%, and income before taxes was unfavorably impacted by $1,138 million, or 2.4%, as a result of foreign currency movements relative to the U.S. dollar. During the first half of fiscal 2012, our revenues were favorably impacted by $7,793 million, or 1.2%, and income before taxes was unfavorably impacted by $4,497 million, or 4.9%, as a result of foreign currency movements relative to the U.S. dollar.
NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented.
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
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performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to fund future debt principal repayments, growth outside of core operations, repurchase common shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the six month periods ended September 30, 2011 and 2010:
Six Months Ended September 30, | ||||||||
(dollars in thousands) | 2011 | 2010 | ||||||
Net cash flows provided by operating activities | $ | 60,537 | $ | 56,357 | ||||
Purchases of property, plant, equipment and intangibles, net | (34,445 | ) | (27,242 | ) | ||||
Proceeds from the sale of property, plant, equipment and intangibles | — | 192 | ||||||
Free cash flow | $ | 26,092 | $ | 29,307 | ||||
To supplement our financial results presented in accordance with U.S. GAAP, we have sometimes referred to certain measures of revenues, gross profit, income tax expense, and the Healthcare segment results of operations in the section of MD&A titled, "Results of Operations" excluding the impact of the SYSTEM 1 Rebate Program recorded in the first quarter of fiscal 2011. This item had a significant impact on the fiscal 2011 first half 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.
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(dollars in thousands) | Six Months Ended | ||
September 30, 2010 | |||
Reported revenues | $ | 501,405 | |
Impact of the SYSTEM 1 Rebate Program | 102,313 | ||
Adjusted revenues | $ | 603,718 | |
Reported capital revenues | 121,247 | ||
Impact of the SYSTEM 1 Rebate Program | 102,313 | ||
Adjusted capital revenues | $ | 223,560 | |
Reported United States revenues | $ | 361,728 | |
Impact of the SYSTEM 1 Rebate Program | 102,313 | ||
Adjusted United States Revenues | $ | 464,041 | |
Reported Healthcare revenues | $ | 323,880 | |
Impact of the SYSTEM 1 Rebate Program | 102,313 | ||
Adjusted Healthcare revenues | $ | 426,193 | |
Reported gross profit | $ | 153,121 | |
Impact of the SYSTEM 1 Rebate Program | 110,004 | ||
Adjusted gross profit | $ | 263,125 | |
Reported gross profit percentage | 30.5 | % | |
Impact of the SYSTEM 1 Rebate Program | 13.0 | % | |
Adjusted gross profit percentage | 43.6 | % | |
Reported operating (loss) | $ | (8,093 | ) |
Impact of the SYSTEM 1 Rebate Program | 110,004 | ||
Adjusted operating income | $ | 101,911 | |
Reported Healthcare operating (loss) | $ | (39,849 | ) |
Impact of the SYSTEM 1 Rebate Program | 110,004 | ||
Adjusted Healthcare operating income | $ | 70,155 | |
Reported income tax expense (benefit) | $ | (4,247 | ) |
Impact of the SYSTEM 1 Rebate Program | 39,660 | ||
Adjusted income tax expense | $ | 35,413 | |
Reported effective income tax rate | 30.9 | % | |
Impact of the SYSTEM 1 Rebate Program | 5.9 | % | |
Adjusted effective income tax rate | 36.8 | % | |
Results of Operations
In the following subsections, we discuss our earnings and the factors affecting them for the second quarter and first half of fiscal 2012 compared with the same fiscal 2011 periods. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.
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Revenues. The following table compares our revenues for the three and six months ended September 30, 2011 to the revenues for the three and six months ended September 30, 2010:
Three Months Ended | ||||||||||||||
September 30, | ||||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Percent Change | ||||||||||
Total revenues | $ | 342,707 | $ | 312,425 | $ | 30,282 | 9.7 | % | ||||||
Revenues by type: | ||||||||||||||
Capital equipment revenues | 149,225 | 120,308 | 28,917 | 24.0 | % | |||||||||
Consumable revenues | 74,277 | 76,784 | (2,507 | ) | (3.3 | )% | ||||||||
Service revenues | 119,205 | 115,333 | 3,872 | 3.4 | % | |||||||||
Revenues by geography: | ||||||||||||||
United States revenues | 257,635 | 237,953 | 19,682 | 8.3 | % | |||||||||
International revenues | 85,072 | 74,472 | 10,600 | 14.2 | % | |||||||||
Six Months Ended | |||||||||||
September 30, | |||||||||||
(dollars in thousands) | 2011 | 2010 | Change | Percent Change | |||||||
Total revenues | $661,346 | $501,405 | $159,941 | 31.9 | % | ||||||
Revenues by type: | |||||||||||
Capital equipment revenues | 273,844 | 121,247 | 152,597 | 125.9 | % | ||||||
Consumable revenues | 151,671 | 153,117 | (1,446 | ) | (0.9 | )% | |||||
Service revenues | 235,831 | 227,041 | 8,790 | 3.9 | % | ||||||
Revenues by geography: | |||||||||||
United States revenues | 502,471 | 361,728 | 140,743 | 38.9 | % | ||||||
International revenues | 158,875 | 139,677 | 19,198 | 13.7 | % | ||||||
Quarter over Quarter Comparison
Revenues increased $30.3 million, or 9.7%, to $342.7 million for the quarter ended September 30, 2011, as compared to $312.4 million for the same prior year quarter. Capital equipment revenues increased $28.9 million, or 24.0%, in the second quarter of fiscal 2012, as compared to the second quarter of fiscal 2011. Capital equipment revenues increased in both the Healthcare and Life Sciences segments. Within Healthcare, the increase was primarily attributable to shipments of SYSTEM 1E units as well as growth in our surgical products. Consumable revenues declined $2.5 million, or 3.3%, for the quarter ended September 30, 2011, as compared to the prior year quarter, attributable to reductions in SYSTEM 1 consumables within the Healthcare segment which were partially offset by growth in consumables within the Life Sciences segment. Service revenues increased $3.9 million, or 3.4%, in the second quarter of fiscal 2012 reflecting growth in all three reportable business segments.
International revenues increased $10.6 million, or 14.2%, to $85.1 million for the quarter ended September 30, 2011, as compared to $74.5 million for the same prior year quarter. International revenues were favorably impacted by increases in
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capital revenues, which increased 21.6% primarily due to increases within Europe and Latin America. International recurring revenues increased during the second quarter of fiscal 2012 by 6.4%, led by increases primarily in Europe and Canada but also reflecting growth in the Latin American and Asia Pacific regions.
United States revenues increased $19.7 million, or 8.3%, to $257.6 million for the quarter ended September 30, 2011, as compared to $238.0 million for the same prior year quarter. Higher capital equipment revenues in both the Healthcare and Life Sciences business segments combined with growth in Isomedix service revenues drove the increase. These increases were partially offset by a decline in consumable revenues driven by decreases in SYSTEM 1 consumables.
First Half over First Half Comparison
Revenues increased $159.9 million, or 31.9%, to $661.3 million for the first half of fiscal 2012. The first half of fiscal 2011 was negatively impacted by the SYSTEM 1 Rebate Program. Adjusted revenues, excluding the impact of the SYSTEM 1 Rebate Program, for the first half of fiscal 2011 were $603.7 million (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Capital equipment revenues increased $152.6 million or 125.9%. The prior year period was negatively impacted by the SYSTEM 1 Rebate Program. Capital equipment revenues increased 22.5% when compared to adjusted capital equipment revenues for the first half of fiscal 2011 of $223.6 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 was driven by improved demand within all geographies -- North America, Europe, Asia Pacific and Latin America. Recurring revenues increased $7.4 million or 1.9% as weaker demand in United States due to decreases in SYSTEM 1 consumables partially offset the impact of growth internationally in consumables and service.
International revenues for the first half of fiscal 2012 were $158.9 million, an increase of $19.2 million, or 13.7%, as compared to the first half of fiscal 2011. Fiscal 2012 year-to-date international revenues were favorably impacted by a 17.6% increase in capital equipment revenue and a 9.9% increase in recurring revenues, reflecting increases in both consumable and service revenues of 9.7% and 10.2%, respectively.
United States revenues for the first half of fiscal 2012 increased $140.7 million, or 38.9%, as compared to the first half of fiscal 2011. United States revenues in the prior year first half were negatively impacted by the SYSTEM 1 Rebate Program. Adjusted United States revenues for the first half of fiscal 2011 were $464.0 million. United States revenues for the first half of fiscal 2012 increased $38.4 million, or 8.3%, when compared to adjusted United States revenues for the first half of fiscal 2011 (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 fiscal 2012 year-to-date increase in United States revenues was driven by increases in capital equipment revenues and service revenues generated by our Isomedix segment. These increases were partially offset by a 4.1% decrease in consumable revenues.
Revenues by segment are further discussed in the section of MD&A titled, "Business Segment Results of Operations."
Gross Profit. The following table compares our gross profit for the three and six months ended September 30, 2011 to the three and six months ended September 30, 2010:
Three Months Ended | Change | Percent Change | |||||||||||||
September 30, | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Gross Profit: | |||||||||||||||
Product | $ | 84,697 | $ | 86,356 | $ | (1,659 | ) | (1.9 | )% | ||||||
Service | 48,612 | 48,699 | (87 | ) | (0.2 | )% | |||||||||
Total Gross Profit | $ | 133,309 | $ | 135,055 | $ | (1,746 | ) | (1.3 | )% | ||||||
Gross Profit Percentage: | |||||||||||||||
Product | 37.9 | % | 43.8 | % | |||||||||||
Service | 40.8 | % | 42.2 | % | |||||||||||
Total Gross Profit Percentage | 38.9 | % | 43.2 | % | |||||||||||
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Six Months Ended | Change | Percent Change | |||||||||||||
September 30, | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Gross Profit: | |||||||||||||||
Product | $ | 169,277 | $ | 57,052 | $ | 112,225 | NM | ||||||||
Service | 96,957 | 96,069 | 888 | 0.9 | % | ||||||||||
Total Gross Profit | $ | 266,234 | $ | 153,121 | $ | 113,113 | NM | ||||||||
Gross Profit Percentage: | |||||||||||||||
Product | 39.8 | % | 20.8 | % | |||||||||||
Service | 41.1 | % | 42.3 | % | |||||||||||
Total Gross Profit Percentage | 40.3 | % | 30.5 | % | |||||||||||
NM - Not meaningful.
Our gross profit percentage 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. Gross profit percentage for the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011 decreased 430 basis points to 38.9% from 43.2%. The fiscal 2012 period was negatively impacted by the SYSTEM 1 transition (approximately 140 bps) primarily reflecting the decline in SYSTEM 1 consumable volumes and the shipment of lower margin SYSTEM 1E units, the unfavorable impact of foreign currency fluctuations (approximately 50 bps), and higher raw material costs (approximately 60 bps). These negative impacts, while primarily within the Healthcare business segment, also impacted gross profits in the Life Sciences business segment.
Gross profit percentage for the first half of fiscal 2012 was 40.3%. The fiscal 2011 first half period gross profit percentage of 30.5% was negatively impacted by the SYSTEM 1 Rebate Program. Excluding the impact of the SYSTEM 1 Rebate Program, adjusted gross profit percentage for the fiscal 2011 period was 43.6% (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). Therefore, the gross profit percentage has decreased 330 basis points for the first half of fiscal 2012 compared to the adjusted gross profit percentage for the first half of fiscal 2011 driven by the same factors that impacted the second quarter of fiscal 2012.
Operating Expenses. The following table compares our operating expenses for the three and six month periods ended September 30, 2011 to the three and six month periods ended September 30, 2010:
Three Months Ended September 30, | Change | Percent Change | |||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Operating Expenses: | |||||||||||||||
Selling, General, and Administrative | $ | 76,652 | $ | 71,999 | $ | 4,653 | 6.5 | % | |||||||
Research and Development | 8,915 | 8,043 | 872 | 10.8 | % | ||||||||||
Restructuring expenses | 99 | 105 | (6 | ) | (5.7 | )% | |||||||||
Total Operating Expenses | $ | 85,666 | $ | 80,147 | $ | 5,519 | 6.9 | % | |||||||
Six Months Ended September 30, | Change | Percent Change | |||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Operating Expenses: | |||||||||||||||
Selling, General, and Administrative | $ | 153,661 | $ | 144,116 | $ | 9,545 | 6.6 | % | |||||||
Research and Development | 17,672 | 16,652 | 1,020 | 6.1 | % | ||||||||||
Restructuring expenses | 357 | 446 | (89 | ) | (20.0 | )% | |||||||||
Total Operating Expenses | $ | 171,690 | $ | 161,214 | $ | 10,476 | 6.5 | % | |||||||
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.The increase of 6.5% in the second quarter of fiscal 2012 is attributable to costs associated with investments to address product reliability issues, in particular for the recently shipped SYSTEM 1E units and V-Pro units, as well as strategic
30
investments within our Healthcare business segment, including transition costs related to our previously announced facility consolidations. As a percentage of revenues, SG&A was 22.4% and 23.0% in the second quarters of fiscal 2012 and 2011, respectively. SG&A expenses increased 6.6% for the first half of fiscal 2012. SG&A as a percentage of revenues was 23.2% for the first half of fiscal 2012 reflecting a decrease of 550 basis points when compared to 28.7% for the first half of fiscal 2011. The measure for the first half of fiscal 2011 was negatively impacted by the $102.3 million reduction of revenues resulting from the SYSTEM 1 Rebate Program.
