10-K 1 ste3312018.htm 10-K Document
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, 2018
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 1-37614
STERIS plc
(Exact name of registrant as specified in its charter)
England and Wales
 
98-1203539
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
Rutherford House Stephensons Way Chaddesden, Derby, England
(Address of principal executive offices)
DE21 6LY

(Zip Code)
44 1332 387100
(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
Ordinary Shares, 10 pence 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.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
 
Accelerated Filer  o
Non-Accelerated Filer  o
(Do not check if a smaller reporting company)
 
Smaller Reporting Company  o
 
 
Emerging Growth Company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 As of September 30, 2017, the aggregate market value of shares held by non-affiliates of STERIS Corporation (the predecessor issuer pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934), based upon the closing sale price of its shares on September 29, 2017, was approximately $7,420.7 million.
The number of Ordinary Shares outstanding as of May 25, 2018: 84,618,075
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting – Part III

1


STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)



 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
Item 16
 
 
 

2


PART I
Throughout this Annual Report, STERIS plc 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,” "fiscal year," or “year-end” mean our fiscal year, which ends on March 31. For example, fiscal year 2018 ended on March 31, 2018.
ITEM 1.
BUSINESS

INTRODUCTION
STERIS plc is a leading provider of infection prevention and other procedural products and services. 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 washers, surgical tables, lights and equipment management systems and connectivity solutions such as operating room integration; consumable products such as detergents and gastrointestinal endoscopy accessories and other products; services, including equipment installation and maintenance, microbial reduction of medical devices, instrument and scope repair solutions, laboratory services and outsourced reprocessing.
STERIS plc (“Parent”) was organized in 2014 under the laws of England and Wales under the name Solar New HoldCo Limited as a private limited company for the purpose of effecting under the laws of England and Wales the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). Effective November 2, 2015 the Parent was re-registered as a public company under the name of STERIS plc and the Combination closed. As a result of the Combination closing, STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name of Synergy Health Limited. The acquisition of Old STERIS was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015, are considered to be the historical financial statements of STERIS plc. Due to the timing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward, which will affect the comparability to the prior period historical operations of the Company throughout this Annual Report on Form 10-K.
With registered offices located in Derby, England, STERIS plc has approximately 12,000 employees worldwide. Through our field sales and service and a network of dealers and distributors, we serve Customers in more than 100 countries around the world.
We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income. Certain minor organizational changes were made to better align with our Customers, resulting in several smaller operations shifting among the segments. The prior period revenues and operating income measures have been recast for comparability.
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 regulatory 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 preventive screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all of 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 fiscal years 2018, 2017, and 2016 is presented in Note 11 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.

3


HEALTHCARE PRODUCTS SEGMENT
Description of Business. Our Healthcare Products segment provides a broad portfolio of infection prevention, procedural and GI solutions including; consumable products, equipment maintenance and installation services, and capital equipment to acute care hospitals, ambulatory surgery centers and GI clinics. 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. Our solutions include cleaning chemistries and sterility assurance products, accessories for GI procedures, washers, sterilizers and other pieces of capital equipment essential to the operations of a sterile processing department ("SPD") and equipment used directly in the operating room, including surgical tables, lights, equipment management services, and connectivity solutions.
Services Offered. Our Healthcare Products segment service associates install, maintain, upgrade, repair, and troubleshoot capital equipment throughout the world.
Customer Concentration. Our Healthcare Products segment sells consumables, services and capital equipment, to Customers in the United Kingdom, United States and many other countries throughout the world. For the year ended March 31, 2018, no Customer represented more than 10% of the Healthcare Product segment's total revenues.
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, Hill-Rom, Johnson & Johnson, Skytron, and Stryker.
HEALTHCARE SPECIALTY SERVICES SEGMENT
Description of Business. Our Healthcare Specialty Services segment provides a range of solutions and managed services including; hospital sterilization services and instrument and scope repairs to acute care hospitals and other healthcare settings that aid our Customers in improving the safety, quality and productivity of their operations.
Services Offered. Our Healthcare Specialty Services segment provides comprehensive instrument and endoscope repair and maintenance solutions (on-site or at one of our dedicated facilities), custom process improvement consulting and outsourced sterile processing (on-site at the hospital and in off-site reprocessing centers). Linen Management Services were divested during fiscal 2017.
Customer Concentration. Our Healthcare Specialty Services segment offers an array of services to Customers in the United Kingdom, United States and many other countries throughout the world. For the year ended March 31, 2018, no Customer represented more than 10% of the Healthcare Specialty Services segment's total revenues.
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 service offerings and operations in one or a limited number of countries. On a service line basis, competitors include Owens & Minor, Stryker, Olympus, Pentax, Karl Storz, Mobile, Northfield, BBraun Sterilog Limited, Berendsen plc, CleanLease (Clean Lease Fortex), Rentex Awé and Rentex Floren.
LIFE SCIENCES SEGMENT
Description of Business.  Our Life Sciences segment designs, manufactures and sells consumable products, equipment maintenance, specialty services and capital equipment primarily to pharmaceutical manufacturers around the world.
Products Offered.  These solutions include formulated cleaning chemistries, barrier products, sterility assurance products, steam and vaporized hydrogen peroxide sterilizers and washer disinfectors.
Services Offered.  Our Life Sciences segment service associates install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We offer various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime.
Customer Concentration.  Our Life Sciences segment sells consumables, services and capital equipment, to Customers in the United Kingdom, United States and many other countries throughout the world. For the year ended March 31, 2018, no Customer represented more than 10% of the Life Sciences segment’s total revenues.
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. We compete for pharmaceutical 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.

4


APPLIED STERILIZATION TECHNOLOGIES SEGMENT
Description of Business. Our Applied Sterilization Technologies ("AST") segment provides contract sterilization services through a network of over 50 facilities located in 16 countries. As a technology neutral service provider, we offer unbiased technology assessments dependent on the individual requirements of each product. Our Customers are primarily medical device and pharmaceutical manufacturers.
Services Offered. We offer two main modalities for sterilization: irradiation and gas. Within irradiation, we offer Gamma, electron beam and X-ray technologies. Gamma utilizes radioisotope (cobalt-60). Electron beam and X-ray utilize high energy electrons as their radiation source. Our offerings for gas sterilization are ethylene oxide ("EO") and hydrogen peroxide. In addition, we offer an array of laboratory testing services that complements the manufacturing of sterile products. Our locations are in major population centers and core distribution corridors throughout the Americas, Europe and Asia. Our technical services group supports Customers in all phases of product development, materials testing, and process validation.
Customer Concentration.  Our Applied Sterilization Technologies segment’s services are offered to Customers throughout the world. For the year ended March 31, 2018, no Customer represented more than 10% of the segment’s revenues.
Competition.  Applied Sterilization Technologies operates in a highly regulated industry and competes with Sterigenics International, Inc., 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 and carbon 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 2019. We have long-term supply contracts for certain materials for which there are few suppliers, or those that are single-sourced in certain regions of the world, such as EO and cobalt-60, which are necessary to our AST operations.
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, 2018, we held approximately 380 United States patents and approximately 1,400 in other jurisdictions and had approximately 125 United States patent applications and 350 patent applications pending in other jurisdictions. 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 varies from country to country and depends in part 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, 2018, we had a total of approximately 1,990 trademark registrations worldwide.
Research and Development.  Research and development is an important factor in our long-term strategy. For the years ended March 31, 2018, 2017, and 2016, research and development expenses were $60.8 million, $59.4 million, and $56.7 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. We have new products throughout our business, including hydrogen peroxide sterilizers, washer disinfectors, steam sterilizers, consumables, including sterility assurance products, accessories for use in GI procedures and surgical products including the latest generation of operating room integration products.
Quality Assurance.  We manufacture, assemble, and package products in several 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.

