STE 3.31.2014 10-K
Table of Contents




United States Securities and Exchange Commission
Washington, D. C. 20549
 ___________________________________________________________________
FORM 10-K
x Annual Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended March 31, 2014
OR
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
(Address of principal executive offices)
44060-1834
(Zip Code)
440-354-2600
(Registrant’s telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
Name of Exchange on Which Registered
Common Shares, without par value
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No   o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x
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 and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock as of September 30, 2013: 2,507,582,546
The number of Common Shares outstanding as of May 23, 2014: 59,087,612
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2014 Annual Meeting – Part III


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STERIS Corporation and Subsidiaries
 Table of Contents
  
 
  
Page
Part I
Item 1
 
 
 
 
 
 
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
Part II
Item 5
 
Item 6
 
Item 7
 
 
 
 
 
 
 
 
 
General Overview and Executive Summary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 7A
 
 
 
 
 
 
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
Part III
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
Part IV
Item 15
 
 
 

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PART I
 
Throughout this Annual Report, STERIS Corporation and its subsidiaries together are called “STERIS,” “the Company,” “we,” “us,” or “our,” unless otherwise noted. References in this Annual Report to a particular “year” or “year-end” mean our fiscal year, which ends on March 31. For example, fiscal year 2014 ended on March 31, 2014.

ITEM 1.
BUSINESS

INTRODUCTION
STERIS Corporation is a leading provider of infection prevention and other procedural products and services, focused primarily on healthcare, pharmaceutical and research. Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe.We offer our Customers a unique mix of innovative capital equipment products, such as sterilizers and surgical tables, and connectivity solutions such as operating room (“OR”) integration; consumable products, such as detergents and skin care products, gastrointestinal ("GI") endoscopy accessories, and other products; services, including equipment installation and maintenance; and microbial reduction of medical devices, instrument and scope repair solutions, and laboratory testing services.
We were founded as Innovative Medical Technologies in Ohio in 1985, and renamed STERIS Corporation in 1987. However, some of our businesses that have been acquired and integrated into STERIS, notably American Sterilizer Company, have much longer operating histories. With global headquarters in Mentor, Ohio, we have approximately 6,000 employees worldwide and operate in more than 60 countries. We have a direct sales force of approximately 600 and a service organization of approximately 1,500 who work diligently to meet the increasingly complex needs of our Customers.
We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs.
In our largest segment, Healthcare, we make a difference for our Customers and their patients by providing innovative surgical, sterile processing, infection prevention and gastrointestinal solutions. We provide support directly to the operating room, as well as to the sterile processing functions where instruments are reprocessed between surgeries and gastrointestinal procedures. Our integrated offering of equipment, consumables and services used throughout healthcare facilities enables Customers to reduce costs and improve outcomes.
Our second largest segment, Life Sciences, primarily serves pharmaceutical manufacturers and research organizations by providing decontamination and sterilization technologies, products and services that help support the safety and effectiveness of the products they produce.
Our Isomedix segment (“Isomedix”) provides ethylene oxide and gamma irradiation services on a contract basis through a network of facilities in North America, where we process medical devices and other products as designated by our Customers' specifications prior to their delivery to the end user.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. 

INFORMATION RELATED TO BUSINESS SEGMENTS
Our chief operating decision maker is our President and Chief Executive Officer (“CEO”). The CEO is responsible for performance assessment and resource allocation. The CEO regularly receives discrete financial information about each reportable segment, and uses this information to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those described in note 1 to the Consolidated Financial Statements titled, “Nature of Operations and Summary of Significant Accounting Policies,” of this Annual Report. Segment performance information for

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fiscal years 2014, 2013, and 2012 is presented in note 12 to our Consolidated Financial Statements titled, “Business Segment Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), of this Annual Report.

HEALTHCARE SEGMENT
Description of Business. Our Healthcare segment manufactures and sells capital equipment, accessory, consumables, information support and service solutions to healthcare providers, including acute care hospitals and surgery and gastrointestinal ("GI") centers. These solutions aid our Customers in improving the safety, quality, productivity, and utility consumption of their surgical, sterile processing, gastrointestinal, and emergency environments.
Products Offered. These perioperative solutions include:
Steam, vaporized hydrogen peroxide and ethylene oxide (“EO”) sterilizers, as well as liquid chemical sterilant processing systems, that allow Customers to meet rigorous standards and regulations and assist in the safe and effective re-use of medical equipment and devices.
Automated washer/disinfector systems that clean and disinfect a wide range of items from rolling instrument carts and other large healthcare equipment to small surgical instruments.
General and specialty surgical tables, surgical and examination lights, equipment management systems, operating room storage cabinets, warming cabinets, scrub sinks, and other complementary products and accessories for use in hospitals and other ambulatory surgery sites.
Gastrointestinal endoscopy accessories for a variety of GI procedure areas including bleed management and procedure irrigation, foreign body retrieval, polypectomy, and tissue acquisition.
Connectivity solutions such as operating room (“OR”) integration, OR and sterile processing department ("SPD") workflow, patient tracking and instrument management that allow for high quality transfer of information and images throughout the hospital and between hospitals throughout the world. These solutions aid in improving the productivity and quality of Customers' inpatient and outpatient surgical departments and sterile processing functions.
Cleaning chemistries and sterility assurance products used in instrument cleaning and decontamination systems.
Cleansing products, including hard surface disinfectants and skin care and hand hygiene solutions, for use by care-givers and patients throughout healthcare institutions.

Significant brand names for these products include SYSTEM 1E®, Amsco®, Hamo®, Reliance®, Cmax®, Harmony®, Kindest Kare®, Alcare®, Verify®, Cal Stat®, Roth Net®, Little Sister ®, and T-Series®.
Services Offered. Our Healthcare segment provides various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. We offer these corrective and preventive service solutions to Customers who have internal clinical/biomedical engineering departments and Customers who rely on us to provide those services. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We also offer comprehensive sterilization and surgical management consulting services allowing healthcare facilities to achieve safety, quality, and productivity improvements in the perioperative loop that flows between and among surgical suites and the SPD. We offer remote equipment monitoring technology to anticipate potential failure modes and take corrective action thereby improving Customers' equipment uptime.
In addition, we offer comprehensive instrument and endoscope repair solutions to Customers, either on site or at one of our dedicated repair facilities. These solutions extend instrument and endoscope life and reduce Customer's replacement costs. Finally, our Healthcare segment provides other support services such as construction and facility planning, engineering support, device testing, Customer education, hand hygiene process excellence, asset management/planning, and the sale of replacement parts. These solutions also include information management and decision support solutions to operating room and central sterilization managers to help in managing these environments and identifying opportunities to improve performance.
Customer Concentration. Our Healthcare segment sells capital equipment, consumables, and services to Customers in the United States and many other countries throughout the world. For the year ended March 31, 2014, no Customer represented more than 10% of the Healthcare segment's total revenues and the loss of any single Customer is not expected to have a material impact on the segment's results of operations or cash flows.
Competition. We compete with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. On a product basis, competitors include 3M, Belimed, Cantel Medical, Ecolab, Getinge, Go Jo, Johnson & Johnson, Kimberly-Clark, Skytron, and Stryker.


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LIFE SCIENCES SEGMENT
Description of Business.  Our Life Sciences segment manufactures and sells a broad range of capital equipment, formulated cleaning chemistries, and service solutions to pharmaceutical companies and private and public research facilities around the globe.
Products Offered.  These capital equipment and formulated cleaning chemistries include:
 
Formulated cleaning chemistries that are used to prevent biological and chemical contamination and to monitor sterilization and decontamination processes, including products used to clean components used in manufacturing, decontaminate systems, and disinfect or sterilize hard surfaces.
Vaporized Hydrogen Peroxide (“VHP”®) generators used to decontaminate many high value spaces, from small isolators to large pharmaceutical processing and laboratory animal rooms.
High-purity water equipment, which generates water for injection and pure steam.
Sterilizers used in the manufacture of pharmaceuticals and biopharmaceuticals as well as sterilizers for equipment and instruments used in research studies, mitigating the risk of contamination.
Washer/disinfectors that decontaminate various large and small components in pharmaceutical and industrial manufacturing processes and in research labs, such as glassware, vessels, equipment parts, drums, hoses, and animal cages.
Significant brand names for these products include Amsco®, Reliance®, Finn-Aqua®, VHP®, and the CIP® Products.
Services Offered.  Our Life Sciences segment offers various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We utilize remote equipment monitoring technology to improve Customers’ equipment uptime. We also offer consulting services and technical support to architecture and engineering firms and laboratory planners. Our services deliver expertise in decontamination and infection control technologies and processes to end users. Our service personnel also provide higher-end validation services in support of our pharmaceutical Customers.
Customer Concentration.  Our Life Sciences segment sells capital equipment, consumables, and services to Customers in the United States and many other countries throughout the world. For the year ended March 31, 2014, no Customer represented more than 10% of the Life Sciences segment’s total revenues and the loss of any single Customer is not expected to have a material impact on the segment’s results of operations or cash flows.
Competition.  Our Life Sciences segment operates in highly regulated environments where the most intense competition results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. In recent years, our pharmaceutical Customer base has also undergone consolidation and reduced capital spending, resulting in fewer project opportunities. We compete for pharmaceutical, research and industrial Customers with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. Competitors include Belimed, Ecolab, Fedegari, Getinge, MECO, Stilmas, and Techniplast.
ISOMEDIX SERVICES SEGMENT
Description of Business.  Our Isomedix segment operates through a network of 19 facilities located in North America. We sell a comprehensive array of contract processing services using gamma irradiation (“Gamma”) and ethylene oxide (“EO”) technologies as well as an array of laboratory testing services. We offer microbial reduction services based on Customer specifications to companies that supply products to the healthcare, industrial, and consumer product industries.
Services Offered. We use Gamma and EO technologies to provide a wide range of processing services at our facilities. Gamma is an irradiation process which utilizes cobalt-60. EO is a gaseous process. In addition, we offer an array of laboratory testing services that complements the manufacturing of terminally sterilized products. Our locations are in major population centers and core distribution corridors throughout North America, primarily in the Northeast, Midwest, Southwest, and southern California. We adapt to increasing imports and changes in manufacturing points-of-origin by monitoring trends in supply chain management. Demographics partially drive this segment's growth. The aging population and rising life expectancy increase the demand for surgical procedures, which increases the consumption of medical devices and surgical kits. Our technical services group supports Customers in all phases of product development, materials testing, and process validation.
Customer Concentration.  Our Isomedix segment’s services are offered to Customers throughout the footprint of its North American network. For the year ended March 31, 2014, no Customer represented more than 10% of the segment’s revenues.

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Because of a largely fixed cost structure, the loss of a single Customer could have a material impact on the segment’s results of operations or cash flows but would not be expected to have a material impact on STERIS.
Competition.  Isomedix operates in a highly regulated industry and competes in North America with Sterigenics International, Inc., and other smaller contract sterilization companies and manufacturers that sterilize products in-house.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Sources and Availability of Raw Materials.  We purchase raw materials, sub-assemblies, components, and other supplies needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials and supplies used in our operations include stainless steel, organic and inorganic chemicals, fuel, and plastic components. These raw materials and supplies are generally available from several suppliers and in sufficient quantities that we do not currently expect any significant sourcing problems in fiscal 2015. We have longer-term supply contracts for certain materials for which there are few suppliers. There is currently only a single supplier for ethylene oxide and radioisotope (cobalt-60) used by the Isomedix segment, although we do have a longer-term supply contract for the latter.
Intellectual Property.  We protect our technology and products by, among other means, obtaining United States and foreign patents. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position.
As of March 31, 2014, we held 340 United States patents and 847 foreign patents and had 66 United States patent applications and 304 foreign patent applications pending. Patents for individual products extend for varying periods according to the date of filing or grant and legal term of patents in various countries where a patent is obtained. The actual protection a patent provides, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in each country.
Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of March 31, 2014, we had a total of 1,081 trademark registrations in the United States and in various foreign countries.
Research and Development.  Research and development is an important factor in our long-term strategy. For the years ended March 31, 2014, 2013, and 2012, research and development expenses were $48.6 million, $41.3 million, and $36.0 million, respectively. We incurred these expenses primarily for the research and development of commercial products.
We are focused on introducing products that increase efficiencies for our Customers, and in fact recently launched several new products. Those include our AMSCO 3052 and 5052 washers, Prolystica HP and the OT 1000 series orthopedic surgical table, and several gastrointestinal endoscopy accessories supporting a variety of procedural categories.
Quality Assurance.  We manufacture, assemble, and package products in the United States and other countries. Each of our production facilities are dedicated to particular processes and products. Our success depends upon Customer confidence in the quality of our production process and the integrity of the data that supports our product safety and effectiveness. We have implemented quality assurance procedures to support the quality and integrity of scientific information and production processes. All of our manufacturing and contract sterilization facilities throughout the world are ISO9001 or ISO13485 certified.
Government Regulation.  Our business is subject to various degrees of governmental regulation in the countries in which we operate. In the United States, the United States Food and Drug Administration (“FDA”), the United States Environmental Protection Agency (“EPA”), the United States Nuclear Regulatory Commission (“NRC”), and other governmental authorities regulate the development, manufacture, sale, and distribution of our products and services. Our international operations also are subject to a significant amount of government regulation, including country-specific rules and regulations and U.S. regulations applicable to our international operations. Government regulations include detailed inspection of, and controls over, research and development, clinical investigations, product approvals and manufacturing, marketing and promotion, sampling, distribution, record-keeping, storage, and disposal practices.
Compliance with applicable regulations is a significant expense for us. Past, current or future regulations, their interpretation, or their application could have a material adverse impact on our operations. Also, additional governmental regulation may be passed that could prevent, delay, revoke, or result in the rejection of regulatory clearance of our products. We cannot predict the effect on our operations resulting from current or future governmental regulation or the interpretation or application of these regulations.

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If we fail to comply with any applicable regulatory requirements, sanctions could be imposed on us. For more information about the risks we face regarding regulatory requirements, see Part I, Item 1A of this Annual Report titled, “Risk Factors, We are subject to extensive regulatory requirements.”
We have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to other regulatory sanctions. At the beginning of fiscal 2011 a consent decree, the terms of which had been previously agreed to by the FDA and us, was approved by the Federal District Court for the Northern District of Ohio concerning our SYSTEM 1 processing system. See Part I, Item 1A of this Annual Report titled, “Risk Factors, We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree,” and “Risk Factors, Compliance with the Consent Decree may be more costly and burdensome than anticipated.” and see also Part I, Item 3, “Legal Proceedings”, for further information on SYSTEM 1 and other regulatory issues and their potential impact. We believe that we are currently compliant in all material respects with applicable regulatory requirements. However, there can be no assurance that future or current regulatory, governmental, or private action will not have a material adverse affect on us or on our performance, results, or financial condition.
Environmental Matters.  We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and in other countries. We have made, and continue to make, significant investments to comply with these laws and regulations. We cannot predict the future capital expenditures or operating costs required to comply with environmental laws and regulations. We believe that we are currently compliant with applicable environmental, health, and safety requirements in all material respects. However, we cannot assure you that future or current regulatory, governmental, or private action will not have a material adverse affect on our performance, results, or financial condition. Please refer to Part I, Item 3, “Legal Proceedings” for further information.
In the future, if a loss contingency related to environmental matters, employee safety, health or conditional asset retirement obligations is significantly greater than the current estimated amount, we would record a liability for the obligation and it may result in a material impact on net income for the annual or interim period during which the liability is recorded. The investigation and remediation of environmental obligations generally occur over an extended period of time, and therefore we do not know if these events would have a material adverse affect on our financial condition, liquidity, or cash flow, nor can we assure you that such liabilities would not have a material adverse affect on our performance, results, or financial condition.

Competition.  The markets in which we operate are highly competitive and generally highly regulated. Competition is intense in all of our business segments and includes many large and small competitors. Brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support are important competitive factors to us. We expect to face continued competition in the future as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services enter the market. We believe many organizations are working with a variety of technologies and sterilizing agents. Also, a number of companies have developed disposable medical instruments and other devices designed to address the risk of contamination.
We believe that our long-term competitive position depends on our success in discovering, developing, and marketing innovative, cost-effective products and services. We devote significant resources to research and development efforts and we believe STERIS is positioned as a global competitor in the search for technological innovations. In addition to research and development, we invest in quality control, Customer programs, distribution systems, technical services, and other information services.
We cannot assure you that we will develop significant new products or services, or that new products or services we provide or develop in the future will be more commercially successful than those provided or developed by our competitors. In addition, some of our existing or potential competitors may have greater resources than us. Therefore, a competitor may succeed in developing and commercializing products more rapidly than we do. Competition, as it relates to our business segments and product categories, is discussed in more detail in the section above titled, “Information Related to Business Segments.”
Employees.  As of March 31, 2014, we had approximately 6,000 employees throughout the world. We believe we have good relations with our employees.
Methods of Distribution.  As of March 31, 2014, we employed approximately 1,700 direct field sales and service representatives within the United States and approximately 400 in international locations. Sales and service activities are supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house Customer service and field support departments. We also contract with distributors and dealers in select markets.
Customer training is important to our business. We provide a variety of courses at Customer locations, at our training and education centers, and over the internet. Our training programs help Customers understand the science, technology, and operation of our products. Many of our operator training programs are approved by professional certifying organizations and offer continuing education credits to eligible course participants.

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Seasonality.  Our financial results have been, from time to time, subject to seasonal patterns. We cannot assure you that these patterns will continue.
International Operations.  We believe we have opportunity to expand internationally, as we currently serve a small portion of the world that could benefit from our products. Through our subsidiaries, we operate in various international locations within the same business segments as in the United States. International revenues have recently represented approximately one-fourth of our total revenues. Revenues from Europe, Middle East and Africa ("EMEA"), Canada, and the Asia Pacific and Latin American regions were 47%, 19%, 21%, and 13%, respectively, of our total international revenues for the year ended March 31, 2014.
Also see note 12 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A”, for a geographic presentation of our revenues for the three years ended March 31, 2014, 2013 and 2012.
We conduct manufacturing in the United States, Canada, Mexico, Brazil, China and various European countries. International cost of revenues have represented approximately one-fourth of our total cost of revenues. There are, in varying degrees, a number of inherent risks to our international operations. We describe some of these risks in Part I, Item 1A of this Annual Report titled, “Risk Factors". We conduct manufacturing, sales, and distribution operations on a worldwide basis.
Fluctuations in the exchange rate of the U.S. dollar relative to the currencies of foreign countries in which we operate can also increase or decrease our reported net assets and results of operations. During fiscal 2014, revenues were unfavorably impacted by $2.1 million, or 0.1%, and income before taxes was favorably impacted by $0.3 million, or 0.2%, as a result of foreign currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or the effect they will have on our operations.
Backlog.  We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2014, we had a backlog of $154.7 million. Of this amount, $110.3 million and $44.4 million related to our Healthcare and Life Sciences segments, respectively. At March 31, 2013, we had backlog orders of $153.6 million. Of this amount $105.2 million and $48.4 million related to our Healthcare and Life Sciences segments, respectively. A significant portion of the backlog orders at March 31, 2014, is expected to ship in the next fiscal year.
Availability of Securities and Exchange Commission Filings.  We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to the Securities and Exchange Commission (“SEC”). You may access these documents, as well as other SEC filings related to the Company, on the Investor Relations page of our website at http://www.steris-ir.com. You may also obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 or by accessing the SEC’s website at http://www.sec.gov. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Code of Ethics, and our Code of Business Conduct, as well as the Charters of the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, and the Compliance Committee of the Company’s Board of Directors.

Executive Officers of the Registrant. The following table presents certain information regarding our executive officers at March 31, 2014. All executive officers serve at the pleasure of the Board of Directors.
 
Name
 
Age
 
Position
Kathleen L. Bardwell
 
58
 
Senior Vice President and Chief Compliance Officer
Timothy L. Chapman
 
52
 
Senior Vice President and Group President Healthcare
Suzanne V. Forsythe
 
60
 
Vice President, Human Resources
David A. Johnson
 
52
 
Senior Vice President, Global Surgical Solutions
Robert E. Moss
 
69
 
Senior Vice President and Group President, STERIS Isomedix Services and Life Sciences
Sudhir K. Pahwa
 
61
 
Senior Vice President, Infection Prevention Technologies
Walter M Rosebrough, Jr.
 
60
 
President and Chief Executive Officer
Michael J. Tokich
 
45
 
Senior Vice President, Chief Financial Officer and Treasurer
J. Adam Zangerle
 
47
 
Vice President, General Counsel & Secretary
The following discussion provides a summary of each executive officer’s recent business experience:

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Kathleen L. Bardwell serves as Senior Vice President and Chief Compliance Officer. She assumed this role in February 2014. From March 2008 to February 2014 she served as Vice President, Chief Compliance Officer.
Timothy L. Chapman serves as Senior Vice President and Group President, Healthcare. He assumed this role in February 2008.
Suzanne V. Forsythe serves as Vice President, Human Resources. She assumed this role in August 2011. She served as Senior Director, Human Resources from April 2008 through August 2011.
David A. Johnson serves as Senior Vice President, Global Surgical Solutions. He assumed this role in February 2014. From July 2012 to February 2014 he served as Senior Vice President, Global Operations and Quality. From April 2010 to July 2012 he served as Vice President, Global Operations and Continuous Improvement. From 2007 to April 2010 he served as Vice President Global Operations and Supply Chain at ConMed Corp., a global medical technology company specializing in the development and sale of surgical and patient monitoring products and services.
Robert E. Moss serves as Senior Vice President and Group President, STERIS Isomedix Services and Life Sciences. He assumed this role in October 2009. He served as Senior Vice President and Group President, STERIS Isomedix Services, from April 2005 until October 2009.
Sudhir K. Pahwa serves as Senior Vice President, Infection Prevention Technologies. He assumed this role in February 2014. From December 2008 to February 2014 he served as Vice President and General Manager, Infection Prevention Technologies.
Walter M Rosebrough, Jr. serves as President and Chief Executive Officer. He assumed this role when he joined STERIS in October 2007. Mr. Rosebrough also joined our Board of Directors in October 2007. Prior to his employment with STERIS, Mr. Rosebrough served from February 2005 to September 2007 as President and Chief Executive Officer of Coastal Hydraulics, Inc., a hydraulic and pneumatic systems company that he purchased in 2005 and he continues to serve as non-executive Chairman. Previously, Mr. Rosebrough spent nearly 20 years in the healthcare industry in various roles as a senior executive with Hill-Rom Holdings, Inc. (at the time, Hillenbrand Industries, Inc.), a worldwide provider of medical equipment and related services, including President and CEO of Support Systems International and President and CEO of Hill-Rom.
Michael J. Tokich serves as Senior Vice President, Chief Financial Officer and Treasurer. He assumed this role in February 2014. He served as Senior Vice President and Chief Financial Officer from March 2008 to February 2014.
J. Adam Zangerle serves as Vice President, General Counsel & Secretary. He assumed this role in July 2013. From May 2007 to July 2013 he served as Associate General Counsel and Group General Counsel, Healthcare.

ITEM 1A.
RISK FACTORS
This item describes certain risk factors that could affect our business, financial condition and results of operations. You should consider these risk factors when evaluating the forward-looking statements contained in this Annual Report on Form 10-K, because our actual results and financial condition might differ materially from those projected in the forward-looking statements should these risks occur. We face other risks besides those highlighted below. These other risks include additional uncertainties not presently known to us or that we currently believe are immaterial, but may ultimately have a significant impact. Should any of these risks, described below or otherwise, actually occur, our business, financial condition, performance, prospects, value, or results of operations could be negatively affected.
The economic climate may adversely affect us.
Adverse economic cycles or conditions and Customer, regulatory or government response to those cycles or conditions, could affect our results of operations. There can be no assurance when these cycles or conditions will occur or when they will begin to improve after they occur. There also can be no assurance as to the strength or length of any recovery from a business downturn or recession. United States and worldwide financial and business conditions are uncertain, and recovery has been slow from the recent severe recession, which had a significant adverse effect on U.S. and global economies.
Credit and liquidity problems may make it difficult for some businesses to access credit markets and obtain financing and may cause some businesses to curtail spending to conserve cash in anticipation of persistent business slowdowns and liquidity needs. If our Customers have difficulty financing their purchases due to tight credit markets or related factors or because of other operational or utilization problems they may be experiencing or otherwise decide to curtail their purchases, our business could be adversely affected. Our exposure to bad debt losses could also increase if Customers are unable to pay for products previously ordered and delivered.
Global economic conditions, in Europe in particular, may have adverse effects on our business and financial condition. Many of our global Customers are governmental entities or other entities that rely on government healthcare systems or government funding. If government funding for healthcare becomes limited or restricted in countries in which we operate, our Customers may be unable to pay their obligations on a timely basis or to make payment in full and it may become necessary to

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increase reserves. In addition, there can be no assurance that there will not be an increase in collection difficulties. Prospectively, additional adverse effects resulting from these conditions may include decreased healthcare utilization, further pricing pressure on our products, and/or weaker overall demand for our products and services, particularly capital products. Should the current economic conditions continue or worsen, our business, performance, prospects, value, financial condition, bad debt expense or results of operations may be adversely affected.
In addition, economic conditions and market volatility impact the investment portfolio of our legacy defined benefit pension plan. Because the values of the pension plan investments have and will fluctuate in response to changing market conditions and the values of liabilities are determined on the basis of interest rates, the amount of gains or losses that will be recognized in subsequent periods and the impact on the funded status of the plan and future minimum required contributions, if any, might have a material adverse effect on our liquidity, value, financial conditions or result of operations.
Our businesses are highly competitive, and if we fail to compete successfully, our revenues and results of operations may be hurt.
We operate in a highly competitive global environment. Our businesses compete with other broad line manufacturers, as well as many smaller businesses specializing in particular products or services, primarily on the basis of brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support. We face increased competition from new infection prevention, sterile processing, contamination control, surgical support, cleaning consumables, gastrointestinal endoscopy accessories, contract sterilization, and other products and services entering the market. Competitors and potential competitors also are attempting to develop alternate technologies and sterilizing agents, as well as disposable medical instruments and other devices designed to address the risk of contamination. If our products, services, support, distribution and/or cost structure do not enable us to compete successfully, our business, performance, prospects, value, financial condition, and results of operations may be adversely affected.
Our success depends, in part, on our ability to design, manufacture, distribute, and achieve market acceptance of, new products with higher functionality and lower costs.
Many of our Customers operate businesses characterized by technological change, product innovation and evolving industry standards. Price is a key consideration in their purchasing decisions. To successfully compete, we must continue to design, develop, and improve innovative products. We also must achieve market acceptance of and effectively distribute those products, and reduce production costs. Our business, performance, prospects, value, financial condition, and results of operations might be adversely effected if our competitors' product development capabilities become more effective, if they introduce new or improved products that displace our products or gain market acceptance, or if they produce and sell products at lower prices.
Decreased availability or increased costs of raw materials or energy supplies or other supplies might increase our production costs or limit our production capabilities or curtail our operations.
We purchase raw materials, fabricated and other components, and energy supplies from a variety of suppliers. Key materials include stainless steel, organic and inorganic chemicals, fuel, cobalt-60, ethylene oxide, and plastic components. The availability and prices of raw materials and energy supplies are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, and other factors. In some situations, we may be able to temporarily limit price increases or support availability through supply agreements. Otherwise, raw material prices and availability are subject to numerous factors outside of our control, including those described above. Increases in prices or decreases in availability of raw materials and oil and gas might impair our procurement of necessary materials or our product production, or might increase production costs. In addition, energy costs impact our transportation and distribution and other supply and sales costs. Also, a number of our key materials and components have a limited number of suppliers. Some are single-sourced, such as cobalt-60 and ethylene oxide, which are necessary to our Isomedix operations; the unavailability or short supply of these products might disrupt or cause shutdowns of portions of our Isomedix operations or have other adverse consequences. Shortages in supply, regulatory or security requirements, or increases in the price of raw materials, components and energy supplies may adversely impact our business, performance, prospects, value, financial condition, or results of operations.
Our operations, and those of our suppliers, are subject to a variety of business continuity hazards and risks, any of which could interrupt production or operations or otherwise adversely affect our performance, results, or value.
Business continuity hazards and other risks include:
explosions, fires, earthquakes, inclement weather, and other disasters;
utility or other mechanical failures;
unscheduled downtime;
labor difficulties;

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inability to obtain or maintain any required licenses or permits;
disruption of communications;
data security, preservation and redundancy disruptions;
inability to hire or retain key management or employees;
disruption of supply or distribution; and
regulation of the safety, security or other aspects of our operations.
The occurrence of any of these or other events might disrupt or shut down operations, or otherwise adversely impact the production or profitability of a particular facility, or our operations as a whole. Certain casualties also might cause personal injury and loss of life, or severe damage to or destruction of property and equipment, and for casualties occurring at our facilities, result in liability claims against us. Although we maintain property and casualty insurance and liability and similar insurance of the types and in the amounts that we believe are customary for our industries, our insurance coverages have limits and we are not fully insured against all potential hazards and risks incident to our business. Should any of the hazards or risks occur, or should our insurance coverage be inadequate or unavailable, our business, performance, prospects, value, financial condition, and results of operations might be adversely affected, both during and after the event.
 We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated with doing business outside the United States.
We maintain significant international operations, including operations in Canada, Mexico, Europe, Asia Pacific and Latin America. As a result, we are subject to a number of risks and complications associated with international manufacturing, sales, services, and other operations. These include:
risks associated with foreign currency exchange rate fluctuations;
difficulties in enforcing agreements and collecting receivables through some foreign legal systems;
enhanced credit risks in certain European countries as well as emerging market regions;
foreign Customers with longer payment cycles than Customers in the United States;
tax rates in certain foreign countries that exceed those in the United States, and foreign earnings subject to withholding tax requirements;
tax laws that restrict our ability to use tax credits, offset gains, or repatriate funds;
tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country;
general economic and political conditions in countries where we operate or where end users of our products are situated;
difficulties associated with managing a large organization spread throughout various countries;
difficulties in enforcing intellectual property rights or weaker intellectual property right protections in some countries; and
difficulties associated with compliance with a variety of laws and regulations governing international trade, including the Foreign Corrupt Practices Act.
Implementation and achievement of international growth objectives also may be impeded by political, social, and economic uncertainties or unrest in countries in which we conduct operations or market or distribute our products. In addition, compliance with multiple, and potentially conflicting, international laws and regulations, import and export limitations, anti-corruption laws, and exchange controls may be difficult, burdensome or expensive.
For example, we are subject to compliance with various laws and regulations, including the Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot assure you that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of events may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
Consolidations among our healthcare and pharmaceutical Customers may result in a loss of Customers or more significant pricing pressures.
A number of our Customers have consolidated. These consolidations are due in part to healthcare cost reduction measures initiated by competitive pressures as well as legislators, regulators and third-party payors. In an effort to attract Customers, some of our competitors have also reduced production costs and lowered prices. This has resulted in greater pricing pressures on us and in some cases loss of Customers. Additional consolidations could result in a loss of Customers or more significant pricing pressures. Additional consolidations and pricing pressures also may occur as a result of recent healthcare legislation and economic conditions. A loss of Customers or more significant pricing pressure also could have an adverse effect on our business, performance, prospects, value, financial conditions or results of operations.