For the three month period ended September 30, 2011, research and development expenses increased 10.8%. For the first half of fiscal 2012, research and development expenses were $17.7 million, representing an increase of 6.1% compared to the same fiscal 2011 period. 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. Our investments in research and development continue to be focused on, but 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 incurred during the three and six month periods of fiscal 2012 and fiscal 2011 related to previously announced restructuring plans. The following tables summarize our total pre-tax restructuring expenses for three and six month periods ended September 30, 2011 and September 30, 2010:
(dollars in thousands) | |||
Three Months Ended September 30, 2011 | Fiscal 2010 Restructuring Plan (1) | ||
Severance, payroll, and other related costs | $ | (26 | ) |
Asset impairment and accelerated depreciation | 92 | ||
Total restructuring charges | $ | 66 | |
(1) | Includes $(33) in charges recorded in cost of revenues on Consolidated Statements of Income. |
(dollars in thousands) | |||
Three Months Ended September 30, 2010 | Fiscal 2010 Restructuring Plan (1) | ||
Severance, payroll, and other related costs | $ | 23 | |
Other | 77 | ||
Total restructuring charges | $ | 100 | |
(1) | Includes $(5) in charges recorded in cost of revenues on Consolidated Statements of Income. |
(dollars in thousands) | |||||||||
Six Months Ended September 30, 2011 | Fiscal 2010 Restructuring Plan (1) | Fiscal 2008 Restructuring Plan | Total | ||||||
Severance, payroll, and other related costs | $ | (80 | ) | $ | — | $ | (80 | ) | |
Product rationalization | 335 | — | 335 | ||||||
Asset impairment and accelerated depreciation | 183 | — | 183 | ||||||
Lease termination obligation and other | — | (152 | ) | (152 | ) | ||||
Total restructuring charges | $ | 438 | $ | (152 | ) | $ | 286 | ||
(1) | Includes $(71) in charges recorded in cost of revenues on Consolidated Statements of Income. |
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(dollars in thousands) | |||
Six Months Ended September 30, 2010 | Fiscal 2010 Restructuring Plan | ||
Severance, payroll, and other related costs | $ | 6 | |
Asset impairment and accelerated depreciation | 356 | ||
Other | 84 | ||
Total restructuring charges | $ | 446 | |
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:
Fiscal 2010 Restructuring Plan | ||||||||||||||||
(dollars in thousands) | Fiscal 2012 | |||||||||||||||
March 31, 2011 | Provision | Payments/ Impairments (1) | September 30, 2011 | |||||||||||||
Severance and termination benefits | $ | 1,993 | $ | (80 | ) | $ | (1,114 | ) | $ | 799 | ||||||
Product rationalization | — | 335 | (335 | ) | — | |||||||||||
Asset impairments | — | 183 | (183 | ) | — | |||||||||||
Lease termination obligations | 1,790 | — | 152 | 1,942 | ||||||||||||
Other | 193 | — | (86 | ) | 107 | |||||||||||
Total | $ | 3,976 | $ | 438 | $ | (1,566 | ) | $ | 2,848 | |||||||
Non-Operating Expenses, Net. Non-operating expense, 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, net for the three and six month periods ended September 30, 2011 and 2010:
Three Months Ended September 30, | ||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | |||||||||
Non-Operating Expenses, Net: | ||||||||||||
Interest expense | $ | 3,081 | $ | 2,996 | $ | 85 | ||||||
Interest income and miscellaneous expense | (682 | ) | (188 | ) | (494 | ) | ||||||
Non-Operating Expenses, Net | $ | 2,399 | $ | 2,808 | $ | (409 | ) | |||||
Six Months Ended September 30, | ||||||||||||
(dollars in thousands) | 2011 | 2010 | Change | |||||||||
Non-Operating Expenses, Net: | ||||||||||||
Interest expense | $ | 6,078 | $ | 6,003 | $ | 75 | ||||||
Interest income and miscellaneous expense | (575 | ) | (350 | ) | (225 | ) | ||||||
Non-Operating Expenses, Net | $ | 5,503 | $ | 5,653 | $ | (150 | ) | |||||
Interest expense during the three and six month periods was approximately the same.
Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the three and six month periods ended September 30, 2011 to the three and six month periods ended September 30, 2010:
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Three Months Ended September 30, | Change | Percent Change | |||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Income Tax Expense (Benefit) | $ | 15,680 | $ | 16,389 | $ | (709 | ) | (4.3 | )% | ||||||
Effective Income Tax Rate | 34.7 | % | 31.5 | % | |||||||||||
Six Months Ended September 30, | Change | Percent Change | ||||||||||||
(dollars in thousands) | 2011 | 2010 | ||||||||||||
Income Tax Expense (Benefit) | $ | 30,746 | $ | (4,247 | ) | $ | 34,993 | NM | ||||||
Effective Income Tax Rate | 34.5 | % | 30.9 | % | ||||||||||
NM - Not meaningful.
Income tax expense (benefit) includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income (loss). The effective income tax rates for continuing operations for the three and six month periods ended September 30, 2011 were 34.7% and 34.5% compared with 31.5% and 30.9% for the same prior year periods. The prior year periods reflect the impact of the recognition of the SYSTEM 1 Rebate Program liability. Because the liability established was incurred in the United States at a higher effective tax rate, a higher portion of the projected income before income taxes will be subject to taxes in jurisdictions with lower tax rates. We benefited from favorable discrete item adjustments relating to the effective settlement of certain items in connection with the United States audit examination for fiscal 2008 and 2009 during the six month period ended September 30, 2011.
We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual effective income tax rate, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.
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. Our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011, provides additional information regarding each business segment. The following tables compare business segment revenues for the three and six months ended September 30, 2011 and 2010:
(dollars in thousands) | Three Months Ended | Change | Percent Change | ||||||||||||
September 30, | |||||||||||||||
2011 | 2010 | ||||||||||||||
Revenues: | |||||||||||||||
Healthcare | $ | 243,176 | $ | 220,114 | $ | 23,062 | 10.5 | % | |||||||
Life Sciences | 58,915 | 53,513 | 5,402 | 10.1 | % | ||||||||||
Isomedix | 39,999 | 37,964 | 2,035 | 5.4 | % | ||||||||||
Total reportable segments | 342,090 | 311,591 | 30,499 | 9.8 | % | ||||||||||
Corporate and other | 617 | 834 | (217 | ) | (26.0 | )% | |||||||||
Total Revenues | $ | 342,707 | $ | 312,425 | $ | 30,282 | 9.7 | % | |||||||
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(dollars in thousands) | Six Months Ended | Change | Percent Change | ||||||||||||
September 30, | |||||||||||||||
2011 | 2010 | ||||||||||||||
Revenues: | |||||||||||||||
Healthcare | $ | 466,400 | $ | 323,880 | $ | 142,520 | 44.0 | % | |||||||
Life Sciences | 111,783 | 100,127 | 11,656 | 11.6 | % | ||||||||||
Isomedix | 82,002 | 75,640 | 6,362 | 8.4 | % | ||||||||||
Total reportable segments | 660,185 | 499,647 | 160,538 | 32.1 | % | ||||||||||
Corporate and other | 1,161 | 1,758 | (597 | ) | (34.0 | )% | |||||||||
Total Revenues | $ | 661,346 | $ | 501,405 | $ | 159,941 | 31.9 | % | |||||||
Healthcare revenues increased $23.1 million, or 10.5%, to $243.2 million for the quarter ended September 30, 2011, as compared to $220.1 million for the same prior year quarter. The increase is attributable to growth in revenues within both the surgical and infection prevention technologies businesses, including revenues for SYSTEM 1E related products and services, which were somewhat offset by the year over year decline in SYSTEM 1 related products and services. The fiscal 2012 second quarter increase in Healthcare revenues also reflects higher demand for our surgical products. Service revenues increased 2.3% as we began to benefit from the installation of SYSTEM 1E units. These increases were partially offset by a decline of 6.2% in consumable revenues driven by lower demand in the United States for SYSTEM 1 consumables. Healthcare revenues increased $142.5 million or 44.0%, to $466.4 million for the first half of fiscal 2012. The prior year period was negatively impacted by the SYSTEM 1 Rebate Program. Adjusted revenues for the prior year first half were $426.2 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). Compared to the adjusted revenues for the prior year first half, Healthcare revenues grew 9.4%. At September 30, 2011, the Healthcare segment’s backlog amounted to $148.2 million, decreasing $1.8 million, or 1.2%, compared to the backlog of $150.0 million at September 30, 2010. Backlog increased $9.6 million, or 6.9%, compared to the backlog of $138.6 million at March 31, 2011.
Life Sciences revenues increased $5.4 million, or 10.1%, to $58.9 million for the quarter ended September 30, 2011, as compared to $53.5 million for the same prior year quarter. The increase in Life Sciences revenues was driven by increases of 18.3% in capital equipment revenues, 7.7% in consumable revenues, and 4.0% in services revenues. The increase in capital equipment revenues was notable within the United States and Europe. The increase is attributable, in part, to replacement product purchases from pharmaceutical Customers. For the first half of fiscal 2012, Life Sciences revenues increased $11.7 million, or 11.6%, to $111.8 million compared to $100.1 million in the first half of fiscal 2011. The increase in Life Sciences revenues was driven by increases of 21.9%, 11.5% and 2.3% in capital equipment, consumables, and service revenues, respectively. While this is a positive development, the prior year first half provided a relatively low base for comparison. At September 30, 2011, the Life Sciences segment’s backlog amounted to $41.2 million, increasing $3.2 million, or 8.4% compared to the backlog of $38.0 million at September 30, 2010. Backlog increased $0.5 million, or 1.2%, compared to the backlog of $40.7 million at March 31, 2011.
Isomedix segment revenues increased $2.0 million, or 5.4%, to $40.0 million for the quarter ended September 30, 2011, as compared to $38.0 million for the same prior year quarter. For the first half of fiscal 2012, revenues increased $6.4 million, or 8.4%, to $82.0 million as compared to $75.6 million for the first half of fiscal 2011. Revenues were favorably impacted by increased demand from our medical device Customers, as well as the benefits realized from capacity expansions in select locations.
The following table compares our business segment operating results for the three and six months ended September 30, 2011 to the three and six months ended September 30, 2010:
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Three Months Ended | Change | Percent Change | |||||||||||||
September 30, | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Operating Income (Loss): | |||||||||||||||
Healthcare | $ | 27,994 | $ | 38,063 | $ | (10,069 | ) | (26.5 | )% | ||||||
Life Sciences | 11,064 | 9,435 | 1,629 | 17.3 | % | ||||||||||
Isomedix | 11,215 | 10,024 | 1,191 | 11.9 | % | ||||||||||
Total reportable segments | 50,273 | 57,522 | (7,249 | ) | (12.6 | )% | |||||||||
Corporate and other | (2,630 | ) | (2,614 | ) | (16 | ) | 0.6 | % | |||||||
Total Operating Income (Loss) | $ | 47,643 | $ | 54,908 | $ | (7,265 | ) | (13.2 | )% | ||||||
Six Months Ended | Change | Percent Change | |||||||||||||
September 30, | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | |||||||||||||
Operating Income (Loss): | |||||||||||||||
Healthcare | $ | 54,262 | $ | (39,849 | ) | $ | 94,111 | NM | |||||||
Life Sciences | 20,523 | 15,730 | 4,793 | 30.5 | % | ||||||||||
Isomedix | 24,174 | 20,608 | 3,566 | 17.3 | % | ||||||||||
Total reportable segments | 98,959 | (3,511 | ) | 102,470 | NM | ||||||||||
Corporate and other | (4,415 | ) | (4,582 | ) | 167 | (3.6 | )% | ||||||||
Total Operating Income (Loss) | $ | 94,544 | $ | (8,093 | ) | $ | 102,637 | NM | |||||||
NM - Not meaningful.
Segment operating income (loss) 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 $10.1 million, to $28.0 million for the second quarter as compared to $38.1 million in the same prior year period. The decrease in operating income was driven primarily by lower SYSTEM 1 consumable volumes, the shipment of lower gross margin SYSTEM 1E units, as well as operating expenses associated with strategic investments within the segment and investments made to address product reliability issues. For the first half of fiscal 2012 the segment's operating income was $54.3 million compared to a loss of $39.8 million for the first half of fiscal 2011. Operating income for the six months ended September 30, 2010 was negatively impacted by the SYSTEM 1 Rebate Program. Adjusted operating income, excluding the impact of the SYSTEM 1 Rebate Program, for the prior year period was $70.2 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 fiscal 2012 decrease from adjusted operating income in fiscal 2011 is attributable to lower SYSTEM 1 consumable volumes, the shipment of lower gross margin SYSTEM 1E units, higher sales related costs, as well as operating expenses associated with strategic investments within the segment and investments made to address product reliability issues.
The Life Sciences segment’s operating income increased $1.6 million for the second quarter of fiscal 2012 as compared to the same prior year period. The segment’s operating margin was 18.8% for the second quarter of fiscal 2012, representing an increase of 120 basis points over the comparable prior year period. The segment's operating income for the first half of fiscal 2012 was $20.5 million or 18.4% of revenues compared to $15.7 million or 15.7% of revenues in the same prior period. The increases in both periods were the result of volume increases and lower operating expenses.
The Isomedix segment’s operating income increased $1.2 million for the second quarter of fiscal 2012 as compared to the same prior year period. The segment’s operating margin was 28.0% for the second quarter of fiscal 2012, representing an increase of 160 basis points over the comparable prior year period. The segment's operating income for the first half of fiscal
35
2012 was $24.2 million or 29.5% of revenues compared to $20.6 million or 27.2% of revenues in the same prior period. The increase in operating income reflects the benefit of increased revenues.
Liquidity and Capital Resources
The following table summarizes significant components of our cash flows for the six months ended September 30, 2011 and 2010:
Six Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2011 | 2010 | ||||||
Operating activities: | ||||||||
Net income (loss) | $ | 58,295 | $ | (9,499 | ) | |||
Non-cash items | 50,428 | (7,629 | ) | |||||
Change in Accrued SYSTEM 1 Rebate Program and class action settlement | (15,921 | ) | 109,956 | |||||
Changes in operating assets and liabilities | (32,265 | ) | (36,471 | ) | ||||
Net cash provided by operating activities | $ | 60,537 | $ | 56,357 | ||||
Investing activities: | ||||||||
Purchases of property, plant, equipment, and intangibles, net | $ | (34,445 | ) | $ | (27,242 | ) | ||
Proceeds from the sale of property, plant, equipment, and intangibles | — | 192 | ||||||
Investments in businesses, net of cash acquired | (22,269 | ) | — | |||||
Net cash used in investing activities | $ | (56,714 | ) | $ | (27,050 | ) | ||
Financing activities: | ||||||||
Repurchases of common shares | $ | (43,679 | ) | $ | (16,627 | ) | ||
Cash dividends paid to common shareholders | (18,928 | ) | (15,459 | ) | ||||
Stock option and other equity transactions, net | 3,172 | 3,290 | ||||||
Tax benefit from stock options exercised | 745 | 786 | ||||||
Net cash used in financing activities | $ | (58,690 | ) | $ | (28,010 | ) | ||
Debt-to-total capital ratio | 21.3 | % | 22.4 | % | ||||
Free cash flow | $ | 26,092 | $ | 29,307 | ||||
Net Cash Provided by Operating Activities. The net cash provided by our operating activities was $60.5 million for the first six months of fiscal 2012 as compared with $56.4 million for the first six months of fiscal 2011. The increase in net cash provided by operating activities is driven by a lower use of cash to fund operating assets offset by the current year use of cash of $15.9 million for the SYSTEM 1 Rebate Program.