5


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.
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 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."
In the past, we have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to other regulatory sanctions. 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 Kingdom, 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, there can be no assurance 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 Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" 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 there be any assurance 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.
There can be no assurance that we will develop significant new products or services, or that the 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.”

6


Employees.  As of March 31, 2018, we had approximately 12,000 employees throughout the world. We believe we generally have good relations with our employees.
Methods of Distribution.  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 and services. Many of our operator training programs are approved by professional certifying organizations and offer continuing education credits to eligible course participants.
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 only a portion of the world that could benefit from our products. Through our subsidiaries, we operate in various international locations. United States revenues represented 70% of our fiscal 2018 revenues. Revenues from the United Kingdom and Europe, Middle East and Africa ("EMEA") were 8% and 13%, respectively, of our fiscal 2018 revenues. The remaining 9% was generated in Canada, the Asia Pacific and Latin American regions.
Also see Note 11 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7 of Part II, for a geographic presentation of our revenues for the three years ended March 31, 2018, 2017 and 2016.
We conduct manufacturing in the United States, United Kingdom, Canada, Mexico, Brazil, China and various other European countries. Cost of revenues incurred in currencies other than the United States dollar have represented approximately 40% 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 and are subject to a variety of risk associated with doing business internationally."
Backlog.  We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2018, we had a backlog of $193.9 million. Of this amount, $133.0 million and $60.8 million related to our Healthcare Products and Life Sciences segments, respectively. At March 31, 2017, we had backlog orders of $162.9 million. Of this amount, $109.7 million and $53.2 million related to our Healthcare Products and Life Sciences segments, respectively. A significant portion of the backlog orders at March 31, 2018 is expected to ship in the 2019 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 or accessible through 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.

7


Executive Officers of the Registrant. The following table presents certain information regarding our executive officers at March 31, 2018. All executive officers serve at the pleasure of the Board of Directors.
Name
 
Age
 
Position
Kathleen L. Bardwell
 
62
 
Senior Vice President and Chief Compliance Officer
Karen L. Burton
 
50
 
Vice President, Controller and Chief Accounting Officer
Daniel A. Carestio
 
45
 
Senior Vice President, Sterilization and Disinfection
Dr. Adrian Coward
 
48
 
Senior Vice President, Healthcare Specialty Services
Michiel de Zwaan
 
46
 
Vice President and Chief Human Resources Officer
Gulam A. Khan
 
51
 
Senior Vice President, Procedural Solutions
Sudhir K. Pahwa
 
65
 
Senior Vice President, Infection Prevention Technologies
Walter M Rosebrough, Jr.
 
64
 
President and Chief Executive Officer
Renato G. Tamaro
 
49
 
Vice President and Corporate Treasurer
Michael J. Tokich
 
49
 
Senior Vice President and Chief Financial Officer
J. Adam Zangerle
 
51
 
Vice President, General Counsel, and Secretary
The following discussion provides a summary of each executive officer's recent business experience through March 31, 2018:
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. Mrs. Bardwell is a Director of First Financial Bancorp.
Karen L. Burton serves as Vice President, Controller and Chief Accounting Officer. She assumed this role in January 2017. She served as Vice President, Corporate Controller from May 2008 to January 2017.
Daniel A. Carestio serves as Senior Vice President, Sterilization and Disinfection. He assumed this role in February 2018. From August 2015 to February 2018, he served as Senior Vice President, STERIS Applied Sterilization Technologies and Life Sciences. From 2011 to August 2015, he served as Vice President, Sales and Marketing for Isomedix Services and General Manager of Life Sciences.
Dr. Adrian Coward serves as Senior Vice President, Healthcare Specialty Services. He assumed this role in November 2015. From April 2014 to November 2015, he served as Chief Operating Officer of Synergy Health plc. From April 2010 to March 2014, Dr. Coward served as CEO of UK & Ireland of Synergy Health plc.
Michiel de Zwaan serves as Vice President and Chief Human Resources Officer. He assumed this role in September 2017. He served as Senior Vice President and Chief Human Resources Officer at Hill-Rom Inc. from August 2014 through December 2015, and as Vice President of Human Resources, International, at Hill-Rom Europe B.V. from September 2011 through July 2014.
Gulam A. Khan serves as Senior Vice President, Procedural Solutions. He assumed this role in August 2015. He served as Chief Executive Officer of United States Endoscopy Group, Inc. from January 2003, prior to its acquisition by STERIS in August 2012, remaining with STERIS until June 2013. From April 2014 until August 2015, he provided independent consulting services to corporations, including business integration consulting services to STERIS.
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 is a Director of Varex Imaging Corporation.
Renato G. Tamaro serves as Vice President and Corporate Treasurer. He assumed this role in August 2017. From March 2006 to July 2017, he served as Assistant Treasurer.
Michael J. Tokich serves as Senior Vice President and Chief Financial Officer. He assumed this role in August 2017. From February 2014 to July 2017, he served as the Senior Vice President, Chief Financial Officer and Treasurer. From March 2008 to February 2014, he served as Senior Vice President and Chief Financial Officer.
J. Adam Zangerle serves as Vice President, General Counsel, and 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.    

8


ITEM 1A.
RISK FACTORS
This section 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.
MARKET RISKS
Risk or uncertainty
Discussion
Doing business internationally
 
We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated with doing business internationally. 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.
We maintain significant international operations, including operations in the U.S., 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 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; Customers with longer payment cycles than Customers in the United States; significant variations in tax rates among the countries in which we do business, and tax withholding obligations in respect of our earnings; 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, including the potential implications of the U.K. “Brexit” or the withdrawal from the EU of other member countries; 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 U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act and laws and regulations dealing with trade with persons in sanctioned countries.
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.
We are subject to compliance with various laws and regulations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery 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. We are also subject to limitations on trade with persons in sanctioned countries. 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.
 
