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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-20165
STERIS CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-1482024
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5960 HEISLEY ROAD, 440-354-2600
MENTOR, OHIO 44060-1834 (Registrant's telephone number
(Address of principal executive offices) including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ].
The number of Common Shares outstanding as of June 30, 1998: 34,137,724
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PART I FINANCIAL INFORMATION
STERIS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS) (UNAUDITED)
======================================================================================================
JUNE 30, MARCH 31,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 21,825 $ 17,172
Accounts receivable 187,511 203,992
Inventories 106,206 87,405
Current portion of deferred income taxes 23,542 23,609
Prepaid expenses and other assets 11,651 12,154
-------------- ---------------
TOTAL CURRENT ASSETS 350,735 344,332
Property, plant, and equipment 300,451 289,658
Accumulated depreciation (90,201) (84,366)
-------------- ---------------
Net property, plant, and equipment 210,250 205,292
Intangibles 241,338 240,488
Accumulated amortization (67,786) (66,516)
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Net intangibles 173,552 173,972
Deferred income taxes 5,722 5,710
Other assets 3,774 3,019
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TOTAL ASSETS $ 744,033 $ 732,325
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term indebtedness $ 2,200 $ 2,200
Accounts payable 32,613 37,213
Accrued expenses and other 128,924 130,241
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TOTAL CURRENT LIABILITIES 163,737 169,654
Long-term indebtedness 152,854 152,879
Other liabilities 50,888 50,840
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TOTAL LIABILITIES 367,479 373,373
Shareholders' equity:
Serial preferred shares, without par value, 3,000 shares authorized;
no shares outstanding
Common Shares, without par value, 100,000 shares authorized; issued
and outstanding shares of 34,138 at June 30, 1998 and 34,010 at
March 31, 1998, excluding 102 and 229 treasury shares, respectively 234,396 230,477
Retained earnings 149,354 135,009
Cumulative translation adjustment (7,196) (6,534)
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TOTAL SHAREHOLDERS' EQUITY 376,554 358,952
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 744,033 $ 732,325
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See notes to consolidated condensed financial statements.
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STERIS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
======================================================================================================
THREE MONTHS ENDED
JUNE 30
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1998 1997
------------- --------------
Net revenues $ 173,775 $ 155,134
Cost of goods and services sold 92,461 88,300
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Gross profit 81,314 66,834
Costs and expenses:
Selling, informational, and administrative 49,531 41,143
Research and development 6,029 5,956
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55,560 47,099
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Income from operations 25,754 19,735
Interest expense (2,394) (522)
Interest income and other 155 60
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Income before income taxes 23,515 19,273
Income tax expense 9,170 7,526
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Net income $ 14,345 $ 11,747
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Net income per share--pre-split-- Note H:
Net income per share - basic $ 0.42 $ 0.35
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Net income per share - diluted $ 0.41 $ 0.34
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See notes to consolidated condensed financial statements.
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STERIS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
==================================================================================================================
THREE MONTHS ENDED
JUNE 30
---------------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 14,345 $ 11,747
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,145 4,593
Deferred income taxes 55 0
Other items 48 (1,233)
Changes in operating assets and liabilities:
Accounts receivable 16,481 7,982
Inventories (18,801) (4,114)
Other assets (252) 1,948
Accounts payable and accruals (11,533) (12,323)
Accrued income taxes 5,664 795
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NET CASH PROVIDED BY OPERATING ACTIVITIES 13,152 9,395
INVESTING ACTIVITIES
Purchases of property, plant, equipment, and patents (11,731) (6,999)
Proceeds from sales of marketable securities 0 1,957
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NET CASH USED IN INVESTING ACTIVITIES (11,731) (5,042)
FINANCING ACTIVITIES
Payments on long-term obligations (25) (37)
Purchase of treasury shares 0 (2,386)
Proceeds from exercise of stock options 1,958 364
Tax benefits from exercise of stock options 1,961 621
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,894 (1,438)
Effect of exchange rate changes on cash and cash equivalents (662) 938
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INCREASE IN CASH AND CASH EQUIVALENTS 4,653 3,853
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,172 20,576
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,825 $ 24,429
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See notes to consolidated condensed financial statements.
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STERIS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
PERIODS ENDED JUNE 30, 1998 AND 1997
A. - REPORTING ENTITY
STERIS Corporation (the "Company" or "STERIS") develops, manufactures, and
markets infection prevention, contamination prevention, microbial reduction, and
surgical support systems, products, services, and technologies for healthcare,
scientific, research, food, and industrial Customers throughout the world. The
Company has over 4,500 Associates (employees) worldwide, including more than
1,700 direct sales, service, and field support personnel. Customer Support
facilities are located in major global market centers with manufacturing
operations in the United States, Canada, Germany, and Finland. STERIS operates
in a single business segment.
B. - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q; they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete audited financial statements. Accordingly,
the reader of these financial statements may wish to refer to the audited
consolidated financial statements of STERIS filed with the Securities and
Exchange Commission as part of STERIS's Form 10-K for the year ended March 31,
1998.
The accompanying consolidated condensed financial statements have been prepared
in accordance with STERIS's customary accounting practices and have not been
audited. Management believes that the financial information included herein
reflects all adjustments necessary for a fair presentation of interim results
and all such adjustments are of a normal and recurring nature. The interim
results reported are not necessarily indicative of the results to be expected
for the fiscal year ending March 31, 1999.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany accounts and transactions have been
eliminated upon consolidation. Certain reclassifications have been made to the
Company's prior year financial statements to agree with current year
classifications.
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STERIS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
C. - EARNINGS PER SHARE
Following is a summary, in thousands, of Common Shares and Common Share
equivalents outstanding used in the calculations of earnings per share:
THREE MONTHS ENDED
JUNE 30
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1998 1997
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Weighted average Common Shares
outstanding - basic 34,059 33,935
Dilutive effect of stock options 1,282 1,021
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Weighted average Common Shares and
equivalents - diluted 35,341 34,956
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D. - COMPREHENSIVE INCOME
Comprehensive income amounted to $13,683 and $12,685, net of tax, for the
quarters ended June 30, 1998 and 1997, respectively. The difference between net
income and comprehensive income is the changes in cumulative translation
adjustment for the periods presented.
E. - INVENTORIES
Inventories were as follows:
JUNE 30, MARCH 31,
1998 1998
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Raw material $38,240 $33,007
Work in process 21,532 17,666
Finished goods 46,434 36,732
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$106,206 $87,405
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STERIS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
F. - FINANCING
During the first fiscal quarter 1998, STERIS increased the amount available for
borrowing under its unsecured revolving Credit Facility from $125,000 to
$215,000. The amended Credit Facility expires September 30, 2001 and may be used
for general corporate purposes. Loans under the Credit Facility will bear
interest, at STERIS's option, at either KeyBank National Association's prime
rate or LIBOR rates plus 0.25 percent to 0.35 percent. The Credit Facility
contains customary covenants which include maintenance of certain financial
ratios. Outstanding borrowings under the Credit Facility were $145,000 at June
30, 1998.
During the first fiscal quarter 1999, STERIS entered into a six month $85,000
line of credit with substantially the same terms and conditions as the Credit
Facility. The line of credit expires September 30, 1998 and there were no
outstanding borrowings at June 30, 1998.
G. - CONTINGENCIES
There are various pending lawsuits and claims arising out of the conduct of
STERIS's business. In the opinion of management, the ultimate outcome of these
lawsuits and claims will not have a material adverse effect on STERIS's
consolidated financial position or results of operations. STERIS presently
maintains product liability insurance coverage in amounts and with deductibles
that it believes are prudent.
As of June 30, 1998 the Company employed 588 persons, or 13% of its total
workforce, who are covered by domestic collective bargaining agreements.
Approximately 481 of these Associates are covered by agreements that will expire
before June 30, 1999. Management considers its relationship with these
Associates to be good.
H. - STOCK SPLIT
On July 28, 1998, STERIS Corporation announced a 2-for-1 stock split by means of
a 100% stock dividend on STERIS Common Shares. The stock split is effective
August 24, 1998 to shareholders of record on August 10, 1998. The net income per
Common Share and the weighted average number of Common Shares outstanding for
all periods shown have not been adjusted to reflect this stock split. Including
the effect of the 2-for-1 stock split, net income per share would be as follows:
THREE MONTHS ENDED
JUNE 30
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1998 1997
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Net income per share - basic $ 0.21 $ 0.17
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Net income per share - diluted $ 0.20 $ 0.17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net revenue increased by 12.0% to $173.8 million in the first quarter fiscal
1999 from $155.1 million in the first quarter fiscal 1998. Infection Prevention
revenues increased by 15.6% to $102.7 million in the first quarter fiscal 1999
from $88.8 million in the first quarter fiscal 1998. Surgical Support revenues
decreased by 13.1% to $28.1 million in the first quarter fiscal 1999 from $32.4
million in the first quarter fiscal 1998. Scientific, Management Services, and
Other revenue increased by 26.5% to $43.0 million in the first quarter fiscal
1999 from $33.9 million in the first quarter fiscal 1998. The increase in net
revenues was due mainly to increases in the sales of capital equipment,
consumables, and services.