Net Cash Used In Investing Activities – The net cash we used in investing activities totaled $56.7 million for the first six months of fiscal 2012 compared with $27.1 million for the first six months of fiscal 2011. The following discussion summarizes the significant changes in our investing cash flows for the first six months of fiscal 2012 and fiscal 2011:
• | Purchases of property, plant, equipment, and intangibles, net – Capital expenditures were $34.4 million for the first six months of fiscal 2012 as compared to $27.2 million during the same prior year period. |
• | Investment in business, net of cash acquired – During fiscal 2012, we used $22.3 million in cash to acquire the stock of a privately held company with operations located near Sao Paulo, Brazil. Total consideration is approximately $30 million, including contingent consideration obligations. The acquired company 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). |
Net Cash Used In Financing Activities – The net cash used in financing activities amounted to $58.7 million for the first six months of fiscal 2012 compared with net cash used in financing activities of $28.0 million for the first six months of fiscal 2011. The following discussion summarizes the significant changes in our financing cash flows for the first six months of fiscal 2012 and fiscal 2011:
• | Repurchases of common shares – The Company’s Board of Directors has provided authorization to repurchase the Company’s common shares. During the first six months of fiscal 2012, we paid for the repurchase of 1,402,227 of our common shares under this authorization at an average purchase price of $30.62 per common share. We also obtained |
36
21,329 of our common shares during the first six months of fiscal 2012 in connection with share-based compensation award programs.
• | Cash dividends paid to common shareholders – During the first six months of fiscal 2012, we paid total cash dividends of $18.9 million, or $0.32 per outstanding common share. During the first six months of fiscal 2011, we paid total cash dividends of $15.5 million, or $0.26 per outstanding common share. |
• | Stock option and other equity transactions, net – We receive cash in some cases for issuing common shares under our various employee stock compensation programs. During the first six months of fiscal 2012 and fiscal 2011, we received cash proceeds totaling $3.2 million and $3.3 million, respectively, under these programs. |
Cash Flow Measures. Free cash flow was $26.1 million in the first six months of fiscal 2012 compared to $29.3 million in the prior year first six months due to higher capital spending levels and the use of cash to fund SYSTEM 1 Rebate Program obligations. Our debt-to-total capital ratio was 21.3% at September 30, 2011 and 21.1% at March 31, 2011.
Sources of Credit and Contractual and Commercial Commitments. Information related to our sources of credit and contractual and commercial commitments is included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011. Our commercial commitments were approximately $36.1 million at September 30, 2011 reflecting a net increase of $1.7 million in surety bonds and other commercial commitments from March 31, 2011. The maximum aggregate borrowing limits under our revolving credit facility (“Facility”) have not changed since March 31, 2011. At September 30, 2011, there was $384.8 million available under the Facility for borrowing. The maximum aggregate borrowing limit of $400.0 million under the Facility is reduced by outstanding borrowings and letters of credit issued under a sub-limit within the Facility ($15.2 million at September 30, 2011). There also were $8.6 million in outstanding letters of credit under another Company facility at September 30, 2011. This other facility was obtained to provide increased flexibility regarding the terms of the Company's letters of credit.
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.
Critical Accounting Policies, Estimates, and Assumptions
Information related to our critical accounting policies, estimates, and assumptions is included in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011. Our critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2011.
SYSTEM 1 Rebate Program
The Accrued SYSTEM 1 Rebate Program (the “Rebate Program”), initially recognized during the first quarter of fiscal 2011, is based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value of rebates to be provided upon their return. Rebates of $102,313 were recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated cost of $7,691 to facilitate the disposal of the returned SYSTEM 1 processors has been recognized as cost of revenues. Both components are recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program include: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that will elect to participate in the Rebate Program, the proportion of Customers that will choose each rebate option, and the estimated per unit costs of disposal.
The number and age of SYSTEM 1 processors has been estimated based on our historical sales and service records and we have assumed that 100% of these Customers will elect to participate in the Rebate Program. In order to estimate the portion of Customers that will choose each available rebate option, we first assessed trends in sales of the proprietary consumable products utilized in the SYSTEM 1 processor. We noted a decline of approximately 19% in shipments of SYSTEM 1 consumables during the period between the notice by FDA to healthcare facility administrators and infection control practitioners and the announcement of the Rebate Program, which indicated that a portion of our Customers transitioned away from the SYSTEM 1 technology during that period. The remaining 81% provides the best available indication of the portion of Customers projected to elect the rebate for the SYSTEM 1E processor. Order and quote data for fiscal 2011 provides
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indications of the proportion of Customers that are expected to choose each of the other rebate options. The per unit costs associated with disposal were estimated based on the service hours involved and quotes from our vendors using existing freight and disposal contracts.
Contingencies
We are involved in various patent, product liability, consumer, commercial, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the course of our business. We record a liability for such contingencies to the extent that 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 of claims that are probable and estimable 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 claims, litigation, and other proceedings is unpredictable and actual results could be materially different from our estimates. We record anticipated recoveries under applicable insurance contracts when assured of recovery. Refer to Part II, Item 1, “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. In the first quarter of fiscal 2012, we reached an agreement with the IRS on all material tax matters for fiscal 2008 and fiscal 2009. The IRS also began its audit of fiscal 2010 in the first quarter of fiscal 2012. We remain subject to tax authority audits in various other jurisdictions in which we operate. If we prevail in matters for which accruals have been recorded, or are required to pay amounts in excess of recorded accruals, our effective income tax rate in a given financial statement period could be materially impacted.
Additional information regarding our commitments and contingencies is included in note 10 to our consolidated financial statements titled, “Contingencies.”
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 the second quarter of fiscal 2012, our revenues were favorably impacted by $3,894 million, or 1.2%, and income before taxes was unfavorably impacted by $1,138 million, or 2.4%, as a result of foreign currency movements relative to the U.S. dollar. During the first half of fiscal 2012, our revenues were favorably impacted by $7,793 million, or 1.2%, and income before taxes was unfavorably impacted by $4,497 million, or 4.9%, as a result of foreign currency movements relative to the U.S. dollar.
Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry, products or activities that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “outlook,” “impact,” “potential,” “confidence,” “improve,” “optimistic,” “comfortable,” “trend”, and “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws, government regulations, labeling or product approvals or the application or interpretation thereof. Other risk factors are described herein and in the Company's Form 10-K and 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, rebate program, transition, cost reductions, business strategies, earnings and revenue trends, expense reduction or other future financial results. References to products, the consent decree, the transition or rebate program, or the settlement agreement are summaries only and do not alter or modify the specific terms of the decree, agreement, 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
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and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications or the Company's rebate program, transition plan or other business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, certifications, regulations, regulatory actions, including without limitation those relating to FDA warning letters, government investigations, the December 3, 2009 or February 22, 2010 FDA notices, the April 20, 2010 consent decree and related transition plan and rebate program, the SYSTEM 1E device, the outcome of any pending FDA requests and clearances 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 or effects of fluctuations in currencies, tax assessments or anticipated rates, raw material costs, benefit or retirement plan costs, or other regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company's products and services, (f) the possibility that anticipated growth, cost savings, rebate assumptions, new product acceptance, performance, or approvals, including without limitation SYSTEM 1E and accessories thereto, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with our business, industry or initiatives including, without limitation, the consent decree, the transition from the SYSTEM 1 processing system, or those matters described in our Form 10-K for the year ended March 31, 2011 and this Form 10-Q and other securities filings may adversely impact Company performance, results, prospects or value, (g) the effect of the contraction in credit availability, as well as the ability of our Customers and suppliers to adequately access the credit markets when needed, and (h) those risks described in our Annual Report on Form 10-K for the year ended March 31, 2011 and this Form 10-Q for the quarter ended September 30, 2011.
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, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish such material to, the Securities Exchange Commission ("SEC.") You may access these documents on the Investor Relations page of our website at http://www.steris-ir.com. The information on our website is not incorporated by reference into this report. 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.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
In the ordinary course of business, we are subject to interest rate, foreign currency, and commodity risks. Information related to these risks and our management of these exposures is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 27, 2011. Our exposures to market risks have not changed materially since March 31, 2011.
ITEM 4. | CONTROLS AND PROCEDURES |
Under the supervision of and with the participation of our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on that evaluation, including the assessment and input of our management, the PEO and PFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the FDA-related matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our SYSTEM 1 sterile processor and the STERIS™ 20 sterilant used with the processor (sometimes referred to collectively in the FDA letter and in this Item 1 as the “device”). Among other matters, the warning letter included the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission resulted in violations of applicable law. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed response contending that the assertions in the warning letter were not correct. On November 4, 2008, we received a letter from the FDA (dated November 3, 2008) in which the FDA stated without elaboration that, after reviewing our response, it disagreed with our position and that a new premarket notification submission was required. After discussions with the FDA regarding the November 3rd letter, we received an additional letter on November 6, 2008 from the FDA. The November 6th letter stated that the intent of the November 3rd letter was to inform us of the FDA's preliminary disagreement with our response to the warning letter and, before finalizing a position, the FDA reiterated that it wanted to meet with us to discuss the Company's response, issues related to the warning letter and next steps to resolve any differences between the Company and the FDA. We thereafter met with the FDA and, on January 20, 2009, we announced that we had submitted to the FDA a new liquid chemical sterilant processing system for 510(k) clearance, and we communicated to Customers that we would continue supporting the existing SYSTEM 1 installed base in the U.S. for at least a two year period from that date.
On December 3, 2009, the FDA provided a notice (“notice”) to healthcare facility administrators and infection control practitioners describing FDA's “concerns about the SYSTEM 1 Processor, components and accessories, and FDA recommendations.” In the notice, among other things, FDA stated its belief that the SYSTEM 1 device had been significantly modified, that FDA had not cleared or approved the modified device, and that FDA had not determined whether the SYSTEM 1 was safe or effective for its labeled claims. The notice further stated that use of a device that does not properly sterilize or disinfect a medical or surgical device poses risks to patients and users, including the transmission of pathogens, exposure to hazardous chemicals and affect the quality and functionality of reprocessed instruments. The notice stated that FDA was aware of reports of malfunctions of the SYSTEM 1 that had the potential to cause or contribute to serious injuries to patients, such as infections, or injuries to healthcare staff, such as burns. Included in FDA's December 3, 2009 notice was a recommendation from FDA that if users had acceptable alternatives to meet sterilization and disinfection needs, they should transition to that alternative as soon as possible. After its December 3, 2009 notice, we engaged in extensive discussions with the FDA regarding a comprehensive resolution of this matter. On February 2, 2010, the FDA notified healthcare facility administrators and infection control practitioners that FDA's total recommended time period for transitioning from SYSTEM 1 in the U.S. was 18 months from that date.
On April 5, 2010, we received FDA clearance of the new liquid chemical sterilant processing system (SYSTEM 1E). Also in April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19, 2010, a
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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 that do not have FDA clearance, describes various process and compliance matters, and defines penalties in the event of violation of the Consent Decree.
The Consent Decree also provides that we may continue to support our Customers' use of SYSTEM 1 in the U.S., including the sale of consumables, parts and accessories and service for a transition period, not to extend beyond August 2, 2011, subject to compliance with requirements for documentation of the Customer's need for continued support and other conditions and limitations (the “Transition Plan”). This transition period has since been extended by the FDA until February 2, 2012. Our Transition Plan includes the “SYSTEM 1 Rebate Program” (the “Rebate Program”). In April 2010, we began to offer rebates to qualifying Customers. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who were users of SYSTEM 1 at the time the Rebate Program was introduced and who return their units have the option of either a pro-rated cash value or rebate toward the future purchase of new STERIS capital equipment (including SYSTEM 1E) or consumable products. In addition, we provide credits for the return of SYSTEM 1 consumables in unbroken packaging and within shelf life and for the unused portion of SYSTEM 1 service contracts. As a result, we recorded a pre-tax liability of $110.0 million related to the SYSTEM 1 Rebate Program in the first quarter of fiscal 2011. Of the $110.0 million, $102.3 million is attributable to the Customer Rebate portion of the Program and was recorded as a reduction of revenues, and $7.7 million is attributable to the disposal liability of the SYSTEM 1 units to be returned and was recorded as an increase in cost of revenues. This also resulted in a $110.0 million reduction in operating income.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions since January 2009 with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory, administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in respect of the Consent Decree, the Transition Plan, SYSTEM 1, or otherwise with respect to regulatory or compliance matters, as described in this Item 1 or in various portions of Item 1A. of Part I contained in our Annual Report on Form 10-K for the year ended March 31, 2011 filed with the SEC on May 27, 2011.
In December of 2010, we began shipping SYSTEM 1E units after having received FDA clearance for the SYSTEM 1E chemical indicator, which is used in conjunction with the SYSTEM 1E. We also submitted a 510(k) to FDA for an optional spore-based indicator strip for use with SYSTEM 1E. Thereafter, as a result of discussions with FDA, we filed a de novo submission requesting classification of this strip in accordance with Section 513(f)(2) of the Federal Food Drug & Cosmetic Act. The de novo process is part of the initial classification for new devices. This spore-based monitoring strip is an optional accessory and is not required for the proper use of SYSTEM 1E. These actions do not affect the prior clearance of the SYSTEM 1E processor or the SYSTEM 1E chemical indicator. There is no assurance regarding the outcome or timing of the de novo submission.