 
 
 
 
 
 
 
 
 
 
 

9


 
 
Risk or uncertainty
Discussion
Economic conditions and financial market access
 
Changes in 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. The onset of these cycles or conditions may not be foreseeable and there can be no assurance 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. 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.
Many of our 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 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 services, and/or weaker overall demand for our products and services, particularly capital products.
Our acquisition activity and ability to grow organically may be adversely affected if we are unable to continue to access the financial markets.
Our recent acquisitions have been financed largely through cash on hand and borrowings under our bank credit facilities. Future 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 through new or expanded borrowing arrangements or equity. There can be no assurance that we will be able to obtain additional funds beyond those available under existing bank credit facilities on terms favorable to us, or at all, or that such facilities can be replaced when they terminate.

10


LEGAL, REGULATORY AND TAX RISKS
Risk or uncertainty
Discussion
Healthcare laws and reimbursement
 
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 and services 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. Reimbursement systems vary significantly by country. However, government-managed healthcare systems control reimbursement for healthcare services in many countries. Public budgetary constraints may significantly impact the ability of hospitals, pharmaceutical manufacturers, and other Customers supported by such systems to purchase our products. Government or other third-party payors may deny or change coverage, reduce their current levels of reimbursement for healthcare services, or otherwise implement measures to regulate pricing or contain costs. In addition, our costs may increase more rapidly than reimbursement levels or permissible pricing increases or we may not satisfy the standards or requirements for reimbursement.
Among other provisions, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, imposed an excise tax on medical devices manufactured or offered for sale in the United States. Early in 2018, U.S. Congress enacted legislation that extended the suspension of the excise tax, which suspension had been in place in since the beginning of calendar year 2016, for 2018 and 2019. Should the U.S. Congress take no further action with regard to this tax we will begin to incur excise tax in the fourth quarter of fiscal 2020. We incurred $5.8 million in medical device excise taxes for fiscal 2016. In addition, we have been required to commit significant resources to “Sunshine Act” compliance. Various additional health care reform proposals have emerged at the federal and state level, and we are unable to predict which, if any, of those proposals will be enacted.
 
 

11


 
 
Risk or uncertainty
Discussion
Product related regulations and claims
 
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 the countries where we do business. In the United States, our products and services are regulated by the FDA and other regulatory authorities. In many foreign countries, sales of our products and services 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.
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 our products and services.

12


We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters.
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, as described above with respect to recalls and restrictions, 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, or be subject to, 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. The impact of any legal, regulatory, or compliance claims, proceeding, investigation, or litigation, is difficult to predict.
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.

13


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 for our products, 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 other countries. We may also acquire patents through acquisitions. We may encounter difficulties in obtaining or protecting patents.
We rely on a combination of patents, trademarks, 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.
Tax and trade risks
 
Current economic and political conditions make tax rules in any jurisdiction subject to significant change.
The U.S. Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Additional guidance is likely to be issued clarifying the application of this new legislation. We cannot predict the overall impact that the additional guidance may have on our business. It is reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the TCJA. In addition, further changes in the tax laws of other jurisdictions could arise, including as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organization for Economic Cooperation and Development (OECD). The OECD, which represents a coalition of member countries, has issued recommendations that, in some cases, would make substantial changes to numerous long-standing tax positions and principles. These contemplated changes, to the extent adopted by OECD members and/or other countries, could increase tax uncertainty and may adversely impact our provision for income taxes.

Our tax rate is uncertain and may vary from expectations, which could have a material impact on our results of operations and earnings per share.
There can be no assurance that we will be able to maintain any particular worldwide effective corporate tax rate. We cannot give any assurance as to what our effective tax rate will be in the future because of, among other things, uncertainty regarding the tax policies of the jurisdictions in which we and our affiliates operate, including the potential tax implications of the U.K. “Brexit”. Our actual effective tax rate may vary from our expectations, and such variance may be material. Additionally, tax laws or their implementation and applicable tax authority practices in any particular jurisdiction could change in the future, possibly on a retroactive basis, and any such change could have a material adverse impact on us and our affiliates.
Changes in tax treaties and trade agreements could negatively impact our costs, results of operations and earnings per share.
Legislative and regulatory action may be taken in the U.S. which, if ultimately adopted, could override or otherwise adversely impact tax treaties upon which we rely or broaden the circumstances under which STERIS would be considered a U.S. resident, each of which could materially and adversely affect our tax obligations. We cannot predict the outcome of any specific legislative or regulatory proposals. However, if proposals were adopted that had the effect of disregarding our incorporation in the U.K. or limiting our ability as a U.K. company to take advantage of tax treaties with the U.S., we could be subject to increased taxation and/or potentially significant expense.
Existing free trade laws and regulations, such as the North American Free Trade Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws and regulations or policies governing the terms of foreign trade, and in particular, increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products could have a material adverse impact on our business and financial results.

14


Proposed legislation relating to the denial of U.S. federal or state governmental contracts to U.S. companies that redomicile abroad could adversely affect our business.
Various U.S. federal and state legislative proposals that would deny governmental contracts to redomiciled companies may adversely affect us if adopted into law. We are unable to predict the likelihood that any such proposed legislation might become law, the nature of regulations that may be promulgated under any future legislative enactments, or the effect such enactments or increased regulatory scrutiny could have on our business.
The U.S. Internal Revenue Service (the “IRS”) may not agree that we are a foreign corporation for U.S. federal tax purposes.
Although we are incorporated under the laws of England and Wales and are a tax resident in the U.K. for U.K. tax purposes, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code” and such Section, “Section 7874”). For U.S. federal tax purposes, a corporation generally is considered to be a tax resident in the jurisdiction of its organization or incorporation. Because we are incorporated under the laws of England and Wales, we would generally be classified as a non-U.S. corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874, however, provides an exception to this general rule under which a non-U.S. incorporated entity may, in certain circumstances (including a transaction pursuant to which a U.S. corporation is acquired by a non-U.S. corporation), be treated as a U.S. corporation for U.S. federal tax purposes.
If we were to be treated as a U.S. corporation for U.S. federal tax purposes, we could be subject to substantial additional U.S. tax liability. Additionally, if we were treated as a U.S. corporation for U.S. federal tax purposes, non-U.S. holders of STERIS ordinary shares would be subject to U.S. withholding tax on the gross amount of any dividends we paid to such shareholders. For U.K. tax purposes, we are expected, regardless of any application of Section 7874, to be treated as a U.K. tax resident. Consequently, if we are treated as a U.S. corporation for U.S. federal tax purposes under Section 7874, we could be liable for both U.S. and U.K. taxes, which could have a material adverse effect on our financial condition and results of operations.
BUSINESS AND OPERATIONAL RISKS
Risk or uncertainty
Discussion
Competition
 
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.
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.