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Changes in healthcare laws or government and other third-party payor reimbursement levels to healthcare providers, or failure to meet healthcare reimbursement or other requirements might negatively impact our business.
We sell many of our products to hospitals and other healthcare providers and pharmaceutical manufacturers. Many of these Customers are subject to or supported by government programs or receive reimbursement for services from third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans, and managed care programs. In the United States, many of these programs set maximum reimbursement levels for these healthcare services and can have complex reimbursement requirements. Outside the United States, reimbursement systems vary significantly by country. However, government-managed healthcare systems control reimbursement for healthcare services in many foreign countries. In these countries, as well as in the United States, public budgetary constraints may significantly impact the ability of hospitals, pharmaceutical manufacturers, and other Customers supported by such systems to purchase our products. If government or other third-party payors deny or change coverage, reduce their current levels of reimbursement for healthcare services, or otherwise implement measures to regulate pricing or contain costs or if our costs increase more rapidly than reimbursement level or permissible pricing increases or we do not satisfy the standards or requirements for reimbursement, our revenues or profitability may suffer and our business, performance, value, prospects, financial condition or results of operations may be adversely affected.
In addition, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, contains provisions that could have a material impact on our business. Among other provisions, this legislation imposes an excise tax on medical devices manufactured or offered for sale in the United States. We incurred $7.4 million in medical device excise taxes for fiscal 2014. In addition, we have been required to commit significant resources to “Sunshine Act” compliance. Various health care reform proposals have also emerged at the state level, and we are unable to predict which, if any, of those proposals will be enacted. However, the ultimate effect of health care reform legislation or any future legislation or regulation could have a material adverse affect on our business, performance, value, prospects, financial condition or results of operation.
We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition, or value.
Our operations are subject to extensive regulation in both the United States and in other countries where we do business. In the U.S, our products and services are regulated by the FDA and other regulatory authorities. In many foreign countries, sales of our products are subject to extensive regulations that may or may not be comparable to those of the FDA. In Europe, our products are regulated primarily by country and community regulations of those countries within the European Economic Area and must conform to the requirements of those authorities.
Government regulation applies to nearly all aspects of testing, manufacturing, safety, labeling, storing, recordkeeping, reporting, promoting, distributing, and importing or exporting of medical devices, products, and services. In general, unless an exemption applies, a sterilization, decontamination or medical device or product or service must receive regulatory approval or clearance before it can be marketed or sold. Modifications to existing products or the marketing of new uses for existing products also may require regulatory approvals, approval supplements or clearances. If we are unable to obtain any required approvals, approval supplements or clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and sale, or recall or restrict the use of such modified device, pay fines, or take other action until such time as appropriate clearance or approval is obtained.
Regulatory agencies may refuse to grant approval or clearance, or review and disagree with our interpretation of approvals or clearances, or with our decision that regulatory approval is not required or has been maintained. Regulatory submissions may require the provision of additional data and may be time consuming and costly, and their outcome is uncertain. Regulatory agencies may also change policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay approval or clearance of devices, or could impact our ability to market a previously cleared, approved, or unregulated device. Our failure to comply with the regulatory requirements of the FDA or other applicable regulatory requirements in the United States or elsewhere might subject us to administratively or judicially imposed sanctions. These sanctions include, among others, warning letters, fines, civil penalties, criminal penalties, injunctions, debarment, product seizure or detention, product recalls and total or partial suspension of production, sale and/or promotion. The failure to receive or maintain, or delays in the receipt of, relevant United States or international qualifications could have a material adverse affect on our business, performance, prospects, value, financial condition or results of operations.
Refer also for further information to the “Risk Factor” below titled, “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree” and the “Risk Factor” below titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.” and to Part I, Item 3, “Legal Proceedings”.

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Our products are subject to recalls and restrictions, even after receiving United States or foreign regulatory clearance or approval.
Ongoing medical device reporting regulations require that we report to appropriate governmental authorities in the United States and/or other countries when our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to a death or serious injury if the malfunction were to recur. Governmental authorities can require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues. For the same reasons, we may voluntarily elect to recall or restrict the use of a product. Any recall or restriction could divert managerial and financial resources and might harm our reputation among our Customers and other healthcare professionals who use or recommend the products. Product recalls, restrictions, suspensions, re-labeling, or other change might have a material adverse affect on our business, performance, prospects, value, financial condition, or results of operations.
We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree.
We face an inherent business risk of exposure to product liability claims and other legal and regulatory actions. A significant increase in the number, severity, amount, or scope of these claims and actions may result in substantial costs and harm our reputation or otherwise adversely affect product sales and our business. Product liability claims and other legal and regulatory actions may also distract management from other business responsibilities.
We are also subject to a variety of other types of claims, proceedings, investigations, and litigation initiated by government agencies or third parties and other potential risks and liabilities. These include compliance matters, product regulation or safety, taxes, employee benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar or different matters. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial costs, restrictions on product use or sales, or otherwise injure our business.
Administratively or judicially imposed or agreed sanctions might include warning letters, fines, civil penalties, criminal penalties, loss of tax benefits, injunctions, product seizure, recalls, suspensions or restrictions, re-labeling, detention, and/or debarment. We also might be required to take actions such as payment of substantial amounts, or revision of financial statements, or to take the following types of actions with respect to our products, services, or business:
redesign, re-label, restrict, or recall products;
cease manufacturing and selling products;
seizure of product inventory;
comply with a court injunction restricting or prohibiting further marketing and sale of products or services;
comply with a consent decree, which could result in further regulatory constraints;
dedication of significant internal and external resources and costs to respond to and comply with legal and regulatory issues and constraints;
respond to claims, litigation, and other proceedings brought by Customers, users, governmental agencies, and others;
disruption of product improvements and product launches;
discontinuation of certain product lines or services; or
other restrictions or limitations on product sales, use or operation, or other activities or business practices.
Some product replacements or substitutions may not be possible or may be prohibitively costly or time consuming.
Examples of the types of matters described above are the warning letter we received from the FDA on May 16, 2008 regarding our SYSTEM 1 sterile processing system, and the Consent Decree entered into on April 20, 2010. In summary, the warning letter outlined the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture or intended use of the device, beyond the FDA's 1988 clearance of the device, such that the FDA asserted a new premarket notification submission was required. After extensive discussion, negotiation and interaction between FDA and us, a consent decree was agreed upon and approved by the Federal District Court for the Northern District of Ohio on April 20, 2010 (the “Consent Decree”). As a consequence of these interactions and the Consent Decree, there are numerous restrictions on us with respect to SYSTEM 1 and other liquid chemical sterilizing and disinfecting devices, components and accessories. For example, we have discontinued all sales of our SYSTEM 1 processor and the provision of service, parts, accessories and sterilant for the processor to U.S. Customers. As a result of these current and future restrictions and commitments, our revenues, earnings, business, performance, prospects or value may be negatively impacted. The Consent Decree also prohibits the sale of liquid chemical sterilizing or disinfecting products that do not have FDA clearance, describes various process and compliance issues, and defines penalties for non-compliance. (For more information regarding this warning letter and the Consent Decree, see the “Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated” and “Legal Proceedings” in Item 3 of Part I.) The Consent Decree, claims by Customers and

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other parties, and other events or impact associated with these matters could materially affect our business, performance, prospects, value, financial condition, or results of operations.
The ongoing impact of the Consent Decree, or the impact of any legal, regulatory, or compliance claims, proceeding, investigation, or litigation, is difficult to predict. The occurrence of any new legal, regulatory or compliance claim or problem respecting any of our significant products, particularly should such events occur in the near term, could adversely affect our reputation with current and prospective Customers and could otherwise materially and adversely affect our business, performance, prospects, value, financial condition, or results of operations.
We maintain product liability and other insurance with coverages believed to be adequate. However, product liability or other claims may exceed insurance coverage limits, fines, penalties and regulatory sanctions may not be covered by insurance, or insurance may not continue to be available or available on commercially reasonable terms. Additionally, our insurers might deny claim coverage for valid or other reasons or may become insolvent.
Compliance with the Consent Decree may be more costly and burdensome than anticipated.
The Consent Decree contains numerous requirements that could create significant costs and compliance risks. The Consent Decree, which is expected to remain in force at a minimum through April, 2015, includes provisions permitting the government to take corrective actions against us if it determines we have violated the Consent Decree, including the right to issue an order requiring cessation of production or take other corrective action, and in some cases we may be required to implement the order before bringing the matter before a court. Failures to comply with the Consent Decree or FDA regulations respecting liquid chemical sterilizing or disinfecting devices also may result in liquidated damages specified in the Consent Decree of up to ten million dollars per calendar year. If costs associated with compliance with the Consent Decree significantly exceed the amounts anticipated, or if we violate the terms of the Consent Decree, our business, performance, value, financial condition, prospects or results of operations may be adversely affected.
We engage in acquisitions and affiliations, divestitures, and other business arrangements. Our growth may be adversely affected if we are unable to successfully identify, price, and integrate strategic business candidates or otherwise optimize our business portfolio.
Our success depends, in part, on strategic acquisitions and joint ventures, which are intended to complement or expand our businesses, divestiture of non-strategic businesses, and other actions to optimize our portfolio of businesses. This strategy depends upon our ability to identify, appropriately price, and complete these types of business development transactions or arrangements and to obtain any necessary financing. In fiscal 2013 we consummated three such acquisitions: United States Endoscopy Group, Inc., Spectrum Surgical Instruments Corp., and Total Repair Express, as well as buying out the interest of our joint venture partner in VTS Medical Systems, LLC. In fiscal 2014 we acquired the assets of Florida Surgical Repair, Inc., and Life Systems, Inc., and purchased the shares of Eschmann Holdings Ltd., and entered into an agreement to acquire the shares of Integrated Medical Systems International, Inc. Our success will also depend on our ability to integrate the businesses acquired, retain key personnel and otherwise execute our strategies. Our success will also depend on our ability to develop satisfactory working arrangements with our strategic partners in joint ventures or other affiliations, or to divest or realign businesses. Competition for strategic business candidates may result in increases in costs and price for acquisition candidates and market valuation issues may reduce the value available for divestiture of non-strategic businesses. These types of transactions are also subject to a number of other risks and uncertainties, including:
delays in realizing or failure to realize anticipated benefits of the transactions;
diversion of management's time and attention from other business concerns;
difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses;
difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture difficulties;
adverse effects on existing business relationships with suppliers or Customers;
other events contributing to difficulties in generating future cash flows;
risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for divested businesses; and
difficulties in obtaining financing.
If we are unable to realize the anticipated operating efficiencies and synergies or other expected transaction benefits, our business, prospects, performance, value, financial condition or results of operation may be adversely impacted.
Our acquisition activity and ability to grow organically may be adversely affected if we are unable to continue to access the financial markets.
The Company’s recent acquisitions have been financed largely through borrowings under the Company’s bank credit facilities and private placements. Additional acquisitions or other capital requirements will necessitate additional cash. To the extent our existing sources of cash are insufficient to fund these or other future activities, we may need to raise additional funds

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through new or expanded borrowing arrangements or the sale of equity securities. There can be no assurance that we will be able to obtain additional funds beyond existing bank credit facilities on terms favorable to us, or at all.
If our cost reduction and restructuring efforts are ineffective, our profitability may be hurt or our business otherwise might be adversely affected.
We have undertaken various cost reduction and restructuring activities, including the targeted restructuring activities announced in March 2014. This latter restructuring involves primarily the closure of our Hopkins Production Facility in Mentor, Ohio and the transfer of the System 1E manufacturing operations conducted there to other North American manufacturing facilities. The Company has recorded a $20 million charge for the restructuring. The restructuring actions are anticipated to result in annual savings of approximately $10 million with savings occurring equally in fiscal year 2015 and fiscal year 2016. These efforts may not produce the full efficiencies and cost reduction benefits we expect or efficiencies and benefits might be delayed. Implementation costs also might exceed expectations and further cost reduction measures might become necessary, resulting in additional future charges. If these cost reduction and restructuring efforts are not properly implemented or are unsuccessful, we might experience business disruptions or our business otherwise might be adversely affected.
If our continuing efforts to create a Lean business and in-source production to reduce costs are not successful, our profitability may be hurt or our business otherwise might be adversely affected.
We have undertaken various activities to create a Lean business. One of those activities is in-sourcing. We have major projects underway to in-source production that is currently provided by third parties. We have made investments during fiscal 2013 and 2014 on these projects, and anticipate additional investments in fiscal 2015. There have been delays in the in-sourcing projects and, as a result, we have not realized the expected savings due to a variety of reasons. These activities may not produce the full efficiencies and cost reduction benefits that we expect or efficiencies and benefits might be further delayed. Implementation costs also might exceed expectations. If these in-sourcing or other Lean activities are not properly implemented or are unsuccessful, we might experience business disruptions, unanticipated additional expense or our business otherwise might be adversely affected.
Our business and results of operations may be adversely affected if we are unable to recruit and retain qualified management and other personnel, or if the Consent Decree or other compliance matters adversely impact our personnel.
Our continued success depends, in large part, on our ability to hire and retain highly qualified people and if we are unable to do so, our business and operations may be impaired or disrupted. Competition for highly qualified people is intense and there is no assurance that we will be successful in attracting or retaining replacements to fill vacant positions, successors to fill retirements or employees moving to new positions, or other highly qualified personnel. Our CEO is a party to the Consent Decree, and other officers and directors are also subject to its terms. If the Consent Decree or other legal, regulatory or compliance matters create significant distraction or diversion of significant or unanticipated resources or attention, that could have a material adverse effect on the responsibilities and retention of these persons, and on our business, performance, prospects, value, financial condition or results of operation.
Our business and financial condition could be adversely affected by difficulties in acquiring or maintaining a proprietary intellectual ownership position.
To maintain our competitive position, we need to obtain patent or other proprietary rights for new and improved products and to maintain and enforce our existing patents and other proprietary rights. We typically apply for patents in the United States and in strategic foreign countries. We may also acquire patents through acquisitions. A 2007 United States Supreme Court decision increases the difficulty of obtaining patent protection in the United States.
We rely on a combination of patents, trade secrets, know-how, and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information. Litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of our proprietary rights. Litigation may also be brought against us claiming that we have violated the intellectual property rights of others. Litigation may be costly and may divert management's attention from other matters. Additionally, in some foreign countries with weaker intellectual property rights, it may be difficult to maintain and enforce patents and other proprietary rights or defend against claims of infringement. If we are unable to obtain necessary patents, our patents and other proprietary rights are successfully challenged, or competitors independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology, our business, performance, value, financial condition, or results of operations may be adversely affected.

ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
The following table sets forth the principal plants and other materially important properties of the Company and its subsidiaries as of March 31, 2014. The Company believes that its facilities are adequate for operations and are maintained in good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially reasonable rates.
In the table below, “Contract Sterilization” refers to locations of the Isomedix segment. “Manufacturing,” “Warehousing,” “Operations,” or “Sales Offices” refer to locations serving both the Healthcare and Life Sciences segments.
 
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.S./INTL
  
Use
  
Owned/Leased
Montgomery, AL
  
U.S.
  
Manufacturing
  
Owned
Ontario, CA
  
U.S.
  
Contract Sterilization
  
Owned
San Diego, CA
  
U.S.
  
Contract Sterilization
  
Owned
Temecula, CA
  
U.S.
  
Contract Sterilization
  
Owned
Libertyville, IL (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Northborough, MA
  
U.S.
  
Contract Sterilization
  
Owned
Brooklyn Park, MN
 
U.S.
 
Contract Sterilization
 
Owned
St. Louis, MO
  
U.S.
  
Manufacturing
  
Owned
South Plainfield, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Whippany, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Chester, NY
  
U.S.
  
Contract Sterilization
  
Owned
Groveport, OH
  
U.S.
  
Contract Sterilization
  
Owned
Mentor, OH (13 locations)
  
U.S.
  
Corporate Headquarters
  
Owned
 
  
U.S.
  
Sales/Marketing Offices
  
Owned
 
  
U.S.
  
Administrative Offices
  
Owned
 
  
U.S.
  
Manufacturing/Warehousing
  
Owned
 
 
U.S.
 
Manufacturing/Operations
 
Owned
 
  
U.S.
  
Research and Development
  
Owned
 
 
U.S.
  
Lobby, Showroom and Customer Service
  
Owned
 
 
U.S.
  
Education Center
  
Owned
Spartanburg, SC
  
U.S.
  
Contract Sterilization
  
Owned
El Paso, TX (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Grand Prairie, TX
  
U.S.
  
Contract Sterilization
  
Owned
Sandy, UT
  
U.S.
  
Contract Sterilization
  
Owned
Minneapolis, MN (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Vega Alta, PR
  
INTL
  
Contract Sterilization
  
Owned
Bordeaux, France
 
INTL
 
Manufacturing/Sales Office/Showroom
 
Owned
Quebec City, Canada
  
INTL
  
Manufacturing
  
Owned
Whitby, Canada
  
INTL
  
Contract Sterilization
  
Owned
Leicester, England
  
INTL
  
Manufacturing
  
Owned
Mogi das Cruzes, Brazil
 
INTL
 
Manufacturing/Sales Office
 
Owned
Tuusula, Finland
  
INTL
  
Manufacturing/Sales Office
  
Owned
Lancing, England
 
INTL
 
Manufacturing/Administration Offices
 
Owned
West Sussex, England
 
INTL
 
Offices, Warehousing, Manufacturing
 
Owned
St. Louis, MO
  
U.S.
  
Warehousing/Distribution
  
Leased
Reno, NV
  
U.S.
  
Warehousing
  
Leased

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United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.S./INTL
  
Use
  
Owned/Leased
Mentor, OH (2 locations)
  
U.S.
  
Administrative Offices
  
Leased
Stow, OH (2 locations)
 
U.S.
 
Sales/Administration Offices
 
Leased
Hillsborough, NJ
 
U.S.
 
Sales/Administration Offices
 
Leased
Lake Orion, MI
 
U.S.
 
Sales/Administration Offices
 
Leased
Keller, TX
 
U.S.
 
Sales/Administration Offices
 
Leased
Haywood, CA
 
U.S.
 
Sales/Administration Offices
 
Leased
Houston, TX
 
U.S.
 
Sales/Administration Offices
 
Leased
Costa Mesa, CA
 
U.S.
 
Sales/Administration Offices
 
Leased
Timonium, MD
 
U.S.
 
Sales/Administration Offices
 
Leased
Montgomery Village, MD
 
U.S.
 
Sales/Administration Offices
 
Leased
Melville, NY
 
U.S.
 
Sales/Administration Offices
 
Leased
Santa Clara, CA
 
U.S.
 
Sales Office
 
Leased
Chesterfield, MO
 
U.S.
 
Sales/Administration Offices
 
Leased
Longwood, FL
 
U.S.
 
Sales/Administration Offices
 
Leased
Berchem, Belgium
  
INTL
  
Sales Office
  
Leased
Brussels, Belgium
 
INTL
 
Sales/Administration Offices
 
Leased
Sao Paulo, Brazil
  
INTL
  
Sales Office
  
Leased
Mississauga, Canada
  
INTL
  
Sales Office/Warehousing
  
Leased
Beijing, China
  
INTL
  
Sales Office
  
Leased
Guangzhou, China
 
INTL
 
Sales/Administration Offices/ Assembly
 
Leased
Shanghai, China
  
INTL
  
Sales Office/ Manufacturing
  
Leased
Basingstoke, England
  
INTL
  
Sales Office
  
Leased
Leicester, England
 
INTL
 
Warehousing
 
Leased
La Chapelle St. Mesmin, France
  
INTL
  
Sales Office
  
Leased
Orleans, France
 
INTL
 
Showroom
 
Leased
Saint Jean d'illac, France
 
INTL
 
Warehousing
 
Leased
Paris, France
 
INTL
 
Sales Office
 
Leased
Toussieu, France
 
INTL
 
Warehousing
 
Leased
Cologne, Germany
  
INTL
  
Sales Office
  
Leased
Calcutta, India
  
INTL
  
Sales Office
  
Leased
Segrate, Italy
  
INTL
  
Sales Office
  
Leased
Tokyo, Japan
  
INTL
  
Sales Office
  
Leased
Petaling Jaya, Malaysia
  
INTL
  
Sales Office
  
Leased
Guadalupe, Mexico
  
INTL
  
Manufacturing
  
Leased
Moscow, Russia
  
INTL
  
Sales Office
  
Leased
Singapore (3 locations)
  
INTL
  
Sales Office, Warehousing
  
Leased
Madrid, Spain
  
INTL
  
Sales Office
  
Leased
United Arab Emirates
  
INTL
  
Sales Office
  
Leased

ITEM 3.
LEGAL PROCEEDINGS

We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed

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malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief. 
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the FDA-related matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.  
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our SYSTEM 1 sterile processor and the STERIS® 20 sterilant used with the processor (sometimes referred to collectively in the FDA letter and in this Item 3 as the “device”). Among other matters, the warning letter included the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission resulted in violations of applicable law.
After ongoing discussions with the FDA, in April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19, 2010, a Complaint and Consent Decree were filed in the U.S. District Court for the Northern District of Ohio, and on April 20, 2010, the Court approved the Consent Decree. In general, the Consent Decree addresses regulatory matters regarding SYSTEM 1, restricts further sales of SYSTEM 1 processors in the U.S., defines certain documentation and other requirements for continued service and support of SYSTEM 1 in the U.S., prohibits the sale of liquid chemical sterilization or disinfection products in the U.S. that do not have FDA clearance, describes various process and compliance matters, and defines penalties in the event of violation of the Consent Decree. The Consent Decree also provided the terms under which we temporarily continued to support our Customers' use of SYSTEM 1 in the U.S., including the sale of consumables, parts and accessories and service for a transition period (the “Transition Plan”), which included the “SYSTEM 1 Rebate Program”.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory, administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in respect of the Consent Decree, the Transition Plan, SYSTEM 1, or otherwise with respect to regulatory or compliance matters, as described in this Item 3 and in various portions of Item 1A of Part I of this Annual Report on Form 10-K.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
Other civil, criminal, regulatory or other proceedings involving our products or services also could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial condition, and results of operations.  
For additional information regarding these matters, see the following portions of this Annual Report on Form 10-K: “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled: “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree” and the “Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.” 
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized. 

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Additional information regarding our commitments and contingencies is included in Item 7, "MD&A", and in note 11 to our consolidated financial statements titled, "Commitments and Contingencies".

ITEM 4.    MINE SAFETY DISCLOSURES

None.

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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Our common shares are traded on the New York Stock Exchange under the symbol “STE.” The following table presents, for the quarters indicated, the high and low sales prices for our common shares.
 
Quarters Ended
March 31
 
December 31
 
September 30
 
June 30
Fiscal 2014
 
 
 
 
 
 
 
High
$
49.92

 
$
48.50

 
$
46.10

 
$
46.59

Low
39.90

 
42.74

 
40.46

 
38.85

Fiscal 2013
 
 
 
 
 
 
 
High
$
41.76

 
$
37.18

 
$
36.33

 
$
31.83

Low
34.80

 
32.23

 
29.91

 
28.77


Holders.  As of March 31, 2014, there were approximately 1,295 holders of record of our common shares. However, we believe that we have a significantly larger number of beneficial holders of common shares.
Dividend Policy.  The Company’s Board of Directors decides the timing and amount of any dividends we may pay. During fiscal 2014, we paid cash dividends totaling $0.82 per outstanding common share ($0.19 per outstanding common share to common shareholders of record on June 4, 2013, and $0.21 per outstanding common share to common shareholders of record on the following dates: August 28, 2013, November 20, 2013 and February 26, 2014). During fiscal 2013, we paid cash dividends totaling $0.74 per outstanding common share ($0.17 per outstanding common share to common shareholders of record on June 5, 2012, and $0.19 per outstanding common share to common shareholders of record on the following dates: August 23, 2012, November 21, 2012 and February 27, 2013).
Recent Sales of Unregistered Securities.  None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.  The following table presents information with respect to purchases STERIS made of its shares of common stock during the fourth quarter of the 2014 fiscal year:
 
 
 
(a)
Total Number  of
Shares Purchased
 
(b)
Average Price Paid
Per Share
 
(c)
Total Number  of
Shares Purchased as
Part of Publicly
Announced Plans (2)
 
(d)
Maximum Dollar Value  of
Shares that May Yet Be
Purchased Under the
Plans at Period End
January 1-31
 

  
$

  

 
$
89,172

February 1-28
 
50,507

  
44.21

  
50,507

 
86,939

March 1-31
 

  

  

 
86,939

Total
 
50,507

(1) 
$
44.21

(1) 
50,507

 
$
86,939


(1)
Does not include 77 shares purchased during the quarter at an average price of $46.84 per share by the STERIS Corporation 401(k) Plan on behalf of certain executive officers of the Company who may be deemed to be affiliated purchasers.
(2)
On March 14, 2008 we announced that, the Board of Directors had authorized the repurchase of up to $300.0 million of our common shares. As of March 31, 2014, $86.9 million remained authorized for repurchase of our common shares under the current share repurchase authorization. This authorization does not have a stated maturity date. We provide information about our full year fiscal 2014 share repurchase activity in note 14 to our consolidated financial statements titled, “Repurchases of Common Shares.”


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ITEM 6.    SELECTED FINANCIAL DATA

 
Years Ended March 31,
(in thousands, except per share data)
2014 (1)
 
2013(1)(2)
 
2012(1)(2)
 
2011(2)
 
2010
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,622,252

 
$
1,501,902

 
$
1,406,810

 
$
1,207,448

 
$
1,257,733

Gross profit
649,622

 
621,263

 
568,465

 
446,162

 
539,181

Restructuring expenses
13,204

 
(565
)
 
644

 
1,202

 
4,848

Income from continuing operations
206,807

 
242,829

 
222,316

 
85,212

 
203,712

Income taxes
58,934

 
67,121

 
74,993

 
22,554

 
63,349

Net income
$
129,442

 
$
159,977

 
$
136,115

 
$
51,265

 
$
128,467

Basic income per common share:
 
 
 
 
 
 
 
 
 
Net income
$
2.20

 
$
2.74

 
$
2.33

 
$
0.86

 
$
2.18

Shares used in computing net income per common share – basic
58,966

 
58,305

 
58,367

 
59,306

 
58,826

Diluted income per common share:
 
 
 
 
 
 
 
 
 
Net income
$
2.17

 
$
2.72

 
$
2.31

 
$
0.85

 
$
2.16

Shares used in computing net income per common share – diluted
59,745

 
58,884

 
58,963

 
60,148

 
59,423

Dividends per common share
$
0.82

 
$
0.74

 
$
0.66

 
$
0.56

 
$
2.44

Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Working capital
$
420,239

 
$
395,103

 
$
373,488

 
$
361,060

 
$
379,328

Total assets
1,887,162

 
1,761,109

 
1,405,696

 
1,426,685

 
1,238,402

Long-term indebtedness
493,480

 
492,290

 
210,000

 
210,000

 
210,000

Total liabilities
845,916

 
814,129

 
583,032

 
638,020

 
483,908

Total shareholders’ equity
1,038,705

 
944,942

 
821,401

 
787,569

 
753,714


(1)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)
Presented amounts include the impact of the SYSTEM 1 Rebate Program and the SYSTEM 1 class action settlement.

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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION
In Management’s Discussion and Analysis (“MD&A”), we explain the general financial condition and the results of operations for STERIS and its subsidiaries including:
 
what factors affect our business;
what our earnings and costs were;
why those earnings and costs were different from the year before;
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.
The MD&A also analyzes and explains the annual changes in the specific line items in the Consolidated Statements of Income. As you read the MD&A, it may be helpful to refer to information in Item 1, “Business,” Item 6, “Selected Financial Data,” and our consolidated financial statements, which present the results of our operations for fiscal 2014, 2013 and 2012, as well as Part I, Item 1A, “Risk Factors” and Part I, Item 3, “Legal Proceedings”, for a discussion of some of the matters that can adversely affect our business and results of operations. This information, discussion, and disclosure may be important to you in making decisions about your investments in STERIS.

FINANCIAL MEASURES

In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We sometimes use the following financial measures in the context of this report: backlog; debt-to-total capital; net debt-to-total capital; and days sales outstanding. We define these financial measures as follows:
 
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

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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.
Product Revenues – We define product revenues as revenues generated from sales of consumable and capital equipment products.
Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment, instrument and endoscope repair services, and revenues generated from contract sterilization offered through our Isomedix segment.
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, V-Pro consumables, gastrointestinal endoscopy accessories, sterility assurance products, skin care products, cleaning consumables, and surgical instruments.
Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues.

GENERAL OVERVIEW AND EXECUTIVE SUMMARY

Our Business. Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. 
We are also investing in several manufacturing in-sourcing projects for the purpose of improving quality, cost and delivery of our products to our Customers.
Highlights.  During fiscal year 2014, we continued to invest in new products and in quality processes to defend and grow our core business. Simultaneously, we continued the execution of our strategy to expand into adjacent markets with acquisitions in the Healthcare segment. In December 2013, we purchased the assets of Florida Surgical Repair ("FSR"), a provider of surgical instrument and surgical equipment repair services. In February 2014, we purchased the assets of Life Systems, Inc. ("LSI"), a provider of sales and service in the endoscopy repair and certified pre-owned equipment markets. In February 2014, we also purchased the stock of Eschmann Holdings Ltd. ("Eschmann"), a provider of surgical and infection prevention solutions and services used primarily in hospitals, surgery centers and dental offices in the United Kingdom.
In the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of our Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We expect that these actions, combined with additional actions taken in prior years, will allow us to make substantial progress in reducing our cost base.
Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to $1,501.9 million for the year ended March 31, 2013. The fiscal 2013 period was positively impacted by the SYSTEM 1 Rebate Program adjustment of $22.4 million. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted revenues of $1,479.5 million for fiscal 2013, which exclude the impact of the SYSTEM 1 Rebate Program, reflecting growth in all three business segments (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures).
Fiscal 2014 operating income was $206.8 million, a decrease of 14.8% over the fiscal 2013 operating income of $242.8 million. The primary drivers of the lower operating income was the positive impact of the $23.6 million SYSTEM 1 Rebate

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Program adjustments recorded during fiscal 2013 and the $16.8 million SYSTEM 1 class action settlement adjustments recorded during fiscal 2013. Fiscal 2014 operating income increased $4.4 million, or 2.2%, over adjusted fiscal 2013 operating income of $202.4 million (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The slight increase from last year was due primarily to the increased revenues within all three business segments, mainly attributable to the contributions of the fiscal 2013 and 2014 acquisitions, which was partially offset by the charges associated with the Fiscal 2014 Restructuring Plan, the Medical Device Excise tax, increased spending for research and development, and investments in in-sourcing.
Cash flows from operations were $209.6 million and free cash flow was $128.0 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). As a result of the acquisition activity, we increased our leverage by borrowing under our revolving credit facility. With this additional leverage, we maintained a debt-to-total capital ratio of 32.2% at March 31, 2014. We increased our dividend double digits for the eighth consecutive year to $0.21 per share per quarter.
Outlook. Since our fiscal 2014 acquisitions did not close until the third and fourth quarters of fiscal 2014, we expect to have stronger top-line revenues from these acquisitions in fiscal 2015. Fluctuations in foreign currency rates can impact revenues and costs outside of the United States, creating variability in our results for fiscal 2015 and beyond.
In fiscal 2015 and beyond, we expect to continue to manage our costs, grow our business with internal product development, invest in greater capacity, and augment these value creating methods with acquisitions of adjacent products and services. We plan to continue our efforts to in-source some of the production that we have traditionally out-sourced. Because we continue to take advantage of our Lean business model, we expect to utilize the capacity we have created to shorten the supply chain and produce certain components in-house.