On February 5, 2010, a complaint was filed by a Customer that claimed to have purchased two SYSTEM 1 devices from STERIS, Physicians of Winter Haven LLC d/b/a Day Surgery Center v. STERIS Corp., Case No. 1:1-cv-00264-CAB (N.D. Ohio). The complaint alleged statutory violations, breaches of various warranties, negligence, failure to warn, and unjust enrichment and Plaintiff sought class certification, damages, and other legal and equitable relief including, without limitation, attorneys' fees and an order requiring STERIS to replace, recall or adequately repair the product and/or to take appropriate regulatory action. On February 7, 2011 we entered into a settlement agreement in which we agreed, among other things, to provide various categories of economic relief for members of the settlement class and not object to plaintiff's counsel's application to the court for attorneys' fees and expenses up to a specified amount. Certification of a settlement class was approved and final approval of the settlement was given by the court in the first quarter of fiscal 2012. During the third quarter of fiscal 2011, we recorded in operating expenses a pre-tax charge of approximately $19.8 million related to the settlement of these proceedings.
Other civil, criminal, regulatory or other proceedings involving our products or services also could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011: “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
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compliance matters, including the Warning Letter and Consent Decree.”, the “Risk Factor” titled: “Our business may be adversely affected as a result of the U.S. Food and Drug Administration notices to healthcare administrators and device manufacturers, and related matters,” 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.
Except as noted above, we believe there have been no material recent developments concerning these legal proceedings since June 30, 2011 and no new material pending legal proceedings that are required to be reported.
ITEM 1A. | RISK FACTORS |
We believe there have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the SEC on May 27, 2011, that would materially affect our business, results of operations, or financial condition.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the second quarter of fiscal 2012, we repurchased 1,334,397 of our common shares. These repurchases were pursuant to a single repurchase program which was approved by the Company’s Board of Directors and announced on March 14, 2008, authorizing the repurchase of up to $300.0 million of our common shares. As of September 30, 2011, $128,460 in common shares remained authorized for repurchase under this authorization. This common share repurchase authorization does not have a stated maturity date. The following table summarizes the common shares repurchase activity during the second quarter of fiscal 2012 under our common share repurchase program:
(a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans at Period End | |||||||||||
July 1-31 | 13,200 | $ | 34.85 | 13,200 | $ | 168,135 | ||||||||
August 1-31 | 647,787 | 30.28 | 647,787 | 148,518 | ||||||||||
September 1-30 | 673,410 | 29.79 | 673,410 | 128,460 | ||||||||||
Total | 1,334,397 | (1) | $ | 30.08 | (1) | 1,334,397 | $ | 128,460 | ||||||
(1) | Does not include 36 shares purchased during the quarter at an average price of $32.17 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. |
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ITEM 5. OTHER INFORMATION
On November 4, 2011 the Company executed an Amendment No. 1 (the “Amendment”) to the STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated Effective January 1, 2009) (the “Plan”). The Amendment imposes a prospective freeze on Plan compensation deferrals. The deferral freeze applies to base salary payable in 2012 and succeeding calendar years and commissions, bonuses and other performance based compensation payable in respect of the 2013 fiscal year and succeeding fiscal years. The Amendment does not impact the timing of Plan benefit payments.
Also on November 4, 2011 the Company executed a letter agreement with Bank of America, N.A. (“B of A”) regarding a transfer and advised line for letters of credit (the “Agreement”). The Agreement provides for the transfer to B of A of all letters of credit currently outstanding under the Company's Second Amended and Restated Credit Agreement with Key Bank National Association, as administrative agent, and the other financial institutions from time to time party thereto, and the consolidation of such letters of credit for Agreement purposes with all then outstanding letters of credit previously issued by or transferred to B of A on behalf of the Company or its subsidiaries on a standalone basis (all such letters of credit being hereafter sometimes collectively referred to as “Existing Letters of Credit”). The Agreement also provides for the renewal of Existing Letters of Credit and issuance of new letters of credit on behalf of the Company or its subsidiaries (together with Existing Letters of Credit, collectively referred to as “Letters of Credit”) from time to time upon request of the Company and in the discretion of B of A. The aggregate face amount of all Letters of Credit outstanding at any time under the Agreement may not exceed $35 million. No Letter of Credit may terminate more than two years from the date of its issuance or last renewal except that Letters of Credit having a face amount not exceeding $3 million in the aggregate at any time outstanding may terminate not later than five years from the date of their respective issuance or last renewal. Also, under the Agreement, B of A has the right at any time to require in its discretion that the Company cash collateralize undrawn Letters of Credit or provide another form of support therefor. The Company has other existing banking/financial relationships with B of A as well.
ITEM 6. | EXHIBITS |
Exhibits required by Item 601 of Regulation S-K
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Exhibit Number | Exhibit Description |
3.1 | 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 filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference). |
3.2 | 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). |
4.1 | Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference). |
10.1 | Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2003 Senior Notes]. |
10.2 | Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2008 Senior Notes]. |
10.3 | 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). |
15.1 | Letter Re: Unaudited Interim Financial Information. |
31.1 | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant 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. |
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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 |
/S/ MICHAEL J. TOKICH |
Michael J. Tokich Senior Vice President and Chief Financial Officer |
November 8, 2011 |
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EXHIBIT INDEX
Exhibit Number | Exhibit Description |
3.1 | 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 filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference). |
3.2 | 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). |
4.1 | Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference). |
10.1 | Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2003 Senior Notes]. |
10.2 | Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2008 Senior Notes]. |
10.3 | 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). |
15.1 | Letter Re: Unaudited Interim Financial Information. |
31.1 | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant 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. |
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Conformed Copy
Exhibit 10.1
GUARANTY SUPPLEMENT
To the Holders of the Series A-2 Notes
and Series A-3 Notes (as
hereinafter defined) of STERIS
Corporation (the “Company”)
Re: STERIS Brazil Holdings, LLC - 2003 Senior Note Issuance
Ladies and Gentlemen:
WHEREAS, in order to refinance certain debt and for general corporate purposes, the Company issued the following notes (a) $40,000,000 aggregate principal amount of its 5.25% Senior Notes, Series A-2, due December 15, 2013 (the “Series A-2 Notes”) and (b) $20,000,000 aggregate principal amount of its 5.38% Senior Notes, Series A-3, due December 15, 2015 (the “Series A-3 Notes”; the Series A-2 Notes and the Series A-3 Notes shall be collectively referred to herein to the “Notes”) pursuant to those certain Note Purchase Agreements dated as of December 17, 2003 (the “Note Purchase Agreements”) between the Company and each of the purchasers named on Schedule A thereto (the “Initial Note Purchasers”).
WHEREAS, as a condition precedent to their purchase of the Notes, the Initial Note Purchasers required that certain subsidiaries of the Company enter into a Subsidiary Guaranty as security for the Notes (the “Guaranty”).
Pursuant to Section 9.7 of the Note Purchase Agreements, the Company has agreed to cause the undersigned, STERIS Brazil Holdings, LLC, a limited liability company formed under the laws of Delaware (the “Additional Guarantor”), to join in the Guaranty. In accordance with the requirements of the Guaranty, the Additional Guarantor desires to amend the definition of Guarantor (as the same may have been heretofore amended) set forth in the Guaranty attached hereto so that at all times from and after the date hereof, the Additional Guarantor shall be jointly and severally liable as set forth in the Guaranty for the obligations of the Company under the Note Purchase Agreements and Notes to the extent and in the manner set forth in the Guaranty.
The undersigned is the duly elected Vice President and Treasurer of the Additional Guarantor, a direct or indirect subsidiary of the Company, and is duly authorized to execute and deliver this Guaranty Supplement to each of you. The execution by the undersigned of this Guaranty Supplement shall evidence its consent to and acknowledgment and approval of the terms set forth herein and in the Guaranty and by such execution the Additional Guarantor shall be deemed to have made in favor of the Holders the representations and warranties set forth in Section 5 of the Guaranty.
Upon execution of this Guaranty Supplement, the Guaranty shall be deemed to be amended as set forth above. Except as amended herein, the terms and provisions of the Guaranty are hereby ratified, confirmed and approved in all respects.
Any and all notices, requests, certificates and other instruments (including the Notes) may refer to the Guaranty without making specific reference to this Guaranty Supplement, but nevertheless all such references shall
be deemed to include this Guaranty Supplement unless the context shall otherwise require.
Dated: July 11, 2011
STERIS Brazil Holdings, LLC
By: /s/William L. Aamoth
William L. Aamoth
Vice President and Treasurer
Accepted and Agreed:
STERIS CORPORATION
By: /s/William L. Aamoth
William L. Aamoth
Vice President and Corporate Treasurer
CONFORMED COPY
SUBSIDIARY GUARANTY
Dated as of December 17, 2003
Re: $40,000,000 4.20% Senior Notes, Series A-1, due December 15, 2008 $40,000,000 5.25% Senior Notes, Series A-2, due December 15, 2013 $20,000,000 5.38% Senior Notes, Series A-3, due December 15, 2015
of
STERIS CORPORATION
TABLE OF CONTENTS
(Not a part of the Agreement)
SECTION | HEADING | PAGE | ||
Parties | 1 | ||||
Recitals | 1 | ||||
SECTION 1. | DEFINITIONS | 2 | |||
SECTION 2. | GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS | 2 | |||
SECTION 3. | GUARANTY OF PAYMENT AND PERFORMANCE | 2 | |||
SECTION 4. | GENERAL PROVISIONS RELATING TO THE GUARANTY | 3 | |||
SECTION 5. | REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS | 8 | |||
SECTION 6. | GUARANTOR COVENANTS | 9 | |||
SECTION 7. | [RESERVED] | 9 | |||
SECTION 8. | GOVERNING LAW | 9 | |||
SECTION 9. | [RESERVED] | 10 | |||
SECTION 10. | AMENDMENTS, WAIVERS AND CONSENTS | 10 | |||
SECTION 11. | NOTICES | 11 | |||
SECTION 12. | MISCELLANEOUS | 11 | |||
SECTION 13. | RELEASE | 12 | |||
Signature | 14 | ||||
SUBSIDIARY GUARANTY
Re: | $40,000,000 4.20% Senior Notes, Series A-1, due December 15, 2008 |
$40,000,000 5.25% Senior Notes, Series A-2, due December 15, 2013
$20,000,000 5.38% Senior Notes, Series A-3, due December 15, 2015
This SUBSIDIARY GUARANTY dated as of December 17, 2003 (the or this "Guaranty") is entered into on a joint and several basis by each of the undersigned, together with any entity which may become a party hereto by execution and delivery of a Guaranty Supplement in substantially the form set forth as Exhibit A hereto (a "Guaranty Supplement") (which parties are hereinafter referred to individually as a "Guarantor" and collectively as the "Guarantors").
RECITALS
A.Each Guarantor is a direct or indirect subsidiary of STERIS Corporation, an Ohio corporation (the "Company").
B.In order to refinance certain debt and for general corporate purposes, the Company has entered into those certain Note Purchase Agreements dated as of December 17, 2003 (the "Note Purchase Agreements") between the Company and each of the purchasers named on Schedule A thereto (the "Initial Note Purchasers"; the Initial Note Purchasers, together with their successors, assigns or any other future holder of the Notes (as defined below), the "Holders"), providing for, inter alia, the issue and sale by the Company to the Initial Note Purchasers of $40,000,000 aggregate principal amount of its 4.20% Senior Notes, Series A-1, due December 15, 2008, $40,000,000 aggregate principal amount of its 5.25% Senior Notes, Series A-2, due December 15, 2013 and $20,000,000 aggregate principal amount of its 5.38% Senior Notes, Series A-3, due December 15, 2015.
C.The Initial Note Purchasers have required as a condition to their purchase of the Notes that the Company cause each of the undersigned to enter into this Guaranty and to cause each Subsidiary (as defined in the Note Purchase Agreements) that after the date hereof delivers a guaranty pursuant to the Bank Credit Agreement (as defined in the Note Purchase Agreements) to enter into a Guaranty Supplement, in each case as security for the Notes, and the Company has agreed to cause each of the undersigned to execute this Guaranty and to cause such additional Subsidiaries to execute a Guaranty Supplement, in each case in order to induce the Initial Note Purchasers to purchase the Notes and thereby benefit the Company and its Subsidiaries.
D.Each of the Guarantors will derive substantial direct and indirect benefit from the sale of the Notes to the Initial Note Purchasers.
Now, THEREFORE, as required by the Note Purchase Agreements and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, each Guarantor does hereby covenant and agree, jointly and severally, as follows:
SECTION 1. DEFINITIONS.
Capitalized terms used herein shall have the meanings set forth in the Note Purchase Agreements unless herein defined or the context shall otherwise require.
SECTION 2. GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS.
(a)Subject to the limitation set forth in Section 2(b) hereof and to the provisions of Section 13 hereof, each Guarantor jointly and severally does hereby absolutely and unconditionally guarantee unto the Holders: (1) the full and prompt payment of the principal of, Make-Whole Amount, if any, and interest on the Notes from time to time outstanding, as and when such payments shall become due and payable whether by lapse of time, upon redemption or prepayment, by extension or by acceleration or declaration or otherwise (including (to the extent legally enforceable) interest due on overdue payments of principal, Make-Whole Amount, if any, or interest at the rate set forth in the Notes and interest accruing at the then applicable rate provided in the Notes after the filing of any petition in bankruptcy,
or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in Federal or other immediately available funds of the United States of America which at the time of payment or demand therefor shall be legal tender for the payment of public and private debts, (2) the full and prompt performance and observance by the Company of each and all of the obligations, covenants and agreements required to be performed or owed by the Company under the terms of the Notes and the Note Purchase Agreements and (3) the full and prompt payment, upon demand by any Holder, of all reasonable actual out of pocket costs and expenses, legal or otherwise (including attorneys' fees), if any, as shall have been expended or incurred in the protection or enforcement of any rights, privileges or liabilities in favor of the Holders under or in respect of the Notes, the Note Purchase Agreements or under this Guaranty or in any consultation or action in connection therewith or herewith and in each and every case irrespective of the validity, regularity, or enforcement of any of the Notes or Note Purchase Agreements or any of the terms thereof or any other like circumstance or circumstances.