15


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, EO, 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. Also, certain of our key materials and components have a limited number of suppliers. Some are single-sourced in certain regions of the world, such as cobalt-60 and EO, which are necessary to our AST operations; the unavailability or short supply of these products might disrupt or cause shutdowns of portions of our AST 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 affect us.
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; 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

16


 
 
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 intended 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 the last several fiscal years we have made a number of acquisitions, the most significant of which was the acquisition of Synergy Health plc. We also completed several divestitures of non-strategic businesses or product lines during fiscal 2018 and 2017 including linen management services in the U.K., U.S. and Netherlands, laboratory services in the U.K., a consumables product line in the U.K., and our Applied Infection Control product line.
Our success with respect to these recent and future acquisitions will depend on our ability to integrate the businesses acquired, retain key personnel, realize identified cost synergies 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 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, including in-sourcing. We continue to look for opportunities to in-source production that is currently provided by third parties and have made large investments during the past few fiscal years. These activities may not produce the full efficiencies and cost reduction benefits that we expect or efficiencies and benefits might be delayed. Implementation costs also might exceed expectations.
Our business and results of operations may be adversely affected if we are unable to recruit and retain qualified management and other personnel 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. In addition, 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 qualified employees.

17


We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers.

We rely extensively on information technology (IT) systems to conduct business. In addition, we rely on networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our data. While we have made investments seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers, the techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action. Enforcement of the General Data Protection Regulation (“GDPR”) is effective as of May 2018. The GDPR is focused on the protection of personal data not merely the privacy of personal data. The GDPR creates a range of new compliance obligations and will significantly increase financial penalties for noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements).

ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
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, 2018. 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 Applied Sterilization Technologies segment. “Manufacturing,” “Warehousing,” “Operations,” or “Sales Offices” refer to locations serving one or more of the Healthcare Products, Healthcare Specialty Services and Life Sciences segments.
United Kingdom (U.K.), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.K/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 (4 locations)
  
U.S.
  
Manufacturing
  
Owned
South Plainfield, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Whippany, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Chester, NY (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned

18


United Kingdom (U.K.), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.K/U.S./INTL*
  
Use
  
Owned/Leased
Groveport, OH
  
U.S.
  
Contract Sterilization
  
Owned
Mentor, OH (14 locations)
  
U.S.
  
Operations
  
Owned
 
  
U.S.
  
Sales Offices
  
Owned
 
  
U.S.
  
Manufacturing/Warehousing
  
Owned
 
 
U.S.
 
Manufacturing/Operations
 
Owned
Philadelphia, PA
 
U.S.
 
Manufacturing/Warehousing
 
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
Birmingham, AL (5 locations)
 
U.S.
 
Manufacturing/Warehousing
 
Owned
Vega Alta, PR
  
U.S.
  
Contract Sterilization
  
Owned
Sturbridge, MA
 
U.S.
 
Operations
 
Owned
Feasterville, PA
 
U.S.
 
Warehousing
 
Owned
Berkshire, England
 
U.K.
 
Contract Sterilization
 
Owned
Derby, England
 
U.K.
 
Operations
 
Owned
Lancashire, England
 
U.K.
 
Operations
 
Owned
Lancing, England
 
U.K.
 
Manufacturing/Operations
 
Owned
Swindon, England (2 locations)
 
U.K.
 
Contract Sterilization
 
Owned
Yorkshire, England (2 locations)
 
U.K.
 
Contract Sterilization
 
Owned
Northamptonshire, England
 
U.K.
 
Contract Sterilization
 
Owned
Mogi das Cruzes, Brazil
 
INTL
 
Manufacturing/Sales Office
 
Owned
Quebec City, Canada
  
INTL
  
Manufacturing
  
Owned
Whitby, Canada
  
INTL
  
Contract Sterilization
  
Owned
Suzhou, China
 
INTL
 
Contract Sterilization
 
Owned
Alajuela, Costa Rica (2 locations)
 
INTL
 
Contract Sterilization
 
Owned
Velka Bites, Czech Republic
 
INTL
 
Contract Sterilization
 
Owned
Tuusula, Finland
  
INTL
  
Manufacturing/Sales Office
  
Owned
Bordeaux, France
 
INTL
 
Manufacturing/Sales Office
 
Owned
Tullamore, Ireland
 
INTL
 
Contract Sterilization
 
Owned
Westport, Ireland
 
INTL
 
Contract Sterilization
 
Owned
Calcinate, Italy
 
INTL
 
Contract Sterilization
 
Owned
Bastia di Rovolon, Italy
 
INTL
 
Contract Sterilization
 
Owned
Spresiano, Italy
 
INTL
 
Contract Sterilization
 
Owned
Rawang, Malaysia
 
INTL
 
Contract Sterilization
 
Owned
Etten-Leur, Netherlands
 
INTL
 
Contract Sterilization
 
Owned
Venlo, Netherlands
 
INTL
 
Contract Sterilization
 
Owned
Michalovce, Slovakia
 
INTL
 
Contract Sterilization
 
Owned
Pribenik, Slovakia
 
INTL
 
Contract Sterilization
 
Owned
Johannesburg, South Africa
 
INTL
 
Contract Sterilization
 
Owned
Daniken, Switzerland
 
INTL
 
Contract Sterilization
 
Owned
Chonburi, Thailand
 
INTL
 
Contract Sterilization
 
Owned

19


United Kingdom (U.K.), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.K/U.S./INTL*
  
Use
  
Owned/Leased
Radeberg, Germany
 
INTL
 
Contract Sterilization
 
Owned
Komenda, Slovenia
 
INTL
 
Contract Sterilization
 
Owned
Bitterfeld-Wolfen, Germany
 
INTL
 
Contract Sterilization
 
Owned
Ede, Netherlands
 
INTL
 
Contract Sterilization
 
Owned
St. Louis, MO
  
U.S.
  
Warehousing/Operations
  
Leased
Reno, NV (2 locations)
  
U.S.
  
Warehousing
  
Leased
Cleveland, Ohio
 
U.S.
 
Operations
 
Leased
Stow, OH
 
U.S.
 
Sales Office/Operations
 
Leased
Hillsborough, NJ
 
U.S.
 
Sales Office/Operations
 
Leased
Keller, TX (2 locations)
 
U.S.
 
Sales Office/Operations
 
Leased
Tustin, CA
 
U.S.
 
Sales Office/Operations
 
Leased
Melville, NY
 
U.S.
 
Sales Office/Operations
 
Leased
Santa Clara, CA
 
U.S.
 
Sales Office
 
Leased
Chesterfield, MO
 
U.S.
 
Sales Office/Operations
 
Leased
Cooper City, FL
 
U.S.
 
Operations
 
Leased
Rockville, MD
 
U.S.
 
Operations
 
Leased
Springdale, OH
 
U.S.
 
Operations/Warehousing
 
Leased
Franklin Park, IL
 
U.S.
 
Manufacturing/ Operations
 
Leased
Bensenville, IL
 
U.S.
 
Operations/Warehousing
 
Leased
Montgomery, AL
 
U.S.
 
Operations/Warehousing
 
Leased
Ooltewah, TN
 
U.S.
 