MATTERS AFFECTING COMPARABILITY

SYSTEM 1 Rebate Program and proposed class action settlement. In April 2010, we introduced the SYSTEM 1 Rebate Program ("Rebate Program") to Customers as a component of our Transition Plan for SYSTEM 1. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who were current users of SYSTEM 1 and who returned their units had the option of either a pro-rated cash value or rebate toward the future purchase of new STERIS capital equipment or consumable products. In addition, we provided credits for SYSTEM 1 service contracts and consumables in unbroken packaging.
During the first quarter of fiscal 2011, we recorded a pre-tax liability related to the SYSTEM 1 Rebate Program. Of the $110.0 million recorded, $102.3 million was attributable to the Customer Rebate portion of the Program and was recorded as a reduction to revenue, and $7.7 million was attributable to the disposal liability of the SYSTEM 1 units to be returned and was recorded in cost of revenues.
During fiscal 2012 and fiscal 2013, based on the actual experience at the time, we adjusted a portion of the original estimated liability related to the Rebate Program. The total fiscal 2012 pre-tax adjustment was $17.4 million, of which $15.3 million was recorded as an increase to revenue for the Customer rebate portion, and $2.1 million was recorded as a reduction in cost of revenues related to the disposal liability. The total fiscal 2013 pre-tax adjustments amounted to $23.7 million, of which $22.4 million was recorded as increases to revenue for the Customer rebate portion, and $1.3 million was recorded as reductions to cost of revenues related to the disposal portion of the liability. These adjustments resulted primarily from a lower number of eligible Customers electing to participate in the Rebate Program than previously estimated.
In fiscal 2011 we recorded a pre-tax charge of $19.8 million related to the initial recognition of the settlement of SYSTEM 1 class action litigation. The impact of the charge was a reduction in net income of $13.1 million (after tax of $6.7 million). As a result of the passage of the claim submission deadline during fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement by $16.8 million based on actual claims submitted.
International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During fiscal 2014, our revenues were unfavorably impacted by $2.1 million, or 0.1%, and income before taxes was favorably impacted by $0.3 million, or 0.2%, as a result of foreign currency movements relative to the U.S. dollar.

NON-GAAP FINANCIAL MEASURES

We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented.

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These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures.
These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to fund future debt principal repayments and growth outside of core operations, repurchase common shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2014, 2013 and 2012:
 
Years Ended March 31,
(dollars in thousands)
2014
 
2013
 
2012
Net cash flows provided by operating activities
$
209,631

 
$
227,815

 
$
149,372

Purchases of property, plant, equipment and intangibles, net
(86,367
)
 
(87,412
)
 
(66,682
)
Proceeds from the sale of property, plant, equipment and intangibles
4,774

 
34

 
42

Free cash flow
$
128,038

 
$
140,437

 
$
82,732


To supplement our financial results presented in accordance with U.S. GAAP, we have sometimes referred to certain measures of revenues, gross profit, gross profit percentage, and the Healthcare segment results of operations in the section of MD&A titled, "Results of Operations" excluding the impact of adjustments recorded in connection with the SYSTEM 1 Rebate Program and the SYSTEM 1 class action settlement. These items had a significant impact on the fiscal 2013 and fiscal 2012 measures and the corresponding trend in each of these measures. We provide adjusted measures to give the reader a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. These measures are used by management and the Board of Directors in making comparisons to our historical operating results and analyzing the underlying performance of our operations. The tables below provide a reconciliation of each of these measures to its most directly comparable GAAP financial measure.
 
Years Ended March 31,
(dollars in thousands)
2014
2013
2012
Reported revenues
$
1,622,252

$
1,501,902

$
1,406,810

Impact of the SYSTEM 1 Rebate Program

(22,367
)
(15,306
)
Adjusted revenues
$
1,622,252

$
1,479,535

$
1,391,504

 
 
 
 
Reported capital equipment revenues
$
603,579

$
613,378

$
626,959

Impact of the SYSTEM 1 Rebate Program

(22,367
)
(15,306
)
Adjusted capital equipment revenues
$
603,579

$
591,011

$
611,653

 
 
 
 
Reported United States revenues
$
1,244,730

$
1,141,633

$
1,057,460

Impact of the SYSTEM 1 Rebate Program

(22,367
)
(15,306
)
Adjusted United States Revenues
$
1,244,730

$
1,119,266

$
1,042,154

 
 
 
 

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Reported Healthcare revenues
$
1,180,051

$
1,074,790

$
1,013,102

Impact of the SYSTEM 1 Rebate Program

(22,367
)
(15,306
)
Adjusted Healthcare revenues
$
1,180,051

$
1,052,423

$
997,796

 
 
 
 
Healthcare capital revenues
$
515,380

$
521,806

$
545,596

Impact of SYSTEM 1 Rebate Program

(22,367
)
(15,306
)
Adjusted Healthcare capital revenues
$
515,380

$
499,439

$
530,290

 
 
 
 
Reported gross profit
$
649,622

$
621,263

$
568,465

Impact of the SYSTEM 1 Rebate Program

(23,640
)
(17,403
)
Adjusted gross profit
$
649,622

$
597,623

$
551,062

 
 
 
 
Reported gross profit percentage
40.0
%
41.4
 %
40.4
 %
Impact of the SYSTEM 1 Rebate Program
%
(1.0
)%
(0.8
)%
Adjusted gross profit percentage
40.0
%
40.4
 %
39.6
 %
 
 
 
 
Reported operating income
$
206,807

$
242,829

$
222,316

Impact of the SYSTEM 1 Rebate Program and class action settlement

(40,422
)
(17,403
)
Adjusted operating income
$
206,807

$
202,407

$
204,913

 
 
 
 
Reported Healthcare operating income
$
109,714

$
153,343

$
141,742

Impact of the SYSTEM 1 Rebate Program and class action settlement

(40,422
)
(17,403
)
Adjusted Healthcare operating income
$
109,714

$
112,921

$
124,339

 
 
 
 
Reported income tax expense
$
58,934

$
67,121

$
74,993

Impact of the SYSTEM 1 Rebate Program and class action settlement

(15,765
)
(6,780
)
Adjusted income tax expense
$
58,934

$
51,356

$
68,213

 
 
 
 
Reported selling, general and administrative
$
380,970

$
337,694

$
309,552

Impact of the SYSTEM 1 class action settlement

16,782


Adjusted selling, general and administrative
$
380,970

$
354,476

$
309,552

 
 
 
 
Reported effective income tax rate
31.3
%
29.6
 %
35.5
 %
Impact of the SYSTEM 1 Rebate Program and class action settlement
%
(2.1
)%
(0.3
)%
Adjusted effective income tax rate
31.3
%
27.5
 %
35.2
 %

RESULTS OF OPERATIONS

In the following subsections, we discuss our earnings and the factors affecting them. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

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FISCAL 2014 AS COMPARED TO FISCAL 2013

Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2014 to the year ended March 31, 2013:

 
Years Ended March 31,
 
 
 
Percent
(dollars in thousands)
2014
 
2013
 
Change
 
Change
Total revenues
$
1,622,252

 
$
1,501,902

 
$
120,350

 
8.0
 %
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
Capital equipment revenues
603,579

 
613,378

 
(9,799
)
 
(1.6
)%
Consumable revenues
407,883

 
353,984

 
53,899

 
15.2
 %
Service revenues
610,790

 
534,540

 
76,250

 
14.3
 %
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
United States revenues
1,244,730

 
1,141,633

 
103,097

 
9.0
 %
International revenues
377,522

 
360,269

 
17,253

 
4.8
 %

Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to $1,501.9 million for the year ended March 31, 2013. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted revenues for fiscal 2013, which exclude the impact of the $22.4 million SYSTEM 1 Rebate Program adjustments (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase reflects growth in all three business segments.
Capital equipment revenues decreased by $9.8 million, or 1.6%, to $603.6 million, during fiscal 2014 as compared to fiscal 2013. Capital equipment revenues for the fiscal year ended 2013 were favorably impacted by adjustments related to the SYSTEM 1 Rebate Program of $22.4 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Fiscal 2014 capital equipment revenues increased $12.6 million, or 2.1% over fiscal 2013 adjusted capital equipment revenues of $591.0 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). This increase was primarily driven by growth in the U.S. and the EMEA region, offset by declines in other international regions. Consumable revenues increased $53.9 million, or 15.2%, during fiscal 2014 from fiscal 2013. This increase was driven by growth within the Healthcare segment due in large part to our recent acquisitions, and growth within the Life Sciences business segment and reflects growth in all regions. Service revenues for fiscal 2014 increased $76.3 million, or 14.3%, over fiscal 2013 primarily driven by the recent acquisitions of the instrument repair businesses, other service offerings, and growth of $14.6 million, or 8.1%, within the Isomedix segment in fiscal 2014 over fiscal 2013. Isomedix revenues were favorably impacted by increased demand from our medical device Customers and the filling of recently added capacity.
United States revenues for fiscal 2014 were $1,244.7 million, an increase of $103.1 million, or 9.0%, over fiscal 2013 revenues of $1,141.6 million. The fiscal 2013 period was favorably impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million. United States revenues for fiscal 2014 increased $125.5 million, or 11.2%, over the adjusted United States revenues for fiscal 2013 of $1,119.3 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase is driven by higher consumable and service revenues attributable, in part, to our recent acquisitions but also attributable to increased revenues from other products. These results reflect growth in all three business segments.
International revenues for fiscal 2014 were $377.5 million, an increase of 4.8% over the fiscal 2013 revenues of $360.3 million. This increase reflects revenue growth in the Latin American and EMEA regions, partially offset by declines in Canada and the Asia Pacific regions.

Gross Profit. The following table compares our gross profit for the year ended March 31, 2014 to the year ended March 31, 2013:
 

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Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
2014
 
2013
 
Gross profit:
 
 
 
 
 
 
 
Product
$
425,286

 
$
416,463

 
$
8,823

 
2.1
%
Service
224,336

 
204,800

 
19,536

 
9.5
%
Total gross profit
$
649,622

 
$
621,263

 
$
28,359

 
4.6
%
Gross profit percentage:
 
 
 
 
 
 
 
Product
42.0
%
 
43.1
%
 
 
 
 
Service
36.7
%
 
38.3
%
 
 
 
 
Total gross profit percentage
40.0
%
 
41.4
%
 
 
 
 

Our gross profit is affected by the volume, pricing and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Our gross profit increased $28.4 million and gross profit percentage decreased to 40.0% for fiscal 2014 as compared to 41.4% for fiscal 2013. Our gross profit increased $52.0 million, or 8.7% over our adjusted fiscal 2013 gross margin, which excludes the $23.6 million impact of the SYSTEM 1 Rebate Program (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Other key factors impacting gross margin and the gross margin percentage for fiscal 2014 include the negative impact of restructuring (50 basis points), inflation (80 basis points), and the Medical Device Excise Tax (40 basis points), and the positive impact of the following: pricing (40 basis points), volume (40 basis points) and our recent acquisitions.

Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2014 to the year ended March 31, 2013:
  
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2014
 
2013
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
380,970

 
$
337,694

 
$
43,276

 
12.8
%
Research and development
 
48,641

 
41,305

 
7,336

 
17.8
%
Restructuring expenses
 
13,204

 
(565
)
 
13,769

 
NM

Total operating expenses
 
$
442,815

 
$
378,434

 
$
64,381

 
17.0
%
NM - Not meaningful
  
Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 12.8% during fiscal 2014 over fiscal 2013. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The impact of the class action settlement aside, the increase in SG&A in fiscal 2014 over fiscal 2013 is primarily attributable to the addition of operating expenses incurred with our acquired businesses. In addition, we recorded a fair value adjustment of $1.0 million related to a deferred payment of purchase price for the 2012 purchase of Sercon Industria E Comercio De Aparelhos Medicos Hospitalares LTDA (“Sercon”).
Research and development expenses increased $7.3 million during fiscal 2014, as compared to fiscal 2013. The majority of the increase is attributable to expenses for research and development incurred within the operations of the businesses acquired in fiscal 2013 and fiscal 2014. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. During fiscal 2014, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and

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equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets.
Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will be able to more effectively utilize our existing North American manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We anticipate that these restructuring actions will result in annual savings of approximately $10.0 million. We expect to incur restructuring charges of approximately $1.0 million in fiscal 2015, as additional costs associated with the plan are incurred.
Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions.

The following tables summarize our total pre-tax restructuring expenses for fiscal 2014 and fiscal 2013:
 
Year Ended March 31, 2014
(dollars in thousands)
Fiscal 2014
Restructuring
Plan (1)
Fiscal 2010
Restructuring
Plan
Total
Severance and other compensation related costs
$
7,363

$
127

$
7,490

Asset impairment and accelerated depreciation
3,621

990

4,611

Lease termination obligation and other
1,103


1,103

Product rationalization
8,144


8,144

Total restructuring charges
$
20,231

$
1,117

$
21,348


(1)
Includes $8.1 million in charges recorded in cost of revenues on Consolidated Statements of Income.

 
Year Ended March 31, 2013
(dollars in thousands)
Fiscal 2010
Restructuring
Plan
Severance and other compensation related costs
$
(918
)
Lease termination obligation and other
353

Total restructuring charges
$
(565
)
 
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following tables summarizes our restructuring liability balances and activity:
 
 
Fiscal 2014 Restructuring Plan
 
 
 
 
Fiscal 2014
 
 
(dollars in thousands)
 
March 31,
2013
 
Provision
 
Payments/
Impairments (1)
 
March 31,
2014
Severance and termination benefits
 
$

 
$
6,429

 
$
(40
)
 
$
6,389

Lease termination obligations and other
 

 
1,589

 

 
1,589

Total
 
$

 
$
8,018

 
$
(40
)
 
$
7,978

(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

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Fiscal 2010 Restructuring Plan
 
 
 
 
Fiscal 2013
 
 
(dollars in thousands)
 
March 31,
2012
 
Provision (1)
 
Payments/
Impairments (2)
 
March 31,
2013
Severance and termination benefits
 
$
659

 
$
(918
)
 
$
730

 
$
471

Lease termination obligations
 
947

 

 
(791
)
 
156

Other
 
76

 
353

 
(429
)
 

Total
 
$
1,682

 
$
(565
)
 
$
(490
)
 
$
627

(1) Includes curtailment benefit of $0.9 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table compares our non-operating expense (income), net for the year ended March 31, 2014 to the year ended March 31, 2013:

 
 
Years Ended March 31,
 
 
(dollars in thousands)
 
2014
 
2013
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
18,770

 
$
15,675

 
$
3,095

Interest income and miscellaneous expense
 
(339
)
 
56

 
(395
)
Non-operating expenses, net
 
$
18,431

 
$
15,731

 
$
2,700


Interest expense during fiscal 2014 increased due to higher outstanding borrowings due to acquisitions. Interest income and miscellaneous expense are immaterial.
Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled, “Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”

Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended March 31, 2014 and March 31, 2013:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2014
 
2013
 
Income tax expense
 
$
58,934

 
$
67,121

 
$
(8,187
)
 
(12.2)%
Effective income tax rate
 
31.3
%
 
29.6
%
 
 
 
 

The effective income tax rate for fiscal 2014 was 31.3% as compared to 29.6% for fiscal 2013. The effective tax rate in fiscal 2013 was impacted by a U.S. tax benefit resulting from European restructuring. Specifically, a U.S. tax deduction was taken relating to the rationalization of operations in Switzerland. The effective tax rate in 2014 includes the benefit from the recognition of previously unrecognized tax benefits due to the settlement of a federal tax examination. Additional information regarding our income tax expense is included in note 9 to our consolidated financial statements titled, “Income Taxes.”

Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2014 to the year ended March 31, 2013:

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(dollars in thousands)
 
Years Ended March 31,
 
Change
 
Percent
Change
2014
 
2013
 
Revenues:
 
 
 
 
 
 
 
 
Healthcare
 
$
1,180,051

 
$
1,074,790

 
$
105,261

 
9.8
 %
Life Sciences
 
246,122

 
244,421

 
1,701

 
0.7
 %
Isomedix
 
194,183

 
179,550

 
14,633

 
8.1
 %
Total reportable segments
 
1,620,356

 
1,498,761

 
121,595

 
8.1
 %
Corporate and other
 
1,896

 
3,141

 
(1,245
)
 
(39.6
)%
Total Revenues
 
$
1,622,252

 
$
1,501,902

 
$
120,350

 
8.0
 %

Healthcare segment revenues increased $105.3 million, or 9.8% to $1,180.1 million for the year ended March 31, 2014, as compared to $1,074.8 million for the prior fiscal year. Healthcare revenues for fiscal 2014 increased $127.7 million, or 12.1%, compared to adjusted Healthcare revenues for fiscal 2013, which exclude the impact of the $22.4 million adjustment related to the SYSTEM 1 Rebate Program (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The addition of consumable and service revenues from our recent acquisitions combined with growth in other product and service offerings drove total growth in capital equipment, consumable and service revenues of 3.2%, 17.1% and 23.3%, respectively. At March 31, 2014, the Healthcare segment’s backlog amounted to $110.3 million, increasing $5.1 million, or 4.9%, compared to the backlog of $105.2 million at March 31, 2013.
Life Science segment revenues increased $1.7 million or 0.7% to $246.1 million for the year ended March 31, 2014, as compared to the prior fiscal year, driven by growth in consumable revenues of 8.4%, which was offset by declines in capital equipment and service revenues of 3.7% and 1.7%, respectively. At March 31, 2014, the Life Sciences segment’s backlog amounted to $44.4 million, decreasing $4.0 million, or 8.3%, compared to the backlog of $48.4 million at March 31, 2013. The March 31, 2014 backlog is consistent with historic levels.
Isomedix segment revenues increased $14.6 million or 8.1% to $194.2 million for the year ended March 31, 2014, as compared to the prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers and positive churn.
The following tables compare our business segment and Corporate and other operating results for the year ended March 31, 2014 to the year ended March 31, 2013:

 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2014
 
2013
 
Operating income (loss):
 
 
 
 
 
 
 
 
Healthcare
 
$
109,714

 
$
153,343

 
$
(43,629
)
 
(28.5
)%
Life Sciences
 
50,049

 
47,453

 
2,596

 
5.5
 %
Isomedix
 
55,186

 
51,455

 
3,731

 
7.3
 %
Total reportable segments
 
214,949

 
252,251

 
(37,302
)
 
(14.8
)%
Corporate and other
 
(8,142
)
 
(9,422
)
 
1,280

 
(13.6
)%
Total operating income (loss)
 
$
206,807

 
$
242,829

 
$
(36,022
)
 
(14.8
)%
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the revenues, gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
The Healthcare segment's operating income decreased $43.6 million, or 28.5% to $109.7 million for the year ended March 31, 2014, as compared to $153.3 million for the prior fiscal year. The Healthcare segment’s operating income for fiscal 2014 decreased $3.2 million, or 2.8%, compared to adjusted fiscal 2013 Healthcare operating income of $112.9 million, which excludes the $40.4 million impact of the adjustment related to the SYSTEM 1 Rebate Program and class action settlement (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-

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GAAP financial measures to the most comparable GAAP measures). The decline in adjusted Healthcare operating income reflects the negative impact of the Fiscal 2014 Restructuring Plan, the Medical Device Excise Tax and investments in in-sourcing. Healthcare operating income was favorably impacted by increased revenues driven largely by our recent acquisitions and a reduction in warranty costs.
The Life Science segment's operating income increased $2.6 million, or 5.5% to $50.0 million for the year ended March 31, 2014, as compared to $47.5 million for the prior fiscal year. The segment's operating margins were 20.3% and 19.4%, respectively, for the years ended March 31, 2014 and March 31, 2013. The improvement was primarily attributable to higher revenues and favorable product mix.
The Isomedix segment's operating income increased $3.7 million or 7.3% to $55.2 million for the year ended March 31, 2014, as compared to $51.5 million for the prior fiscal year, reflecting the benefits of increased revenues. The segment's operating margins were 28.4% and 28.7%, respectively, for the years ended March 31, 2014 and March 31, 2013.

FISCAL 2013 AS COMPARED TO FISCAL 2012

Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2013 to the year ended March 31, 2012:

 
Years Ended March 31,
 
 
 
Percent
(dollars in thousands)
2013
 
2012
 
Change
 
Change
Total revenues
$
1,501,902

 
$
1,406,810

 
$
95,092

 
6.8
 %
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
Capital equipment revenues
613,378

 
626,959

 
(13,581
)
 
(2.2
)%
Consumable revenues
353,984

 
301,171

 
52,813

 
17.5
 %
Service revenues
534,540

 
478,680

 
55,860

 
11.7
 %
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
United States revenues
1,141,633

 
1,057,460

 
84,173

 
8.0
 %
International revenues
360,269

 
349,350

 
10,919

 
3.1
 %

Revenues increased $95.1 million, or 6.8%, to $1,501.9 million for the year ended March 31, 2013, as compared to $1,406.8 million for the year ended March 31, 2012. The fiscal 2013 and fiscal 2012 periods were impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted revenues for the year ended March 31, 2013, excluding the impact of the adjustment related to the SYSTEM 1 Rebate Program, were $1,479.5 million, a 6.3% increase over adjusted revenues for fiscal 2012 (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase reflects growth in all three business segments.
Capital equipment revenues decreased by $13.6 million, or 2.2%, to $613.4 million, during fiscal 2013 as compared to fiscal 2012. Capital equipment revenues for the fiscal years ended 2013 and 2012 were favorably impacted by adjustments related to the SYSTEM 1 Rebate Program of $22.4 million and $15.3 million, respectively. Adjusted capital equipment revenues for fiscal 2013 were $591.0 million, a 3.4% decrease over adjusted capital equipment revenues for fiscal 2012. This decrease was primarily driven by the expected post-transition decline in SYSTEM 1E unit sales (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Consumable revenues increased $52.8 million, or 17.5%, during 2013 from fiscal 2012, as increases within the Healthcare segment, driven largely by recent acquisitions, and the Life Sciences business segment more than offset the anticipated decline in SYSTEM 1 consumable volume. Service revenues for fiscal 2013 increased $55.9 million, or 11.7%, over fiscal 2012 primarily driven by the recent acquisition of the instrument repair businesses and other service offerings.
United States revenues for fiscal 2013 were $1,141.6 million, an increase of $84.2 million, or 8.0%, over fiscal 2012 revenues of $1,057.5 million. The fiscal 2013 and 2012 periods were impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted United States revenues for fiscal 2013 were $1,119.3 million, an increase of $77.1 million, or 7.4%, over adjusted United States revenues for fiscal 2012 (see subsection of MD&A titled, "Non-

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GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase is driven by higher consumable and service revenues attributable, in part, to our recent acquisitions but also attributable to increased revenues from other products. These increases were partially offset by the decline in capital equipment revenues driven primarily by the expected post-transition decline in SYSTEM 1E unit sales.
International revenues for fiscal 2013 were $360.3 million, an increase of 3.1% over the fiscal 2012 revenues of $349.4 million. This increase reflects revenue growth in the Asia Pacific and Latin American regions and Canada, partially offset by declines in the EMEA region.

Gross Profit. The following table compares our gross profit for the year ended March 31, 2013 to the year ended March 31, 2012:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
2013
 
2012
 
Gross profit:
 
 
 
 
 
 
 
Product
$
416,463

 
$
376,134

 
$
40,329

 
10.7
%
Service
204,800

 
192,331

 
12,469

 
6.5
%
Total gross profit
$
621,263

 
$
568,465

 
$
52,798

 
9.3
%
Gross profit percentage:
 
 
 
 
 
 
 
Product
43.1
%
 
40.5
%
 
 
 
 
Service
38.3
%
 
40.2
%
 
 
 
 
Total gross profit percentage
41.4
%
 
40.4
%
 
 
 
 

Our gross profit is affected by the volume, pricing and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Our gross profit increased $52.8 million and gross profit percentage increased to 41.4% for fiscal 2013 as compared to 40.4% for fiscal 2012. The most significant driver of this increase results from the change brought about by SYSTEM 1 Rebate Program which had a $23.6 million positive impact in fiscal 2013 as compared to a $17.4 million positive impact in fiscal 2012. Excluding the impact of the SYSTEM 1 Rebate Program, fiscal 2013 adjusted gross profit and gross profit percentage were $597.6 million and 40.4%, respectively, while fiscal 2012 adjusted gross profit and gross profit percentage were $551.1 million and 39.6%, respectively (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Other key factors impacting gross margin and the gross margin percentage of fiscal 2013 include the negative impact of the loss of sterliant and capital equipment revenues due to the SYSTEM 1 and SYSTEM 1E transition (70 basis points) and the Medical Device Excise Tax (20 basis points) and the positive impact of the following; acquisitions (80 basis points), pricing (60 basis points), volume from other products (30 basis points) and foreign currency fluctuations (30 basis points).

Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2013 to the year ended March 31, 2012:
  
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2013
 
2012
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
337,694

 
$
309,552

 
$
28,142

 
9.1
%
Research and development
 
41,305

 
35,953

 
5,352

 
14.9
%
Restructuring expenses
 
(565
)
 
644

 
(1,209
)
 
NM

Total operating expenses
 
$
378,434

 
$
346,149

 
$
32,285

 
9.3
%
NM - Not meaningful
  
Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 9.1% during fiscal 2013 over fiscal 2012. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial

33

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measures to the most comparable GAAP measures). Fiscal 2012 operating expenses reflect lower costs for our annual incentive compensation plan since fiscal 2012 bonuses were not paid as performance targets for fiscal 2012 were not met. Fiscal 2013 SG&A includes transaction costs and incremental amortization of acquired intangible assets associated with the recent acquisitions. SG&A also increased due to the operating expenses incurred within the operations of recently acquired businesses.
Research and development expenses increased $5.4 million during fiscal 2013, as compared to fiscal 2012. The majority of the increase is attributable to expenses for research and development incurred by the recently acquired US Endoscopy. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. During fiscal 2013, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and the areas of emerging infectious agents such as Prions and Nanobacteria.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets.
During the fourth quarter of fiscal 2010, we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions. We do not expect to incur any significant additional restructuring expenses related to this plan.
During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused on our North American operations (the “Fiscal 2008 Restructuring Plan”). As part of this plan, we announced the closure of two sales offices, reduced the workforce in certain support functions, and rationalized certain products. These actions are intended to enhance profitability and improve efficiency by reducing ongoing operating costs. Across all of our reporting segments, approximately 90 employees, primarily located in North America, were directly impacted. We do not expect to incur any significant additional restructuring expenses related to this plan.
We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not committed to any additional specific actions.
Further information regarding our restructuring actions is included in note 2 to our consolidated financial statements titled, “Restructuring.”
The following tables summarize our total restructuring charges for fiscal 2013, and 2012:
   
 
Year Ended March 31, 2013
(dollars in thousands)
Fiscal 2010
Restructuring
Plan
Severance and other compensation related costs
$
(918
)
Lease termination obligation and other
353

Total restructuring charges
$
(565
)


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Table of Contents

 
Year Ended March 31, 2012
(dollars in thousands)
Fiscal 2010
Restructuring
Plan
Fiscal 2008
Restructuring
Plan
Total
Severance and other compensation related costs
$
(776
)
$

$
(776
)
Product rationalization
335


335

Asset impairment and accelerated depreciation
1,103


1,103

Lease termination obligation and other
143

(152
)
(9
)
Total restructuring charges
$
805

$
(152
)
$
653


 
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following table summarizes our liabilities related to these restructuring activities:
 
 
Fiscal 2010 Restructuring Plan
 
 
 
 
Fiscal 2013
 
 
(dollars in thousands)
 
March 31,
2012
 
Provision (1)
 
Payments/
Impairments (2)
 
March 31,
2013
Severance and termination benefits
 
$
659

 
$
(918
)
 
$
730

 
$
471

Lease termination obligations
 
947

 

 
(791
)
 
156

Other
 
76

 
353

 
(429
)
 

Total
 
$
1,682

 
$
(565
)
 
$
(490
)
 
$
627

(1) Includes curtailment benefit of $0.9 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
 
 
Fiscal 2010 Restructuring Plan
 
 
 
 
Fiscal 2012
 
 
(dollars in thousands)
 
March 31,
2011
 
Provision (1)
 
Payments/
Impairments (2)
 
March 31,
2012
Severance and termination benefits
 
$
1,993

 
$
(776
)
 
$
(558
)
 
$
659

Product rationalization
 

 
335

 
(335
)
 

Asset impairments and accelerated depreciation
 

 
1,103

 
(1,103
)
 

Lease termination obligations
 
1,790

 
139

 
(982
)
 
947

Other
 
193

 
4

 
(121
)
 
76

Total
 
$
3,976

 
$
805

 
$
(3,099
)
 
$
1,682

(1) Includes curtailment benefit of $1.3 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table compares our non-operating expense (income), net for the year ended March 31, 2013 to the year ended March 31, 2012:

 
 
Years Ended March 31,
 
 
(dollars in thousands)
 
2013
 
2012
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
15,675

 
$
12,065

 
$
3,610

Interest income and miscellaneous expense
 
56

 
(857
)
 
913

Non-operating expenses, net
 
$
15,731

 
$
11,208

 
$
4,523


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Interest expense during fiscal 2013 periods increased due to higher outstanding borrowings due to acquisitions. Interest income and miscellaneous expense is immaterial.
Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled, “Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”

Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended March 31, 2013 and March 31, 2012:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2013
 
2012
 
Income tax expense
 
$
67,121

 
$
74,993

 
$
(7,872
)
 
(10.5)%
Effective income tax rate
 
29.6
%
 
35.5
%
 
 
 
 

The effective income tax rate for fiscal 2013 was 29.6% as compared to 35.5% for fiscal 2012. The effective tax rate in fiscal 2013 was impacted by a U.S. tax benefit resulting from European restructuring. Specifically, a U.S. tax deduction was taken relating to the rationalization of operations in Switzerland. Additional information regarding our income tax expense is included in note 9 to our consolidated financial statements titled, “Income Taxes.”

Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2013 to the year ended March 31, 2012:
(dollars in thousands)
 
Years Ended March 31,
 
Change
 
Percent
Change
2013
 
2012
 
Revenues:
 
 
 
 
 
 
 
 
Healthcare
 
$
1,074,790

 
$
1,013,102

 
$
61,688

 
6.1
%
Life Sciences
 
244,421

 
226,658

 
17,763

 
7.8
%
Isomedix
 
179,550

 
164,257

 
15,293

 
9.3
%
Total reportable segments
 
1,498,761

 
1,404,017

 
94,744

 
6.7
%
Corporate and other
 
3,141

 
2,793

 
348

 
12.5
%
Total Revenues
 
$
1,501,902

 
$
1,406,810

 
$
95,092

 
6.8
%

Healthcare segment revenues increased $61.7 million, or 6.1% to $1,074.8 million for the year ended March 31, 2013, as compared to $1,013.1 million for the prior fiscal year. Adjusted Healthcare revenues, excluding the impact of the adjustments in each fiscal year related to the SYSTEM 1 Rebate Program, were $1,052.4 million in fiscal 2013, representing an increase of 5.5% compared to $997.8 million for fiscal 2012 (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase in adjusted Healthcare revenues are attributable to the addition of consumable and service revenues from our recent acquisitions as well as organic growth in capital equipment, consumable and service revenues. These increases were partially offset by the expected post-transition decline in SYSTEM 1E unit sales and the decline in SYSTEM 1 consumable volumes. At March 31, 2013, the Healthcare segment’s backlog amounted to $105.2 million, increasing $2.7 million, or 2.6%, compared to the backlog of $102.5 million at March 31, 2012.
Life Science segment revenues increased $17.8 million or 7.8% to $244.4 million for the year ended March 31, 2013, as compared to the prior fiscal year, driven by growth in capital equipment, consumable and service revenues of 12.7%, 5.8% and 4.5%, respectively. The demand for capital equipment reflects replacement product purchases by our pharmaceutical Customers. At March 31, 2013, the Life Sciences segment’s backlog amounted to $48.4 million, decreasing $1.7 million, or 3.4%, compared to the backlog of $50.1 million at March 31, 2012.
Isomedix segment revenues increased $15.3 million or 9.3% to $179.6 million for the year ended March 31, 2013, as compared to prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers, as

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well as the acquisition of Biotest in March 2012. With lab operations in Minneapolis, Minnesota, Biotest provides validation services to our Customers.
The following tables compare our business segment and Corporate and other operating results for the year ended March 31, 2013 to the year ended March 31, 2012:

 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2013
 
2012
 
Operating Income (loss):
 
 
 
 
 
 
 
 
Healthcare
 
$
153,343

 
$
141,742

 
$
11,601

 
8.2
%
Life Sciences
 
47,453

 
41,633

 
5,820

 
14.0
%
Isomedix
 
51,455

 
47,596

 
3,859

 
8.1
%
Total reportable segments
 
252,251

 
230,971

 
21,280

 
9.2
%
Corporate and other
 
(9,422
)
 
(8,655
)
 
(767
)
 
8.9
%
Total Operating Income (loss)
 
$
242,829

 
$
222,316

 
$
20,513

 
9.2
%
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the revenues, gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
The Healthcare segment's operating income increased $11.6 million, or 8.2% to $153.3 million for the year ended March 31, 2013, as compared to $141.7 million for the prior fiscal year. Adjusted Healthcare operating income, excluding the impact of the SYSTEM 1 Rebate Program and class action settlement, was $112.9 million as compared to an adjusted $124.3 million during the prior fiscal year (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The decline in adjusted Healthcare operating income reflects the impact of the expected post-transition decline in SYSTEM 1E unit sales, decline in SYSTEM 1 consumable volumes, the negative impact of the Medical Device Excise Tax, and expenses related to the recent acquisitions. Also, fiscal 2012 operating expenses reflect lower costs for our annual compensation plan since fiscal 2012 bonuses were not paid as performance targets for fiscal 2012 were not met.
The Life Science segment's operating income increased $5.8 million, or 14.0% to $47.5 million for the year ended March 31, 2013, as compared to $41.6 million for the prior fiscal year. The segment's operating margins were 19.4% and 18.4%, respectively, for the years ended March 31, 2013 and March 31, 2012. The improvement was primarily attributable to higher revenues.
The Isomedix segment's operating income increased $3.9 million or 8.1% to $51.5 million for the year ended March 31, 2013, as compared to $47.6 million for the prior fiscal year, reflecting the benefits of increased revenues and improved operating efficiencies. The segment's operating margins were 28.7% and 29.0%, respectively, for the years ended March 31, 2013 and March 31, 2012.




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LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes significant components of our cash flows for the years ended March 31, 2014, 2013 and 2012:
 
 
Years Ended March 31,
(dollars in thousands)
 
2014
 
2013
 
2012
Operating activities:
 
 
 
 
 
 
Net income
 
$
129,442

 
$
159,977

 
$
136,115

Non-cash items
 
107,138

 
97,877

 
88,854

Change in Accrued SYSTEM 1 Rebate Program and class action settlement
 
(245
)
 
(68,812
)
 
(58,618
)
Changes in operating assets and liabilities
 
(26,704
)
 
38,773

 
(16,979
)
Net cash provided by operating activities
 
$
209,631

 
$
227,815

 
$
149,372

Investing activities:
 
 
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
$
(86,367
)
 
$
(87,412
)
 
$
(66,682
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
4,774

 
34

 
42

Investments in businesses, net of cash acquired
 
(67,059
)
 
(399,676
)
 
(34,635
)
Net cash used in investing activities
 
$
(148,652
)
 
$
(487,054
)
 
$
(101,275
)
Financing activities:
 
 
 
 
 
 
          Proceeds from the issuance of long-term obligations
 
$

 
$
200,000

 
$

          Payments on long-term obligations
 
(70,000
)
 

 

Proceeds under credit facilities, net
 
71,190

 
82,290

 

Repurchases of common shares
 
(25,469
)
 
(8,002
)
 
(56,751
)
          Deferred financing fees and debt issuance costs
 
(43
)
 
(1,924
)
 

Cash dividends paid to common shareholders
 
(48,385
)
 
(43,195
)
 
(38,560
)
Stock option and other equity transactions, net
 
15,660

 
23,019

 
5,723

Excess Tax benefit from stock options exercised
 
2,841

 
2,058

 
1,514

Net cash provided by (used in ) in financing activities
 
$
(54,206
)
 
$
254,246

 
$
(88,074
)
Debt-to-total capital ratio
 
32.2
%
 
34.3
%

20.4
%
Free cash flow
 
$
128,038

 
$
140,437

 
$
82,732


Net Cash Provided By Operating Activities –The net cash provided by our operating activities was $209.6 million for the year ended March 31, 2014 compared to $227.8 million for the year ended March 31, 2013 and $149.4 million for the year ended March 31, 2012. The following discussion summarizes the significant changes in our operating cash flows for the years ended March 31, 2014, 2013 and 2012:

Net cash provided by operating activities decreased 8.0% in fiscal 2014 compared to fiscal 2013. The decrease is primarily attributable to payments made in connection with our annual incentive compensation program which did not occur in fiscal 2013. In addition, the fiscal 2013 period reflected strong improvements in working capital management.
Net cash provided by operating activities increased 52.5% in fiscal 2013 compared to fiscal 2012. The increase is attributable to lower accounts receivable and inventory levels, and the cash benefit from a tax deduction related to the closure of our Swiss manufacturing operations.

Net Cash Used In Investing Activities – The net cash used in our investing activities was $148.7 million for the year ended March 31, 2014, compared to $487.1 million for the year ended March 31, 2013 and $101.3 million for the year ended March 31, 2012. The following discussion summarizes the significant changes in our investing cash flows for the years ended March 31, 2014, 2013 and 2012:

Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $86.4 million during fiscal 2014, $87.4 million during fiscal 2013 and $66.7 million during fiscal 2012. Fiscal 2014 capital expenditures were essentially flat as compared to fiscal 2013. Fiscal 2013 capital expenditures were higher than fiscal 2012 as a result of investments in our manufacturing centers and higher purchases of radioisotope (cobalt-60).

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Proceeds from the sale of property, plant, equipment, and intangibles – During the third quarter of fiscal 2014 we sold our former Pieterlen, Switzerland manufacturing facility in conjunction with our 2010 Restructuring Plan. Total proceeds and net loss on the sale were $4.7 million and $0.8 million, respectively. Proceeds from fiscal 2013 and 2012 proceeds relate to minor disposals.
Investments in business, net of cash acquired – During fiscal 2014, we used $64.4 million of cash for the acquisitions of the assets of FSR and LSI, and the capital stock of Eschmann. For more information on these acquisitions refer to note 4 to our consolidated financial statements titled, "Business Acquisitions". During fiscal 2014, we also used $3.2 million in cash for a deferred purchase price payment related to the fiscal 2012 Brazil acquisition described below. During fiscal 2013, we used $399.7 million of cash for the acquisitions of the capital stock of United States Endoscopy Group Inc., and Spectrum Surgical Instruments Corp, the assets of Total Repair Express, and the remaining VTS Medical Systems, LLC interests not already owned by us. During fiscal 2012, we used $34.6 million of cash to acquire two businesses. We acquired the stock of a privately held company with operations located near Sao Paulo, Brazil which designs and manufactures small, medium, and large sterilizers used by public hospitals, clinics, dental offices and industrial companies (e.g., research laboratories and pharmaceutical research and production companies). We also acquired the stock of privately held Biotest with lab operations in Minneapolis, Minnesota which provides validation services to our Customers and is a natural extension of our Isomedix segment.

Net Cash Provided By (Used In) Financing Activities – Net cash used by financing activities was $54.2 million for the year ended March 31, 2014, compared to net cash provided by financing activities of $254.2 million, and net cash used by financing activities of $88.1 million for the years ended March 31, 2013 and March 31, 2012, respectively. The following discussion summarizes the significant changes in our financing cash flows for the years ended March 31, 2014, 2013 and 2012:
Proceeds from the issuance of long-term obligations – During fiscal year 2013 we issued $200 million of senior notes in a private placement, which are long-term obligations. We provide additional information about our debt structure in note 7 to our consolidated financial statements titled, “Debt,” and in this section of the MD&A titled, “Liquidity and Capital Resources” in the subsection titled, “Sources of Credit.”
Payments on long term obligations- During the second quarter of fiscal 2014 we repaid $30.0 million for the senior notes issued in August 2008, which matured in August 2013. During the third quarter of fiscal 2014 we repaid $40.0 million for the senior notes issued in December 2003, which matured in December 2013.
Proceeds under credit facilities, net – At the end of fiscal 2014, $153.5 million of debt was outstanding under our credit facilities.
Repurchases of common shares – During fiscal 2014, we paid for the repurchase of 565,887 commons shares at an average purchase price of $43.63 and obtained common shares in connection with our stock-based compensation award programs in the amount $0.8 million. During fiscal 2013, we paid for the repurchase of 204,349 common shares at an average purchase price of $33.42 and obtained common shares in connection with our stock-based compensation award programs in the amount of $1.2 million. During fiscal 2012, we paid for the repurchase of 1,851,510 common shares at an average purchase price of $30.21 and obtained common shares in connection with our stock-based compensation award programs in the amount of $0.8 million. We provide additional information about our common share repurchases in note 14 to our consolidated financial statements titled, “Repurchases of Common Shares.”
Cash dividends paid to common shareholders – During fiscal 2014, we paid cash dividends totaling $48.4 million or $0.82 per outstanding common share. During fiscal 2013, we paid cash dividends totaling $43.2 million or $0.74 per outstanding common share. During fiscal 2012, we paid cash dividends totaling $38.6 million, or $0.66 per outstanding common share.
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee stock option programs. During fiscal 2014, fiscal 2013 and fiscal 2012, we received cash proceeds totaling $14.2 million $23.0 million, and $5.7 million, respectively, under these programs. In fiscal 2014, we also issued $1.5 million of STERIS restricted stock in conjunction with the LSI acquisition.
Excess Tax benefit from stock options exercised – For the years ended March 31, 2014, 2013 and 2012, our income taxes were reduced by $2.8 million, $2.1 million, and $1.5 million, respectively, as a result of excess deductions allowed for stock options exercised.
Cash Flow Measures. Free cash flow was $128.0 million in fiscal 2014 compared to $140.4 million in fiscal 2013. Our free cash flow decreased in fiscal 2014 primarily due to payments made in connections with our annual incentive compensation in fiscal 2014, which did not occur in fiscal 2013, and due to higher working capital requirements, specifically in accounts receivable (see subsection of MD&A titled, "Non-GAAP Financial Measures", for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Our debt-to-total capital ratio was 32.2% at March 31, 2014 and 34.3% at March 31, 2013.

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Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated from operations, and our existing credit facilities for short-term and long-term capital expenditures and our other liquidity needs. We believe that these amounts will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, our capital requirements will depend on many uncertain factors, including our rate of sales growth, our Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, and changes in our operating expenses. To the extent that our existing sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or selling equity securities. We cannot assure you that we will be able to obtain additional funds on terms favorable to us, or at all.
At March 31, 2014, approximately 94% of our consolidated cash and cash equivalents were held in locations outside of the United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States. We do not intend to repatriate any significant amounts of cash in the foreseeable future.
Sources of Credit.  Our sources of credit as of March 31, 2014 are summarized in the following table:
 
(dollars in thousands)
Maximum
Amounts
Available
 
Reductions in
Available Credit
Facility for Other
Financial  Instruments
 
March 31, 2014 Amounts
Outstanding
 
March 31, 2014 Amounts
Available
Sources of Credit
 
 
 
 
 
 
 
Private placement
$
340,000

 
$

 
340,000

 

Credit Agreement and Swing Line Facility (1)
415,000

 

 
153,480

 
261,520

Total Sources of Credit
755,000

 
$

 
493,480

 
261,520


(1)
Our $400.0 million revolving credit facility contains a sub-limit that reduces the maximum amount available to us for borrowings by letters of credit outstanding.
 
Our sources of funding from credit are summarized below:

In December 2003, we issued $100.0 million of senior notes, of which $20.0 million are still outstanding, to certain institutional investors in a private placement that was not required to be registered with the SEC. The agreements related to these notes require us to meet certain financial covenants, including limitations on debt and a minimum consolidated net worth requirement. The remaining outstanding $20.0 million of senior notes have a maturity of 12 years at an annual interest rate of 5.38%.
On August 15, 2008, we issued $150.0 million of senior notes, of which $120.0 million are still outstanding, to certain institutional investors in a private placement that was not required to be registered with the SEC. The agreements related to these notes require us to meet certain financial covenants, including limitations on debt and a minimum consolidated net worth requirement. Of the $120.0 million remaining in outstanding notes, $85.0 million have a maturity of 10 years at an annual interest rate of 6.33%, and the remaining $35.0 million have a maturity of 12 years at an annual interest rate of 6.43%.
In December 2012, we issued $100.0 million of senior notes to certain institutional investors in a private placement that was not required to be registered with the SEC. Of the $100.0 million of notes, $47.5 million have a maturity of 10 years at an annual interest rate of 3.20%, an additional $40.0 million have a maturity of 12 years at an annual interest rate of 3.35%, and the remaining $12.5 million have a maturity of 15 years at an annual interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The agreements related to these notes require us to meet certain financial covenants regarding limitations on debt.
In February 2013, we issued $100.0 million of senior notes to certain institutional investors in a private placement that was not required to be registered with the SEC. Of the $100.0 million of notes, $47.5 million have a maturity of nine years and 10 months at an annual interest rate of 3.20%, an additional $40.0 million have a maturity of 11 years and 10 months at an annual interest rate of 3.35%, and the remaining $12.5 million have a maturity of 14 years and 10 months at an annual interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The agreements related to these notes require us to meet certain financial covenants regarding limitations on debt.
On April 13, 2012 we signed a Third Amended and Restated Credit Agreement (the "Credit Agreement") with KeyBank National Association, as administrative agent (“Agent”) for the lenders from time to time party thereto ("Lenders") and such Lenders. The Credit Agreement amended, restated and replaced our previous credit agreement. The Credit Agreement

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initially provided a $300.0 million credit facility and was amended in October 2012, to increase the credit facility to $400.0 million (which may be increased by up to an additional $100.0 million in specified circumstances, and subject to certain Lender consent requirements) for borrowings and letters of credit, and will mature April 13, 2017. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable on that date. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the Credit Agreement. Borrowings bear interest at floating rates based upon the Base Rate (as defined) or fixed rates based upon the Eurodollar Rate or Alternate Currency Rate (as defined), plus the Applicable Margin (as defined) in effect from time to time under the Credit Agreement based upon the Company's Leverage Ratio (as defined). Interest on floating rate loans is payable quarterly in arrears and interest on fixed rate loans is payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. The Credit Agreement also requires the payment of a facility fee on the total facility commitment amount, which fee is determined based on the Company's Leverage Ratio. There is no premium or penalty for prepayment of floating rate loans but prepayments of fixed rate loans may be subject to a prepayment fee. The Credit Agreement also permits the Company to make short term "Swing Loan" borrowings from the Agent in an aggregate amount not to exceed $35.0 million outstanding at any time. Swing Loans bear interest at the Agent's cost of funds plus the applicable margin in effect from time to time. The Credit Agreement requires the Company to maintain compliance with certain financial covenants, including a maximum Leverage Ratio and a minimum Interest Coverage Ratio. The Company's obligations under the Credit Agreement are unsecured but guaranteed by its material domestic subsidiaries.
On December 6, 2013 we executed an agreement with PNC Bank, National Association (the “Bank”), providing for the extension of a $15.0 million line of credit (the “Swing Line Facility”) to the Company. Borrowings under the Swing Line Facility are evidenced by a promissory note issued by the Company (the “Note”). The Company may borrow, repay and reborrow from time to time under the Swing Line Facility until its maturity date. The maturity date is the earlier of (i) December 5, 2014, or such later date as may be designated by the Bank, or (ii) the date on which the Bank is no longer a lender under the Credit Agreement, as amended, or a replacement credit agreement. The maturity date may be accelerated in the case of certain defaults. Borrowings bear interest at a rate per annum from time to time equal to the sum of the Daily LIBOR Rate (as defined in the Note) and the Applicable Margin (calculated as provided in the Note) and the interest is payable monthly.
At March 31, 2014, we had $261.5 million of funding available under the Credit Agreement and Swing Line Facility. The Credit Agreement includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. At March 31, 2014, there were no letters of credit outstanding under the Credit Agreement.
At March 31, 2014, we were in compliance with all financial covenants associated with our indebtedness. We provide additional information regarding our debt structure and payment obligations in the section of the MD&A titled, “Liquidity and Capital Resources” in the subsection titled, “Contractual and Commercial Commitments” and in note 7 to our consolidated financial statements titled, “Debt.”

CAPITAL EXPENDITURES
Our capital expenditure program is a component of our long-term strategy. This program includes, among other things, investments in new and existing facilities, business expansion projects, radioisotope (cobalt-60) and information technology enhancements and research and development advances. During fiscal 2014, our capital expenditures amounted to $86.4 million. We use cash provided by operating activities and our cash and cash equivalent balances to fund capital expenditures. We expect fiscal 2015 capital expenditures to be comparable to fiscal 2014 levels with continued investment in projects intended to improve quality, provide expansion, reduce operating costs and add value to the current product offering.

CONTRACTUAL AND COMMERICAL COMMITMENTS
At March 31, 2014, we had commitments under non-cancelable operating leases totaling $48.4 million.
Our contractual obligations and commercial commitments as of March 31, 2014 are presented in the following tables. Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies, and other potential cash outflows resulting from events that require us to fulfill commitments.
 

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Payments due by March 31,
 
 
(in thousands)
2015
 
2016
 
2017
 
2018
 
2019 and
thereafter
 
Total
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
 
Debt
$
12,980

 
$
20,000

 
$

 
$
140,500

 
$
320,000

 
$
493,480

Operating leases
16,425

 
13,261

 
9,475

 
6,263

 
3,023

 
48,447

Purchase obligations
13,985

 
14,377

 
14,809

 
11,350

 

 
54,521

Benefit payments under defined benefit plans
4,069

 
3,975

 
3,866

 
3,755

 
20,428

 
36,093

Trust assets available for benefit payments under defined benefit plans
(4,069
)
 
(3,975
)
 
(3,866
)
 
(3,755
)
 
(20,428
)
 
(36,093
)
Benefit payments under other post-retirement welfare benefit plans
2,950

 
2,765

 
2,414

 
2,147

 
8,714

 
18,990

Other obligations
186

 
165

 
167

 

 

 
518

Total Contractual Obligations
$
46,526

 
$
50,568

 
$
26,865

 
$
160,260

 
$
331,737

 
$
615,956


The table above includes only the principal amounts of our contractual obligations. We provide information about the interest component of our long-term debt in the subsection of MD&A titled, “Liquidity and Capital Resources,” and in note 7 to our consolidated financial statements titled, “Debt.”
Purchase obligations shown in the table above relate to minimum purchase commitments with suppliers for materials purchases.
The table above excludes contributions we make to our defined contribution plan. Our future contributions to this plan depend on uncertain factors, such as the amount and timing of employee contributions and discretionary employer contributions. We provide additional information about our defined benefit pension plan, defined contribution plan, and other post-retirement medical benefit plan in note 10 to our consolidated financial statements titled, “Benefit Plans.”

 
Amount of Commitment Expiring March 31,
 
 
(in thousands)
2015
 
2016
 
2017
 
2018
 
2019 and
thereafter
 
Totals
Commercial Commitments:
 
 
 
 
 
 
 
 
 
 
 
Performance and surety bonds
$
39,147

 
$
3,591

 
$
115

 
$
15

 
$
756

 
$
43,624

Letters of credit as security for self-insured risk retention policies
5,961

 

 

 

 

 
5,961

Total Commercial Commitments
$
45,108

 
$
3,591

 
$
115

 
$
15

 
$
756

 
$
49,585


CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS

The following subsections describe our most critical accounting policies, estimates, and assumptions. Our accounting policies are more fully described in note 1 to our consolidated financial statements titled, “Nature of Operations and Summary of Significant Accounting Policies.”
Estimates and Assumptions.  Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements that were prepared in accordance with United States generally accepted accounting principles. We make certain estimates and assumptions that we believe to be reasonable when preparing these financial statements. These estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could be materially different from these estimates. We periodically review these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit Committee of the Company’s Board of Directors.
Revenue Recognition.  We recognize revenue for products when ownership passes to the Customer, which is based on contract or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor. We have no further obligations related to bringing about resale, and our standard return and restocking fee policies are applied.
We also have individual Customer contracts that offer extended payment terms and/or discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns,

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rebates, and other similar allowances in the same period the related revenues are recorded. Returns, rebates, and similar allowances are estimated based on historical experience and trend analysis.
In transactions that contain multiple elements, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each element based on its relative fair value, based on the price for the product or service when it is sold separately.
We offer preventative maintenance agreements to our Customers with contract terms that range from one to five years, which require us to maintain and repair our products during this time. Amounts received under these Customer contracts are initially recorded as deferred service revenues and then recognized as service revenues ratably over the contract term.
We classify shipping and handling amounts billed to Customers in sales transactions as revenues.
Allowance for Doubtful Accounts Receivable.  We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by Customers. We estimate the allowance based on analyzing a number of factors, including amounts written off historically, Customer payment practices, and general economic conditions. We also analyze significant Customer accounts on a regular basis and record a specific allowance when we become aware of a specific Customer’s inability to pay. As a result, the related accounts receivable are reduced to an amount that we reasonably believe is collectible. These analyses require a considerable amount of judgment. If the financial condition of our Customers worsens, or economic conditions change, we may be required to make changes to our allowance for doubtful accounts receivable.
Allowance for Sales Returns.  We maintain an allowance for sales returns based upon known returns and estimated returns for both capital equipment and consumables. We estimate returns of capital equipment and consumables based upon historical experience less the estimated inventory value of the returned goods.
Inventories and Reserves.  Inventories are stated at the lower of their cost or market value. We determine cost based upon a combination of the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods. We determine the LIFO inventory value at the end of the year based on inventory levels and costs at that time. For inventories valued using the LIFO method, we believe that the use of the LIFO method results in a matching of current costs and revenues. Inventories valued using the LIFO method represented approximately 34.6% and 38.6% of total inventories at March 31, 2014 and 2013, respectively. Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have been $19.5 million and $18.9 million higher than those reported at March 31, 2014 and 2013, respectively.
We review the net realizable value of inventory on an ongoing basis, considering factors such as deterioration, obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues.
Asset Impairment Losses.  Property, plant, equipment, and identifiable intangible assets are reviewed for impairment when events and circumstances indicate that the carrying value of such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We conduct this review on an ongoing basis and, if impairment exists, we record the loss in the Consolidated Statements of Income during that period.
When we evaluate assets for impairment, we make certain judgments and estimates, including interpreting current economic indicators and market valuations, evaluating our strategic plans with regards to operations, historical and anticipated performance of operations, and other factors. If we incorrectly anticipate these factors, or unexpected events occur, our operating results could be materially affected.
Restructuring.  We have recorded specific accruals in connection with plans for restructuring elements of our business. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, and contractual obligations. Actual amounts could differ from the original estimates.
We review our restructuring-related accruals on a quarterly basis and changes to plans are appropriately recognized in the Consolidated Statements of Income in the period the change is identified. Note 2 to our consolidated financial statements titled, “Restructuring,” summarizes our restructuring plans.
Purchase Accounting and Goodwill.  Assets and liabilities of the business acquired are accounted for at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. We supplement management expertise with valuation specialists in performing appraisals to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We generally amortize our intangible assets over their useful lives with the exception of indefinite lived intangible assets. We do not amortize goodwill, but we evaluate it annually for impairment. Therefore, the allocation of acquisition costs to intangible assets and goodwill has a significant impact on future operating results.

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We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. We may consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We calculate the fair value of our reporting units based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.
We performed our annual goodwill and indefinite lived intangible asset impairment evaluation as of October 31, 2013. Based on this evaluation, we determined that there was no impairment of the recorded amounts and we do not believe that any of our reporting units are at a significant risk of failing goodwill impairment testing.
We evaluate indefinite lived intangible assets annually, or when evidence of potential impairment exists. We evaluate several qualitative indicators and assumptions, and trends that influence the valuation of the assets to determine if any evidence of potential impairment exists.
Income Taxes.  Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, income tax rates, changes in uncertain tax benefits, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and the respective governmental taxing authorities. We use significant judgment in determining our annual effective income tax rate and evaluating our tax positions. We prepare and file tax returns based on our interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. We cannot be sure that the tax authorities will agree with all of the tax positions taken by us. The actual income tax liability for each jurisdiction in any year can, in some instances, be ultimately determined several years after the tax return is filed and the financial statements are published.
We evaluate our tax positions using the recognition threshold and measurement attribute in accordance with current accounting guidance. We determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority and that the taxing authority will have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The appropriate unit of account for determining what constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. We review and adjust our tax estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance, which would increase our effective income tax rate and could result in an adverse impact on our consolidated financial position, results of operations, or cash flows.
We believe that adequate accruals have been made for income taxes. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations or cash flow for any one period.
Additional information regarding income taxes is included in note 9 to our consolidated financial statements titled, “Income Taxes.”
SYSTEM 1 Rebate Program and Class Action Settlement. The SYSTEM 1 Rebate Program (the “Rebate Program”) was initially recognized during the first quarter of fiscal 2011. The rebate portion of the Rebate Program was recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the returned SYSTEM 1 processors portion of the Rebate Program were recognized as cost of revenues. Both components were recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program included: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that would

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elect to participate in the Rebate Program, the proportion of Customers that would choose each rebate option, and the estimated per unit costs of disposal.
The Rebate Program ended August 2, 2012. Customers utilized rebates totaling approximately $66.6 million on orders placed since the initiation of the Rebate Program. The costs associated with the Rebate Program were lower than originally estimated because fewer Customers elected to participate in the Rebate Program than anticipated.
The SYSTEM 1 class action settlement was initially recognized during the third quarter of fiscal 2011. The claim submission deadline was December 31, 2012. As a result, during fiscal 2013 we reduced the liability related to the SYSTEM 1 class action settlement by $16.8 million. The adjustment was recorded as a reduction to operating expenses.
Self-Insurance Liabilities.  We record a liability for self-insured risks that we retain for general and product liabilities, workers’ compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and actuarial methods to calculate the estimated liability. This liability includes estimated amounts for both losses and incurred but not reported claims. We review the assumptions used to calculate the estimated liability at least annually to evaluate the adequacy of the amount recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are subject to the terms and conditions of those policies. The obligation covered by insurance contracts will remain on the balance sheet as we remain liable to the extent insurance carriers do not meet their obligation. Estimated amounts receivable under the contracts are included in the "Other assets" line, of our consolidated balance sheets. Our accrual for self-insured risk retention as of March 31, 2014 and 2013 was $14.4 million and $14.1 million, respectively.
We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based upon recent claims experience.
Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual results are not consistent with these assumptions and judgments, we could be exposed to additional costs in subsequent periods.
Warranty Reserves.  We generally offer a limited one-year parts and labor warranty on our capital equipment. The specific terms and conditions of warranties may vary depending on the product sold and the country where we conduct business. We record a liability for the estimated cost of product warranties in the period revenues are recognized. We estimate warranty expenses based primarily on historical warranty claim experience. While we have extensive quality programs and processes and actively monitor and evaluate the quality of suppliers, actual warranty experience could be different from our estimates. If actual product failure rates, material usage, or service costs are different from our estimates, we may have to record an adjustment to the estimated warranty liability. As of March 31, 2014 and 2013, we had accrued $7.8 million and $12.7 million, respectively, for warranty exposures.
Contingencies.  We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Part I, Item 3, “Legal Proceedings” for additional information.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of our federal income tax returns.
Additional information regarding our commitments and contingencies is included in note 11 to our consolidated financial statements titled, “Commitments and Contingencies.”

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Benefit Plans.  We provide defined benefit pension plans for certain former manufacturing and plant administrative personnel as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. As of March 31, 2014, we sponsored a defined benefit pension plan for eligible participants in the United States. In addition, as of March 31, 2014, we sponsored an unfunded post-retirement welfare benefits plan for two groups of United States retirees, including the same retirees who receive pension benefits under the United States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage.
Employee pension and post-retirement welfare benefits plans are a cost of conducting business and represent obligations that will be settled far in the future and therefore, require us to use estimates and make certain assumptions to calculate the expense and liabilities related to the plans. Changes to these estimates and assumptions can result in different expense and liability amounts. Future actual experience may be significantly different from our current expectations. We believe that the most critical assumptions used to determine net periodic benefit costs and projected benefit obligations are the expected long-term rate of return on plan assets and the discount rate. A summary of significant assumptions used to determine the March 31, 2014 projected benefit obligations and the fiscal 2014 net periodic benefit costs is as follows:
 
  
U.S. Defined Benefit Pension Plan
 
Other Post-
Retirement Plan
Funding Status
Funded
 
Unfunded
Assumptions used to determine March 31, 2014
 
 
 
benefit obligations:
 
 
 
Discount rate
4.00
%
 
3.50
%
Assumptions used to determine fiscal 2014
 
 
 
net periodic benefit costs:
 
 
 
Discount rate
3.50
%
 
3.00
%
Expected return on plan assets
7.75
%
 
n/a

NA – Not applicable.
We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios, and the long-term asset class return expectations. Generally, net periodic benefit costs increase as the expected long-term rate of return on plan assets assumption decreases. Holding all other assumptions constant, lowering the expected long-term rate of return on plan assets assumption for our funded defined benefit pension plans by 50 basis points would have increased the fiscal 2014 benefit costs by $0.2 million.
We develop our discount rate assumptions by evaluating input from third-party professional advisors, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as our projected benefit obligations. Generally, the projected benefit obligations and the net periodic benefit costs both increase as the discount rate assumption decreases. Holding all other assumptions constant, lowering the discount rate assumption for our defined benefit pension plans and for the other post-retirement plan by 50 basis points would have decreased the fiscal 2014 net periodic benefit costs by approximately $0.05 million and would have increased the projected benefit obligations by approximately $3.0 million at March 31, 2014.
We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five year-period from the assumed current year healthcare cost trend rate of 7% to the assumed long-term healthcare cost trend rate. A 100 basis point change in the assumed healthcare cost trend rate (including medical, prescription drug, and long-term rates) would have had the following effect at March 31, 2014:
 
100 Basis Point
(dollars in thousands)
Increase
 
Decrease
Effect on total service and interest cost components
$
3

 
$
(3
)
Effect on postretirement benefit obligation
90

 
(88
)

We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and post-retirement benefit plans in our balance sheets. This amount is measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in other comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date. Note 10 to

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our consolidated financial statements titled, “Benefit Plans,” contains additional information about our pension and other post-retirement welfare benefits plans.
Share-Based Compensation.  We measure the estimated fair value for share-based compensation awards, including grants of employee stock options at the grant date and recognize the related compensation expense over the period in which the share-based compensation vests. We selected the Black-Scholes-Merton option pricing model as the most appropriate method for determining the estimated fair value of our share-based stock option compensation awards. This model involves assumptions that are judgmental and affect share-based compensation expense.
Share-based compensation expense was $11.1 million in fiscal 2014, $8.9 million in fiscal 2013 and $7.9 million in fiscal 2012. Note 15 to our consolidated financial statements titled, “Share-Based Compensation,” contains additional information about our share-based compensation plans.