(b)The liability of each Guarantor under this Guaranty shall not exceed an amount equal to a maximum amount as will, after giving effect to such maximum amount and all other liabilities of such Guarantor, contingent or otherwise, result in the obligations of such Guarantor hereunder not constituting a fraudulent transfer, obligation or conveyance.
SECTION 3. GUARANTY OF PAYMENT AND PERFORMANCE.
This is a guarantee of payment and performance and each Guarantor hereby waives, to the fullest extent permitted by law, any right to require that any action on or in respect of any Note or the Note Purchase Agreements be brought against the Company or any other Person or that resort be had to any direct or indirect security for the Notes or for this Guaranty or any other remedy. Any Holder may, at its option, proceed hereunder against any Guarantor in the first instance to collect monies when due, the payment of which is guaranteed hereby, without first proceeding against the Company or any other Person and without first resorting to any direct or indirect security for the Notes or for this Guaranty or any other remedy. The liability of each Guarantor hereunder shall in no way be affected or impaired by any acceptance by any Holder of any direct or indirect security for, or other guaranties of, any Debt, liability or obligation of the Company or any other Person to any Holder or by any failure, delay, neglect or omission by any Holder to realize upon or protect any such guarantees, Debt, liability or obligation or any notes or other instruments evidencing the same or any direct or indirect security therefor or by any approval, consent, waiver, or other action taken, or omitted to be taken by any such Holder.
The covenants and agreements on the part of the Guarantors herein contained shall take effect as joint and several covenants and agreements, and references to the Guarantors shall take effect as references to each of them and none of them shall be released from liability hereunder by reason of the guarantee ceasing to be binding as a continuing security on any other of them.
SECTION 4. GENERAL PROVISIONS RELATING TO THE GUARANTY.
(a) Each Guarantor hereby consents and agrees that any Holder or Holders from time to time, with or without any further notice to or assent from any other Guarantor may, without in any manner affecting the liability of any Guarantor under this Guaranty, and upon such terms and conditions as any such Holder or Holders may deem advisable:
(1)extend in whole or in part (by renewal or otherwise), modify, change, compromise, release or extend the duration of the time for the performance or payment of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligations of the Company on the Notes, or waive any Default with respect thereto, or waive, modify, amend or change any provision of any other agreement or this Guaranty; or
(2)sell, release, surrender, modify, impair, exchange or substitute any and all property, of any nature and from whomsoever received, held by, or for the benefit of, any such Holder as direct or indirect security for the payment or performance of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes; or
(3)settle, adjust or compromise any claim of the Company against any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes.
Each Guarantor hereby ratifies and confirms any such extension, renewal, change, sale, release, waiver,
surrender, exchange, modification, amendment, impairment, substitution, settlement, adjustment or compromise and that the same shall be binding upon it, and hereby waives, to the fullest extent permitted by law, any and all defenses, counterclaims or offsets which it might or could have by reason thereof, it being understood that such Guarantor shall at all times be bound by this Guaranty and remain liable hereunder.
(b) Each Guarantor hereby waives, to the fullest extent permitted by law:
(1)notice of acceptance of this Guaranty by the Holders or of the creation, renewal or accrual of any liability of the Company, present or future, or of the reliance of such Holders upon this Guaranty (it being understood that every Debt, liability and obligation described in Section 2 hereof shall conclusively be presumed to have been created, contracted or incurred in reliance upon the execution of this Guaranty);
(2)demand of payment by any Holder from the Company or any other Person indebted in any manner on or for any of the Debt, liabilities or obligations hereby guaranteed; and
(3)presentment for the payment by any Holder or any other Person of the Notes or any other instrument, protest thereof and notice of its dishonor to any party thereto and to such Guarantor.
The obligations of each Guarantor under this Guaranty and the rights of any Holder to enforce such obligations by any proceedings, whether by action at law, suit in equity or otherwise, shall not be subject to any reduction, limitation, impairment or termination (other than by payment in full of the Notes and the obligations of the Company under the Note Purchase Agreements), whether by reason of any claim of any character whatsoever or otherwise and shall not be subject to any defense, set-off, counterclaim (other than any compulsory counterclaim), recoupment or termination whatsoever.
(c) Subject to Section 13 hereof, the obligations of the Guarantors hereunder shall be binding upon the Guarantors and their successors and assigns, and shall remain in full force and effect until the entire principal, interest and Make-Whole Amount, if any, on the Notes and all other sums due pursuant to Section 2 shall have been paid and such obligations shall not be affected, modified or impaired upon the happening from time to time of any event, including without limitation any of the following, whether or not with notice to or the consent of the Guarantors:
(1)the genuineness, validity, regularity or enforceability of the Notes, the Note Purchase Agreements or any other agreement or any of the terms of any thereof, the continuance of any obligation on the part of the Company, any other Guarantors or any other Person on or in respect of the Notes or under the Note Purchase Agreements or any other agreement or the power or authority or the lack of power or authority of the Company to issue the Notes or the Company to execute and deliver the Note Purchase Agreements or any other agreement or of any other Guarantors to execute and deliver this Guaranty or any other agreement or to perform any of its obligations hereunder or the existence or continuance of the Company or any other Person as a legal entity; or
(2)any default, failure or delay, willful or otherwise, in the performance by the Company, any other Guarantor or any other Person of any obligations of any kind or character whatsoever under the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or
(3)any creditors' rights, bankruptcy, receivership or other insolvency proceeding of the Company, any other Guarantor or any other Person or in respect of the property of the Company, any other Guarantor or any other Person or any merger, consolidation, reorganization, dissolution, liquidation, the sale of all or substantially all of the assets of or winding up of the Company, any other Guarantor or any other Person; or
(4)impossibility or illegality of performance on the part of the Company, any other Guarantor or any other Person of its obligations under the Notes, the Note Purchase Agreements, this Guaranty or any other agreements; or
(5)in respect of the Company, any other Guarantors or any other Person, any change of circumstances, whether or not foreseen or foreseeable, whether or not imputable to the Company, any other Guarantors or any other Person, or other impossibility of performance through fire, explosion, accident, labor disturbance, floods, droughts, embargoes, wars (whether or not declared), civil commotion, acts of God or the public enemy, delays or failure of suppliers or carriers, inability to obtain materials, action of any Federal or state regulatory body or agency, change of law or any other causes affecting performance, or any other force majeure, whether or not beyond the control of the Company, any other Guarantors or any other Person and whether or not of the kind hereinbefore specified; or
(6)any attachment, claim, demand, charge, Lien, order, process, encumbrance or any other happening or event or reason, similar or dissimilar to the foregoing, or any withholding or diminution at the source, by reason of any taxes, assessments, expenses, Debt, obligations or liabilities of any character, foreseen or unforeseen, and whether or not valid, incurred by or against the Company, any Guarantor or any other Person or any claims, demands, charges or Liens of any nature, foreseen or unforeseen, incurred by the Company, any Guarantor or any other Person, or against any sums payable in respect of the Notes or under the Note Purchase Agreements or this Guaranty, so that such sums would be rendered inadequate or would be unavailable to make the payments herein provided; or
(7)any order, judgment, decree, ruling or regulation (whether or not valid) of any court of any nation or of any political subdivision thereof or any body, agency, department, official or administrative or regulatory agency of any thereof or any other action, happening, event or reason whatsoever which shall delay, interfere with, hinder or prevent, or in any way adversely affect, the performance by the Company, any Guarantor or any other Person of its respective obligations under or in respect of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or
(8)the failure of any Guarantor to receive any benefit from or as a result of its execution, delivery and performance of this Guaranty; or
(9)any failure or lack of diligence in collection or protection, failure in presentment or demand for payment, protest, notice of protest, notice of default and of nonpayment, any failure to give notice to any Guarantor of failure of the Company, anyGuarantor or any other Person to keep and perform any obligation, covenant or agreement under the terms of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or failure to resort for payment to the Company, any other Guarantor or to any other Person or to any other guaranty or to any property, security, Liens or other rights or remedies; or
(10)the acceptance of any additional security or other guaranty, the advance of additional money to the Company or any other Person, the renewal or extension of the Notes or amendments, modifications, consents or waivers with respect to the Notes, the Note Purchase Agreements or any other agreement, or the sale, release, substitution or exchange of any security for the Notes; or
(11)any merger or consolidation of the Company, any other Guarantor or any other Person into or with any other Person or any sale, lease, transfer or other disposition of any of the assets of the Company, any other Guarantor or any other Person to any other Person, or any change in the ownership of any shares of the Company, any other Guarantor or any other Person; or
(12)any defense whatsoever that: (i) the Company or any other Person might have to the payment of the Notes (principal, Make-Whole Amount, if any, or interest), other than payment thereof in Federal or other immediately available funds, or (ii) the Company or any other Person might have to the performance or observance of any of the provisions of the Notes, the Note Purchase Agreements or any other agreement, whether through the satisfaction or purported satisfaction by the Company, any other Guarantor or any other Person of its debts due to any cause such as bankruptcy, insolvency, receivership, merger, consolidation, reorganization, dissolution, liquidation, winding-up or otherwise, other than the defense of indefeasible payment in full in cash of the Notes; or
(13)any act or failure to act with regard to the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or anything which might vary the risk of any Guarantor or any other Person; or
(14)any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor or any other Person in respect of the obligations of any Guarantor or other Person under this Guaranty or any other agreement, other than the defense of indefeasible payment in full in cash of the Notes;
provided that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, though not specifically mentioned above, it being the purpose and intent of this Guaranty and the parties hereto that the obligations of each Guarantor shall be absolute and unconditional and shall not be discharged, impaired or varied except pursuant to Section 13 hereof and by the payment of the principal of, Make-Whole Amount, if any, and interest on the Notes in accordance with their respective terms whenever the same shall become due and payable as in the Notes provided and all other sums due and payable under the Note Purchase Agreements, at the place specified in and all in the manner and with the effect provided in the Notes and the Note Purchase Agreements, as each may be amended or modified from time to time. Without limiting the foregoing, it is understood that repeated and successive demands may be made and recoveries may be had hereunder as and when, from time to time, the Company shall default under or in respect of the terms of the Notes or the Note Purchase Agreements and that notwithstanding recovery hereunder for or in respect of any given default or defaults by the
Company under the Notes or the Note Purchase Agreements, this Guaranty shall remain in full force and effect and shall apply to each and every subsequent default.
(d) All rights of any Holder may be transferred or assigned at any time and shall be considered to be transferred or assigned at any time or from time to time upon the transfer of such Note in accordance with the Note Purchase Agreements whether with or without the consent of or notice to the Guarantors under this Guaranty or to the Company.
(e) To the extent of any payments made under this Guaranty, the Guarantors shall be subrogated to the rights of the Holder or Holders upon whose Notes such payment was made, but each Guarantor covenants and agrees that such right of subrogation shall be junior and subordinate in right of payment to the prior indefeasible final payment in cash in full of all amounts due and owing by the Company with respect to the Notes and the Note Purchase Agreements and by the Guarantors under this Guaranty, and the Guarantors shall not take any action to enforce such right of subrogation, and the Guarantors shall not accept any payment in respect of such right of subrogation, until all amounts due and owing by the Company under or in respect of the Notes and the Note Purchase Agreements and all amounts due and owing by the Guarantors hereunder have indefeasibly been finally paid in cash in full. If any amount shall be paid to any Guarantor in violation of the preceding sentence at any time prior to the indefeasible payment in cash in full (or other satisfaction agreed to by the Holders) of the Notes and all other amounts payable under the Notes, the Note Purchase Agreements and this Guaranty, such amount shall be held in trust for the benefit of the Holders and shall, except to the extent the Holders have received payment, promptly be paid to the Holders to be credited and applied to the amounts due or to become due with respect to the Notes and all other amounts payable under the Note Purchase Agreements and this Guaranty, whether matured or unmatured. Each Guarantor acknowledges that it has received direct and indirect benefits from the financing arrangements contemplated by the Note Purchase Agreements and that the waiver set forth in this paragraph (e) is knowingly made as a result of the receipt of such benefits.
(f) To the extent of any payments made under this Guaranty, each Guarantor making such payment shall have a right of contribution from the other Guarantors, but such Guarantor covenants and agrees that such right of contribution shall be subordinate in right of payment to the rights of the Holders for which full payment has not been made or provided for and, to that end, such Guarantor agrees not to claim or enforce any such right of contribution unless and until all of the Notes and all other sums due and payable under the Note Purchase Agreements have been fully and irrevocably paid and discharged.
(g) Each Guarantor agrees that to the extent the Company, any other Guarantor or any other Person makes any payment on any Note, which payment or any part thereof is subsequently invalidated, voided, declared to be fraudulent or preferential, set aside, recovered, rescinded, or otherwise defeased or is required to be retained by or repaid to a trustee, receiver, or any other Person under any bankruptcy code, common law, or equitable cause, then and to the extent of such payment, the obligation or the part thereof intended to be satisfied shall be revived and continued in full force and effect with respect to the Guarantors' obligations hereunder, as if said payment had not been made. The liability of the Guarantors hereunder shall not be reduced or discharged, in whole or in part, by any payment to any Holder from any source that is thereafter paid, returned or refunded in whole or in part by reason of the assertion of a claim of any kind relating thereto, including, but not limited to, any claim for breach of contract, breach of warranty, preference, illegality, invalidity, or fraud asserted by any account debtor or by any other Person.
(h) No Holder shall be under any obligation: (1) to marshal any assets in favor of the Guarantors or in payment of any or all of the liabilities of the Company under or in respect of the Notes or the obligations of the Guarantors hereunder or (2) to pursue any other remedy that the Guarantors may or may not be able to pursue themselves and that may lighten the Guarantors' burden, any right to which each Guarantor hereby expressly waives.
(i) The obligations of each Guarantor under this Guaranty rank pari passu in right of payment with all other Debt of such Guarantor which is not secured or which is not expressly subordinated in right of payment to any other unsecured Debt of such Guarantor.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS.