Operations/Warehousing
 
Leased
Bethlehem, PA
 
U.S.
 
Sales Office/Operations
 
Leased
Westborough, MA
 
U.S.
 
Sales Office/Operations
 
Leased
Belair, MD
 
U.S.
 
Sales Office/Operations
 
Leased
Point Richmond, CA
 
U.S.
 
Manufacturing/ Operations /Sales Offices/ Warehousing
 
Leased
San Diego, CA
 
U.S.
 
Contract Sterilization
 
Leased
Denver, CO
 
U.S.
 
Contract Sterilization
 
Leased
Lima, OH
 
U.S.
 
Contract Sterilization
 
Leased
Saxonburg, PA
 
U.S.
 
Contract Sterilization
 
Leased
Petaluma, CA
 
U.S.
 
Contract Sterilization
 
Leased
Tampa, FL
 
U.S.
 
Operations
 
Leased
Temple Terrace, FL
 
U.S.
 
Operations
 
Leased
Hamilton, OH
 
U.S.
 
Operations/Warehouse
 
Leased
Henrico, VA
 
U.S.
 
Operations
 
Leased
Rochester, NY
 
U.S.
 
Operations
 
Leased
Birmingham, AL
 
U.S.
 
Warehouse
 
Leased
Long Island City, NY
 
U.S.
 
Operations
 
Leased
Chusclan, France
 
INTL
 
Contract Sterilization
 
Leased
Calcinate, Italy
 
INTL
 
Contract Sterilization
 
Leased
Jalan Persiaran, Malaysia
 
INTL
 
Sales Office/Operations
 
Leased
Riyadh, Saudi Arabia
 
INTL
 
Operations
 
Leased
Toronto, Canada
 
INTL
 
Operations
 
Leased

20


United Kingdom (U.K.), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.K/U.S./INTL*
  
Use
  
Owned/Leased
Malle, Belgium
 
INTL
 
Sales Office/ Operations/ Warehousing
 
Leased
Antwerpen, Belgium
 
INTL
 
Sales Office/Operations
 
Leased
Sao Paulo, Brazil
  
INTL
  
Sales Office
  
Leased
Mississauga, Canada
  
INTL
  
Sales Office/Warehousing
  
Leased
Beijing, China
  
INTL
  
Sales Office
  
Leased
Nanjing, China
 
INTL
 
Operations
 
Leased
Shanghai, China
  
INTL
  
Sales Office/ Manufacturing
  
Leased
Suzhou, China
 
INTL
 
Operations
 
Leased
Wuhan, China
 
INTL
 
Operations
 
Leased
La Chapelle St. Mesmin, France
  
INTL
  
Sales Office
  
Leased
Marseille, France
 
INTL
 
Contract Sterilization
 
Leased
Paris, France
 
INTL
 
Sales Office
 
Leased
Toussieu, France
 
INTL
 
Warehousing
 
Leased
Allershausen, Germany
 
INTL
 
Contract Sterilization
 
Leased
Cologne, Germany
  
INTL
  
Sales Office
  
Leased
Gokul Nagar, India
  
INTL
  
Sales Office
  
Leased
Poggio Rusco, Italy
 
INTL
 
Contract Sterilization
 
Leased
Segrate, Italy
  
INTL
  
Sales Office
  
Leased
Seriate, Italy
 
INTL
 
Contract Sterilization/Operations

 
Leased
Trescore Balneario, Italy
 
INTL
 
Operations
 
Leased
Tokyo, Japan
  
INTL
  
Sales Office
  
Leased
Kuala Ketil, Malaysia
 
INTL
 
Contract Sterilization
 
Leased
Kulim, Malaysia
 
INTL
 
Contract Sterilization
 
Leased
MINT Bangi, Malaysia
 
INTL
 
Contract Sterilization
 
Leased
Petaling Jaya, Malaysia
  
INTL
  
Sales Office
  
Leased
Guadalupe, Mexico
  
INTL
  
Manufacturing
  
Leased
Utrecht, Netherlands
 
INTL
 
Operations
 
Leased
Moscow, Russia
  
INTL
  
Sales Office
  
Leased
Singapore (2 locations)
  
INTL
  
Sales Office/Warehousing
  
Leased
Madrid, Spain
  
INTL
  
Sales Office
  
Leased
New Cross, England
 
U.K
 
Operations
 
Leased
Basingstoke, England
  
U.K.
  
Sales Office
  
Leased
Derby, England
 
U.K.
 
Operations
 
Leased
Hoddesdon, England
 
U.K.
 
Operations
 
Leased
Chorley, England
 
U.K.
 
Operations
 
Leased
Leicester, England (2 locations)
 
U.K.
 
Warehousing/Operations
 
Leased
Lincoln, England
 
U.K.
 
Operations
 
Leased
Grimsby England
 
U.K.
 
Operations
 
Leased
Knowsley, England
 
U.K.
 
Operations
 
Leased
Oxfordshire, England
 
U.K.
 
Contract Sterilization
 
Leased
Sheffield, England
 
U.K.
 
Operations
 
Leased
Strathclyde, Scotland
 
U.K.
 
Operations
 
Leased
Swindon, England
 
U.K.
 
Operations
 
Leased

21


United Kingdom (U.K.), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.K/U.S./INTL*
  
Use
  
Owned/Leased
Wythenshawe, England (2 locations)
 
U.K.
 
Operations
 
Leased
Bishop Stortford, Hertfordshire, England

 
U.K.
 
Manufacturing/Warehousing/Operations
 
Leased
Pitsford, England
 
U.K.
 
Operations
 
Leased
Homeston, England
 
U.K.
 
Operations
 
Leased
Guildford, England
 
U.K.
 
Operations
 
Leased
Horrow, England
 
U.K.
 
Operations
 
Leased
Salisbury, England
 
U.K.
 
Operations
 
Leased
* International includes all countries other than the U.K. and U.S.
ITEM 3.
LEGAL PROCEEDINGS
Information regarding our legal proceedings is included in Item 7 of Part II, Management's Discussion and Analysis ("MD&A"), and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies," and incorporated herein by reference thereto.
ITEM 4.    MINE SAFETY DISCLOSURES
None.