RECENTLY ISSUED ACCOUNTING STANDARDS IMPACTING THE COMPANY
Recently issued accounting standards that are relevant to us are presented in note 1 to our consolidated financial statements titled, “Nature of Operations and Summary of Significant Accounting Policies.”

INFLATION
Our business has not been significantly impacted by the overall effects of inflation. We monitor the prices we charge for our products and services on an ongoing basis and plan to adjust those prices to take into account future changes in the rate of inflation. However, we may not be able to completely offset the impact of inflation.

FORWARD-LOOKING STATEMENTS
This Form 10-K may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry, products or activities that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "outlook," "impact," "potential," "confidence," "improve," "optimistic," "deliver," "comfortable," "trend", and "seeks," or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws, government regulations, labeling or product approvals or the application or interpretation thereof. Other risk factors are described herein and in the Company's other securities filings. Many of these important factors are outside STERIS's control. No assurances can be provided as to any result or the timing of any outcome regarding matters described herein or otherwise with respect to any regulatory action, administrative proceedings, government investigations, litigation, warning letters, consent decree, transition, cost reductions, business strategies, earnings or revenue trends or future financial results. References to products, the consent decree, the transition or rebate program, or the class action settlement, are summaries only and should not be considered the specific terms of the decree, settlement, program or product clearance or literature. Unless legally required, the Company does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing or costs that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, certifications, regulations, regulatory actions, including without limitation those relating to FDA warning notices or letters, government investigations, the outcome of any pending FDA requests, inspections or submissions, or other requirements or standards may delay, limit or prevent new product introductions, affect the production and marketing of existing products or services or otherwise affect Company performance, results, prospects or value, (d) the potential of international unrest, economic downturn or effects of currencies, tax assessments, adjustments or anticipated rates, raw material costs or availability, benefit or retirement plan costs, or other regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company's products and services, (f) the possibility that anticipated growth, cost savings, new product acceptance, performance or approvals, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with our business, industry or initiatives including, without limitation, the consent decree, and those matters described in this Form 10-K for the year ended March 31, 2014 and other securities filings, may adversely impact Company performance, results, prospects or value, (g) the possibility that anticipated financial results or benefits of recent acquisitions or our restructuring efforts will not be realized or will be other than anticipated, (h) the effects of

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contractions in credit availability, as well as the ability of our Customers and suppliers to adequately access the credit markets when needed, and (i) those risks described in our securities filings including this Annual Report on Form 10-K for the year ended March 31, 2014.

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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to various risks, including, but not limited to, interest rate, foreign currency, and commodity risks. These risks are described in the sections that follow.
INTEREST RATE RISK
As of March 31, 2014, we had $340.0 million in fixed rate senior notes outstanding. As of March 31, 2014, we had $153.5 million in outstanding borrowings under our Credit Agreement and Swing Line Facility. Borrowings under the Credit Agreement and Swing Line Facility are exposed to changes in interest rates. We monitor our interest rate risk, but do not engage in any hedging activities using derivative financial instruments. For additional information regarding our debt structure, refer to note 7 to our Consolidated Financial Statements titled, “Debt.”

FOREIGN CURRENCY RISK
We are exposed to the impact of foreign currency exchange fluctuations. This foreign currency exchange risk arises when we conduct business in a currency other than the U.S. dollar. For most international operations, local currencies have been determined to be the functional currencies. The financial statements of international subsidiaries are translated to their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities and at average currency exchange rates for revenues and expenses. Translation adjustments for international subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Note 19 to our consolidated financial statements titled, “Accumulated Other Comprehensive Income (Loss),” contains additional information about the impact of translation on accumulated other comprehensive income (loss) and shareholders’ equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the Consolidated Statements of Income. Since we operate internationally and approximately one-fourth of our revenues and one-fourth of our cost of revenues are generated outside the United States, foreign currency exchange rate fluctuations can significantly impact our financial position, results of operations, and competitive position.
We enter into foreign currency forward contracts to hedge assets and liabilities denominated in foreign currencies, including inter-company transactions. We do not use derivative financial instruments for speculative purposes. At March 31, 2014, we held foreign currency forward contracts to buy 68 million Mexican pesos, 10 million Canadian dollars and 3 million Euros, and contracts to sell 18 million Mexican pesos.

COMMODITY RISK
We are dependent on basic raw materials, sub-assemblies, components, and other supplies used in our operations. Our financial results could be affected by the availability and changes in prices of these materials. Some of these materials are sourced from a limited number of suppliers or only a single supplier. These materials are also key source materials for our competitors. Therefore, if demand for these materials rises, we may experience increased costs and/or limited or unavailable supplies. As a result, we may not be able to acquire key production materials on a timely basis, which could impact our ability to produce products and satisfy incoming sales orders on a timely basis. In addition, the costs of these materials can rise suddenly and result in significantly higher costs of production. We believe that we have adequate sources of supply for many of our key materials and energy sources. Where appropriate, we enter into long-term supply contracts as a basis to guarantee a reliable supply. We may also enter into commodity swap contracts to hedge price changes in a certain commodity that impacts raw materials included in our cost of revenues.

49

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 
  
Page
 
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
 
Financial Statement Schedule:
 
 




50



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Shareholders
STERIS Corporation

We have audited the accompanying consolidated balance sheets of STERIS Corporation and subsidiaries as of March 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of STERIS Corporation and subsidiaries at March 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), STERIS Corporation and subsidiaries’ internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated May 29, 2014 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP

Cleveland, Ohio
May 29, 2014



51

Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
March 31,
 
2014
 
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
152,802

 
$
142,008

Accounts receivable (net of allowances of $10,922 and $10,043, respectively)
 
313,686

 
275,937

Inventories, net
 
155,146

 
144,443

Deferred income taxes, net
 
16,084

 
21,195

Prepaid expenses and other current assets
 
37,027

 
30,357

Total current assets
 
674,745

 
613,940

Property, plant, and equipment, net
 
454,410

 
431,952

Goodwill and intangibles, net
 
747,715

 
704,424

Other assets
 
10,292

 
10,793

Total assets
 
$
1,887,162

 
$
1,761,109

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
102,430

 
$
79,374

Accrued payroll and other related liabilities
 
58,774

 
54,316

Accrued expenses and other
 
93,302

 
85,147

Total current liabilities
 
254,506

 
218,837

Long-term indebtedness
 
493,480

 
492,290

Deferred income taxes, net
 
59,053

 
44,924

Other liabilities
 
38,877

 
58,078

Total liabilities
 
$
845,916

 
$
814,129

Commitments and contingencies (see note 11)
 
 
 
 
Serial preferred shares, without par value; 3,000 shares authorized; no shares issued or outstanding
 

 

Common shares, without par value; 300,000 shares authorized; 70,040 shares issued; 58,968 and 58,759 shares outstanding, respectively
 
246,186

 
239,648

Common shares held in treasury, 11,072 and 11,281 shares, respectively
 
(324,202
)
 
(321,801
)
Retained earnings
 
1,112,240

 
1,031,183

Accumulated other comprehensive income
 
4,481

 
(4,088
)
Total shareholders’ equity
 
1,038,705

 
944,942

Noncontrolling interest
 
2,541

 
2,038

Total equity
 
1,041,246

 
946,980

Total liabilities and equity
 
$
1,887,162

 
$
1,761,109

See notes to consolidated financial statements.



52

Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

 
Years Ended March 31,
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
 
Product
 
$
1,011,462

 
$
967,362

 
$
928,129

Service
 
610,790

 
534,540

 
478,681

Total revenues
 
1,622,252

 
1,501,902

 
1,406,810

Cost of revenues:
 
 
 
 
 
 
Product
 
586,176

 
550,899

 
551,995

Service
 
386,454

 
329,740

 
286,350

Total cost of revenues
 
972,630

 
880,639

 
838,345

Gross profit
 
649,622

 
621,263

 
568,465

Operating expenses:
 
 
 
 
 
 
Selling, general, and administrative
 
380,970

 
337,694

 
309,552

Research and development
 
48,641

 
41,305

 
35,953

Restructuring expenses
 
13,204

 
(565
)
 
644

Total operating expenses
 
442,815

 
378,434

 
346,149

Income from operations
 
206,807

 
242,829

 
222,316

Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
18,770

 
15,675

 
12,065

Interest income and miscellaneous expense
 
(339
)
 
56

 
(857
)
Total non-operating expenses, net
 
18,431

 
15,731

 
11,208

Income before income tax expense
 
188,376

 
227,098

 
211,108

Income tax expense
 
58,934

 
67,121

 
74,993

Net income
 
$
129,442

 
$
159,977

 
$
136,115

Net income per common share
 
 
 
 
 
 
Basic
 
$
2.20

 
$
2.74

 
$
2.33

Diluted
 
$
2.17

 
$
2.72

 
$
2.31

Cash dividends declared per common share outstanding
 
$
0.82

 
$
0.74

 
$
0.66


See notes to consolidated financial statements.
 

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Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)


Years Ended March 31,
 
2014
 
2013
 
2012
Net income
 
$
129,442

 
$
159,977

 
136,115

Unrealized gain on available for sale securities
 
275

 
112

 
70

Amortization of pension and postretirement benefit plans costs, net of taxes of $(1,798), $2,706, $4,102 and respectively
 
2,756

 
(4,082
)
 
(7,279
)
Change in cumulative foreign currency translation adjustment
 
5,538

 
(13,745
)
 
(14,352
)
Total other comprehensive income (loss)
 
8,569

 
(17,715
)
 
(21,561
)
Comprehensive income
 
$
138,011

 
$
142,262

 
$
114,554


See notes to consolidated financial statements.




54

Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
Years Ended March 31,
 
2014
 
2013
 
2012
Operating activities:
 
 
 
 
 
 
Net income
 
$
129,442

 
$
159,977

 
$
136,115

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation, depletion, and amortization
 
75,649

 
69,035

 
62,906

Deferred income taxes
 
15,176

 
23,751

 
22,093

Share-based compensation expense
 
11,100

 
8,917

 
7,858

Loss on the disposal of property, plant, equipment, and intangibles, net
 
5,279

 
294

 
664

Other items
 
(66
)
 
(4,120
)
 
(4,667
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
 
Accounts receivable, net
 
(28,794
)
 
21,866

 
(6,517
)
Inventories, net
 
2,767

 
28,015

 
11,833

Other current assets
 
(5,482
)
 
(8,889
)
 
385

Accounts payable
 
19,377

 
(12,536
)
 
(9,120
)
Accrued SYSTEM 1 Rebate Program and class action settlement
 
(245
)
 
(68,812
)
 
(58,618
)
Accruals and other, net
 
(14,572
)
 
10,317

 
(13,560
)
Net cash provided by operating activities
 
209,631

 
227,815

 
149,372

Investing activities:
 
 
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(86,367
)
 
(87,412
)
 
(66,682
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
4,774

 
34

 
42

Acquisition of business, net of cash acquired
 
(67,059
)
 
(399,676
)
 
(34,635
)
Net cash used in investing activities
 
(148,652
)
 
(487,054
)
 
(101,275
)
Financing activities:
 
 
 
 
 
 
Proceeds from the issuance of long-term obligations
 

 
200,000

 

Payments on long-term obligations
 
(70,000
)
 

 

Proceeds under credit facilities, net
 
71,190

 
82,290

 

Deferred financing fees and debt issuance costs
 
(43
)
 
(1,924
)
 

Repurchases of common shares
 
(25,469
)
 
(8,002
)
 
(56,751
)
Cash dividends paid to common shareholders
 
(48,385
)
 
(43,195
)
 
(38,560
)
Stock option and other equity transactions, net
 
15,660

 
23,019

 
5,723

Excess tax benefit from stock options exercised
 
2,841

 
2,058

 
1,514

Net cash provided by (used in) financing activities
 
(54,206
)
 
254,246

 
(88,074
)
Effect of exchange rate changes on cash and cash equivalents
 
4,021

 
(3,820
)
 
(2,218
)
Increase (decrease) in cash and cash equivalents
 
10,794

 
(8,813
)
 
(42,195
)
Cash and cash equivalents at beginning of period
 
142,008

 
150,821

 
193,016

Cash and cash equivalents at end of period
 
$
152,802

 
$
142,008

 
$
150,821


See notes to consolidated financial statements.


55

Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)


 
Common Shares
 
Treasury Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-controlling
Interest
 
Total
Equity
  
Number
 
Amount
 
Number
 
Amount
 
 
 
 
 
 
 
 
Balance at March 31, 2011
59,122

 
$
241,343

 
10,918

 
$
(305,808
)
 
$
816,846

 
$
35,188

 
$
1,096

 
$
788,665

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Net income

 

 

 

 
136,115

 

 

 
136,115

Other comprehensive loss

 

 

 

 

 
(21,561
)
 

 
(21,561
)
Repurchases of common shares
(1,887
)
 

 
1,887

 
(56,751
)
 

 

 

 
(56,751
)
Equity compensation programs
498

 
1,234

 
(498
)
 
11,841

 

 

 

 
13,075

Tax benefit of stock options exercised

 
1,514

 

 

 

 

 

 
1,514

Cash dividends – $0.66 per common share

 

 

 

 
(38,560
)
 

 

 
(38,560
)
Change in noncontrolling interest

 

 

 

 

 

 
167

 
167

Balance at March 31, 2012
57,733

 
$
244,091

 
12,307

 
$
(350,718
)
 
$
914,401

 
$
13,627

 
$
1,263

 
$
822,664

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
159,977

 

 

 
159,977

Other comprehensive loss

 

 

 

 

 
(17,715
)
 

 
(17,715
)
Repurchases of common shares
(257
)
 

 
257

 
(8,002
)
 

 

 

 
(8,002
)
Equity compensation programs
1,283

 
(6,501
)
 
(1,283
)
 
36,919

 

 

 

 
30,418

Tax benefit of stock options exercised

 
2,058

 

 

 

 

 

 
2,058

Cash dividends – $0.74 per common share

 

 

 

 
(43,195
)
 

 

 
(43,195
)
Change in noncontrolling interest

 

 

 

 

 

 
775

 
775

Balance at March 31, 2013
58,759

 
$
239,648

 
11,281

 
$
(321,801
)
 
$
1,031,183

 
$
(4,088
)
 
$
2,038

 
$
946,980

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
129,442

 

 

 
129,442

Other comprehensive income

 

 

 

 

 
8,569

 

 
8,569

Repurchases of common shares
(624
)
 

 
624

 
(25,469
)
 

 

 

 
(25,469
)
Equity compensation programs and other
833

 
3,697

 
(833
)
 
23,068

 

 

 

 
26,765

Tax benefit of stock options exercised

 
2,841

 

 

 

 

 

 
2,841

Cash dividends – $0.82 per common share

 

 

 

 
(48,385
)
 

 

 
(48,385
)
Change in noncontrolling interest

 

 

 

 

 

 
503

 
503

Balance at March 31, 2014
58,968

 
$
246,186

 
11,072

 
$
(324,202
)
 
$
1,112,240

 
$
4,481

 
$
2,541

 
$
1,041,246

See notes to consolidated financial statements.

56

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)




1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations.  STERIS Corporation, an Ohio corporation, together with its subsidiaries, develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and procedural support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental Customers throughout the world. As used in this annual report, STERIS Corporation and its subsidiaries together are called “STERIS,” the “Company,” “we,” “us,” or “our,” unless otherwise noted.
We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services (“Isomedix”). We describe our operating segments in note 12 titled, "Business Segment Information". Our fiscal year ends on March 31. References in this Annual Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:
Principles of Consolidation.  The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Income attributable to non-controlling interests is reported in the "Interest income and
miscellaneous expense" line of our Consolidated Statements of Income and is not material.
Use of Estimates.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Actual results could differ from those estimates. On an ongoing basis, we revise the estimates and assumptions as new information becomes available.
Cash Equivalents and Supplemental Cash Flow Information.  Cash equivalents are all highly liquid investments with a maturity of three months or less when purchased. We invest our excess cash in short-term instruments including money market funds and time deposits with major banks and financial institutions. We select investments in accordance with the criteria established in our investment policy. Our investment policy specifies, among other things, maturity, credit quality and concentration restrictions with the objective of preserving capital and maintaining adequate liquidity.
Information supplementing our Consolidated Statements of Cash Flows is as follows:
 
Years Ended March 31,
2014
 
2013
 
2012
Cash paid during the year for:
 
 
 
 
 
Interest
$
19,268

 
$
14,115

 
$
12,496

Income taxes
52,888

 
38,475

 
52,213

Cash received during the year for income tax refunds
3,076

 
1,096

 
408


Revenue Recognition. We recognize revenue for products when ownership passes to the Customer, which is based on contract or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor. We have no further obligations related to bringing about resale and our standard return and restocking fee policies are applied. Revenues are reported net of sales and value-added taxes collected from Customers.
We also have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances in the same period the related revenues are recorded. Returns, rebates, and similar allowances are estimated based on historical experience and trend analysis.
In transactions that contain multiple elements, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each element based on its relative fair value, based on the price for the product or service when it is sold separately.

57

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


We offer preventative maintenance agreements to our Customers with contract terms of one to five years which require us to maintain and repair our products during this time. Amounts received under these Customer contracts are initially recorded as deferred service revenues and then recognized as service revenues ratably over the contract term.
Accounts Receivable.  Accounts receivable are presented at their face amount, less allowances for sales returns and uncollectible accounts. Accounts receivable consist of amounts billed and currently due from Customers and amounts earned but unbilled. We generally obtain and perfect security interest in products sold in the United States when we have a concern with the Customer's risk profile.
We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by Customers. We estimate the allowance based on analyzing a number of factors, including amounts written off historically, Customer payment practices, and general economic conditions. We also analyze significant Customer accounts on a regular basis and record a specific allowance when we become aware of a specific Customer’s inability to pay. As a result, the related accounts receivable are reduced to an amount that we reasonably believe is collectible.
We maintain an allowance for sales returns based upon known returns and estimated returns for both capital equipment and consumables. We estimate returns of capital equipment and consumables based upon recent historical experience less the estimated inventory value of the returned goods.
Inventories, net.  Inventories are stated at the lower of their cost or market value. We determine cost based upon a combination of the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods. For inventories valued using the LIFO method, we believe that the use of the LIFO method results in a matching of current costs and revenues. Inventories valued using the LIFO method represented approximately 34.6% and 38.6% of total inventories at March 31, 2014 and 2013, respectively. Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have been $19,450 and $18,944 higher than those reported at March 31, 2014 and 2013, respectively.
We review the net realizable value of inventory on an ongoing basis, considering factors such as deterioration, obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues.
Property, Plant, and Equipment.  Our property, plant, and equipment consists of land and land improvements, buildings and leasehold improvements, machinery and equipment, information systems, radioisotope (cobalt-60), and construction in progress. Property, plant, and equipment are presented at cost less accumulated depreciation and depletion. We capitalize additions and improvements. Repairs and maintenance are charged to expense as they are incurred.
Land is not depreciated and construction in progress is not depreciated until placed in service. Depreciation of most assets is computed on the cost less the estimated salvage value by using the straight-line method over the estimated remaining useful lives. Depletion of radioisotope is computed using the annual decay factor of the material, which is similar to the sum-of-the-years-digits method.
We generally depreciate or deplete property, plant, and equipment over the useful lives presented in the following table:
 
Asset Type
Useful Life
(years)
Land improvements
3-40

Buildings and leasehold improvements
2-50

Machinery and equipment
2-20

Information Systems
2-20

Radioisotope (cobalt-60)
20


When we sell, retire, or dispose of property, plant, and equipment, we remove the asset’s cost and accumulated depreciation from our Consolidated Balance Sheets. We recognize the net gain or loss on the sale or disposition in the Consolidated Statements of Income in the period when the transaction occurs.
Interest.  We capitalize interest costs incurred during the construction of long-lived assets. We capitalized interest costs of $415 and $585 for the years ended March 31, 2014 and 2013, respectively.

58

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Total interest expense for the years ended March 31, 2014, 2013, and 2012 was $18,770, $15,675, and $12,065, respectively.
Identifiable Intangible Assets.  Our identifiable intangible assets include product technology rights, trademarks, licenses, and Customer relationships. We record these assets at cost, or when acquired as part of a business acquisition, at estimated fair value. We generally amortize identifiable intangible assets over periods ranging from 5 to 20 years using the straight-line method. Our intangible assets also include indefinite lived assets including certain trademarks and tradenames that were acquired in fiscal 2013 and 2014. These assets are tested at least annually for impairment.
Investments.  Investments in marketable securities are stated at fair value and are included in "Other assets" on the Consolidated Balance Sheets. Unrealized gains and losses on marketable securities classified as available-for-sale are recorded in Accumulated Other Comprehensive Income (Loss).
Asset Impairment Losses.  Property, plant, equipment, and identifiable intangible assets are reviewed for impairment when indicators of impairment exist and circumstances indicate that the carrying value of such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We conduct this review on an ongoing basis and, if an impairment exists, we record the loss in the Consolidated Statements of Income during that period.
Acquisitions of Business.  Assets acquired and liabilities assumed in a business combination are accounted for at fair value on the date of acquisition. Costs related to the acquisition are expensed as incurred.
Goodwill.  We perform our annual impairment test for goodwill in the third quarter of each year. We may consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We calculate the fair value of our reporting units based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.
SYSTEM 1 Rebate Program. The Accrued SYSTEM 1 Rebate Program (the “Rebate Program”), initially recognized during the first quarter of fiscal 2011, was based upon the quantity of SYSTEM 1 processors eligible for rebates and the estimated value of rebates to be provided upon their return. The rebate portion of the Rebate Program was recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the returned SYSTEM 1 processors was recognized as cost of revenues. Both components were recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program included: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that would elect to participate in the Rebate Program, the proportion of Customers that would choose each rebate option, and the estimated per unit costs of disposal.
The Rebate Program ended August 2, 2012. Customers utilized rebates totaling approximately $66,600 on orders placed since the initiation of the Rebate Program. The costs associated with the Rebate Program were lower than originally estimated because fewer Customers elected to participate in the Rebate Program than anticipated.
Self-Insurance Liabilities.  We record a liability for self-insured risks that we retain for general and product liabilities, workers’ compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and actuarial methods to calculate the liability. This liability includes estimates for both losses and incurred but not reported claims. We review the assumptions used to calculate the estimated liability at least annually to evaluate the adequacy of the amount recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are subject to the terms and conditions of those policies.
We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based upon recent claims experience.
Benefit Plans.  We sponsor defined benefit pension and other post-retirement welfare benefit plans for certain former employees. We determine our costs and obligations related to these plans by evaluating input from third-party professional advisors. These costs and obligations are affected by assumptions including the discount rate, expected long-term rate of return on plan assets, the annual rate of change in compensation for eligible employees, estimated changes in costs of healthcare benefits, and other factors. We review the assumptions used on an annual basis.

59

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and post-retirement benefit plans in our consolidated balance sheets. This amount is measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in other comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date.
We provide additional information about our pension and other post-retirement welfare benefits plans in note 10 to our consolidated financial statements titled, “Benefit Plans.”
Fair Value of Financial Instruments.  Except for long-term debt, our financial instruments are highly liquid or have short-term maturities.
We provide additional information about the fair value of our financial instruments in note 18 titled, “Fair Value Measurements.”
Foreign Currency Translation.  Most of our operations use their local currency as their functional currency. Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments for international subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying Consolidated Statements of Income, except for certain inter-company balances designated as long-term investments.
Forward and Swap Contracts.  We enter into foreign currency forward contracts to hedge assets and liabilities denominated in foreign currencies, including inter-company transactions. We do not use derivative financial instruments for speculative purposes. These contracts are marked to market, with gains and losses recognized within “Selling, general, and administrative expenses” or "Cost of revenues" in the accompanying Consolidated Statements of Income.
Warranty.  Warranties are provided on the sale of certain of our products and services and an accrual for estimated future claims is recorded at the time revenue is recognized. We estimate warranty expense based primarily on historical warranty claim experience.
Shipping and Handling.  We record shipping and handling costs in costs of revenues. Shipping and handling costs charged to Customers are recorded as revenues in the period the product revenues are recognized.
Advertising Expenses.  Costs incurred for communicating, advertising and promoting our products are generally expensed when incurred as a component of Selling, General and Administrative Expense. We incurred $8,606, $6,880, and $5,857 of advertising costs during the years ended March 31, 2014, 2013, and 2012, respectively.
Research and Development.  We incur research and development costs associated with commercial products and expense these costs as incurred. If a Customer reimburses us for research and development costs, the costs are charged to the related contracts as costs of revenues.
Income Taxes.  Our income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. We defer income taxes for all temporary differences between pre-tax financial and taxable income and between the book and tax basis of assets and liabilities. We record valuation allowances to reduce net deferred tax assets to an amount that we expect will more-likely-than-not be realized. In making such a determination, we consider all available information, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes and the effective tax rate.
We evaluate uncertain tax positions in accordance with a two-step process. The first step is recognition: The determination of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate tax authority and that the tax authority will have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to recognize in the financial statements. The measurement process requires the determination of the range of possible settlement amounts and the

60

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met.
We describe income taxes further in note 9 to our consolidated financial statements titled, “Income Taxes.”
Medical Device Excise Tax. The Medical Device Excise Tax became effective January 1, 2013. The excise tax was mandated by the 2010 health care reform legislation and assesses a 2.3% tax on the sale or use of certain medical devices that are sold or manufactured in the United States. Many of our products are subject to the excise tax. The tax is included in cost of revenues in the period of sale. We incurred Medical Device Excise taxes of $7,390 during fiscal year 2014.
Share-Based Compensation.  We describe share-based compensation in note 15 to our consolidated financial statements titled, “Share-Based Compensation.” We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. We record liability awards at fair value each reporting period and the change in fair value is reflected as share-based compensation expense in our Consolidated Statements of Income. The expense is classified as cost of goods sold, selling, general and administrative expenses or research and development expenses in a manner consistent with the employee’s compensation and benefits. These costs are recognized in the Consolidated Statement of Income over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits realized from the exercise of stock options are reported as a financing cash inflow.
Restructuring.  We recognize restructuring expenses as incurred. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the related facilities and machinery and equipment to their estimated fair value. In addition, the remaining useful lives of other property, plant, and equipment associated with the related operations are reevaluated based on the respective restructuring plan, which may result in the acceleration of depreciation and amortization of certain assets.

Recently Issued Accounting Standards Impacting the Company

In February 2013, the FASB issued an accounting standards update titled "Presentation of Comprehensive Income: Reclassification Out of Accumulated Other Comprehensive Income," amending Accounting Standards Codification ASC Topic 220, "Comprehensive Income". This amended guidance requires an entity to report information about the amounts reclassified out of accumulated other comprehensive income (AOCI) by component. In addition, for significant items reclassified from AOCI to net income in their entirety, during the same reporting period, entities are required to report the effect on the line items on the face of the statement where net income is presented, or in the notes. For significant items that are not classified to net income in their entirety, entities are required to cross-reference to other disclosures that provide additional information about those amounts. The standards update was effective prospectively for fiscal periods beginning after December 15, 2012, with early adoption permitted. We adopted the new standard during the first quarter of our fiscal year 2014. The adoption of this standard did not impact our consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued an accounting standards update titled "Testing Indefinite-Lived Intangible Assets" for Impairment," amending certain sections of Subtopic 350-30 Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. This amended guidance allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The standards update was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this standard did not impact our consolidated financial position, results of operations or cash flows.

2. RESTRUCTURING
The following summarizes our restructuring plans announced in current and prior fiscal years. We recognize restructuring expenses as incurred. In addition, we assess the property, plant and equipment associated with the related facilities for impairment.

61

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs.
We have incurred pre-tax expenses totaling $20,231 related to these actions, of which $12,087 was recorded as restructuring expenses and $8,144 was recorded in cost of revenues, with restructuring expenses of $18,247, $635, and $1,349 related to the Healthcare, Life Sciences and Isomedix segments, respectively. We do not expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.
Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions.
Since the inception of the Fiscal 2010 Restructuring Plan, we have incurred pre-tax expenses totaling $9,294 related to these actions, of which $8,190 was recorded as restructuring expenses and $1,104 was recorded in cost of revenues. We do not expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.

The following tables summarize our total pre-tax restructuring expenses for fiscal 2014, fiscal 2013 and fiscal 2012:

Year Ended March 31, 2014
Fiscal 2014
Restructuring
Plan (1)
Fiscal 2010
Restructuring
Plan
Total
Severance and other compensation related costs
$
7,363

$
127

$
7,490

Asset impairment and accelerated depreciation
3,621

990

4,611

Lease termination obligation and other
1,103


1,103

Product rationalization
8,144


8,144

Total restructuring charges
$
20,231

$
1,117

$
21,348


(1)
Includes $8,144 in charges recorded in cost of revenues on Consolidated Statements of Income.

Year Ended March 31, 2013
Fiscal 2010
Restructuring
Plan
Severance and other compensation related costs
$
(918
)
Lease termination obligation and other
353

Total restructuring charges
$
(565
)


Year Ended March 31, 2012
Fiscal 2010
Restructuring
Plan (1)
Other
Plans
Total
Severance and other compensation related costs
$
(776
)
$

$
(776
)
Product rationalization
335


335

Asset impairment and accelerated depreciation
1,103


1,103

Lease termination obligation and other
143

(152
)
(9
)
Total restructuring charges
$
805

$
(152
)
$
653


62

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


(1)
Includes $(9) in charges recorded in cost of revenues on Consolidated Statements of Income.
 