Each Guarantor represents and warrants to each Holder that:
(a)Such Guarantor is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on (1) the business, operations, affairs, financial condition, assets or properties of the Company and its subsidiaries, taken as a whole, or (2) the ability of such Guarantor to perform its obligations under this Guaranty, or (3) the validity or enforceability of this Guaranty. Such Guarantor has the power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Guaranty and to perform the provisions hereof.
(b)This Guaranty has been duly authorized by all necessary action on the part of such Guarantor, and upon execution and delivery of this Guaranty and of the Note Purchase Agreements and receipt of consideration for the Note Purchase Agreements and the Notes, this Guaranty will constitute a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(c)The execution, delivery and performance by such Guarantor of this Guaranty will not (1) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Guarantor under any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, charter document or by-law, or any other material agreement or instrument to which such Guarantor is bound or by which such Guarantor or any of its properties may be bound or affected, (2) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Guarantor or (3) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the such Guarantor.
(d)No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority by the Guarantor is required in connection with the execution, delivery or performance by such Guarantor of this Guaranty.
(e)Such Guarantor has capital not unreasonably small in relation to its business or any contemplated or undertaken transaction and has assets having a value both at fair valuation and at present fair salable value greater than the amount required to pay its debts as they become due and greater than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. Such Guarantor does not intend to incur, or believe or should have believed that it will incur, debts beyond its ability to pay such debts as they become due. Such Guarantor will not be rendered insolvent by the execution and delivery of, and performance of its obligations under, this Guaranty. Such Guarantor does not intend to hinder, delay or defraud its creditors by or through the execution and delivery of, or performance of its obligations under, this Guaranty.
SECTION 6. GUARANTOR COVENANTS.
From and after the date of issuance of the Notes by the Company and continuing so long as any amount remains unpaid thereon each Guarantor agrees to comply with the terms and provisions of Sections 9.1, 9.2, 9.3, 9.4 and 9.5 of the Note Purchase Agreements, insofar as such provisions apply to such Guarantor, as if said Sections were set forth herein in full.
SECTION 7. [RESERVED]
SECTION 8. GOVERNING LAW.
(a)THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE THEREIN.
(b)Each Guarantor hereby (1) irrevocably submits and consents to the jurisdiction of the federal court located within the County of New York, State of New York (or if such court lacks jurisdiction, the State courts located therein), and irrevocably agrees that all actions or proceedings relating to this Guaranty may be litigated in such courts, and (2) waives any objection which it may have based on improper venue or forum non conveniens to the conduct of
any proceeding in any such court and waives personal service of any and all process upon it, and (3) consents that all such service of process be made by delivery to it at the address of such Person set forth in Section 11 below or to its agent referred to below at such agent's address set forth below (with a courtesy copy to such Guarantor at the address set forth in Section 11) and that service so made shall be deemed to be completed upon actual receipt. Each Guarantor hereby irrevocably appoints CT Corporation System, with an office on the date hereof at 111 Eighth Avenue, New York, New York 10011, as its agent for the purpose of accepting service of any process within the State of New York. Nothing contained in this section shall affect the right of any Holder to serve legal process in any other manner permitted by law or to bring any action or proceeding in the courts of any jurisdiction against a Guarantor or to enforce a judgment obtained in the courts of any other jurisdiction.
(c) The parties hereto waive any right to have a jury participate in resolving any dispute, whether sounding in contract, tort, or otherwise, between them arising out of, connected with, related to or incidental to the relationship established between them in connection with this Guaranty, any financing agreement, any loan party document or any other instrument, document or agreement executed or delivered in connection herewith or the transactions related hereto. The parties hereto hereby agree and consent that any such claim, demand, action or cause of action shall be decided by court trial without a jury and that any of them may file an original counterpart or a copy of this Guaranty with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury.
SECTION 9. [RESERVED]
SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS.
(a)This Guaranty may be amended, and the observance of any term hereof may be waived (either retroactively or prospectively), with (and only with) the written consent of each Guarantor and the Required Holders.
(b)The Guarantors will provide each Holder (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof. The Guarantors will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 10 to each Holder promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders.
(c)The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of fee or otherwise, or grant any security, to any Holder as consideration for or as an inducement to the entering into by any Holder of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each Holder even if such Holder did not consent to such waiver or amendment.
(d)Any amendment or waiver consented to as provided in this Section 10 applies equally to all Holders and is binding upon them and upon each future holder and upon the Guarantors. No such amendment or waiver will extend to or affect any obligation, covenant or agreement not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Guarantors and any Holder nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of any Holder. As used herein, the term "this Guaranty" and references thereto shall mean this Guaranty as it may from time to time be amended or supplemented.
(e)Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Guaranty, Notes directly or indirectly owned by any Guarantor, the Company or any of their respective
subsidiaries or Affiliates shall be deemed not to be outstanding.
SECTION 11. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(1)if to an Initial Note Purchaser or such Initial Note Purchaser's nominee, to such Initial Note Purchaser or such Initial Note Purchaser's nominee at the address specified for such communications in Schedule A to the Note Purchase Agreements, or at such other address as such Initial Note Purchaser or such Initial Note Purchaser's nominee shall have specified to any Guarantor or the Company in writing,
(2)if to any other Holder, to such Holder at such address as such Holder shall have specified to any Guarantor or the Company in writing, or
(3)if to any Guarantor, to such Guarantor c/o the Company at its address set forth at the beginning of the Note Purchase Agreements to the attention of Corporate Treasurer, or at such other address as such Guarantor shall have specified to the Holders in writing.
Notices under this Section 11 will be deemed given only when actually received.
SECTION 12. MISCELLANEOUS.
(a) No remedy herein conferred upon or reserved to any Holder is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Guaranty now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such
right or power or shall be construed to be a waiver thereof but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle any Holder to exercise any remedy reserved to it under the Guaranty, it shall not be necessary for such Holder to physically produce its Note in any proceedings instituted by it or to give any notice, other than such notice as may be herein expressly required.
(b) The Guarantors will pay all sums becoming due under this Guaranty by the method and at the address specified in the Note Purchase Agreements, or by such other method or at such other address as any Holder shall have from time to time specified to the Guarantors in writing for such purpose, without the presentation or surrender of this Guaranty or any Note.
(c) Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
(d) If the whole or any part of this Guaranty shall be now or hereafter become unenforceable against any one or more of the Guarantors for any reason whatsoever or if it is not executed by any one or more of the Guarantors, this Guaranty shall nevertheless be and remain fully binding upon and enforceable against each other Guarantor as if it had been made and delivered only by such other Guarantors.
(e) This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of each Holder and its successors and assigns so long as its Notes remain outstanding and unpaid.
(f) This Guaranty may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
SECTION 13. RELEASE.
Notwithstanding anything that may be contained herein to the contrary, the Holders agree that, in accordance with Section 2.2(e) of the Note Purchase Agreements, this Guaranty shall be automatically released and discharged without the necessity of further action on the part of the Holders if, and to the extent, the corresponding guaranty given pursuant to the terms of the Bank Credit Agreement is released and discharged; provided that in the event the Guarantor shall again become obligated under or with respect to the previously discharged Guaranty pursuant to the terms and provisions of the Guaranty, the Bank Credit Agreement or any additional bank loan agreement entered into by the Company pursuant to which such lenders make available to the Company credit facilities which are pari passu with the Notes, then the obligations of such Guarantor under this Guaranty shall be reinstated and any release thereof previously given shall be deemed null and void, and such Guaranty shall again benefit the Holders on an equal and pro rata basis and such Guaranty shall once again be subject to the terms of the Intercreditor Agreement. Any release by the Holders shall be deemed to have occurred concurrently with the release and discharge under the Bank Credit Agreement. The Company shall promptly notify the Holders of any release of a Subsidiary Guaranty pursuant to this
Section 13 and shall deliver evidence of any release or discharge of a guaranty or Lien in customary form.
[Intentionally Blank]
IN WITNESS WHEREOF, the undersigned has caused this Subsidiary Guaranty to be duly executed by an authorized representative as of this 17th day of December, 2003.
ECOMED, INC.
AMERICAN STERILIZER COMPANY
STERIS EUROPE, INC.
STERIS ASIA PACIFIC, INC.
STERIS INC.
STERIS LATIN AMERICA, INC.
HTD HOLDING CORP.
HSTD LLC
HAUSTED, INC.
ISOMEDIX INC.
ISOMEDIX OPERATIONS INC.
STERILTEK, INC.
STRATEGIC TECHNOLOGY ENTERPRISES, INC.
By: /s/ William L Aamoth
Name: William L. Aamoth
Title: Treasurer
Accepted and Agreed:
STERIS CORPORATION
By: /s/ William L Aamoth
Name: William L. Aamoth
Title: Treasurer
CONFORMED COPY
Exhibit 10.2
GUARANTY SUPPLEMENT
To the Holders of the Series A-1 Notes, Series
A-2 Notes and Series A-3 Notes (as
hereinafter defined) of STERIS Corporation
(the “Company”)
Re: STERIS Brazil Holdings, LLC- 2008 Senior Note Issuance
Ladies and Gentlemen:
WHEREAS, in order to refinance certain debt and for general corporate purposes, the Company issued (a) $30,000,000 aggregate principal amount of its 5.63% Senior Notes, Series A-1, due August 15, 2013 (the “Series A-1 Notes”), (b) $85,000,000 aggregate principal amount of its 6.33% Senior Notes, Series A-2, due August 15, 2018 (the “Series A-2 Notes”) and (c) $35,000,000 aggregate principal amount of its 6.43% Senior Notes, Series A-3, due August 15, 2020 (the “Series A-3 Notes”; the Series A-1 Notes, Series A-2 Notes and the Series A-3 Notes shall be collectively referred to herein to the “Notes”) pursuant to those certain Note Purchase Agreements dated as of August 15, 2008 (the “Note Purchase Agreements”) between the Company and each of the purchasers named on Schedule A thereto (the “Initial Note Purchasers”).
WHEREAS, as a condition precedent to their purchase of the Notes, the Initial Note Purchasers required that certain subsidiaries of the Company enter into a Subsidiary Guaranty as security for the Notes (the “Guaranty”).
Pursuant to Section 9.7 of the Note Purchase Agreements, the Company has agreed to cause the undersigned, STERIS Brazil Holdings, LLC, a limited liability company formed under the laws of Delaware (the “Additional Guarantor”), to join in the Guaranty. In accordance with the requirements of the Guaranty, the Additional Guarantor desires to amend the definition of Guarantor (as the same may have been heretofore amended) set forth in the Guaranty attached hereto so that at all times from and after the date hereof, the Additional Guarantor shall be jointly and severally liable as set forth in the Guaranty for the obligations of the Company under the Note Purchase Agreements and Notes to the extent and in the manner set forth in the Guaranty.
The undersigned is the duly elected Vice President and Treasurer of the Additional Guarantor, a subsidiary of the Company, and is duly authorized to execute and deliver this Guaranty Supplement to each of you. The execution by the undersigned of this Guaranty Supplement shall evidence its consent to and acknowledgment and approval of the terms set forth herein and in the Guaranty and by such execution the Additional Guarantor shall be deemed to have made in favor of the Holders the representations and warranties set forth in Section 5 of the Guaranty.
Upon execution of this Guaranty Supplement, the Guaranty shall be deemed to be amended as set forth above. Except as amended herein, the terms and provisions of the Guaranty are hereby ratified, confirmed and approved in all respects.
Any and all notices, requests, certificates and other instruments (including the Notes) may refer to the
Guaranty without making specific reference to this Guaranty Supplement, but nevertheless all such references shall be deemed to include this Guaranty Supplement unless the context shall otherwise require.
Dated: July 11, 2011
STERIS Brazil Holdings, LLC
By: /s/William L. Aamoth
William L. Aamoth
Vice President and Treasurer
Accepted and Agreed:
STERIS CORPORATION
By: /s/William L. Aamoth
William L. Aamoth
Vice President and Corporate Treasurer
EXECUTION COPY
SUBSIDIARY GUARANTY
Dated as of August 15, 2008
Re: $30,000,000 5.63% Senior Notes, Series A-1, due August 15, 2013
$85,000,000 6.33% Senior Notes, Series A-2, due August 15, 2018
$35,000,000 6.43% Senior Notes, Series A-3, due August 15, 2020
of
STERIS CORPORATION
TABLE OF CONTENTS
(Not a part of the Agreement)
SECTION | HEADING | PAGE | ||
Parties | 1 | ||||
Recitals | 1 | ||||
SECTION 1. | DEFINITIONS | 2 | |||
SECTION 2. | GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS | 2 | |||
SECTION 3. | GUARANTY OF PAYMENT AND PERFORMANCE | 2 | |||
SECTION 4. | GENERAL PROVISIONS RELATING TO THE GUARANTY | 3 | |||
SECTION 5. | REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS | 8 | |||
SECTION 6. | GUARANTOR COVENANTS | 9 | |||
SECTION 7. | [RESERVED] | 9 | |||
SECTION 8. | GOVERNING LAW | 9 | |||
SECTION 9. | [RESERVED] | 10 | |||
SECTION 10. | AMENDMENTS, WAIVERS AND CONSENTS | 10 | |||
SECTION 11. | NOTICES | 11 | |||
SECTION 12. | MISCELLANEOUS | 11 | |||
SECTION 13. | RELEASE | 12 | |||
Signature | 14 | ||||
SUBSIDIARY GUARANTY
Re: $30,000,000 5.63% Senior Notes, Series A-1, due August 15, 2013
$85,000,000 6.33% Senior Notes, Series A-2, due August 15, 2018
$35,000,000 6.43% Senior Notes, Series A-3, due August 15, 2020
This SUBSIDIARY GUARANTY dated as of August 15, 2008 (the or this "Guaranty") is entered into on a joint and several basis by each of the undersigned, together with any entity which may become a party hereto by execution and delivery of a Guaranty Supplement in substantially the form set forth as Exhibit A hereto (a "Guaranty Supplement") (which parties are hereinafter referred to individually as a "Guarantor" and collectively as the "Guarantors").
RECITALS
A.Each Guarantor is a direct or indirect subsidiary of STERIS Corporation, an Ohio corporation (the "Company").