22


PART II
ITEM 5.
MARKET FOR REGISTRANT’S ORDINARY EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our ordinary shares are traded on the New York Stock Exchange under the symbol “STE.” The following table presents, for the quarters ending on the dates indicated, the high and low sales prices for our shares.
Quarters Ended
 
March 31
 
December 31
 
September 30
 
June 30
Fiscal 2018
 
 
 
 
 
 
 
 
High
 
$
96.43

 
$
93.39

 
$
88.43

 
$
83.54

Low
 
82.88

 
86.02

 
80.74

 
69.11

Fiscal 2017
 
 
 
 
 
 
 
 
High
 
$
72.35

 
$
73.06

 
$
74.63

 
$
74.10

Low
 
65.27

 
63.80

 
67.25

 
63.26

Holders. As of March 31, 2018, there were approximately 82 holders of record of our ordinary shares. However, we believe that we have a significantly larger number of beneficial holders of our shares.
Dividend Policy. The Company’s Board of Directors decides the timing and amount of any dividends we may pay. During fiscal 2018, we paid cash dividends totaling $1.21 per outstanding share in respect for all shares outstanding for the entire fiscal year ($0.28 per outstanding share to shareholders of record on June 7, 2017, and $0.31 per outstanding share to shareholders of record on the following dates: August 29, 2017, November 22, 2017 and February 28, 2018). During fiscal 2017, we paid cash dividends totaling $1.09 per outstanding share ($0.25 per outstanding share to shareholders of record on June 8, 2016, and $0.28 per outstanding share to shareholders of record on the following dates: August 30, 2016, November 23, 2016 and February 28, 2017).
Recent Sales of Unregistered Securities. On November 2, 2015, we issued 100,000 preferred shares, par value of £0.10 each, for an aggregate consideration of £10,000, or approximately $15,000, to one of our service providers in satisfaction of debt owed to such service provider. This issuance of preferred shares was made pursuant to the exemption from registration provided for in Section 4(a)(2) of the Securities Act of 1933 by virtue of it being a private placement. Please refer to Note 12 of our Consolidated Financial Statements for more information regarding our preferred stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. On August 9, 2016, the Company announced that its Board of Directors had authorized the purchase of up to $300 million (net of taxes, fees and commissions) of our ordinary shares. We may enter into share repurchase contracts until August 2, 2021 to effect these purchases. Shares may be repurchased from time to time through open market transactions, including 10b5-1 plans. The repurchase program may be suspended or discontinued at any time. We purchased 664,963 of our ordinary shares during fiscal 2018 for the aggregate amount of $59,234 which included $294 of taxes and commissions. As of March 31, 2018, $151.1 million remains available for repurchase of ordinary shares under this authorization.
The following table presents information with respect to purchases STERIS made of its ordinary shares during the fourth quarter of the 2018 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
 
(d)
Maximum Dollar Value  of Shares that May Yet Be Purchased Under the
Plans at Period End (dollars in thousands)
January 1-31
 
84,000

  
$
90.53

  
84,000

 
$
164,225

February 1-28
 
70,116

  
88.78

  
70,116

 
158,000

March 1-31
 
74,300

  
93.39

  
74,300

 
151,061

Total
 
228,416

(1) 
$
90.92

(1) 
228,416

 
$
151,061

(1) Does not include 11 shares purchased during the quarter at an average price of $90.78 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.



23



ITEM 6.    SELECTED FINANCIAL DATA
 
 
Years Ended March 31,
(in thousands, except per share data)
 
2018 (1)
 
2017 (1)
 
2016 (1)
 
2015(1)
 
2014(1)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,619,996

 
$
2,612,756

 
$
2,238,764

 
$
1,850,263

 
$
1,622,252

Gross profit
 
1,094,223

 
1,025,632

 
895,481

 
774,301

 
649,622

Restructuring expenses
 
103

 
215

 
(820
)
 
(391
)
 
13,204

Income from continuing operations
 
403,454

 
227,595

 
212,927

 
227,211

 
206,807

Income taxes
 
63,360

 
74,015

 
60,299

 
73,756

 
58,934

Net income attributable to shareholders
 
290,915

 
109,965

 
110,763

 
135,064

 
129,442

Basic income per ordinary share:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
3.42

 
$
1.29

 
$
1.57

 
$
2.27

 
$
2.20

Shares used in computing net income per ordinary share – basic
 
85,028

 
85,473

 
70,698

 
59,413

 
58,966

Diluted income per ordinary share:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
3.39

 
$
1.28

 
$
1.56

 
$
2.25

 
$
2.17

Shares used in computing net income per ordinary share – diluted
 
85,713

 
86,094

 
71,184

 
60,045

 
59,745

Dividends per ordinary share
 
$
1.21

 
$
1.09

 
$
0.98

 
$
0.90

 
$
0.82

Balance Sheets Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
591,195

 
$
636,219

 
$
571,919

 
$
437,101

 
$
420,239

Total assets
 
5,200,334

 
4,924,555

 
5,346,416

 
2,097,291

 
1,887,162

Long-term indebtedness
 
1,316,001

 
1,478,361

 
1,567,796

 
621,075

 
493,480

Total liabilities
 
1,983,034

 
2,114,422

 
2,307,524

 
1,023,645

 
845,916

Total shareholders’ equity
 
$
3,205,960

 
$
2,798,602

 
$
3,023,034

 
$
1,071,632

 
$
1,038,705

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
.

24


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 ordinary 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 2018, 2017 and 2016, as well as Part I, Item 1A, “Risk Factors” and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" 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; 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.
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."

25


REVENUES– DEFINED
As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
Revenues – Our revenues are presented net of sales returns and allowances.
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. Service revenues also include hospital sterilization services, instrument and scope repairs, and linen management as well as revenues generated from contract sterilization and laboratory services offered through our Applied Sterilization Technologies segment. Linen management services were divested in fiscal 2017.
Capital Equipment Revenues – We define capital equipment 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, barrier product solutions 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
STERIS plc is a leading provider of infection prevention and other procedural products and services. 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 consumable products, such as detergents, gastrointestinal ("GI") endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, instrument and scope repair solutions, laboratory testing services, on-site and off-site reprocessing, and capital equipment products, such as sterilizers and surgical tables, and connectivity solutions such as operating room (“OR”) integration.
STERIS plc (“Parent”) was organized in 2014 under the laws of England and Wales under the name Solar New HoldCo Limited as a private limited company for the purpose of effecting under the laws of England and Wales the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). Effective November 2, 2015, the Parent was re-registered as a public company under the name of STERIS plc and the Combination closed. As a result of the Combination closing, STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name of Synergy Health Limited. The acquisition of Old STERIS was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly, the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015, are considered to be the historical financial statements of STERIS plc.
Due to the timing of the closing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward, which will affect comparability for the fiscal 2016 periods to more recent fiscal periods of the Company throughout this Annual Report on From 10-K.
We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. We describe our business segments in Note 11 to our consolidated financial statements, titled "Business Segment Information."
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 regulatory 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