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following tables summarizes our restructuring liability balances and activity:
 
 
Fiscal 2014 Restructuring Plan
 
 
 
 
Fiscal 2014
 
 
 
 
March 31,
2013
 
Provision
 
Payments/
Impairments (1)
 
March 31,
2014
Severance and termination benefits
 
$

 
$
6,429

 
$
(40
)
 
$
6,389

Lease termination obligations and other
 

 
1,589

 

 
1,589

Total
 
$

 
$
8,018

 
$
(40
)
 
$
7,978

(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

 
 
Fiscal 2010 Restructuring Plan
 
 
 
 
Fiscal 2013
 
 
 
 
March 31,
2012
 
Provision (1)
 
Payments/
Impairments (2)
 
March 31,
2013
Severance and termination benefits
 
$
659

 
$
(918
)
 
$
730

 
$
471

Lease termination obligations
 
947

 

 
(791
)
 
156

Other
 
76

 
353

 
(429
)
 

Total
 
$
1,682

 
$
(565
)
 
$
(490
)
 
$
627

(1) Includes curtailment benefit of $922 related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans."
(2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

3. GOODWILL AND INTANGIBLE ASSETS
Goodwill is tested annually for impairment. Further, goodwill is reviewed for impairment whenever events or changes in circumstances indicate there may be a possible permanent loss of value. We performed our annual impairment tests for goodwill and indefinite life intangible assets during the third quarter of fiscal 2014. These tests confirmed that the fair value of STERIS’s reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized in fiscal 2014 or for any prior periods. Future impairment tests will be performed annually in the fiscal third quarter, or sooner if a triggering event occurs.
Changes to the carrying amount of goodwill for the years ended March 31, 2014 and 2013 were as follows:
 
  
Healthcare
Segment
 
Life Sciences
Segment
 
STERIS
Isomedix Services
Segment
 
Total
Balance at March 31, 2012
$
189,632

 
$
33,848

 
$
82,369

 
$
305,849

Goodwill acquired or allocated
187,937

 

 
666

 
188,603

Foreign currency translation adjustments
(3,901
)
 
(1,085
)
 

 
(4,986
)
Balance at March 31, 2013
373,668

 
32,763

 
83,035

 
489,466

Goodwill acquired or allocated
22,783

 

 

 
22,783

Foreign currency translation adjustments
3,215

 
1,547

 

 
4,762

Balance at March 31, 2014
$
399,666

 
$
34,310

 
$
83,035

 
$
517,011



63

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


The fiscal 2014 increase in goodwill associated with the Healthcare segment resulted from the acquisitions of the assets of Florida Surgical Repair, Inc., and Life Systems, Inc., and the capital stock of Eschmann Holdings, Ltd., as described in Note 4 to our consolidated financial statements titled, "Business Acquisitions". The increase associated with the Life Science segment resulted from foreign currency fluctuations.
The fiscal 2013 increase in goodwill associated with the Healthcare segment resulted from the acquisitions of the capital stock of United States Endoscopy Group, Inc., and Spectrum Surgical Instruments Corp, the assets of Total Repair Express, and the remaining interest in VTS Medical Systems, LLC, as described in Note 4 to our consolidated financial statements titled, "Business Acquisitions". The decrease associated with Life Science segment resulted from foreign currency fluctuations.
Information regarding our intangible assets is as follows:
 
 
March 31, 2014
 
March 31, 2013
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
87,747

 
$
26,808

 
$
60,759

 
$
21,302

Non-compete agreements
3,766

 
3,315

 
3,773

 
3,177

Patents and technology
173,287

 
46,111

 
169,589

 
33,612

Trademarks and tradenames
55,006

 
12,868

 
49,780

 
10,852

Other
13

 
13

 
12

 
12

Total
$
319,819

 
$
89,115

 
$
283,913

 
$
68,955


Certain trademarks and tradenames totaling $28,400 acquired in fiscal 2014 and 2013 are indefinite-lived assets. Total amortization expense for finite-lived intangible assets was $18,612, $13,068, and $7,726 for the years ended March 31, 2014, 2013, and 2012, respectively. Based upon the current amount of intangible assets subject to amortization, the amortization expense for each of the five succeeding fiscal years is estimated to be as follows:
 
  
2015
 
2016
 
2017
 
2018
 
2019 and thereafter
Estimated amortization expense
$
19,243

 
$
19,005

 
$
18,410

 
$
18,322

 
$
93,176


The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31, 2014 foreign currency exchange rates.

4. BUSINESS ACQUISTIONS
Fiscal Year 2014
Florida Surgical Repair, Inc.
On December 31, 2013, we purchased the assets and assumed certain liabilities of Florida Surgical Repair, Inc. ("FSR"), a provider of surgical instrument and surgical equipment repair services to hospitals and surgery centers in Florida. The purchase price was approximately $5,779, subject to a customary working capital adjustment. FSR has been integrated into the Healthcare business segment. The purchase price has been allocated to the net assets acquired based on fair values at the acquisition date. The intangible assets acquired consist of Customer relationships, which will be amortized on a straight line basis over nine years. We recorded an immaterial amount of acquisition related costs which are reported in selling, general and administrative expenses.
Life Systems, Inc.
On February 4, 2014, we purchased the assets and assumed certain liabilities of Life Systems, Inc. ("LSI"), a provider of sales and service in the endoscope repair and certified pre-owned equipment markets, which is located in St. Louis, Missouri.
The purchase price was approximately $24,500, subject to a customary working capital adjustment, which included $1,500 in restricted stock granted to one of the sellers. LSI will be integrated into the Healthcare business segment. The purchase price has been allocated to the net assets acquired based on fair values at the acquisition date.

64

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


We recorded acquisition related costs of approximately $255, before tax, which are reported in selling, general and administrative expenses. The intangible assets acquired consist of Customer relationships, which will be amortized on a straight line basis over thirteen years.
Eschmann Holdings Ltd.
On February 10, 2014, we purchased the capital stock of Eschmann Holdings Ltd. ("Eschmann"), a provider of surgical and infection prevention solutions and services used primarily in hospitals, surgery centers and dental offices in the United Kingdom.
The purchase price was approximately 25 million British pounds sterling (approximately $36,648 at the acquisition date). We paid 22 million British pounds sterling at the closing date and expect to pay an additional 3 million British pounds sterling of deferred consideration in the first quarter of fiscal 2015. The purchase price remains subject to a customary working capital adjustment. Eschmann will be integrated into the Healthcare business segment. The purchase price has been allocated to the net assets acquired based on fair values at the acquisition date.
We recorded acquisition related costs of approximately $602, before tax, which are reported in selling, general and administrative expenses. The intangible assets acquired consist of tradenames, developed technology, and Customer relationships, which will be amortized on a straight line basis over six to thirteen years, with the exception of the Eschmann tradename which has an indefinite life.
Fiscal Year 2013
United States Endoscopy Group, Inc.
In August 2012, we completed the acquisition of all the outstanding shares of capital stock of United States Endoscopy Group, Inc. (“US Endoscopy”). The purchase price was approximately $270,000, plus a working capital adjustment of $2,145, which adjustment was paid during the third quarter of fiscal year 2013. In addition, we purchased all real estate used in the US Endoscopy business for approximately $7,000, including properties owned by two US Endoscopy affiliates. We did not assume any existing debt in connection with the purchases. US Endoscopy has been integrated into the Healthcare segment.
We recorded acquisition related costs of $4,109, before tax, which are reported in selling, general and administrative expenses. We have made a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code, which allows goodwill and intangibles to be fully deductible for tax purposes. The intangible assets acquired consist of trademarks, trade names and developed technologies, which will be amortized on a straight line basis over thirteen to fifteen years, with the exception of the US Endoscopy trade name which has an indefinite life.
Spectrum Surgical Instruments Corp and Total Repair Express
In October 2012, we purchased two privately-owned businesses: Spectrum Surgical Instruments Corp ("Spectrum") and Total Repair Express ("TRE"), providers of surgical instrument repair services and instrument care products to hospitals and surgery centers in the United States. The aggregate purchase price of approximately $110,000, including contingent consideration, was financed with borrowings under our Credit Agreement (as hereinafter defined). The purchase price remained subject to a working capital adjustment as of March 31, 2013. The instrument repair business has been integrated into the Healthcare business segment.
We recorded acquisition related costs of $2,388, before tax, which are reported in selling, general and administrative expenses. We have made a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code with regard to the acquisition of Spectrum, which allows goodwill and intangibles to be fully deductible for tax purposes. The intangible assets acquired consist of trademarks, customer relationships and non-compete arrangements, which will be amortized on a straight line basis over one to fifteen years with the exception of the Spectrum tradename which has an indefinite life.
VTS Medical Systems, LLC
In December 2012, we purchased the remaining interests in our VTS Medical Systems, LLC ("VTS") joint venture. The joint venture began in fiscal 2009, and we increased our ownership of the joint venture to just under 50% during fiscal 2011. The fair value of our equity interest held in VTS immediately before the date of acquisition was $22,034, which approximated fair value. With this final investment, VTS became a wholly-owned subsidiary of STERIS and has been integrated into the Healthcare business segment. We purchased the remaining interests for a total of approximately $19,000, comprised of cash at closing and deferred cash payments payable over a ten year period.

65

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


We recorded an immaterial amount of acquisition related costs which are reported in selling, general and administrative expenses. We consolidated VTS for the first time in the third quarter of fiscal 2013.
Each of these fiscal 2013 and 2014 acquisitions were funded with cash on hand and/or credit facility borrowings. The Consolidated Financial Statements include the operating results of of each acquisition from the respective acquisition dates. Pro-forma results of operations for fiscal 2014 and 2013 periods have not been presented because the effects of the acquisitions were not material to our financial results.
The table below summarizes the preliminary allocation of the purchase price to the net assets acquired based on fair values at the acquisition dates for our fiscal 2014 and fiscal 2013 acquisitions.
 
Fiscal Year 2014
 
Fiscal Year 2013
 
FSR
 
LSI
 
Eschmann (1)
 
USE
 
Spectrum/TRE
 
VTS
Cash
$

 
$

 
$
2,545

 
$
767

 
$
424

 
$
1,442

Accounts receivable
388

 
2,341

 
5,336

 
8,291

 
10,795

 
689

Inventory
402

 
2,727

 
10,017

 
7,228

 
5,107

 
3,838

Property, plant and equipment
98

 
301

 
6,262

 
12,457

 
5,091

 
1,576

Other assets
11

 
117

 
475

 
913

 
530

 
1,997

Intangible assets
2,765

 
4,462

 
21,128

 
144,000

 
45,600

 
6,930

Goodwill
2,131

 
16,230

 
9,277

 
111,261

 
46,513

 
25,551

Total Assets
5,795

 
26,178

 
55,040

 
284,917

 
114,060

 
42,023

 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
(16
)
 
(1,649
)
 
(2,507
)
 
(2,167
)
 
(5,528
)
 
(1,454
)
Current liabilities

 
(29
)
 
(11,850
)
 
(3,243
)
 
(2,973
)
 
(82
)
Non-current liabilities

 

 
(4,035
)
 

 

 
(1,707
)
Total Liabilities
(16
)
 
(1,678
)
 
(18,392
)
 
(5,410
)
 
(8,501
)
 
(3,243
)
 
 
 
 
 
 
 
 
 
 
 
 
Net Assets
$
5,779

 
$
24,500

 
$
36,648

 
$
279,507

 
$
105,559

 
$
38,780

(1) Purchase price allocation is still preliminary as of March 31, 2014, as valuations have not been finalized.

5. INVENTORIES, NET
Inventories, net consisted of the following:
March 31,
 
2014
 
2013
Raw materials
 
$
60,328

 
$
54,456

Work in process
 
24,449

 
24,300

Finished goods
 
102,928

 
96,616

LIFO reserve
 
(19,450
)
 
(18,944
)
Reserve for excess and obsolete inventory
 
(13,109
)
 
(11,985
)
Inventories, net
 
$
155,146

 
$
144,443


66

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)



6. PROPERTY, PLANT AND EQUIPMENT
Information related to the major categories of our depreciable assets is as follows:
 March 31,
 
2014
 
2013
Land and land improvements (1)
 
$
33,601

 
$
36,355

Buildings and leasehold improvements
 
256,879

 
242,885

Machinery and equipment
 
360,977

 
331,953

Information systems
 
100,349

 
96,567

Radioisotope
 
258,547

 
237,516

Construction in progress (1)
 
35,016

 
36,032

Total property, plant, and equipment
 
1,045,369

 
981,308

Less: accumulated depreciation and depletion
 
(590,959
)
 
(549,356
)
Property, plant, and equipment, net
 
$
454,410

 
$
431,952

(1)
Land is not depreciated. Construction in progress is not depreciated until placed in service.


Depreciation and depletion expense was $57,037, $55,085 and $52,980, for the years ended March 31, 2014, 2013, and 2012, respectively.
Rental expense for operating leases was $17,643, $15,664, and $14,635 for the years ended March 31, 2014, 2013, and 2012, respectively. Operating leases relate to manufacturing, warehouse and office space, service facilities, vehicles, equipment, and communication systems. Certain lease agreements grant us varying renewal and purchase options.
Future minimum annual rentals payable under noncancelable operating lease agreements at March 31, 2014 were as follows:
 
  
Operating
Leases
2015
$
16,425

2016
13,261

2017
9,475

2018
6,263

2019 and thereafter
3,023

Total Minimum Lease Payments
$
48,447


In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign currencies have been calculated based upon March 31, 2014 foreign currency exchange rates.


7. DEBT

Indebtedness was as follows: 
March 31,
 
2014
 
2013
Private Placement
 
$
340,000

 
$
410,000

Credit Agreement and Swing Line Facility
 
153,480

 
82,290

Total long term debt
 
$
493,480

 
$
492,290



67

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


In February 2013, we issued $100,000 of senior notes in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. Of the $100,000 of notes, $47,500 have a maturity of nine years and 10 months at an annual interest rate of 3.20%, an additional $40,000 have a maturity of 11 years and 10 months at an annual interest rate of 3.35%, and the remaining $12,500 have a maturity of 14 years and 10 months at an annual interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The agreements governing these notes contain financial covenants regarding limitations on debt.
In December 2012, we issued $100,000 of senior notes in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. Of the $100,000 of notes, $47,500 have a maturity of 10 years at an annual interest rate of 3.20%, an additional $40,000 have a maturity of 12 years at an annual interest rate of 3.35%, and the remaining $12,500 have a maturity of 15 years at an annual interest rate of 3.55%. These borrowings were used primarily for the repayment of existing credit facility debt. The agreements governing these notes contain financial covenants regarding limitations on debt.
On August 15, 2008, we issued $150,000 of senior notes, of which $120,000 currently remain outstanding, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. Of the outstanding notes $85,000 have a maturity of 10 years at an annual interest rate of 6.33%, and the remaining $35,000 have a maturity of 12 years at an annual interest rate of 6.43%. The agreements governing these notes require us to meet certain financial covenants, including limitations on debt and a minimum consolidated net worth requirement.
In December 2003, we issued $100,000 of senior notes, of which $20,000 currently remain outstanding, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. The remaining $20,000 have a maturity of 12 years at an annual interest rate of 5.38%. The agreements related to these notes require us to meet certain financial covenants, including limitations on debt and a minimum consolidated net worth requirement.
On April 13, 2012 we signed a Third Amended and Restated Credit Agreement (the "Credit Agreement") with KeyBank National Association, as administrative agent (“Agent”) for the lenders from time to time party thereto ("Lenders") and such Lenders. The Credit Agreement amended, restated and replaced our previous credit agreement. The Credit Agreement initially provided a $300,000 credit facility, and was amended in October 2012 to increase the credit facility to $400,000 (which may be increased by up to an additional $100,000 in specified circumstances, and subject to certain Lender consent requirements) for borrowings and letters of credit, and will mature April 13, 2017. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable on that date. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the Credit Agreement. Borrowings bear interest at floating rates based upon the Base Rate (as defined) or fixed rates based upon the Eurodollar Rate or Alternate Currency Rate (as defined), plus the Applicable Margin (as defined) in effect from time to time under the Credit Agreement based upon the Company's Leverage Ratio (as defined). Interest on floating rate loans is payable quarterly in arrears and interest on fixed rate loans is payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. The Credit Agreement also requires the payment of a facility fee on the total facility commitment amount, which fee is determined based on the Company's Leverage Ratio. There is no premium or penalty for prepayment of floating rate loans but prepayments of fixed rate loans may be subject to a prepayment fee. The Credit Agreement also permits the Company to make short term "Swing Loan" borrowings from the Agent in an aggregate amount not to exceed $35,000 outstanding at any time. Swing Loans bear interest at the Agent's cost of funds plus the applicable margin in effect from time to time. The Credit Agreement requires the Company to maintain compliance with certain financial covenants, including a maximum Leverage Ratio and a minimum Interest Coverage Ratio. The Company's obligations under the Credit Agreement are unsecured but guaranteed by its material domestic subsidiaries.
On December 6, 2013 we executed an agreement with PNC Bank, National Association (the “Bank”), providing for the extension of a $15,000 line of credit (the “Swing Line Facility”) to the Company. Borrowings under the Swing Line Facility are evidenced by a promissory note issued by the Company (the “Note”). The Company may borrow, repay and reborrow from time to time under the Swing Line Facility until its maturity date. The maturity date is the earlier of (i) December 5, 2014, or such later date as may be designated by the Bank, or (ii) the date on which the Bank is no longer a lender under the Company’s Third Amended and Restated Credit Agreement dated April 13, 2012, as amended, or a replacement credit agreement. The maturity date may be accelerated in the case of certain defaults. Borrowings bear interest at a rate per annum from time to time equal to the sum of the Daily LIBOR Rate (as defined in the Note) and the Applicable Margin (calculated as provided in the Note) and the interest is payable monthly.

68

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


As of March 31, 2014, a total $153,480 of indebtedness was outstanding under the Credit Agreement and Swing Line Facility.
At March 31, 2014, we were in compliance with all financial covenants associated with our indebtedness.
The combined annual aggregate amount of maturities of our outstanding debt by fiscal year is as follows:
2015
$
12,980

2016
20,000

2017

2018
140,500

2019 and thereafter
320,000

Total
$
493,480


69

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


8. ADDITIONAL CONSOLIDATED BALANCE SHEETS INFORMATION
Additional information related to our Consolidated Balance Sheets is as follows:
March 31,
 
2014
 
2013
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
19,418

 
$
12,078

Accrued vacation/paid time off
 
6,172

 
6,739

Accrued bonuses
 
18,451

 
22,342

Accrued employee commissions
 
11,322

 
9,656

Other postretirement benefit obligations-current portion
 
2,950

 
3,271

Other employee benefit plans' obligations-current portion
 
461

 
230

Total accrued payroll and other related liabilities
 
$
58,774

 
$
54,316

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
39,441

 
$
40,422

Self-insured risk reserves-current portion
 
4,656

 
3,726

Accrued dealer and distributor commissions, fees and rebates
 
10,017

 
8,545

Accrued warranty
 
7,765

 
12,734

Other
 
31,423

 
19,720

Total accrued expenses and other
 
$
93,302

 
$
85,147

Other liabilities:
 
 
 
 
Self-insured risk reserves-long-term portion
 
$
10,689

 
$
11,552

Other postretirement benefit obligations-long-term portion
 
18,393

 
21,278

Defined benefit pension plans obligations-long-term portion
 
691

 
6,890

Other employee benefit plans obligations-long-term portion
 
6,013

 
5,349

Accrued long-term income taxes
 

 
9,670

Other
 
3,091

 
3,339

Total other liabilities
 
$
38,877

 
$
58,078


9. INCOME TAXES
Income from continuing operations before income taxes was as follows:
Years Ended March 31,
2014
 
2013
 
2012
United States operations
$
122,245

 
$
175,743

 
$
170,776

Non-United States operations
66,131

 
51,355

 
40,332

 
$
188,376

 
$
227,098

 
$
211,108



70

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


The components of the provision for income taxes related to income from continuing operations consisted of the following:
Years Ended March 31,
2014
 
2013
 
2012
Current:
 
 
 
 
 
United States federal
$
24,016

 
$
22,259

 
$
33,129

United States state and local
5,991

 
4,893

 
4,956

Non-United States
16,449

 
13,516

 
15,049

 
46,456

 
40,668

 
53,134

Deferred:
 
 
 
 
 
United States federal
10,501

 
26,550

 
20,762

United States state and local
1,473

 
(10
)
 
3,506

Non-United States
504

 
(87
)
 
(2,409
)
 
12,478

 
26,453

 
21,859

Total Provision for Income Taxes
$
58,934

 
$
67,121

 
$
74,993


The total provision for income taxes can be reconciled to the tax computed at the United States federal statutory tax rate as follows:
 
Years Ended March 31,
2014
 
2013
 
2012
United States federal statutory tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (decrease) in accruals for uncertain tax positions
(5.1
)%
 
3.6
 %
 
(0.7
)%
State and local taxes, net of federal income tax benefit
2.6
 %
 
2.1
 %
 
2.8
 %
Increase (decrease) in valuation allowances
1.5
 %
 
1.1
 %
 
0.2
 %
Foreign income tax credit
(2.0
)%
 
(0.5
)%
 
(0.2
)%
Difference in non-United States tax rates
(0.1
)%
 
(2.5
)%
 
(0.5
)%
U.S. manufacturing deduction
(1.2
)%
 
(1.3
)%
 
(1.6
)%
U.S. Tax Benefit resulting from European Restructuring
(0.6
)%
 
(7.8
)%
 
0.0
 %
All other, net
1.2
 %
 
(0.1
)%
 
0.5
 %
Total Provision for Income Taxes
31.3
 %
 
29.6
 %
 
35.5
 %

Unrecognized Tax Benefits.  We classify uncertain tax positions and related interest and penalties as long-term liabilities within “Other liabilities” in our accompanying Consolidated Balance Sheets, unless they are expected to be paid within 12 months, in which case, the uncertain tax positions would be classified as current liabilities within “Accrued income taxes.” We recognize interest and penalties related to unrecognized tax benefits within “Income tax expense” in our accompanying Consolidated Statements of Income.
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

71

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Years Ended March 31,
2014
 
2013
Unrecognized Tax Benefits Balance at April 1
$
9,362

 
$
1,527

Increases for tax provisions of prior years

 
9,244

Decreases for tax provisions of prior years

 
(700
)
Increases for tax provisions of current year

 

Decreases for tax provisions of current year

 

Settlements
(9,244
)
 
(553
)
Lapse of statute of limitations
(118
)
 
(156
)
Unrecognized Tax Benefits Balance at March 31
$

 
$
9,362



The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0 at March 31, 2014 and $9,362 at March 31, 2013.
For the years ended March 31, 2014 and 2013, current income tax expense includes (benefit) expense of $(276) and $(659) for interest, and (benefit) expense of $(31) and $(33) for penalties, respectively. In total, as of March 31, 2014 and 2013, we have recognized a liability for interest of $0 and $276 and penalties of $0 and $31, respectively.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local, as well as foreign jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2013 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2009. We remain subject to tax authority audits in various jurisdictions wherever we do business. We do not expect the results of these examinations to have a material adverse effect on our consolidated financial statements.
Deferred Taxes.  The significant components of the deferred tax assets and liabilities recorded in our accompanying balance sheets at March 31, 2014 and 2013 were as follows:
 
March 31,
2014
 
2013
Deferred Tax Assets:
 
 
 
Post-retirement benefit accrual
$
8,171

 
$
9,556

Compensation
22,008

 
19,628

Net operating loss carryforwards
12,518

 
13,757

Accrued expenses
6,681

 
8,626

Insurance
3,689

 
3,696

Deferred income
5,265

 
8,770

Bad debt
2,191

 
1,727

Pension
408

 
2,807

Other
965

 
39

Deferred Tax Assets
61,896

 
68,606

Less: Valuation allowance
12,541

 
12,428

Total Deferred Tax Assets
49,355

 
56,178

Deferred Tax Liabilities:
 
 
 
Depreciation and depletion
50,265

 
47,809

Intangibles
36,367

 
27,240

Inventory
921

 
1,040

Other
4,771

 
3,818

Total Deferred Tax Liabilities
92,324

 
79,907

Net Deferred Tax Assets (Liabilities)
$
(42,969
)
 
$
(23,729
)


72

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


At March 31, 2014, we had federal operating loss carryforwards of $993, which can be utilized subject to certain limitations, and foreign operating loss carry forwards of $48,062. Substantially all of the foreign carryforwards have a definite expiration period and will expire if unused between fiscal years 2015 and 2021. In addition, we have recorded tax benefits of $941 related to state operating loss carryforwards. At March 31, 2014, we had $75 of tax credit carryforwards. These credit carryforwards expire between fiscal 2017 and fiscal 2026.
We review the need for a valuation allowance against our deferred tax assets. A valuation allowance of $12,541 has been applied to a portion of the net deferred tax assets because we do not believe it is more-likely-than-not that we will receive future benefit. The valuation allowance increased during fiscal 2014 by $113.
At March 31, 2014, cumulative undistributed earnings of international operations amounted to approximately $222,069. These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for deferred taxes related to the future repatriation of such earnings, nor is it practicable to determine the amount of this liability.
At March 31, 2014, we had a current prepaid income tax position. This was mainly due to the timing of U.S. Federal income tax estimated payments and a prior year overpayment carryforward.

10. BENEFIT PLANS
We provide defined benefit pension plans for certain former manufacturing and plant administrative personnel as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. In addition to providing pension benefits to certain employees, we sponsor an unfunded post-retirement welfare benefits plan for two groups of United States retirees; including the same retirees who receive pension benefits under the United States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage.
During the second quarter of fiscal 2009, we amended our United States post-retirement welfare benefits plan, reducing the benefits to be provided to retirees under the plan and increasing their share of the costs. The amendments resulted in a decrease of $46,001 in the accumulated post-retirement benefit obligation. The impact of this change was recognized in our Consolidated Balance Sheets in fiscal 2009 and is being amortized as a component of the annual net periodic benefit cost over a period of approximately thirteen years.
A defined benefit pension plan was also provided to the employees of our former Pieterlen, Switzerland manufacturing facility. Restructuring actions related to the Pieterlen, Switzerland manufacturing facility were taken as part of the Fiscal 2010 Restructuring Plan. These actions resulted in workforce reductions that resulted in curtailments and complete settlement of the plan as the vested benefits of affected employees were substantially settled.
We recognize the funded status of our defined benefit pension and post-retirement benefit plans in our Consolidated Balance Sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The funded status is measured as of March 31 each year and is calculated as the difference between the fair value of plan assets and the benefit obligation (which is the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for post-retirement benefit plans). Accumulated comprehensive income (loss) represents the net unrecognized actuarial losses and unrecognized prior service cost. These amounts will be recognized in net periodic benefit cost as they are amortized. We will recognize future changes to the funded status of these plans in the year the change occurs, through other comprehensive income.

Obligations and Funded Status.  The following table reconciles the funded status of the defined benefit pension plans and the other post-retirement medical benefit plan to the amounts recorded on our Consolidated Balance Sheets at March 31, 2014 and 2013, respectively. Benefit obligation balances presented in the following table reflect the projected benefit obligations for our defined benefit pension plans and the accumulated other post-retirement benefit obligation for our post-retirement medical benefit plan. The measurement date of our defined benefit pension plans and other post-retirement medical benefit plan is March 31, for both periods presented.
 


73

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


 
 
Defined Benefit Pension Plans
 
Other
Postretirement
Benefits Plan
 
 
U.S. Qualified
 
International
 
 
 
2014
 
2013
 
2013
 
2014
 
2013
Change in Benefit Obligations:
 
 
 
 
 
 
 
 
 
 
Benefit Obligations at Beginning of Year
 
$
53,433

 
$
51,319

 
$
5,103

 
$
24,548

 
$
24,894

Service cost
 
160

 
150

 
84

 

 

Interest cost
 
1,799

 
2,092

 
76

 
683

 
867

Actuarial (gain) loss
 
(1,916
)
 
4,227

 

 
(654
)
 
2,140

Benefits and expenses
 
(4,270
)
 
(4,355
)
 

 
(3,235
)
 
(3,353
)
Curtailments/settlements
 

 

 
(5,263
)
 

 

Benefit Obligations at End of Year
 
49,206

 
53,433

 

 
21,342

 
24,548

Change in Plan Assets:
 
 
 
 
 
 
 
 
 
 
Fair Value of Plan Assets at Beginning of Year
 
46,543

 
42,391

 
4,150

 

 

Actual return on plan assets
 
6,340

 
3,962

 

 

 

Employer contributions
 

 
4,545

 
70

 
3,235

 
3,353

Employee contributions
 

 

 
(70
)
 

 

Benefits and expenses paid
 
(4,270
)
 
(4,355
)
 

 
(3,235
)
 
(3,353
)
Curtailments/settlements
 

 

 
(4,150
)
 

 

Fair Value of Plan Assets at End of Year
 
48,613

 
46,543

 

 

 

Funded Status of the Plans
 
$
(593
)
 
$
(6,890
)
 
$

 
$
(21,342
)
 
$
(24,548
)

Amounts recognized in the consolidated balance sheets consist of the following:
 
 
Pension Plans
 

 
 
 
U.S. Qualified
Other Post-retirement Plan
  
2014
 
2013
2014
 
2013
Current liabilities
$

 
$

$
(2,949
)
 
$
(3,271
)
Noncurrent liabilities
(593
)
 
(6,890
)
(18,393
)
 
(21,277
)
 
$
(593
)
 
$
(6,890
)
$
(21,342
)
 
$
(24,548
)

The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other comprehensive (loss) income at March 31, 2014 was $(30,304) and $26,369, respectively. During fiscal 2015, we will amortize the following pre-tax amounts from accumulated other comprehensive income:

 
Pension Plans
 
Other Post-retirement
Benefit Plan
  
U.S. Qualified
Plan
 
International
Plan
 
Actuarial loss
$
1,106

 
$

 
$
721

Prior Service Cost

 

 
(3,263
)

Defined benefit plans with an accumulated benefit obligation exceeding the fair value of plan assets had the following plan assets and obligations at March 31, 2014 and 2013:

 
U.S. Qualified
  
2014
 
2013
Aggregate fair value of plan assets
$
48,613

 
$
46,543

Aggregate accumulated benefit obligations
49,206

 
53,433



74

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Defined benefit plans with a projected benefit obligation exceeding the fair value of plan assets had the following plan assets and obligations at March 31, 2014 and 2013:

 
U.S. Qualified
  
2014
 
2013
Aggregate fair value of plan assets
$
48,613

 
$
46,543

Aggregate projected benefit obligations
49,206

 
53,433


Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income.  Components of the annual net periodic benefit cost of our defined benefit pension plans and our other post-retirement medical benefit plan were as follows:
 
Pension Plans
 
 
 
 
 
 
 
U.S. Qualified
 
International
 
Other Post-retirement Plan
  
2014
 
2013
 
2012
 
2013
 
2012
 
2014
 
2013
 
2012
Service cost
$
160

 
$
150

 
$
205

 
$
84

 
$
334

 
$

 
$

 
$

Interest cost
1,799

 
2,092

 
2,438

 
76

 
195

 
683

 
867

 
991

Expected return on plan assets
(3,442
)
 
(3,337
)
 
(3,304
)
 
(100
)
 
(209
)
 

 

 

Prior service cost recognition

 

 

 

 

 
(3,263
)
 
(3,263
)
 
(3,263
)
Net amortization and deferral
1,458

 
1,333

 
1,066

 

 

 
891

 
725

 
425

Net periodic benefit cost
(25
)
 
238

 
405

 
60

 
320

 
(1,689
)
 
(1,671
)
 
(1,847
)
Curtailments/settlements

 

 

 
(982
)
 
(1,384
)
 

 

 

Total benefit cost
$
(25
)
 
$
238

 
$
405

 
$
(922
)
 
$
(1,064
)
 
$
(1,689
)
 
$
(1,671
)
 
$
(1,847
)
Recognized in other comprehensive (income) loss before tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss (gain) occurring during year
$
(4,814
)
 
$
3,602

 
$
5,220

 
$

 
$
818

 
$
(654
)
 
$
2,140

 
$
3,512

Amortization of prior service credit (cost)

 

 

 

 

 
3,263

 
3,263

 
3,263

Amortization of net (loss) gain
(1,458
)
 
(1,333
)
 
(1,066
)
 
(159
)
 
87

 
(891
)
 
(725
)
 
(425
)
Total recognized in other comprehensive loss (income)
(6,272
)
 
2,269

 
4,154

 
(159
)
 
905

 
1,718

 
4,678

 
6,350

Total recognized in total benefits cost and other comprehensive loss (income)
$
(6,297
)
 
$
2,507

 
$
4,559

 
$
(1,081
)
 
$
(159
)
 
$
29

 
$
3,007

 
$
4,503


Assumptions Used in Calculating Benefit Obligations and Net Periodic Benefit Cost.  The following table presents significant assumptions used to determine the projected benefit obligations at March 31:
 
  
2014
 
2013
Discount Rate:
 
 
 
U.S. qualified pension plan
4.00
%
 
3.50
%
Other post-retirement plan
3.50
%
 
3.00
%

The following table presents significant assumptions used to determine the net periodic benefit costs for the years ended March 31:
 

75

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


  
2014
 
2013
 
2012
Discount Rate:
 
 
 
 
 
U.S. qualified pension plan
3.50
%
 
4.25
%
 
5.25
%
Switzerland pension plan
n/a

 
2.25
%
 
2.75
%
Other post-retirement plan
3.00
%
 
3.75
%
 
4.50
%
Expected Return on Plan Assets:
 
 
 
 
 
U.S. qualified pension plan
7.75
%
 
8.00
%
 
8.00
%
Switzerland pension plan
n/a

 
3.25
%
 
3.25
%
Rate of Compensation Increase:
 
 
 
 
 
Switzerland pension plan
n/a

 
2.50
%
 
2.50
%

The net periodic benefit cost and the actuarial present value of projected benefit obligations are based upon assumptions that we review on an annual basis. These assumptions may be revised annually based upon an evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing benefits.
We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios and the long-term asset class return expectations.
We develop our discount rate assumptions by evaluating input from third-party professional advisors, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as our projected obligations.
We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five-year period from the assumed current year healthcare cost trend rate to the assumed long-term healthcare cost trend rate noted below.