B.In order to refinance certain debt and for general corporate purposes, the Company has entered into those certain Note Purchase Agreements dated as of August 15, 2008 (the "Note Purchase Agreements") between the Company and each of the purchasers named on Schedule A thereto (the "Initial Note Purchasers"; the Initial Note Purchasers, together with their successors, assigns or any other future holder of the Notes (as defined below), the "Holders"), providing for, inter alia, the issue and sale by the Company to the Initial Note Purchasers of $30,000,000 aggregate principal amount of its 5.63% Senior Notes, Series A-1, due August 15, 2013, $85,000,000 aggregate principal amount of its 6.33% Senior Notes, Series A-2, due August 15, 2018 and $35,000,000 aggregate principal amount of its 6.43% Senior Notes, Series A-3, due August 15, 2020.
C.The Initial Note Purchasers have required as a condition to their purchase of the Notes that the Company cause each of the undersigned to enter into this Guaranty and to cause each Subsidiary (as defined in the Note Purchase Agreements) that after the date hereof delivers a guaranty pursuant to the Bank Credit Agreement (as defined in the Note Purchase Agreements) to enter into a Guaranty Supplement, in each case as security for the Notes, and the Company has agreed to cause each of the undersigned to execute this Guaranty and to cause such additional Subsidiaries to execute a Guaranty Supplement, in each case in order to induce the Initial Note Purchasers to purchase the Notes and thereby benefit the Company and its Subsidiaries.
D.Each of the Guarantors will derive substantial direct and indirect benefit from the sale of the Notes to the initial Note Purchasers.
Now, THEREFORE, as required by the Note Purchase Agreements and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, each Guarantor does hereby covenant and agree, jointly and severally, intending to be legally bound as follows:
SECTION 1. DEFINITIONS.
Capitalized terms used herein shall have the meanings set forth in the Note Purchase Agreements unless herein defined or the context shall otherwise require.
SECTION 2. GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS.
(a)Subject to the limitation set forth in Section 2(b) hereof and to the provisions of Section 13 hereof, each Guarantor jointly and severally does hereby absolutely and unconditionally guarantee unto the Holders: (1) the full and prompt payment of the principal of, Make-Whole Amount, if any, and interest on the Notes from time to time outstanding, as and when such payments shall become due and payable whether by lapse of time, upon redemption or prepayment, by extension or by acceleration or declaration or otherwise (including (to the extent legally enforceable)
interest due on overdue payments of principal, Make-Whole Amount, if any, or interest at the rate set forth in the Notes and interest accruing at the then applicable rate provided in the Notes after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in Federal or other immediately available funds of the United States of America which at the time of payment or demand therefor shall be legal tender for the payment of public and private debts, (2) the full and prompt performance and observance by the Company of each and all of the obligations, covenants and agreements required to be performed or owed by the Company under the terms of the Notes and the Note Purchase Agreements and (3) the full and prompt payment, upon demand by any Holder, of all reasonable actual out of pocket costs and expenses, legal or otherwise (including attorneys' fees), if any, as shall have been expended or incurred in the protection or enforcement of any rights, privileges or liabilities in favor of the Holders under or in respect of the Notes, the Note Purchase Agreements or under this Guaranty or in any consultation or action in connection therewith or herewith and in each and every case irrespective of the validity, regularity, or enforcement of any of the Notes or Note Purchase Agreements or any of the terms thereof or any other like circumstance or circumstances.
(b)The liability of each Guarantor under this Guaranty shall not exceed an amount equal to a maximum amount as will, after giving effect to such maximum amount and all other liabilities of such Guarantor, contingent or otherwise, result in the obligations of such Guarantor hereunder not constituting a fraudulent transfer, obligation or conveyance.
SECTION 3. GUARANTY OF PAYMENT AND PERFORMANCE.
This is a guarantee of payment and performance and each Guarantor hereby waives, to the fullest extent permitted by law, any right to require that any action on or in respect of any Note or the Note Purchase Agreements be brought against the Company or any other Person or that resort be had to any direct or indirect security for the Notes or for this Guaranty or any other remedy. Any Holder may, at its option, proceed hereunder against any Guarantor in the first instance to collect monies when due, the payment of which is guaranteed hereby, without first proceeding against the Company or any other Person and without first resorting to any direct or indirect security for the Notes or for this Guaranty or any other remedy. The liability of each
Guarantor hereunder shall in no way be affected or impaired by any acceptance by any Holder of any direct or indirect security for, or other guaranties of, any Debt, liability or obligation of the Company or any other Person to any Holder or by any failure, delay, neglect or omission by any Holder to realize upon or protect any such guarantees, Debt, liability or obligation or any notes or other instruments evidencing the same or any direct or indirect security therefor or by any approval, consent, waiver, or other action taken, or omitted to be taken by any such Holder.
The covenants and agreements on the part of the Guarantors herein contained shall take effect as joint and several covenants and agreements, and references to the Guarantors shall take effect as references to each of them and none of them shall be released from liability hereunder by reason of the guarantee ceasing to be binding as a continuing security on any other of them.
SECTION 4. GENERAL PROVISIONS RELATING TO THE GUARANTY.
(a) Each Guarantor hereby consents and agrees that any Holder or Holders from time to time, with or without any further notice to or assent from any other Guarantor may, without in any manner affecting the liability of any Guarantor under this Guaranty, and upon such terms and conditions as any such Holder or Holders may deem advisable:
(1)extend in whole or in part (by renewal or otherwise), modify, change, compromise, release or extend the duration of the time for the performance or payment of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligations of the Company on the Notes, or waive any Default with respect thereto, or waive, modify, amend or change any provision of any other agreement or this Guaranty; or
(2)sell, release, surrender, modify, impair, exchange or substitute any and all property, of any nature and from whomsoever received, held by, or for the benefit of, any such Holder as direct or indirect
security for the payment or performance of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes; or
(3)settle, adjust or compromise any claim of the Company against any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes.
Each Guarantor hereby ratifies and confirms any such extension, renewal, change, sale, release, waiver, surrender, exchange, modification, amendment, impairment, substitution, settlement, adjustment or compromise and that the same shall be binding upon it, and hereby waives, to the fullest extent permitted by law, any and all defenses, counterclaims or offsets which it might or could have by reason thereof, it being understood that such Guarantor shall at all times be bound by this Guaranty and remain liable hereunder.
(b) Each Guarantor hereby waives, to the fullest extent permitted by law:
(1)notice of acceptance of this Guaranty by the Holders or of the creation, renewal or accrual of any liability of the Company, present or future, or of the reliance of such Holders upon this Guaranty (it being understood that every Debt, liability and obligation described in Section 2 hereof shall conclusively be presumed to have been created, contracted or incurred in reliance upon the execution of this Guaranty);
(2)demand of payment by any Holder from the Company or any other Person indebted in any manner on or for any of the Debt, liabilities or obligations hereby guaranteed; and
(3)presentment for the payment by any Holder or any other Person of the Notes or any other instrument, protest thereof and notice of its dishonor to any party thereto and to such Guarantor.
The obligations of each Guarantor under this Guaranty and the rights of any Holder to enforce such obligations by any proceedings, whether by action at law, suit in equity or otherwise, shall not be subject to any reduction, limitation, impairment or termination (other than by payment in full of the Notes and the obligations of the Company under the Note Purchase Agreements), whether by reason of any claim of any character whatsoever or otherwise and shall not be subject to any defense, set-off, counterclaim (other than any compulsory counterclaim), recoupment or termination whatsoever.
(c) Subject to Section 13 hereof, the obligations of the Guarantors hereunder shall be binding upon the Guarantors and their successors and assigns, and shall remain in full force and effect until the entire principal, interest and Make-Whole Amount, if any, on the Notes and all other sums due pursuant to Section 2 shall have been paid and such obligations shall not be affected, modified or impaired upon the happening from time to time of any event, including without limitation any of the following, whether or not with notice to or the consent of the Guarantors:
(1)the genuineness, validity, regularity or enforceability of the Notes, the Note Purchase Agreements or any other agreement or any of the terms of any thereof, the continuance of any obligation on the part of the Company, any other Guarantors or any other Person on or in respect of the Notes or under the Note Purchase Agreements or any other agreement or the power or authority or the lack of power or authority of the Company to issue the Notes or the Company to execute and deliver the Note Purchase Agreements or any other agreement or of any other Guarantors to execute and deliver this Guaranty or any other agreement or to perform any of its obligations hereunder or the existence or continuance of the Company or any other Person as a legal entity; or
(2)any default, failure or delay, willful or otherwise, in the performance by the Company, any other Guarantor or any other Person of any obligations of any kind or character whatsoever under the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or
(3)any creditors' rights, bankruptcy, receivership or other insolvency proceeding of the Company, any other Guarantor or any other Person or in respect of the property of the Company, any other Guarantor or any other Person or any merger, consolidation, reorganization, dissolution, liquidation, the sale of all or substantially all of the assets of or winding up of the Company, any other Guarantor or any other Person; or
(4)impossibility or illegality of performance on the part of the Company, any other Guarantor
or any other Person of its obligations under the Notes, the Note Purchase Agreements, this Guaranty or any other agreements; or
(5)in respect of the Company, any other Guarantors or any other Person, any change of circumstances, whether or not foreseen or foreseeable, whether or not imputable to the Company, any other Guarantors or any other Person, or other impossibility of performance through fire, explosion, accident, labor disturbance, floods, droughts, embargoes, wars (whether or not declared), civil commotion, acts of God or the public enemy, delays or failure of suppliers or carriers, inability to obtain materials, action of any Federal or state regulatory body or agency, change of law or any other causes affecting performance, or any other force majeure, whether or not beyond the control of the Company, any other Guarantors or any other Person and whether or not of the kind hereinbefore specified; or
(6)any attachment, claim, demand, charge, Lien, order, process, encumbrance or any other happening or event or reason, similar or dissimilar to the foregoing, or any withholding or diminution at the source, by reason of any taxes, assessments, expenses, Debt, obligations or liabilities of any character, foreseen or unforeseen, and whether or not valid, incurred by or against the Company, any Guarantor or any other Person or any claims, demands, charges or Liens of any nature, foreseen or unforeseen, incurred by the Company, any Guarantor or any other Person, or against any sums payable in respect of the Notes or under the Note Purchase Agreements or this Guaranty, so that such sums would be rendered inadequate or would be unavailable to make the payments herein provided; or
(7)any order, judgment, decree, ruling or regulation (whether or not valid) of any court of any nation or of any political subdivision thereof or any body, agency, department, official or administrative or regulatory agency of any thereof or any other action, happening, event or reason whatsoever which shall delay, interfere with, hinder or prevent, or in any way adversely affect, the performance by the Company, any Guarantor or any other Person of its respective obligations under or in respect of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or
(8)the failure of any Guarantor to receive any benefit from or as a result of its execution, delivery and performance of this Guaranty; or
(9)any failure or lack of diligence in collection or protection, failure in presentment or demand for payment, protest, notice of protest, notice of default and of nonpayment, any failure to give notice to any Guarantor of failure of the Company, any Guarantor or any other Person to keep and perform any obligation, covenant or agreement under the terms of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or failure to resort for payment to the Company, any other Guarantor or to any other Person or to any other guaranty or to any property, security, Liens or other rights or remedies; or
(10)the acceptance of any additional security or other guaranty, the advance of additional money to the Company or any other Person, the renewal or extension of the Notes or amendments, modifications, consents or waivers with respect to the Notes, the Note Purchase Agreements or any other agreement, or the sale, release, substitution or exchange of any security for the Notes; or
(11)any merger or consolidation of the Company, any other Guarantor or any other Person into or with any other Person or any sale, lease, transfer or other disposition of any of the assets of the Company, any other Guarantor or any other Person to any other Person, or any change in the ownership of any shares of the Company, any other Guarantor or any other Person; or
(12)any defense whatsoever that: (i) the Company or any other Person might have to the payment of the Notes (principal, Make-Whole Amount, if any, or interest), other than payment thereof in Federal or other immediately available funds, or (ii) the Company or any other Person might have to the performance or observance of any of the provisions of the Notes, the Note Purchase Agreements or any other agreement, whether through the satisfaction or purported satisfaction by the Company, any other Guarantor or any other
Person of its debts due to any cause such as bankruptcy, insolvency, receivership, merger, consolidation, reorganization, dissolution, liquidation, winding-up or otherwise, other than the defense of indefeasible payment in full in cash of the Notes; or
(13)any act or failure to act with regard to the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or anything which might vary the risk of any Guarantor or any other Person; or
(14)any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor or any other Person in respect of the obligations of any Guarantor or other Person under this Guaranty or any other agreement, other than the defense of indefeasible payment in full in cash of the Notes;
provided that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, though not specifically mentioned above, it being the purpose and intent of this Guaranty and the parties hereto that the obligations of each Guarantor shall be absolute and unconditional and shall not be discharged, impaired or varied except pursuant to Section 13 hereof and by the payment of the principal of, Make-Whole Amount, if any, and interest on the Notes in accordance with their respective terms whenever the same shall become due and payable as in the Notes provided and all other sums due and payable under the Note Purchase Agreements, at the place specified in and all in the manner and with the effect provided in the Notes and the Note Purchase Agreements, as each may be amended or modified from time to time. Without limiting the foregoing, it is understood that repeated and successive demands may be made and recoveries may be had hereunder as and when, from time to time, the Company shall default under or in respect of the terms of the Notes or the Note Purchase Agreements and that notwithstanding recovery hereunder for or in respect of any given default or defaults by the Company under the Notes or the Note Purchase Agreements, this Guaranty shall remain in full force and effect and shall apply to each and every subsequent default.
(d) All rights of any Holder may be transferred or assigned at any time and shall be considered to be transferred or assigned at any time or from time to time upon the transfer of such Note in accordance with the Note Purchase Agreements whether with or without the consent of or notice to the Guarantors under this Guaranty or to the Company.