26


demand for medical procedures, including preventive 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 completed several acquisitions and asset purchases in fiscal 2018 and 2017 that expanded our product and service offerings to our Customers.
During fiscal 2018, we divested our Synergy Health Healthcare Consumable Solutions ("HCS") business with annual revenues of approximately $40 million. During fiscal 2017, we divested our Applied Infection Control ("AIC") product line (annual revenues of approximately $50 million) and four businesses acquired in the Combination with Synergy consisting of: the UK Linen Management Services business (annual revenues of approximately $50 million), U.S. Linen Management Services business (annual revenues of approximately $50 million), Synergy Health Netherlands Linen Management Services (annual revenues of approximately $75 million) and Synergy Health Laboratory Services (annual revenues of approximately $15 million).
We continue to invest in manufacturing in-sourcing projects and lean process improvements for the purpose of improving quality, cost and delivery of our products to our Customers.
U.S. Tax Reform. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending March 31, 2018, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of non-U.S. subsidiaries which is payable over eight years, (2) bonus depreciation that will allow for full expensing of qualified property and (3) reduction of the U.S. federal corporate tax rate. The TCJA reduces the federal corporate income tax rate to 21.0 percent beginning January 1, 2018. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending March 31, 2018, will have a U.S. blended corporate income tax rate of approximately 31.5 percent, which is based on the applicable tax rates before and after the TCJA and the number of days in the fiscal year.
The TCJA also establishes new tax laws that may affect the Company’s fiscal year 2019 and forward, including, but not limited to, (1) reduction of the U.S. federal corporate income tax rate as noted above; (2) elimination of the corporate alternative minimum tax ("AMT"); (3) the creation of the base erosion anti-abuse tax ("BEAT"), a new minimum tax; (4) a general elimination of U.S. federal income taxes on dividends from non-U.S. subsidiaries; (5) a new provision designed to tax global intangible low-taxed income ("GILTI"), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of FTCs to reduce the U.S. income tax liability; and (10) limitations on net operating losses ("NOLs") generated after December 31, 2017, to 80.0 percent of taxable income.
Highlights.  Revenues increased $7.2 million, or 0.3%, to $2,620.0 million for the year ended March 31, 2018, as compared to $2,612.8 million for the year ended March 31, 2017. The increase reflects organic revenue growth within all business segments, the favorable impact of our recent acquisitions and the positive impact of fluctuations in currencies, which more than offset the impact of our recent divestitures.
Fiscal 2018 operating income increased 77.3% to $403.5 million over the fiscal 2017 operating income of $227.6 million. The increase is attributable to gross profit improvements, recent acquisitions, and lower acquisition and integration related expenses. Fiscal 2017 was also negatively impacted by losses from the divestiture of certain non-core operations and a goodwill impairment loss.
Net cash flows from operations were $457.6 million and free cash flow was $294.3 million in fiscal 2018 compared to net cash flows from operations of $424.1 million and free cash flow of $256.0 million in fiscal 2017 (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). Cash flow from operations and free cash flow increased primarily due to higher earnings and lower requirements to fund operating assets and liabilities.
Our debt-to-total capital ratio was 29.1% at March 31, 2018. During the year, we increased our quarterly dividend for the twelfth consecutive year to $0.31 per share per quarter.
Outlook. Fluctuations in currency rates can impact revenues and costs outside of the United States, creating variability in our results for fiscal 2019 and beyond.
In fiscal 2019 and beyond, we expect to continue to manage our costs, grow our business with internal product and service development, invest in greater capacity, and augment these value creating methods with acquisitions of additional products and services.

27



NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented.
These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures.
These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying 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 within investing activities 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 shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2018, 2017 and 2016:
 
 
Years Ended March 31,
(dollars in thousands)
 
2018
 
2017
 
2016
Net cash flows provided by operating activities
 
$
457,632

 
$
424,086

 
$
254,675

Purchases of property, plant, equipment and intangibles, net
 
(165,457
)
 
(172,901
)
 
(126,407
)
Proceeds from the sale of property, plant, equipment and intangibles
 
2,094

 
4,846

 
844

Free cash flow
 
$
294,269

 
$
256,031

 
$
129,112

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.

28


FISCAL 2018 AS COMPARED TO FISCAL 2017
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2018 to the year ended March 31, 2017:
 
 
Years Ended March 31,
 
 
 
Percent
(dollars in thousands)
 
2018
 
2017
 
Change
 
Change
Total revenues
 
$
2,619,996

 
$
2,612,756

 
$
7,240

 
0.3
 %
 
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
 
Service revenues
 
1,399,363

 
1,414,437

 
(15,074
)
 
(1.1
)%
Consumable revenues
 
581,563

 
558,834

 
22,729

 
4.1
 %
Capital equipment revenues
 
639,070

 
639,485

 
(415
)
 
(0.1
)%
 
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
 
United Kingdom revenues
 
207,514

 
229,603

 
(22,089
)
 
(9.6
)%
United States revenues
 
1,836,414

 
1,803,457

 
32,957

 
1.8
 %
Other foreign revenues
 
576,068

 
579,696

 
(3,628
)
 
(0.6
)%
Revenues increased $7.2 million, or 0.3%, to $2,620.0 million for the year ended March 31, 2018, as compared to $2,612.8 million for the year ended March 31, 2017. This increase is primarily attributable to organic growth within all business segments, favorable pricing, the benefit of acquisitions and the positive impact of fluctuations in currencies. These increases were largely offset by the impact of our recent divestitures.
Service revenues for fiscal 2018 decreased $15.1 million, or 1.1%, over fiscal 2017, as the impact of recent divestitures more than offset increases in other service offerings. Consumable revenues increased $22.7 million, or 4.1%, during fiscal 2018 over fiscal 2017, reflecting growth within the Healthcare Products and Life Sciences business segments, which more than offset the impact of the divestitures of the AIC product line and HCS business within the Healthcare Products segment. Capital equipment revenues decreased by $0.4 million, or 0.1%, during fiscal 2018 as compared to fiscal 2017, reflecting a decline in revenues from the Healthcare Products segment, which was offset by growth in revenues from the Life Sciences segment.
United Kingdom revenues for fiscal 2018 were $207.5 million, a decrease of $22.1 million, or 9.6%, over fiscal 2017 revenues of $229.6 million, reflecting a 11.1% decline in service revenues, primarily resulting from our fiscal 2017 divestitures of our laboratory and linen management services.
United States revenues for fiscal 2018 were $1,836.4 million, an increase of $33.0 million, or 1.8%, over fiscal 2017 revenues of $1,803.5 million. Strength in Life Sciences capital equipment and service offerings within the Healthcare Products, Life Sciences and Applied Sterilization Technologies segments more than offset the negative impact of the decline in capital equipment revenues from the Healthcare Products segment and the recent divestitures.
Revenues from other foreign locations for fiscal 2018 were $576.1 million, a decrease of 0.6% over the fiscal 2017 revenues of $579.7 million, primarily due to the fiscal 2017 divestiture of the Netherlands Linen Management Services, which more than offset growth in Canada and in the Asia Pacific and Latin America regions.