  
2014
 
2013
 
2012
Healthcare cost trend rate – medical
7.0
%
 
8.0
%
 
8.0
%
Healthcare cost trend rate – prescription drug
7.0
%
 
7.0
%
 
8.0
%
Long-term healthcare cost trend rate
4.5
%
 
4.5
%
 
4.5
%
 
To determine the healthcare cost trend rates, we evaluate a combination of information, including ongoing claims cost monitoring, annual statistical analyses of claims data, reconciliation of forecasted claims against actual claims, review of trend assumptions of other plan sponsors and national health trends, and adjustments for plan design changes, workforce changes, and changes in plan participant behavior.
A one-percentage-point change in assumed healthcare cost trend rates (including medical, prescription drug, and long-term rates) would have had the following effect at March 31, 2014:
 
One-Percentage
Point
  
Increase
 
Decrease
Effect on total service and interest cost components
$
3

 
$
(3
)
Effect on other post-retirement benefit obligation
90

 
(88
)

Plan Assets.  Our United States defined benefit pension plan is funded. The following table presents the targeted asset allocation of plan assets at March 31, 2014 and the actual allocation of plan assets at March 31, 2014 and 2013 for this plan:

76

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


 
Long-Term
Target
Allocation
Percentage
 
Percentage of Plan
Assets March 31
  
 
2014
 
2013
U.S. Qualified Plan:
 
 
 
 
 
Equity securities
35
%
 
34.1
%
 
60.9
%
Debt securities
65
%
 
65.2
%
 
38.4
%
Cash
0
%
 
0.7
%
 
0.7
%
Total
100
%
 
100
%
 
100
%

The long-term target allocations in the preceding table reflect our asset class return expectations and tolerance for investment risk within the context of the pension plans’ long-term benefit obligations. Investment policies, strategies, and long-term target allocations are developed on a plan specific basis. We continually challenge the long-term target asset allocations and support the allocations by an analysis that incorporates historical and expected returns by asset class as well as volatilities across asset classes and our liability profile. Due to market conditions and other factors, actual asset allocations may vary from the long-term target allocations presented in the preceding table. Plan assets for our U.S. defined benefit plan are managed by outside investment managers pursuant to investment policy guidelines established by the Company for the plan. If asset allocations move outside of the target ranges, the portfolios may be rebalanced. For the purpose of the above analysis, debt and equity securities include fixed income and equity security mutual funds, respectively. At March 31, 2014 and 2013, the plan's assets did not include investments in STERIS common shares.

Financial instruments included in pension plan assets are categorized into three tiers. These tiers include a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 - Quoted prices for identical assets in active markets.
Level 2 - Quoted prices for similar assets in active markets with inputs that are observable, either directly or indirectly.
Level 3 - Unobservable prices or inputs in which little or no market data exists.

The fair value of our pension benefits plan assets at March 31, 2014 and 2013 by asset category is as follows:
 
Fair Value Measurements at March 31, 2014
 
Fair Value Measurements at March 31, 2013
 
U.S. Qualified Pension Plan
 
U.S. Qualified Pension Plan
(In thousands)
Total
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
Cash and Short Term Securities
$
339

 
$

 
$
339

 
$

 
$
344

 
$

 
$
344

 
$

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
16,596

 
16,596

 

 

 
28,353

 
28,353

 

 

Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
31,678

 
31,678

 

 

 
17,846

 
17,846

 

 

Total Plan Assets
$
48,613

 
$
48,274

 
$
339

 
$

 
$
46,543

 
$
46,199

 
$
344

 
$



Cash Flows.  We contribute amounts to our defined benefit pension plans at least equal to the minimum amounts required by applicable employee benefit laws and local tax laws. We have recorded liabilities for amounts greater than the required funding levels on our accompanying Consolidated Balance Sheets. As of March 31, 2014, we do not expect to make additional contributions to the U.S. qualified defined benefit pension plan in fiscal 2015.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2014, the following benefit payments are expected to be made to plan participants:
 

77

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


  
Defined Pension Plan
 
Other Post-Retirement Benefit Plan
2015
$
4,069

 
$
2,950

2016
3,975

 
2,765

2017
3,866

 
2,414

2018
3,755

 
2,147

2019
3,644

 
1,841

2020-2025
16,784

 
6,873

 
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) provides a prescription drug benefit for Medicare beneficiaries, a benefit we provide to Medicare eligible retirees covered by our post-retirement benefits plan. We have concluded that the prescription drug benefit provided in our post-retirement benefit plan is considered to be actuarially equivalent to the benefit provided under the Act and thus qualifies for the subsidy under the Act. Benefits are subject to a per capita per month cost cap and any costs above the cap become the responsibility of the retiree. The subsidy is applied to reduce the retiree responsibility. As a result, the expected future subsidy no longer reduces our accumulated post-retirement benefit obligation and net periodic benefit cost. We collected subsidies totaling approximately $316 and $400, during fiscal 2014 and fiscal 2013, respectively, which reduced the retiree responsibility for costs in excess of the caps established in the post-retirement benefit plan.
Defined Contribution Plans. We maintain a 401(k) defined contribution plan for eligible United States employees, a 401(k)defined contribution plan for eligible Puerto Rico employees and a similar savings plan for Canadian employees. We provide a match on a specified portion of an employee’s contribution. The United States plan assets are held in trust and invested as directed by the plan participants. The Canadian plan assets are held by insurance companies. The aggregate fair value of plan assets was $424,297 at March 31, 2014. At March 31, 2014, the U.S. plan held 740,073 STERIS common shares with a fair value of $35,338. We paid dividends of $622, $592, and $545 to the plan and participants on STERIS common stock held by the plan for the years ended March 31, 2014, 2013, and 2012, respectively. We contributed $9,956, $7,974, and $7,771, to the defined contribution plans for the years ended March 31, 2014, 2013, and 2012, respectively.
We also maintain a domestic non-qualified deferred compensation plan covering certain employees, which formerly allowed for the deferral of compensation for an employee-specified term or until retirement or termination. There were no Employee contributions made to this plan in fiscal 2014 or fiscal 2013. Employee contributions to this plan were $443 in fiscal 2012. The Plan was amended in fiscal 2012 to disallow deferrals of salary payable in 2012 and subsequent calendar years and of commissions and other incentive compensation payable in respect of the 2013 and subsequent fiscal years. We hold investments in mutual funds to satisfy future obligations of the plan. We account for these assets as available-for-sale securities and they are included in “Other assets” on our accompanying Consolidated Balance Sheets, with a corresponding liability for the plan’s obligation recorded in “Accrued expenses and other.” The aggregate value of the assets was $3,397 and $3,139 at March 31, 2014 and March 31, 2013, respectively. Realized gains and losses on these investments are recorded in “Interest and miscellaneous income” within “Non-operating expenses” on our accompanying Consolidated Statements of Income. Changes in the fair value of the assets are recorded in other comprehensive income on our accompanying balance sheets.


78

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


11. COMMITMENTS AND CONTINGENCIES
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse affect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
As previously disclosed, we received a warning letter (the “warning letter”) from the FDA on May 16, 2008 regarding our SYSTEM 1® sterile processor and the STERIS 20 sterilant used with the processor (sometimes referred to collectively in the FDA letter and in this note 11 as the “device”). Among other matters, the warning letter included the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture, or intended use of the device beyond the FDA's 1988 clearance, such that the FDA believed a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made, and the assertion that our failure to make such a submission resulted in violations of applicable law.
After ongoing discussions with the FDA, in April 2010 we reached agreement with the FDA on the terms of a consent decree (“Consent Decree”). On April 19, 2010, a Complaint and Consent Decree were filed in the U.S. District Court for the Northern District of Ohio, and on April 20, 2010, the Court approved the Consent Decree. In general, the Consent Decree addresses regulatory matters regarding SYSTEM 1, restricts further sales of SYSTEM 1 processors in the U.S., defines certain documentation and other requirements for continued service and support of SYSTEM 1 in the U.S., prohibits the sale of liquid chemical sterilization or disinfection products in the U.S. that do not have FDA clearance, describes various process and compliance matters, and defines penalties in the event of violation of the Consent Decree. The Consent Decree also provided the terms under which we temporarily continued to support our Customers' use of SYSTEM 1 in the U.S., including the sale of consumables, parts and accessories and service for a transition period (the “Transition Plan”), which included the “SYSTEM 1 Rebate Program”.
The Consent Decree has defined the resolution of a number of issues regarding SYSTEM 1, and we believe our actions with respect to SYSTEM 1, including the Transition Plan, were and are not recalls, corrections or removals under FDA regulations. However, there is no assurance that these or other claims will not be brought or that judicial, regulatory, administrative or other legal or enforcement actions, notices or remedies will not be pursued, or that action will not be taken in respect of the Consent Decree, the Transition Plan, SYSTEM 1, or otherwise with respect to regulatory or compliance matters, as described in this note and in various portions of Item 1A. of Part I of this Annual Report on Form 10-K.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
Other civil, criminal, regulatory or other proceedings involving our products or services also could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially affect our business, performance, prospects, value, financial condition, and results of operations.

79

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


For additional information regarding these matters, see the following portions of this Annual Report on Form 10-K: “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Warning Letter and Consent Decree” and the "Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated.”
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 9 to our consolidated financial statements titled, “Income Taxes” in this Annual Report on Form 10-K.
Additional information regarding our contingencies is included in Item 7 of Part II titled, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” and in Item 3 of Part I titled, “Legal Proceedings” contained in this Annual Report on Form 10-K.
As of March 31, 2014 and 2013, our commercial commitments totaled $49,585 and $45,804, respectively. Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies, and other potential cash outflows resulting from an event that requires payment by us. Approximately $5,961 of the March 31, 2014 and 2013 totals relate to letters of credit required as security under our self-insured risk retention policies.
As of March 31, 2014 and 2013, we had minimum purchase commitments with suppliers for raw material purchases totaling $54,521 and $59,358, respectively.

12. BUSINESS SEGMENT INFORMATION
We operate and report in three business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare segment manufactures and sells capital equipment, accessory, consumable, and service solutions to healthcare providers, including acute care hospitals, surgery and gastrointestinal centers. These solutions aid our Customers in improving the safety, quality, and productivity of their surgical, sterile processing, gastrointestinal, and emergency environments.
Our Life Sciences segment manufactures and sells capital equipment, formulated cleaning chemistries, and service solutions to pharmaceutical companies, and private and public research facilities around the globe.
Our Isomedix segment operates through a network of facilities located in North America. We sell a comprehensive array of contract sterilization services using gamma irradiation and ethylene oxide (“EO”) technologies as well as an array of laboratory testing services. We provide microbial reduction services based on Customer specifications to companies that supply products to the healthcare, industrial, and consumer products industries.
Financial information for each of our segments is presented in the following table. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits.
The accounting policies for reportable segments are the same as those for the consolidated Company. For the year ended March 31, 2014, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues.

80

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


 
Years Ended March 31,
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
Healthcare (1)
$
1,180,051

 
$
1,074,790

 
$
1,013,102

Life Sciences
246,122

 
244,421

 
226,658

Isomedix
194,183

 
179,550

 
164,257

Total reportable segments
1,620,356

 
1,498,761

 
1,404,017

Corporate and other
1,896

 
3,141

 
2,793

Total revenues (1)
$
1,622,252

 
$
1,501,902

 
$
1,406,810

Operating income (loss):
 
 
 
 
 
Healthcare (2)
$
109,714

 
$
153,343

 
$
141,742

Life Sciences
50,049

 
47,453

 
41,633

Isomedix
55,186

 
51,455

 
47,596

Total reportable segments
214,949

 
252,251

 
230,971

Corporate and other
(8,142
)
 
(9,422
)
 
(8,655
)
Total operating income (2)
$
206,807

 
$
242,829

 
$
222,316

(1) Includes an increase of $22,367 in fiscal 2013, and an increase of $15,306 in fiscal 2012, resulting from the SYSTEM 1 Rebate Program.
(2) Includes an increase of $23,640 in fiscal 2013, and an increase of $17,403 in fiscal 2012, resulting from SYSTEM 1 Rebate Program, and an increase of $16,782 in fiscal year 2013, resulting from the class action settlement.

For the year ended March 31, 2014, pre-tax restructuring expenses of $19,364, $635, and $1,349 are included in the operating results of the Healthcare, Life Sciences and Isomedix segments, respectively. For the years ended March 31, 2013, and 2012, pre-tax restructuring expenses of $(565) and $644, respectively, are included in the operating results of the Healthcare segment.
Assets include the current and long-lived assets directly attributable to the segment based on the management of the location or on utilization. Certain corporate assets were allocated to the reportable segments based on revenues. Assets attributed to sales and distribution locations are only allocated to the Healthcare and Life Sciences segments. Corporate and other includes assets directly attributable to the Defense and Industrial business unit, as well as certain unallocated amounts related to being a publicly traded company. Total assets associated with the Healthcare segment have increased substantially during fiscal 2014, as a result of several business acquisitions as described in Note 4 to our consolidated financial statements titled, "Business Acquisitions".
Individual facilities, equipment, and intellectual properties are utilized for production by both the Healthcare and Life Sciences segments at varying levels over time. As a result, an allocation of total assets, capital expenditures, and depreciation and amortization is not meaningful to the individual performance of the Healthcare and Life Sciences segments. Therefore, their respective amounts are reported together.
March 31,
2014
 
2013
Assets:
 
 
 
Healthcare and Life Sciences
$
1,476,471

 
$
1,357,368

Isomedix
408,528

 
400,171

Total reportable segments
1,884,999

 
1,757,539

Corporate and other
2,163

 
3,570

Total assets
$
1,887,162

 
$
1,761,109



81

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Years Ended March 31,
2014
 
2013
 
2012
Capital Expenditures:
 
 
 
 
 
Healthcare and Life Sciences
$
47,043

 
$
44,201

 
$
31,713

Isomedix
39,310

 
43,198

 
34,943

Total Reportable Segments
86,353

 
87,399

 
66,656

Corporate and other
14

 
13

 
26

Total Capital Expenditures
$
86,367

 
$
87,412

 
$
66,682

Depreciation, Depletion, and Amortization:
 
 
 
 
 
Healthcare and Life Sciences
$
46,315

 
$
41,622

 
$
37,559

Isomedix
29,318

 
27,396

 
25,324

Total Reportable Segments
75,633

 
69,018

 
62,883

Corporate and other
16

 
17

 
23

Total Depreciation, Depletion, and Amortization
$
75,649

 
$
69,035

 
$
62,906


Financial information for each of our United States and international geographic areas is presented in the following table. Revenues are based on the location of these operations and their Customers. Property, plant and equipment, net are those assets that are identified within the operations in each geographic area.
Years Ended March 31,
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
United States
$
1,244,730

 
$
1,141,633

 
$
1,057,461

International
377,522

 
360,269

 
349,349

Total Revenues
$
1,622,252

 
$
1,501,902

 
$
1,406,810

 
March 31,
2014
 
2013
Property, Plant, and Equipment, Net
 
 
 
United States
$
396,233

 
$
377,320

International
58,177

 
54,632

Property, Plant, and Equipment, Net
$
454,410

 
$
431,952


13. 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: 
 
Years Ended March 31,
 
2014
 
2013
 
2012
Denominator (shares in thousands):
 
 
 
 
 
Weighted average common shares outstanding—basic
58,966

 
58,305

 
58,367

Dilutive effect of common share equivalents
779

 
539

 
596

Weighted average common shares outstanding and common share equivalents—diluted
59,745

 
58,844

 
58,963


Options to purchase the following number of common shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the common shares during the periods, so including these options would be anti-dilutive: 

82

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


 
 
Years Ended March 31,
 
 
2014
 
2013
 
2012
(shares in thousands)
 
 
 
 
Number of common share options
 
327

 
649

 
741


14. REPURCHASES OF COMMON SHARES
In March 2008, we announced that the Company’s Board of Directors provided authorization to repurchase up to $300,000 of STERIS common shares. The March 2008 common share repurchase authorization does not have a stated maturity date. Under this authorization, we may purchase shares from time to time through open market purchases, including transactions pursuant to Rule 10b5-1 plans, or privately negotiated transactions.
Under the stock repurchase authorization provided by our Board of Directors, we repurchased 565,887 of our common shares during fiscal 2014 in the aggregate amount of $24,691, representing an average price of $43.63 per common share. During fiscal 2013, we paid an aggregate amount of $6,830 for the repurchase of 204,349 of our common shares, representing an average price of $33.42 per common share. During fiscal 2012, we paid an aggregate amount of $55,942 for the repurchase of 1,851,510 of our common shares, representing an average price of $30.21 per common share.
We obtained 58,529 of our common shares during fiscal 2014 in the aggregate amount of $778 in connection with stock based compensation award programs. We obtained 52,893 of our common shares during fiscal 2013 in the aggregate amount of $1,172 in connection with these programs. We obtained 22,927 of our common shares during fiscal 2012 in the aggregate amount of $808 in connection with these programs. At March 31, 2014, $86,939 of STERIS common shares remained authorized for repurchase pursuant to the most recent Board approved repurchase authorization (the March 2008 Board Authorization). Also, 11,071,728 common shares were held in treasury at March 31, 2014.

15. SHARE-BASED COMPENSATION
We maintain a long-term incentive plan that makes available common shares for grants, at the discretion of the Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights, and common share grants. Stock options provide the right to purchase our common shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or earlier if the option holder is no longer employed by us and has not met specific age and service requirements. Restricted shares and restricted share units generally cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date for grantees who have met specific age and service requirements. As of March 31, 2014, 3,386,347 shares remained available for grant under the long-term incentive plan.
The fair value of share-based stock option compensation awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.

The following weighted-average assumptions were used for options granted during fiscal 2014, fiscal 2013 and fiscal 2012:
 
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
Risk-free interest rate
 
.95
%
 
1.21
%
 
2.41
%
Expected life of options
 
5.7 years

 
5.8 years

 
5.7 years

Expected dividend yield of stock
 
2.22
%
 
2.15
%
 
1.78
%
Expected volatility of stock
 
31.22
%
 
31.24
%
 
29.78
%


83

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 1.44%, 1.83% and 2.08% was applied in fiscal 2014, 2013 and 2012, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.

A summary of share option activity is as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at March 31, 2013
 
2,657,133

 
$
28.40

 
 
 
 
Granted
 
322,710

 
45.26

 
 
 
 
Exercised
 
(536,532
)
 
26.03

 
 
 
 
Forfeited
 
(44,175
)
 
36.37

 
 
 
 
Canceled
 
(2,150
)
 
25.39

 
 
 
 
Outstanding at March 31, 2014
 
2,396,986

 
$
31.06

 
5.5 years
 
$
40,002

Exercisable at March 31, 2014
 
1,735,631

 
$
28.37

 
4.5 years
 
$
33,644


We estimate that 654,707 of the non-vested stock options outstanding at March 31, 2014 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $47.75 closing price of our common shares on March 31, 2014 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of our common shares.
The total intrinsic value of stock options exercised during the years ended March 31, 2014, 2013 and 2012 was $10,253, $10,071 and $2,846, respectively. Net cash proceeds from the exercise of stock options were $14,160, $23,019 and $5,723 for the years ended March 31, 2014, 2013 and 2012, respectively. The tax benefit from stock option exercises was $2,841, $2,058 and $1,514 for the years ended March 31, 2014, 2013 and 2012, respectively.
The weighted average grant date fair value of stock option grants was $10.59, $7.32 and $9.31 for the years ended March 31, 2014, 2013 and 2012, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they may be settled in cash or stock upon exercise. Those settled in cash are classified as liabilities. The fair value of the outstanding SARS as of March 31, 2014 and 2013 was $1,432 and $1,253, respectively. The fair value of cash settled outstanding SARs is revalued at each reporting date and the related liability and expense are adjusted appropriately.

A summary of the non-vested restricted share activity is presented below: 
 
 
Number of
Restricted
Shares
 
Number of Restricted Share Units
 
Weighted-Average
Grant Date
Fair Value
Non-vested at March 31, 2013
 
737,343

 

 
$
32.81

Granted
 
296,666

 
33,196

 
45.07

Vested
 
(61,725
)
 
(17,470
)
 
37.33

Canceled
 
(41,266
)
 
(750
)
 
35.26

Non-vested at March 31, 2014
 
931,018

 
14,976

 
$
36.60


Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that vested during fiscal 2014 was $2,956.

84

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Restricted share units carry generally the same terms and vesting requirements as restricted stock except that they may be settled in stock or cash upon vesting. Those that are settled in cash are classified as liabilities. The fair value of outstanding cash-settled restricted share units as of March 31, 2014 and 2013 was $1,259 and $1,405, respectively. The fair value of each cash-settled restricted share unit is revalued at each reporting date and the related liability and expense are adjusted appropriately.
As of March 31, 2014, there was a total of $20,392 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average period of 2.23 years.

16. FINANCIAL AND OTHER GUARANTEES
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our warranty liability during the periods presented are as follows:
Years Ended March 31,
2014
2013
2012
Balance, Beginning of Year
$
12,734

$
11,189

$
7,509

Warranties issued during the period
3,538

16,111

19,944

Settlements made during the period
(8,507
)
(14,566
)
(16,264
)
Balance, End of Year
$
7,765

$
12,734

$
11,189


We also sell product maintenance contracts to our Customers. These contracts range in terms from one to five years and require us to maintain and repair the product over the maintenance contract term. We initially record amounts due from Customers under these contracts as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” The liability recorded for such deferred service revenue was $31,079, $35,258 and $43,252 as of March 31, 2014, 2013 and 2012, respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenues is excluded from the table presented above.

17. FORWARD AND SWAP CONTRACTS
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in a certain commodity that impacts raw materials included in our cost of revenues. We do not use derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At March 31, 2014, we held foreign currency forward contracts to buy 68 million Mexican pesos, 10 million Canadian dollars and 3 million Euros, and contracts to sell 18 million Mexican pesos.
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Fair Value at
 
Fair Value at
 
Fair Value at
 
Fair Value at
Balance Sheet Location
 
March 31, 2014
 
March 31, 2013
 
March 31, 2014
 
March 31, 2013
Prepaid & Other
 
$
167

 
$
161

 
$

 
$

Accrued expenses and other
 
$

 
$

 
$
67

 
$
128


The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:

85

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


 
 
Location of gain (loss) recognized in income
 
Amount of gain (loss)
recognized in income
Years Ended March 31,
2014
 
2013
 
2012
Foreign currency forward contracts
 
Selling, general and administrative
 
$
(1,175
)
 
$
161

 
$
(1,115
)
Commodity swap contracts
 
Cost of revenues
 
$
(57
)
 
$
(217
)
 
$
(1,544
)

18. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions. The following table shows the fair value of our financial assets and liabilities at March 31, 2014 and March 31, 2013:
 
 
 
 
 
Fair Value Measurements at March 31, 2014 and March 31, 2013 Using
 
Carrying Value
 
Quoted Prices
in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
Level 1
 
Level 2
 
Level 3
2014
2013
2014
2013
 
2014
2013
 
2014
2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
152,802

$
142,008

 
$
137,189

$
135,277

 
$
15,613

$
6,731

 
$

$

Forward and swap contracts (2)
167

161

 


 
167

161

 


Investments (3)
3,397

3,139

 
3,397

3,139

 


 


Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward and swap contracts (2)
$
67

$
128

 
$

$

 
$
67

$
128

 
$

$

Deferred compensation plans (3)
3,495

3,218

 
3,495

3,218

 


 


Long term debt (4)
493,480

492,290

 


 
511,690

531,856

 


Contingent consideration obligations (5)
9,887

5,453

 


 


 
9,887

5,453


(1) Money market fund holdings are classified as level two as active market quoted prices are not available.
(2) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(3) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying investments. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)).
(4) We estimate the fair value of our long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(5) Contingent consideration obligations arise from prior business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual

86

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at March 31, 2014 are summarized as follows:
 
Contingent Consideration
Balance at March 31, 2012
$
6,953

Additions
1,412

(Gains) Losses
(2,452
)
Foreign currency translation adjustments (1)
(460
)
Balance at March 31, 2013
$
5,453

Additions
5,083

Payments
(24
)
(Gains) Losses
(374
)
Foreign currency translation adjustments (1)
(251
)
Balance at March 31, 2014
$
9,887

(1) Reported in other comprehensive income (loss).

19. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income shown in our Consolidated Statements of Shareholders' Equity consists of the following:
 
Year Ended March 31,
 
2014
2013
2012
Cumulative foreign currency translation adjustment
$
6,348

$
810

$
14,555

Amortization of pension and postretirement benefit plans costs, net of taxes
(2,428
)
(5,184
)
(1,102
)
Unrealized gain on available for sale securities
561

286

174

Total
$
4,481

$
(4,088
)
$
13,627


87

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


20. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Foreign Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the years ended March 31, 2014 and March 31, 2013 were as follows:

 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Foreign Currency Translation (3)
 
Total Accumulated Other Comprehensive Income
(Loss)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Beginning Balance
$
286

 
$
174

 
$
(5,184
)
 
$
(1,102
)
 
$
810

 
$
14,555

 
$
(4,088
)
 
$
13,627

Other Comprehensive Income (Loss) before reclassifications
143

 
7

 
4,470

 
(2,650
)
 
5,901

 
(14,550
)
 
10,514

 
(17,193
)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
132

 
105

 
(1,714
)
 
(1,432
)
 
(363
)
 
805

 
(1,945
)
 
(522
)
Net current-period Other Comprehensive Income (Loss)
275

 
112

 
2,756

 
(4,082
)
 
5,538

 
(13,745
)
 
8,569

 
(17,715
)
Balance March 31, 2014
$
561

 
$
286

 
$
(2,428
)
 
$
(5,184
)
 
$
6,348

 
$
810

 
$
4,481

 
$
(4,088
)

Details of amounts reclassified from Accumulated Other Comprehensive Income (Loss) are as follows:

(1) Realized gain (loss) on available for sale securities is reported in the interest income and miscellaneous expense line of the Consolidated Statements of Income.
(2) Amortization (gain) of defined benefit pension items is reported in the selling, general and administrative expense line of the Consolidated Statements of Income.
(3) Realized gain (loss) on intra-entity foreign currency transactions that are of long term investment nature are reported in the selling, general and administrative expense line of the Consolidated Statements of Income.

21. SUBSEQUENT EVENTS
On April 1, 2014 the Company announced a definitive agreement to acquire Integrated Medical Systems International("IMS"), for a purchase price of $165,000, subject to a customary working capital adjustment, plus $10,000 for the purchase of certain real estate. IMS has facilities located in Alabama, Florida, and Maryland and provides a variety of services including; endoscope repair, surgical instrument management and sterile processing consulting. IMS will be integrated into our Healthcare segment as part of our Specialty Services business.
The transaction closed on May 9, 2014 and was financed through credit facility borrowings.
We anticipate that the acquisition of IMS will qualify for a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code, which allows goodwill and intangibles to be fully deductible for tax purposes.



88

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


22. QUARTERLY RESULTS (UNAUDITED)
 
Quarters Ended
March 31,
 
December 31,
 
September 30,
 
June 30,
Fiscal 2014
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Product
$
300,609

 
$
252,616

 
$
235,309

 
$
222,928

Service
164,678

 
152,935

 
148,453

 
144,724

Total Revenues
465,287

 
405,551

 
383,762

 
367,652

Cost of Revenues:
 
 
 
 
 
 
 
Product
178,125

 
144,884

 
133,629

 
129,538

Service
102,667

 
96,892

 
95,627

 
91,268

Total Cost of Revenues
280,792

 
241,776

 
229,256

 
220,806

Gross Profit
184,495

 
163,775

 
154,506

 
146,846

Percentage of Revenues
39.7
%
 
40.4
%
 
40.3
%
 
39.9
%
Restructuring Expenses
12,326

 
808

 
18

 
52

Net Income
$
38,876

 
$
28,506

 
$
29,743

 
$
32,317

Basic Income Per Common Share:
 
 
 
 
 
 
 
Net income
$
0.66

 
$
0.48

 
$
0.50

 
$
0.55

Diluted Income Per Common Share:
 
 
 
 
 
 
 
Net income
$
0.65

 
$
0.48

 
$
0.50

 
$
0.54

 
 
 
 
 
 
 
 
Fiscal 2013 (1)
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Product
$
278,237

 
$
243,722

 
$
231,650

 
$
213,753

Service
149,979

 
136,683

 
124,671

 
123,207

Total Revenues
428,216

 
380,405

 
356,321

 
336,960

Cost of Revenues:
 
 
 
 
 
 
 
Product
158,587

 
139,683

 
127,147

 
125,482

Service
91,861

 
87,600

 
76,053

 
74,226

Total Cost of Revenues
250,448

 
227,283

 
203,200

 
199,708

Gross Profit
177,768

 
153,122

 
153,121

 
137,252

Percentage of Revenues
41.5
%
 
40.3
%
 
43.0
%
 
40.7
%
Restructuring Expenses
5

 
(386
)
 
(48
)
 
(136
)
Net Income
$
41,381

 
$
48,097

 
$
40,145

 
$
30,354

Basic Income Per Common Share:
 
 
 
 
 
 
 
Net income
$
0.71

 
$
0.82

 
$
0.69

 
$
0.52

Diluted Income Per Common Share:
 
 
 
 
 
 
 
Net income
$
0.70

 
$
0.82

 
$
0.68

 
$
0.52


(1)    The fiscal 2013 quarter ended September 30, includes the impact of the SYSTEM 1 Rebate Program as a $20,400 increase in product revenues and a $1,100 decrease in product cost of revenues. The fiscal 2013 quarter ended December 31, includes the impact of a $15,800 adjustment to the SYSTEM 1 class action settlement as a decrease in selling, general and administrative expenses. The fiscal 2013 quarter ended March 31, includes the impact of the SYSTEM 1 Rebate Program as a $1,967 increase in product revenues and a $173 decrease in product cost of revenues and the impact of a $982 adjustment to the SYSTEM 1 class action settlement as a decrease in selling, general and administrative expenses.