(e) To the extent of any payments made under this Guaranty, the Guarantors shall be subrogated to the rights of the Holder or Holders upon whose Notes such payment was made, but each Guarantor covenants and agrees that such right of subrogation shall be junior and subordinate in right of payment to the prior indefeasible final payment in cash in full of all amounts due and owing by the Company with respect to the Notes and the Note Purchase Agreements and by the Guarantors under this Guaranty, and the Guarantors shall not take any action to enforce such right of subrogation, and the Guarantors shall not accept any payment in respect of such right of subrogation, until all amounts due and owing by the Company under or in respect of the Notes and the Note Purchase Agreements and all amounts due and owing by the Guarantors hereunder have indefeasibly been finally paid in cash in full. If any amount shall be paid to any Guarantor in violation of the preceding sentence at any time prior to the indefeasible payment in cash in full (or other satisfaction agreed to by the Holders) of the Notes and all other amounts payable under the Notes, the Note Purchase Agreements and this Guaranty, such amount shall be held in trust for the benefit of the Holders and shall, except to the extent the Holders have received payment, promptly be paid to the Holders to be credited and applied to the amounts due or to become due with respect to the Notes and all other amounts payable under the Note Purchase Agreements and this Guaranty, whether matured or unmatured. Each Guarantor acknowledges that it has received direct and indirect benefits from the financing arrangements contemplated by the Note Purchase Agreements and that the waiver set forth in this paragraph (e) is knowingly made as a result of the receipt of such benefits.
(f) To the extent of any payments made under this Guaranty, each Guarantor making such payment shall have a right of contribution from the other Guarantors, but such Guarantor covenants and agrees that such right of contribution shall be subordinate in right of payment to the rights of the Holders for which full payment has not been made or provided for and, to that end, such Guarantor agrees not to claim or enforce any such right of contribution
unless and until all of the Notes and all other sums due and payable under the Note Purchase Agreements have been fully and irrevocably paid and discharged.
(g) Each Guarantor agrees that to the extent the Company, any other Guarantor or any other Person makes any payment on any Note, which payment or any part thereof is subsequently invalidated, voided, declared to be fraudulent or preferential, set aside, recovered, rescinded, or otherwise defeased or is required to be retained by or repaid to a trustee, receiver, or any other Person under any bankruptcy code, common law, or equitable cause, then and to the extent of such payment, the obligation or the part thereof intended to be satisfied shall be revived and continued in full force and effect with respect to the Guarantors' obligations hereunder, as if said payment had not been made. The liability of the Guarantors hereunder shall not be reduced or discharged, in whole or in part, by any payment to any Holder from any source that is thereafter paid, returned or refunded in whole or in part by reason of the assertion of a claim of any kind relating thereto, including, but not limited to, any claim for breach of contract, breach of warranty, preference, illegality, invalidity, or fraud asserted by any account debtor or by any other Person.
(h) No Holder shall be under any obligation: (1) to marshal any assets in favor of the Guarantors or in payment of any or all of the liabilities of the Company under or in respect of the Notes or the obligations of the Guarantors hereunder or (2) to pursue any other remedy that the Guarantors may or may not be able to pursue themselves and that may lighten the Guarantors' burden, any right to which each Guarantor hereby expressly waives.
(i) The obligations of each Guarantor under this Guaranty rank pari passu in right of payment with all other Debt of such Guarantor which is not secured or which is not expressly subordinated in right of payment to any other unsecured Debt of such Guarantor.
SECTION 5 . REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS.
Each Guarantor represents and warrants to each Holder that:
(a)Such Guarantor is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on (1) the business, operations, affairs, financial condition, assets or properties of the Company and its subsidiaries, taken as a whole, or (2) the ability of such Guarantor to perform its obligations under this Guaranty, or (3) the validity or enforceability of this Guaranty. Such Guarantor has the power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Guaranty and to perform the provisions hereof.
(b)This Guaranty has been duly authorized by all necessary action on the part of such Guarantor, and upon execution and delivery of this Guaranty and of the Note Purchase Agreements and receipt of consideration for the Note Purchase Agreements and the Notes, this Guaranty will constitute a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(c) The execution, delivery and performance by such Guarantor of this Guaranty will not (1) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Guarantor under any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, charter document or by-law, or any other material agreement or instrument to which such Guarantor is bound or by which such Guarantor or any of its properties may be bound or affected, (2) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental
Authority applicable to such Guarantor or (3) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the such Guarantor.
(d) No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority by the Guarantor is required in connection with the execution, delivery or performance by such Guarantor of this Guaranty.
(e) Such Guarantor has capital not unreasonably small in relation to its business or any contemplated or undertaken transaction and has assets having a value both at fair valuation and at present fair salable value greater than the amount required to pay its debts as they become due and greater than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. Such Guarantor does not intend to incur, or believe or should have believed that it will incur, debts beyond its ability to pay such debts as they become due. Such Guarantor will not be rendered insolvent by the execution and delivery of, and performance of its obligations under, this Guaranty. Such Guarantor does not intend to hinder, delay or defraud its creditors by or through the execution and delivery of, or performance of its obligations under, this Guaranty.
SECTION 6. GUARANTOR COVENANTS.
From and after the date of issuance of the Notes by the Company and continuing so long as any amount remains unpaid thereon each Guarantor agrees to comply with the terms and provisions of Sections 9.1, 9.2, 9.3, 9.4 and 9.5 of the Note Purchase Agreements, insofar as such provisions apply to such Guarantor, as if said Sections were set forth herein in full.
SECTION 7. [RESERVED]
SECTION 8. GOVERNING LAW.
(a)THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE THEREIN.
(b)Each Guarantor hereby (I) irrevocably submits and consents to the jurisdiction of the federal court located within the County of New York, State of New York (or if such court lacks jurisdiction, the State courts located therein), and irrevocably agrees that all actions or proceedings relating to this Guaranty may be litigated in such courts, and (2) waives any objection which it may have based on improper venue or forum non conveniens to the conduct of any proceeding in any such court and waives personal service of any and all process upon it, and (3) consents that all such service of process be made by delivery to it at the address of such Person set forth in Section 11 below or to its agent referred to below at such agent's address set forth below (with a courtesy copy to such Guarantor at the address set forth in Section 11) and that service so made shall be deemed to be completed upon actual receipt. Each Guarantor hereby irrevocably appoints CT Corporation System, with an office on the date hereof at 111 Eighth Avenue, New York, New York 10011, as its agent for the purpose of accepting service of any process within the State of New York. Nothing contained in this section shall affect the right of any Holder to serve legal process in any other manner permitted by law or to bring any action or proceeding in the courts of any jurisdiction against a Guarantor or to enforce a judgment obtained in the courts of any other jurisdiction.
(c) The parties hereto waive any right to have a jury participate in resolving any dispute, whether sounding in contract, tort, or otherwise, between them arising out of, connected with, related to or incidental to the relationship established between them in connection with this Guaranty, any financing agreement, any loan party document or any other instrument, document or agreement executed or delivered in connection herewith or the transactions related hereto. The parties hereto hereby agree and consent that any such claim, demand, action or cause of action shall be decided by court trial without a jury and that any of them may file an original counterpart or a copy of this Guaranty with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury.
SECTION 9. [RESERVED]
SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS.
(a)This Guaranty may be amended, and the observance of any term hereof may be waived (either retroactively or prospectively), with (and only with) the written consent of each Guarantor and the Required Holders.
(b)The Guarantors will provide each Holder (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof. The Guarantors will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 10 to each Holder promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders.
(c)The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of fee or otherwise, or grant any security, to any Holder as consideration for or as an inducement to the entering into by any Holder of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each Holder even if such Holder did not consent to such waiver or amendment.
(d)Any amendment or waiver consented to as provided in this Section 10 applies equally to all Holders and is binding upon them and upon each future holder and upon the Guarantors. No such amendment or waiver will extend to or affect any obligation, covenant or agreement not expressly amended or waived or impair any right consequent thereon.: No course of dealing between the Guarantors and any Holder nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of any Holder. As used herein, the term "this Guaranty" and references thereto shall mean this Guaranty as it may from time to time be amended or supplemented.
(e)Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Guaranty, Notes directly or indirectly owned by any Guarantor, the Company or any of their respective subsidiaries or Affiliates shall be deemed not to be outstanding.
SECTION 11. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(1)if to an Initial Note Purchaser or such Initial Note Purchaser's nominee, to such Initial Note Purchaser or such Initial Note Purchaser's nominee at the address specified for such communications in Schedule A to the Note Purchase Agreements, or at such other address as such Initial Note Purchaser or such Initial Note Purchaser's nominee shall have specified to any Guarantor or the Company in writing,
(2)if to any other Holder, to such Holder at such address as such Holder shall have specified to any Guarantor or the Company in writing, or
(3)if to any Guarantor, to such Guarantor c/o the Company at its address set forth at the beginning of the Note Purchase Agreements to the attention of Corporate Treasurer, or at such other address as such Guarantor shall have specified to the Holders in writing.
Notices under this Section 11 will be deemed given only when actually received.
SECTION 12. MISCELLANEOUS.
(a) No remedy herein conferred upon or reserved to any Holder is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Guaranty now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such
right or power or shall be construed to be a waiver thereof but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle any Holder to exercise any remedy reserved to it under the Guaranty, it shall not be necessary for such Holder to physically produce its Note in any proceedings instituted by it or to give any notice, other than such notice as may be herein expressly required.
(b) The Guarantors will pay all sums becoming due under this Guaranty by the method and at the address specified in the Note Purchase Agreements, or by such other method or at such other address as any Holder shall have from time to time specified to the Guarantors in writing for such purpose, without the presentation or surrender of this Guaranty or any Note.
(c) Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
(d) If the whole or any part of this Guaranty shall be now or hereafter become unenforceable against any one or more of the Guarantors for any reason whatsoever or if it is not executed by any one or more of the Guarantors, this Guaranty shall nevertheless be and remain fully binding upon and enforceable against each other Guarantor as if it had been made and delivered only by such other Guarantors.
(e) This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of each Holder and its successors and assigns so long as its Notes remain outstanding and unpaid.
(f) This Guaranty may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
SECTION 13. RELEASE.
Notwithstanding anything that may be contained herein to the contrary, the Holders agree that, in accordance with Section 2.2(e) of the Note Purchase Agreements, this Guaranty shall be automatically released and discharged without the necessity of further action on the part of the Holders if, and to the extent, the corresponding guaranty given pursuant to the terms of the Bank Credit Agreement is released and discharged; provided that in the event the Guarantor shall again become obligated under or with respect to the previously discharged Guaranty pursuant to the terms and provisions of the Guaranty, the Bank Credit Agreement or any additional bank loan agreement entered into by the Company pursuant to which such lenders make available to the Company credit facilities which are pari passu with the Notes, then the obligations of such Guarantor under this Guaranty shall be reinstated and any release thereof previously given shall be deemed null and void, and such Guaranty shall again benefit the Holders on an equal and pro rata basis and such Guaranty shall once again be subject to the terms of the lntercreditor Agreement. Any release by the Holders shall be deemed to have occurred concurrently with the release and discharge under the Bank Credit Agreement. The Company shall promptly notify the Holders of any release of a Subsidiary Guaranty pursuant to this Section 13 and shall deliver evidence of any release or discharge of a guaranty or Lien in customary form.
[Intentionally Blank]
IN WITNESS WHEREOF, the undersigned has caused this Subsidiary Guaranty to be duly executed by an authorized representative as of this day of August, 2008.
AMERICAN STERILIZER COMPANY
STERIS EUROPE, INC. STERIS INC.
HTD HOLDING CORP.
HSTD LLC
HAUSTED, INC.
ISOMEDIX INC.
ISOMEDIX OPERATIONS INC.
STERILTEK, INC.
STERILTEK HOLDINGS, INC.
STERIS ISOMEDIX SERVICES, I .
By:
Name: William L. Aamoth
Title: Vice President & Treasurer
STRATEGIC TECHNOLOGY ENTERPRISES, INC.
By:
Name: William L. Aamoth
Title: Treasurer
ACCEPTED AND AGREED: STERIS CORPORATION
By:
Name: William L. Aamoth
Title: Vice President & Corporate Treasurer
Exhibit 15.1
LETTER OF ERNST & YOUNG LLP REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Board of Directors and Shareholders
STERIS Corporation
We are aware of the incorporation by reference in the following Registration Statements and Post Effective Amendments and related Prospectuses of our report dated November 8, 2011 relating to the unaudited consolidated interim financial statements of STERIS Corporation and subsidiaries that are included in its Form 10-Q for the quarter ended September 30, 2011:
Registration Number | Description |
333-65155 | Form S-8 Registration Statement - STERIS Corporation 1998 Long-Term Incentive Compensation Plan |
333-32005 | Form S-8 Registration Statement - STERIS Corporation 1997 Stock Option Plan |
333-06529 | Form S-3 Registration Statement - STERIS Corporation |
333-01610 | Post-effective Amendment to Form S-4 on Form S-8 - STERIS Corporation |
33-55976 | Form S-8 Registration Statement - STERIS Corporation 401(k) Plan |
333-09733 | Form S-8 Registration Statement - STERIS Corporation 401(k) Plan |
333-101308 | Form S-8 Registration Statement - STERIS Corporation 2002 Stock Option Plan |
333-137167 | Form S-8 Registration Statement - STERIS Corporation Deferred Compensation Plan |
333-136239 | Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan |
333-170884 | Form S-8 Registration Statement - STERIS Corporation 401(k) Plan |
333-176167 | Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan (As Amended and Restated Effective July 28, 2011) |
/s/ Ernst & Young LLP
Cleveland, Ohio
November 8, 2011
Exhibit 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
I, Walter M Rosebrough, Jr., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of STERIS Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | November 8, 2011 |
/S/ WALTER M ROSEBROUGH, JR. | |
Walter M Rosebrough, Jr. President and Chief Executive Officer | |
Exhibit 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, Michael J. Tokich, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of STERIS Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | November 8, 2011 |
/S/ MICHAEL J. TOKICH | |
Michael J. Tokich Senior Vice President and Chief Financial Officer | |
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-Q of STERIS Corporation (the “Company”) for the quarter ended September 30, 2011, 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) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | 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: | Walter M Rosebrough, Jr. | |
Title: | President and Chief Executive Officer | |
/S/ MICHAEL J. TOKICH | ||
Name: | Michael J. Tokich | |
Title: | Senior Vice President and Chief Financial Officer | |
Dated: November 8, 2011