The costs of products and services sold increased by 4.7% to $92.5 million in
the first quarter fiscal 1999 from $88.3 million in the first quarter fiscal
1998. The cost of products and services sold as a percentage of net revenue was
53.2% for the first quarter fiscal 1999 compared to 56.9% for the same period in
fiscal 1998. The decrease in the cost of products and services sold as a
percentage of net revenue for the first quarter fiscal 1999 resulted principally
from improved overhead absorption from plant consolidation and volume increases,
vertical integration, and benefits from acquired companies.
Selling, informational, and administrative expenses increased by 20.4% to $49.5
million in the first quarter fiscal 1999 from $41.1 million in the first quarter
fiscal 1998. The expenses as a percentage of net revenue increased to 28.5% in
the first quarter fiscal 1999 from 26.5% in the first quarter fiscal 1998. The
increase was primarily attributable to investments in Customer Support, direct
sales efforts in key global markets, business development, and management
information systems as well as the inclusion of selling, informational, and
administrative expenses of acquired companies.
Research and development expenses were $6.0 million in the first quarter fiscal
1999 and fiscal 1998. Research and development expenses as a percentage of net
revenue were 3.5% for the first quarter fiscal 1999 compared to 3.8% for the
first quarter fiscal 1998.
Interest expense increased by 358.6% to $2.4 million in the first quarter fiscal
1999 from $0.5 million in the first quarter fiscal 1998. The increase was due to
the additional borrowing under the Credit Facility for the purchase of acquired
companies.
Net income for the first quarter fiscal 1999 was $14.3 million, compared to net
income of $11.7 million in the first quarter fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had $21.8 million in cash and cash equivalents as of June 30, 1998,
compared to $17.2 million of the same at March 31, 1998. The increase was
primarily attributable to cash received from operations and the exercise of
stock options offset by the cash used for purchases of property, plant, and
equipment.
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Accounts receivable decreased by 8.1% to $187.5 million as of June 30, 1998,
compared to $204.0 million at March 31, 1998.
Inventory increased by 21.5% to $106.2 million as of June 30, 1998, compared to
$87.4 million at March 31, 1998. The increase was necessary to support the
increase in product sales and anticipated future product sales.
Property, plant, and equipment increased by 3.7% to $300.5 million as of June
30, 1998, compared to $289.7 million at March 31, 1998.
Intangibles increased by 0.4% to $241.3 million as of June 30, 1998, compared to
$240.5 million at March 31, 1998.
Current liabilities decreased by 3.5% to $163.7 as of June 30, 1998, compared to
$169.7 million at March 31, 1998.
Other liabilities were $50.9 million as of June 30, 1998, compared to $50.8
million of the same at March 31, 1998.
During the first fiscal quarter 1998, STERIS increased the amount available for
borrowing under its unsecured revolving Credit Facility from $125 million to
$215 million. The amended Credit Facility expires September 30, 2001 and may be
used for general corporate purposes. Loans under the Credit Facility will bear
interest, at STERIS's option, at either KeyBank National Association's prime
rate or LIBOR rates plus 0.25 percent to 0.35 percent. The Credit Facility
contains customary covenants which include maintenance of certain financial
ratios. Outstanding borrowing under the Credit Facility was $145 million at June
30, 1998.
During the first fiscal quarter 1999, STERIS entered into a six month $85
million line of credit with substantially the same terms and conditions as the
Credit Facility. The line of credit expires September 30, 1998, and there were
no outstanding borrowings at June 30, 1998.
The Company has no material commitments for capital expenditures. The Company
believes that its cash requirements will increase due to increased sales
requiring more working capital, accelerated research and development, and
potential acquisitions or investments in complementary businesses. However, the
Company believes that its available cash, cash flow from operations, and sources
of credit will be adequate to satisfy its capital needs for the foreseeable
future.
CONTINGENCIES
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For a discussion of contingencies, see Note G to the consolidated condensed
financial statements.
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SEASONALITY
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Historical data indicates that financial results of acquired businesses were
subject to recurring seasonal fluctuations. A number of factors have contributed
to the seasonal patterns, including sales promotion and compensation programs,
customer buying patterns of capital equipment, and international business
practices. Sales and profitability of certain of the acquired and consolidated
product lines have historically been disproportionately weighted toward the
latter part of each quarter and each fiscal year. Various changes in business
practices resulting from the integration of acquired businesses into STERIS,
including the change to a March ending fiscal year, may alter the historical
patterns of the previously independent businesses.