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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
 
Description
Balance at
Beginning
of Period
 
Charges
to Costs
and
Expenses
 
 
Charges
to Other
Accounts
 
 
Deductions
 
 
Balance at
End of
Period
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Year ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for trade accounts receivable (1)
$
10,043

 
$
3,266

 
 
$
(37
)
(3
)
 
$
(2,350
)
(4
)
 
$
10,922

Inventory valuation reserve
11,985

 
1,067

(2
)
 
57

(3
)
 

 
 
13,109

Deferred tax asset valuation allowance
12,428

 
508

 
 
227

 
 
(622
)
 
 
12,541

Recorded within liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Casualty loss reserves
$
14,100

 
$
4,000

 
 
$
(68
)
 
 
$
(3,588
)
 
 
$
14,444

Accrued SYSTEM 1 Rebate Program and class action settlement
253

 

 
 

 
 
(245
)
 
 
8

Year ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for trade accounts receivable (1)
$
11,428

 
$
(91
)
 
 
$
(49
)
(3
)
 
$
(1,245
)
(4
)
 
$
10,043

Inventory valuation reserve
15,313

 
(3,140
)
(2
)
 
(188
)
(3
)
 

 
 
11,985

Deferred tax asset valuation allowance
11,842

 
3,279

 
 
(569
)
 
 
(2,124
)
 
 
12,428

Recorded within liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Casualty loss reserves
$
10,776

 
$
2,387

 
 
$
3,185

 
 
$
(2,248
)
 
 
$
14,100

Accrued SYSTEM 1 Rebate Program and class action settlement
69,065

 
(40,422
)
(5
)
 

 
 
(28,390
)
 
 
253

Year ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for trade accounts receivable (1)
$
9,085

 
$
2,901

  
 
$
1,520

(3
)
 
$
(2,078
)
(4
)
 
$
11,428

Inventory valuation reserve
10,122

 
5,304

(2
)
 
(114
)
(3
)
 

  
 
15,313

Deferred tax asset valuation allowance
11,421

 
1,360

  
 
(435
)
  
 
(504
)
 
 
11,842

Recorded within liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Casualty loss reserves
$
13,037

 
$
1,205

  
 
$
(792
)
  
 
$
(2,674
)
 
 
$
10,776

Accrued SYSTEM 1 Rebate Program and class action settlement
127,683

 
(17,403
)
(6
)
 

 
 
(41,215
)
 
 
69,065


(1)
Net allowance for doubtful accounts and allowance for sales and returns.
(2)
Provision for excess and obsolete inventory, net of inventory written off.
(3)
Change in foreign currency exchange rates and acquired reserves.
(4)
Uncollectible accounts written off, net of recoveries.
(5)
Adjustments were classified as follows: $22,367 as an increase to revenues, $1,273 as a decrease to cost of revenues, and $16,782 as a decrease to selling, general and administrative expenses.
(6)
Adjustments were classified as follows: $15,306 as an increase to revenues and $2,097 as a decrease to cost of revenues.

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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the PEO and PFO have determined that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS
During the quarter ended March 31, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the PEO and PFO, we conducted an evaluation of the effectiveness of internal control over financial reporting as of March 31, 2014 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under this framework, management concluded that the internal control over financial reporting was effective as of March 31, 2014.
We acquired the assets of FSR and LSI and the stock of Eschmann during fiscal 2014. Our assessment of and conclusion on the effectiveness of internal control over financial reporting as of March 31, 2014 did not include the internal controls of these entities. Total assets of the acquired businesses (inclusive of acquired intangible assets and goodwill) represented approximately 5 percent of our consolidated assets as of March 31, 2014 and less than 1 percent of our consolidated net sales for the year ended March 31, 2014.
The independent registered public accounting firm that audited the financial statements has issued an attestation report on internal control over financial reporting. The report is below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
STERIS Corporation

We have audited STERIS Corporation and subsidiaries’ internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, 1992 framework (the COSO criteria). STERIS Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on STERIS Corporation and subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of the conclusions on the effectiveness of internal control over financial reporting did not include the internal controls of Eschmann Holdings Limited (“EHL”), Life Systems, Inc. (“LSI”), and Florida Surgical Repair (“FSR”) which were acquired in fiscal 2014 and are included in the March 31, 2014 consolidated financial statements of STERIS Corporation and subsidiaries, and constituted approximately 5% of total assets, as of March 31, 2014 and less than 1% of total revenues for the year then ended. Our audit of internal control over financial reporting of STERIS Corporation and subsidiaries also did not include an evaluation of the internal control over financial reporting of EHL, LSI and FSR which were acquired in fiscal 2014.
In our opinion, STERIS Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of STERIS Corporation and subsidiaries as of March 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2014 of STERIS Corporation and subsidiaries, and our report dated May 29, 2014 expressed an unqualified opinion thereon.

                    



/s/ ERNST & YOUNG LLP

Cleveland, Ohio
May 29, 2014





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Table of Contents


ITEM 9B.
OTHER INFORMATION
On May 23, 2014 the Company received a warning letter from the FDA regarding an inspection that the FDA concluded on January 8, 2014 at our STERIS Isomedix Services facility located in Libertyville, Illinois. The facility primarily provides microbial reduction services for certain medical device Customers. Among other matters, the FDA warning letter asserts that certain processes and procedures observed during the inspection did not conform to current Good Manufacturing Practices for medical devices as required by Title 21 CFR Part 820 and, as a result, that certain devices processed at the subject facility are adulterated within the meaning of the Federal Food, Drug and Cosmetic Act. Since the inspection, STERIS has provided detailed responses to the FDA regarding its corrective actions, and will continue to work diligently to remediate the FDA’s concerns. We do not believe that this inspection was a result of Customer complaints and there have been no reports of patient injury. We do not expect this situation to have a material adverse effect on our operations or financial condition.
The Company and Timothy L. Chapman, the Company’s Senior Vice President and Group President, Healthcare, have agreed that Mr. Chapman’s employment with the Company will terminate effective June 1, 2014. Mr. Chapman has been on a personal leave of absence since January 13, 2014.



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PART III


ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This Annual Report on Form 10-K incorporates by reference the information appearing under the caption “Nominees for Election as Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board Meetings and Committees” and “Shareholder Nominations of Directors and Nominee Criteria” of our definitive proxy statement to be filed with the SEC in connection with our 2014 Annual Meeting of Shareholders (the “Proxy Statement”).
Our executive officers serve for a term of one year from the date of election to the next organizational meeting of the Board of Directors and until their respective successors are elected and qualified, except in the case of death, resignation, or removal. Information concerning our executive officers is contained in Item 1 of Part I of this Annual Report. We have adopted a code of ethics, our Code of Business Conduct for Employees, that applies to our PEO and PFO and Principal Accounting Officer as well as all our other employees. We have also adopted a code of ethics, our Director Code of Ethics, which applies to the members of the Company’s Board of Directors, including our PEO. Our Code of Business Conduct for Employees and the Director Code of Ethics can be found on our Investor Relations website at www.steris-ir.com. Any amendments or waivers of either of these codes will be made available on this website.

ITEM 11.
EXECUTIVE COMPENSATION
This Annual Report on Form 10-K incorporates by reference the information appearing beginning under the captions “Executive Compensation,” “Non-Employee Director Compensation” and “Miscellaneous Matters” of the Proxy Statement.


ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

This Annual Report on Form 10-K incorporates by reference the information appearing under the captions “Ownership of Voting Securities” of the Proxy Statement.
The table below presents information concerning all equity compensation plans and individual equity compensation arrangements in effect as of our fiscal year ended March 31, 2014.
 
Plan Category
  
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
($)
  
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
  
2,396,986
 
31.06
  
3,386,347
Equity compensation plans not approved by security holders
  
 
  
Total
  
2,396,986
 
31.06
  
3,386,347
 

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This Annual Report on Form 10-K incorporates by reference the information appearing beginning under the captions “Governance Generally,” “Board Meetings and Committees” and “Miscellaneous Matters” of the Proxy Statement.


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ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

This Annual Report on Form 10-K incorporates by reference the information relating to principal accounting fees and services appearing under the caption “Independent Registered Public Accounting Firm” of the Proxy Statement.

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PART IV


ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

(a) (1) The following consolidated financial statements of STERIS Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheets – March 31, 2014 and 2013.
Consolidated Statements of Income – Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Comprehensive Income –Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Cash Flows – Years ended March 31, 2014, 2013, and 2012.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2014, 2013, and 2012.
Notes to Consolidated Financial Statements.
(a) (2) The following consolidated financial statement schedule of STERIS Corporation and subsidiaries is included in Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) Exhibits
Exhibit
Number
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 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 for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.1
STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.2
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*



 
 
10.3
STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.4
STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.5
STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.6
Amendment No. 1 to STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.11 to Form 10-K for the fiscal year ended March 31, 2007 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 

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10.7
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.7 to Form 10-Q for the fiscal quarter ended September 30, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.8
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.8 to Form 10-Q for the fiscal quarter ended September 30, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.9
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.10
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.11
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.12
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.13
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).*

 
 
10.14
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees. (filed as Exhibit 10.22 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.15
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.23 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.16
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference.*

 
 
10.17
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.18
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.27 to Form 10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by reference).*
 
 
10.19
STERIS Corporation Form of Restricted Stock Agreement for Employees.(filed as Exhibit 10.28 to Form 10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by reference).*

 
 
10.20
Amendment to Nonqualified Stock Option Agreement (filed as Exhibit 10.11 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.21
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.12 to Form10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.22
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.13 to Form10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.23
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.14 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*


 
 

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10.24
Form of Career Restricted Stock Unit Agreement for Nonemployee Directors (filed as Exhibit 10.33 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643), and incorporated by reference).*
 
 
10.25
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.34 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643), and incorporated by reference).*
 
 
10.26
STERIS Corporation 2006 Long-Term Equity Incentive Plan (as Amended and Restated Effective March 13, 2014).*
 
 
10.27
Description of Non-Employee Director Compensation Arrangements (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2013 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.28
STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.29
STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated Effective January 1, 2009) (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.30
Amended and Restated Adoption Agreement related to STERIS Corporation Deferred Compensation Plan (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.31
Amendment No. 1 to STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated Effective January 1, 2009) dated November 4, 2011 (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2011 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.32
STERIS Corporation Management Incentive Compensation Plan (filed as Exhibit 10.1 to Form 8-K filed May 7, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.33
STERIS Corporation Senior Executive Management Incentive Compensation Plan, as Amended and Restated Effective April 1, 2010 (filed as Appendix A to Schedule 14A (Definitive Proxy Statement) filed June 8, 2010 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.34
STERIS Corporation Senior Executive Severance Plan effective June 1, 2012 (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission No. 1-14643), and incorporated herein by reference.*
 
 
10.35
Form of Indemnification Agreement between STERIS Corporation and each of its directors and certain executive officers (filed as Exhibit 10.31 to Form 10-K for the fiscal year ended March 31, 2010 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.36
Agreement dated as of April 23, 2008 by and among STERIS Corporation, Richard C. Breeden, Robert H. Fields, and the Breeden Investors identified therein (filed as Exhibit 10.1 to Form 8-K filed April 24, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.37
Agreement dated November 4, 2011 between STERIS Corporation and Bank of America, N.A. providing Transfer and Advised Line for Letters of Credit (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.38
Third Amended and Restated Credit Agreement, dated as of April 13, 2012, among STERIS Corporation, KeyBank National Association, as agent for the lenders from time to time party thereto, and such lenders (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.39
Third Amended and Restated Guaranty of Payment, dated as of April 13, 2012, entered into by American Sterilizer Company, STERIS Inc., Isomedix Operations, Inc., and STERIS Isomedix Services, in favor of KeyBank National Association, as agent for the benefit of the lenders (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission File No. 1-14643), and incorporated herein by reference.
 
 

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10.40
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by United States Endoscopy Group, Inc. and dated October 9, 2012 (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.41
Amendment No. 1 dated October 12, 2012 to Third Amended and Restated Credit Agreement, dated as of April 13, 2012, among STERIS Corporation, KeyBank National Association as agent for the lenders from time to time party thereto and such lenders (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.42
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by Spectrum Surgical Instruments Corp. and dated October 29, 2012 (filed as Exhibit 10.6 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.43
Form of Note Purchase Agreements, dated December 17, 2003, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.44
First Amendment dated as of August 15, 2008 to Note Purchase Agreements dated as of December 17, 2003 between STERIS Corporation and certain institutional investors (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.45
Subsidiary Guaranty dated December 17, 2003, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.46
Guaranty Supplement dated January 7, 2005, by STERIS Isomedix Services, Inc. and STERIS Corporation (filed as Exhibit 10.20 to Form 10-K for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.47
Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2003 Senior Notes] (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.48
Guaranty Supplement dated October 10, 2012 by United States Endoscopy Group, Inc. and STERIS Corporation (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.49
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS Corporation (filed as Exhibit 10.7 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.50
Form of Note Purchase Agreements dated as of August 15, 2008, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.51
Subsidiary Guaranty dated as of August 15, 2008, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.52
Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2008 Senior Notes] (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.53
Guaranty Supplement dated October 10, 2012 by United States Endoscopy Group, Inc. and STERIS Corporation (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.54
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS Corporation (filed as Exhibit 10.8 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 

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10.55
Form of Note Purchase Agreements dated as of December 4, 2012, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.9 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.56
Subsidiary Guaranty dated as of December 4, 2012, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.10 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.57
Letter Agreement - Committed Line of Credit dated December 6, 2013 between STERIS Corporation and PNC Bank, National Association (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2013 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.58
Stock Purchase Agreement dated July 16, 2012 by and among STERIS Corporation, United States Endoscopy Group, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to Form 8-K filed August 15, 2012 (Commission No. 1-14643), and incorporated herein by reference).
 
 
10.59
Stock Purchase Agreement dated October 16, 2012 between STERIS Corporation, Richard J. and Michelle A. Schultz, individually and as trustees of certain trusts, such trusts and Spectrum Surgical Instruments Corp. (filed as Exhibit 10.5 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.60
Stock Purchase Agreement dated March 31, 2014 by and among STERIS Corporation, Integrated Medical Systems International, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to Form 8-K filed May 9, 2014 (Commission No. 1-14643), and incorporated herein by reference).
 
 
21.1
Subsidiaries of STERIS Corporation.
 
 
23.1
Consent of Independent Registered Public Accounting Firm.
 
 
24.1
Power of Attorney.
 
 
31.1
Certification of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
 
31.2
Certification of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
 
32.1
Certification of the Principal Executive Officer and the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
EX-101
Instance Document.
 
 
EX-101
Schema Document.
 
 
EX-101
Calculation Linkbase Document.
 
 
EX-101
Definition Linkbase Document.
 
 
EX-101
Labels Linkbase Document.
 
 
EX-101
Presentation Linkbase Document.
 
 
*
A management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.    





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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
 
 
 
STERIS CORPORATION
(Registrant)
 
 
 
 
Date: 
May 29, 2014
By:
/S/    MICHAEL J. TOKICH        
 
 
Michael J. Tokich
 
 
Senior Vice President, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE
  
TITLE
 
DATE
 
 
 
 
 
/S/    WALTER M ROSEBROUGH, JR.        
  
President, Chief Executive Officer and Director
 
May 29, 2014
Walter M Rosebrough, Jr.
 
 
 
 
/S/    MICHAEL J. TOKICH        
  
Senior Vice President, Chief Financial Officer and Treasurer
 
May 29, 2014
Michael J. Tokich
 
 
 
 
*
  
Chairman and Director
 
May 29, 2014
John P. Wareham
 
 
 
 
*
  
Director
 
May 29, 2014
Richard C. Breeden
 
 
 
 
*
  
Director
 
May 29, 2014
Cynthia L. Feldmann
 
 
 
 
*
  
Director
 
May 29, 2014
David B. Lewis
 
 
 
 
*
 
Director
 
May 29, 2014
Jacqueline B. Kosecoff
 
 
 
 
*
  
Director
 
May 29, 2014
Kevin M. McMullen
 
 
 
 
*
  
Director
 
May 29, 2014
Mohsen M. Sohi
 
 
 
 
*
  
Director
 
May 29, 2014
Loyal W. Wilson
 
 
 
 
*
  
Director
 
May 29, 2014
Michael B. Wood
 
 
 
 
*
The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named directors of the Registrant and filed with the Securities and Exchange Commission on behalf of such directors.

Date:
May 29, 2014
By:
/S/    J. ADAM ZANGERLE     
 
 
J. Adam Zangerle,
Attorney-in-Fact for Directors



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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 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 for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.1
STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.2
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*



 
 
10.3
STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.4
STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.5
STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.6
Amendment No. 1 to STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.11 to Form 10-K for the fiscal year ended March 31, 2007 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.7
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.7 to Form 10-Q for the fiscal quarter ended September 30, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.8
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.8 to Form 10-Q for the fiscal quarter ended September 30, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.9
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.10
STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.11
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.12
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.13
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).*

 
 

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10.14
STERIS Corporation Form of Non-Qualified Stock Option Agreement for Employees. (filed as Exhibit 10.22 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.15
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.23 to Form 10-K for the fiscal year ended March 31, 2011(Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.16
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference.*

 
 
10.17
STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).*

 
 
10.18
STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.27 to Form 10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by reference).*
 
 
10.19
STERIS Corporation Form of Restricted Stock Agreement for Employees.(filed as Exhibit 10.28 to Form 10-K for the fiscal year ended March 31, 2012 (Commission File No. 1-14643, and incorporated herein by reference).*

 
 
10.20
Amendment to Nonqualified Stock Option Agreement (filed as Exhibit 10.11 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.21
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.12 to Form10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.22
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.13 to Form10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.23
Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.14 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).*


 
 
10.24
Form of Career Restricted Stock Unit Agreement for Nonemployee Directors (filed as Exhibit 10.33 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643), and incorporated by reference).*
 
 
10.25
Form of Nonqualified Stock Option Agreement for Nonemployee Directors (filed as Exhibit 10.34 to Form 10-K for the fiscal year ended March 31, 2013 (Commission File No. 1-14643), and incorporated by reference).*
 
 
10.26
STERIS Corporation 2006 Long-Term Equity Incentive Plan (as Amended and Restated Effective March 13, 2014).*
 
 
10.27
Description of Non-Employee Director Compensation Arrangements (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2013 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.28
STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.29
STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated Effective January 1, 2009) (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.30
Amended and Restated Adoption Agreement related to STERIS Corporation Deferred Compensation Plan (filed as Exhibit 10.2 to Form 10-Q filed for the fiscal quarter ended December 31, 2008 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 

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10.31
Amendment No. 1 to STERIS Corporation Deferred Compensation Plan Document (as Amended and Restated Effective January 1, 2009) dated November 4, 2011 (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2011 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.32
STERIS Corporation Management Incentive Compensation Plan (filed as Exhibit 10.1 to Form 8-K filed May 7, 2009 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.33
STERIS Corporation Senior Executive Management Incentive Compensation Plan, as Amended and Restated Effective April 1, 2010 (filed as Appendix A to Schedule 14A (Definitive Proxy Statement) filed June 8, 2010 (Commission File No. 1-14643), and incorporated herein by reference).*
 
 
10.34
STERIS Corporation Senior Executive Severance Plan effective June 1, 2012 (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission No. 1-14643), and incorporated herein by reference.*
 
 
10.35
Form of Indemnification Agreement between STERIS Corporation and each of its directors and certain executive officers (filed as Exhibit 10.31 to Form 10-K for the fiscal year ended March 31, 2010 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.36
Agreement dated as of April 23, 2008 by and among STERIS Corporation, Richard C. Breeden, Robert H. Fields, and the Breeden Investors identified therein (filed as Exhibit 10.1 to Form 8-K filed April 24, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.37
Agreement dated November 4, 2011 between STERIS Corporation and Bank of America, N.A. providing Transfer and Advised Line for Letters of Credit (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.38
Third Amended and Restated Credit Agreement, dated as of April 13, 2012, among STERIS Corporation, KeyBank National Association, as agent for the lenders from time to time party thereto, and such lenders (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.39
Third Amended and Restated Guaranty of Payment, dated as of April 13, 2012, entered into by American Sterilizer Company, STERIS Inc., Isomedix Operations, Inc., and STERIS Isomedix Services, in favor of KeyBank National Association, as agent for the benefit of the lenders (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 2012 (Commission File No. 1-14643), and incorporated herein by reference.
 
 
10.40
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by United States Endoscopy Group, Inc. and dated October 9, 2012 (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.41
Amendment No. 1 dated October 12, 2012 to Third Amended and Restated Credit Agreement, dated as of April 13, 2012, among STERIS Corporation, KeyBank National Association as agent for the lenders from time to time party thereto and such lenders (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.42
Joinder Supplement to Third Amended and Restated Guaranty of Payment made by Spectrum Surgical Instruments Corp. and dated October 29, 2012 (filed as Exhibit 10.6 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.43
Form of Note Purchase Agreements, dated December 17, 2003, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.44
First Amendment dated as of August 15, 2008 to Note Purchase Agreements dated as of December 17, 2003 between STERIS Corporation and certain institutional investors (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 

104

Table of Contents

10.45
Subsidiary Guaranty dated December 17, 2003, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.46
Guaranty Supplement dated January 7, 2005, by STERIS Isomedix Services, Inc. and STERIS Corporation (filed as Exhibit 10.20 to Form 10-K for the fiscal year ended March 31, 2005 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.47
Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2003 Senior Notes] (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.48
Guaranty Supplement dated October 10, 2012 by United States Endoscopy Group, Inc. and STERIS Corporation (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.49
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS Corporation (filed as Exhibit 10.7 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.50
Form of Note Purchase Agreements dated as of August 15, 2008, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.51
Subsidiary Guaranty dated as of August 15, 2008, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended September 30, 2008 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.52
Guaranty Supplement dated July 11, 2011 by STERIS Brazil Holdings, LLC and STERIS Corporation [For 2008 Senior Notes] (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended September 30, 2011 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.53
Guaranty Supplement dated October 10, 2012 by United States Endoscopy Group, Inc. and STERIS Corporation (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.54
Guaranty Supplement dated October 29, 2012 by Spectrum Surgical Instruments Corp. and STERIS Corporation (filed as Exhibit 10.8 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.55
Form of Note Purchase Agreements dated as of December 4, 2012, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.9 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.56
Subsidiary Guaranty dated as of December 4, 2012, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.10 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.57
Letter Agreement - Committed Line of Credit dated December 6, 2013 between STERIS Corporation and PNC Bank, National Association (filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2013 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.58
Stock Purchase Agreement dated July 16, 2012 by and among STERIS Corporation, United States Endoscopy Group, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to Form 8-K filed August 15, 2012 (Commission No. 1-14643), and incorporated herein by reference).
 
 
10.59
Stock Purchase Agreement dated October 16, 2012 between STERIS Corporation, Richard J. and Michelle A. Schultz, individually and as trustees of certain trusts, such trusts and Spectrum Surgical Instruments Corp. (filed as Exhibit 10.5 to Form 10-Q for the fiscal quarter ended December 31, 2012 (Commission File No. 1-14643), and incorporated herein by reference).
 
 
10.60
Stock Purchase Agreement dated March 31, 2014 by and among STERIS Corporation, Integrated Medical Systems International, Inc. and the shareholders party thereto (filed as Exhibit 2.1 to Form 8-K filed May 9, 2014 (Commission No. 1-14643), and incorporated herein by reference).
 
 
21.1
Subsidiaries of STERIS Corporation.

105

Table of Contents

 
 
23.1
Consent of Independent Registered Public Accounting Firm.
 
 
24.1
Power of Attorney.
 
 
31.1
Certification of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
 
31.2
Certification of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
 
32.1
Certification of the Principal Executive Officer and the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
EX-101
Instance Document.
 
 
EX-101
Schema Document.
 
 
EX-101
Calculation Linkbase Document.
 
 
EX-101
Definition Linkbase Document.
 
 
EX-101
Labels Linkbase Document.
 
 
EX-101
Presentation Linkbase Document.
 
 
*
A management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.    




106
STE 03.31.2014 EX 21.1


EXHIBIT 21.1
SUBSIDIARIES OF STERIS CORPORATION
STERIS Corporation has no parent company. As of March 31, 2014, its direct and indirect subsidiaries(1) were as follows:
 
Albert Browne Limited
United Kingdom
American Sterilizer Company
Pennsylvania
Biotest Laboratories, Inc.
Minnesota
CLBV Limited
United Kingdom
Eschmann Holdings Limited
United Kingdom
Eschmann Holdings Pte Limited
Singapore
Hausted, Inc.
Delaware
HSTD LLC
Delaware
HTD Holding Corp.
Delaware
Isomedix Corporation
Canada
Isomedix Inc.
Delaware
Isomedix Operations Inc.
Delaware
PeriOptimum, Inc.
Delaware
Sercon Indústria E Comércio De Aparelhos Médicos E Hospitalares Ltda.
Brazil
Spectrum Surgical Instruments Corp.
Ohio
SterilTek Holdings, Inc.
Delaware
SterilTek, Inc.
Nevada
STERIS
France
STERIS AB
Sweden
STERIS Asia Pacific, Inc.
Delaware
STERIS-Austar Pharmaceutical Systems Hong Kong Limited
Hong Kong
STERIS-Austar Pharmaceutical Systems (Shanghai) Limited
China
STERIS (Barbados) Corp.
Barbados
STERIS Brasil Servicos Administrativos Ltda.
Brazil
STERIS (BVI) I Limited
British Virgin Islands
STERIS Brazil Holdings, LLC
Delaware
STERIS Canada Corporation
Canada
STERIS Canada Inc.
Canada
STERIS CH Limited
United Kingdom
STERIS China Holdings Limited
Hong Kong
STERIS Corporation de Costa Rica, S.A.
Costa Rica
STERIS Deutschland GmbH
Germany
STERIS Enterprises LLC
Russia
STERIS Europe, Inc.
Delaware
STERIS GmbH
Switzerland
STERIS Holdings B.V.
Netherlands
STERIS Iberia, S.A.
Spain
STERIS Inc.
Delaware
STERIS (India) Private Limited
India
STERIS Isomedix Services, Inc.
Delaware
STERIS Isomedix Puerto Rico, Inc.
Puerto Rico
STERIS Japan Inc.
Japan
STERIS Latin America, Inc.
Delaware
STERIS Limited
United Kingdom
STERIS Luxembourg Holding S.à r.l.
Luxembourg
STERIS Luxembourg Finance S.à r.l.
Luxembourg
STERIS Mauritius Limited
Republic of Mauritius



STERIS Mexico, S. de R.L. de C.V.
Mexico
STERIS Netherlands Holdings B.V.
Netherlands
STERIS Personnel Services, Inc.
Delaware
STERIS Personnel Services Mexico, S.de RL.de C.V.
Mexico
STERIS NV
Belgium
STERIS SEA Sdn. Bhd.
Malaysia
STERIS (Shanghai) Trading Co. Ltd.
China
STERIS Singapore Pte. Ltd.
Singapore
STERIS S.r.l.
Italy
STERIS Surgical Technologies
France
STERIS UK Holding Limited
United Kingdom
Strategic Technology Enterprises, Inc.
Delaware
United States Endoscopy Group, Inc.

Ohio

(1
)
The names of one or more subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute at the end of fiscal 2014 a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X have been excluded.


STE 03.31.2014 EX 23.1


Exhibit 23.1

Consent of Independent Registered Public Accounting Firm
 
 
We consent to the incorporation by reference in the following Registration Statements of STERIS Corporation and subsidiaries (STERIS) of our reports dated May 29, 2014, with respect to the consolidated financial statements and schedule of STERIS, and the effectiveness of internal control over financial reporting of STERIS, included in this Annual Report (Form 10-K) of STERIS for the year ended March 31, 2014.
 
 
 
Registration
Number
 
Description
 
 
 
333-32005
Form S-8 Registration Statement - STERIS Corporation 1997 Stock Option Plan
 
 
33-55976
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
 
 
333-09733
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
 
 
333-101308
Form S-8 Registration Statement - STERIS Corporation 2002 Stock Option Plan
 
 
333-137167
Form S-8 Registration Statement - STERIS Corporation Deferred Compensation Plan
 
 
333-136239
Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan
 
 
333-170884
Form S-8 Registration Statement - STERIS Corporation 401(k) Plan
 
 
333-176167
Form S-8 Registration Statement - STERIS Corporation 2006 Long-Term Equity Incentive Plan (As Amended and Restated Effective July 28, 2011)
 
 
 

/s/    Ernst & Young LLP
 
Cleveland, Ohio
May 29, 2014



STE 03.31.2014 EX 24.1


Exhibit 24.1


STERIS CORPORATION
POWER OF ATTORNEY
FORM 10-K

Each of the undersigned hereby makes, constitutes, and appoints Walter M Rosebrough, Jr., Michael J. Tokich, J. Adam Zangerle, Ronald E. Snyder, Dennis P. Patton, and each of them, his or her true and lawful attorney, with full power of substitution, for and in his or her name, place, and stead, to affix, as attorney-in-fact, his or her signature in any and all capacities, to the Annual Report on Form 10-K of STERIS Corporation for its fiscal year ended March 31, 2014, and any and all amendments thereto to be filed with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, with power to file said Form 10-K and such amendments, and any and all other documents that may be required in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts and things requisite or appropriate in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or any of them may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 24th 
day of April 2014.


 /s/    RICHARD C. BREEDEN
 
/s/    CYNTHIA L. FELDMANN
Richard C. Breeden, Director
 
Cynthia L. Feldmann, Director
 
 
 
/s/    JACQUELINE B. KOSECOFF
 
/s/    DAVID B. LEWIS
Jacqueline B. Kosecoff, Director
 
David B. Lewis, Director
 
 
 
/s/    KEVIN M. MCMULLEN
 
/s/    MOHSEN M. SOHI
Kevin M. McMullen, Director
 
Mohsen M. Sohi, Director
 
 
 
/s/    JOHN P. WAREHAM
 
/s/    LOYAL W. WILSON
John P. Wareham, Chairman of the Board
 
Loyal W. Wilson, Director
 
 
 
/s/    MICHAEL B. WOOD
 
/s/    WALTER M ROSEBROUGH, JR
Michael B. Wood, Director
 
Walter M Rosebrough, Jr.
 
 
President and Chief Executive Officer
/s/    MICHAEL J. TOKICH
 
(Principal Executive Officer), Director
Michael J. Tokich
 
 
Senior Vice President, Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 

                            



STE 03.31.2014 EX 31.1


 
Exhibit 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
I, Walter M Rosebrough, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of STERIS Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
May 29, 2014
 
 
/S/    WALTER M ROSEBROUGH, JR.        
Walter M Rosebrough, Jr.
President and Chief Executive Officer




STE 03.31.2014 EX 31.2


 
Exhibit 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, Michael J. Tokich, certify that:
1.
I have reviewed this annual report on Form 10-K of STERIS Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
May 29, 2014
 
 
/S/    MICHAEL J. TOKICH        
Michael J. Tokich
Senior Vice President, Chief Financial Officer and Treasurer




STE 03.31.2014 EX 32.1


 
Exhibit 32.1
Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Form 10-K of STERIS Corporation (the “Company”) for the fiscal year ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, that, to such officer's knowledge:
(1)
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, Chief Financial Officer and Treasurer
Dated: May 29, 2014



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