YEAR 2000 DATE CONVERSION
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An issue affecting STERIS and most other companies is how computer systems and
applications recognize and process date-sensitive information. Some older
computer programs were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-sensitive
software that recognize a date using "00" as the year 1900 rather than the year
2000. Without corrective actions, this could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has investigated the impact of the year 2000 issue on its products
and does not anticipate any effect on the performance of its products. The
Company is in the process of assessing and implementing necessary changes for
all areas of the Company's business which could be impacted; these include such
areas as business computer systems, technical infrastructure, plant floor
equipment, building infrastructure, end-user computing, and suppliers. The
Company has initiated a project to prepare its computer systems for the year
2000 and is addressing the year 2000 issues. The Company has implemented year
2000 compliant systems in a number of areas, including order entry systems. The
Company plans to have necessary modifications made to most of its other critical
systems and applications by the end of 1998 and to complete testing by 1999. The
Company, however, has little direct control over whether its suppliers will make
the appropriate modifications to their systems and applications on a timely
basis. The Company is implementing a vendor compliance program.
Operating expenses include costs incurred in preparing systems and applications
for the year 2000. The Company expects to incur internal staff costs as well as
consulting and other expenses related to the conversion and testing of the
systems and applications. These costs, which are expensed as incurred, have been
immaterial to date. Based on assessments completed to date and compliance plans
in process, the Company does not expect that the year 2000 issues will have a
material effect on its business operations or results of operations. However, if
appropriate modifications are not made by the Company's suppliers on a timely
basis, or if the Company's actual costs or timing for the year 2000 conversion
differ materially from its present estimates, the Company's operations and
financial results could be significantly affected.
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FORWARD-LOOKING INFORMATION
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This Form 10-Q contains statements concerning certain trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for the protections afforded
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. There are many important factors that could cause actual results to
differ materially from those in the forward-looking statements. Many of these
important factors are outside STERIS's control. Changes in market conditions,
including competitive factors and changes in government regulations, could cause
actual results to differ materially from the Company's expectations. No
assurance can be provided as to any future financial results. Other potentially
negative factors that could cause actual results to differ materially from those
in the forward-looking statements include (a) the possibility that the
continuing integration of acquired businesses will take longer than anticipated,
(b) the potential for increased pressure on pricing that leads to erosion of
profit margins, (c) the possibility that market demand will not develop for new
technologies, products, and applications, (d) the potential effects of
fluctuations in foreign currencies, and (e) the possibility of reduced demand,
or reductions in the rate of growth in demand, for the Company's products.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
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Reference is made to Part I, Item 1., Note G of this Report on Form 10-Q, which
is incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The company held its Annual Meeting of Shareholders on July 23, 1998, at 5960
Heisley Road, Mentor, Ohio. At the Annual Meeting, shareholders: (a) re-elected
four Class II directors to serve with a term expiring at the Annual Meeting of
Shareholders in 2000, (b) approved an Amendment to the Articles of Incorporation
to increase the Authorized Number of Common Shares, (c) approved the STERIS
Corporation Senior Executive Management Incentive Compensation Plan, and (d)
approved the STERIS Corporation 1998 Long-Term Incentive Stock Plan. Results of
the voting on directors were: Jerry E. Robertson 29,341,208 votes for, 151,012
withheld, Frank E. Samuel, Jr. 29,363,732 votes for, 128,488 withheld, Bill R.
Sanford 29,363,631 votes for, 128,589 withheld, and Loyal W. Wilson 29,360,496
votes for, 131,724 withheld. Results of the voting on the Amendment to the
Articles of Incorporation to increase the Authorized Number of Common Shares
were 20,774,961 votes for, 8,650,001 against, 53,257 abstain, and 14,000 broker
non-votes. Results of the voting on the STERIS Corporation Senior Executive
Management Incentive Compensation Plan were 28,350,451 votes for, 980,301
against, 160,968 abstain, and 500 broker non-votes. Results of the voting on the
STERIS Corporation 1998 Long-Term Incentive Stock Plan were 21,663,808 votes
for, 7,702,930 against, 111,481 abstain, and 14,000 broker non-votes.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
--------
EXHIBIT NUMBER EXHIBIT DESCRIPTION
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27.1 Financial Data Schedule
(b) Reports on Form 8-K
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None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERIS Corporation
(Registrant)
/s/ Michael A. Keresman, III
----------------------------
Michael A. Keresman, III
Chief Financial Officer and
Senior Vice President
(Principal Financial Officer)
August 13, 1998
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5
1,000
3-MOS
MAR-31-1999
JUN-30-1998
21,825
0
187,511
0
106,206
350,735
300,451
(90,201)
744,033
163,737
0
0
0
234,396
142,158
744,033
173,775
173,775
92,461
92,461
0
0
2,394
23,515
9,170
14,345
0
0
0
14,345
0.42
0.41