29


Gross Profit. The following table compares our gross profit for the year ended March 31, 2018 to the year ended March 31, 2017: 
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2018
 
2017
 
Gross profit:
 
 
 
 
 
 
 
 
Product
 
$
574,456

 
$
574,299

 
$
157

 
NM

Service
 
519,767

 
451,333

 
68,434

 
15.2
%
Total gross profit
 
$
1,094,223

 
$
1,025,632

 
$
68,591

 
6.7
%
Gross profit percentage:
 
 
 
 
 
 
 
 
Product
 
47.1
%
 
47.9
%
 
 
 
 
Service
 
37.1
%
 
31.9
%
 
 
 
 
Total gross profit percentage
 
41.8
%
 
39.3
%
 
 
 
 
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 $68.6 million and gross profit percentage increased 250 basis points to 41.8% for fiscal 2018 as compared to 39.3% for fiscal 2017. The increase in our gross profit percentage was due to the favorable impact of the divestiture of lower margin operations (190 basis points), favorable mix (60 basis points), and favorable pricing (30 basis points) which were partially offset by the negative impact of currencies (30 basis points).
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2018 to the year ended March 31, 2017:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2018
 
2017
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
629,884

 
$
680,069

 
$
(50,185
)
 
(7.4
)%
Goodwill impairment loss
 

 
58,356

 
(58,356
)
 
NM

Research and development
 
60,782

 
59,397

 
1,385

 
2.3
 %
Restructuring expenses
 
103

 
215

 
(112
)
 
NM

Total operating expenses
 
$
690,769

 
$
798,037

 
$
(107,268
)
 
(13.4
)%
NM - Not meaningful
Selling, General, and Administrative Expenses. 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, gains or losses from divestitures, and other general and administrative expenses. SG&A decreased 7.4% in fiscal 2018 over fiscal 2017. The decline was primarily attributable to a lower net loss on divestitures and lower acquisition and integration costs incurred in fiscal 2018 as compared to fiscal 2017.
Goodwill impairment loss. Goodwill impairment loss of $58.4 million was recorded during fiscal 2017 as a result of our annual goodwill impairment review in the third quarter relative to the Synergy Health Netherlands linen management reporting unit.
Research and Development. Research and development expenses increased $1.4 million during fiscal 2018, as compared to fiscal 2017. 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 2018, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, procedural products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
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

30


compares our non-operating expense (income), net for the year ended March 31, 2018 to the year ended March 31, 2017:
 
 
Years Ended March 31,
 
 
(dollars in thousands)
 
2018
 
2017
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
50,629

 
$
44,520

 
$
6,109

Interest income and miscellaneous expense
 
(2,157
)
 
(1,571
)
 
(586
)
Non-operating expenses, net
 
$
48,472

 
$
42,949

 
$
5,523

Interest expense increased $6.1 million during fiscal 2018 as compared to 2017. This increase was primarily due to an increase in the proportion of higher-cost, fixed rate debt following the issuance and sale of senior notes in a private placement to certain investors on February 27, 2017. Interest income and miscellaneous expense is immaterial.
Additional information regarding our outstanding debt is included in Note 6 to our consolidated financial statements titled, “Debt,” and in the subsection of this 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, 2018 and March 31, 2017:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2018
 
2017
 
Income tax expense
 
$
63,360

 
$
74,015

 
$
(10,655
)
 
(14.4)%
Effective income tax rate
 
17.8
%
 
40.1
%
 
 
 
 
The effective income tax rate for fiscal 2018 was 17.8% as compared to 40.1% for fiscal 2017. The fiscal 2018 effective tax rate decreased when compared to fiscal 2017 primarily due to the TCJA impact and non-recurring nondeductible costs related to divestitures. Additional information regarding our income tax expense is included in Note 8 to our consolidated financial statements titled, “Income Taxes.”
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The SEC staff issued Staff Accounting Bulletin No.118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118, provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. Our accounting for the various elements of the TCJA is incomplete. However, in accordance with SAB 118 guidance, we were able to make what we believe to be reasonable estimates of certain effects and therefore recorded a provisional net tax benefit of approximately $18.9 million related to the reduction of the U.S. federal corporate income tax rate and the deemed repatriation transition tax. While we were able to make what we believe to be reasonable estimates of the tax rate reduction and transition tax effects, both items may be affected by other analyses related to the TCJA as well as actual activities to occur in the remainder of the Company’s measurement period. We are continuing to gather information and will reflect final effects within the measurement period permitted by SAB 118.
Business Segment Results of Operations. We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including consumable products, equipment maintenance and installation services, and capital equipment.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services and instrument and scope repairs. Linen Management Services were divested in fiscal 2017.
Our Life Sciences segment offers consumable products, equipment maintenance, specialty services and capital equipment primarily for pharmaceutical manufacturers.
Our Applied Sterilization Technologies segment offers contract sterilization and laboratory services primarily for medical device and pharmaceutical Customers.
Certain minor organizational changes were made to better align with our Customers, resulting in several smaller operations shifting among the segments. The prior period revenues and operating income measures have been recast for comparability.

31


The accounting policies for reportable segments are the same as those for the consolidated Company. Management will evaluate performance and allocate resources based on a segment operating income measure. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which result 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 Products segment is responsible for the management of all but two manufacturing facilities and uses standard cost to sell products to the other segments. Corporate and other includes certain non-allocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. Segment operating income excludes certain adjustments which include acquisition related costs, amortization of acquired intangibles, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by adjusting for these items they gain better insight and greater transparency of the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making. For more information regarding our segments please refer to Note 11 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 and operating income for the year ended March 31, 2018 to the year ended March 31, 2017:
 
 
Years ended March 31,
 
 
 
Percent
(dollars in thousands)
 
2018
 
2017
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
1,276,054

 
$
1,266,517

 
$
9,537

 
0.8
 %
Healthcare Specialty Services
 
469,065

 
539,536

 
(70,471
)
 
(13.1
)%
Life Sciences
 
361,590

 
328,866

 
32,724

 
10.0
 %
Applied Sterilization Technologies
 
513,287

 
477,837

 
35,450

 
7.4
 %
Total revenues
 
$
2,619,996

 
$
2,612,756

 
$
7,240

 
0.3
 %
Operating income (loss):
 
 
 
 
 
 
 
 
Healthcare Products
 
221,795

 
227,707

 
(5,912
)
 
(2.6
)%
Healthcare Specialty Services
 
28,910

 
10,573

 
18,337

 
173.4
 %
Life Sciences
 
106,737

 
97,180

 
9,557

 
9.8
 %
Applied Sterilization Technologies
 
173,375

 
158,379

 
14,996

 
9.5
 %
Corporate
 
(17,439
)
 
(17,307
)
 
(132
)
 
NM

Total operating income before adjustments
 
$
513,378

 
$
476,532

 
$
36,846

 
7.7
 %
Less: Adjustments
 
 
 
 
 
 
 
 
Goodwill impairment loss (1)
 

 
58,356

 
 
 
 
Amortization of inventory and property "step up" to fair value (2)
 
1,599

 
4,743

 
 
 
 
Amortization and impairment of purchased intangible assets (2)
 
67,793

 
66,398

 
 
 
 
Acquisition related transaction and integration charges (3)
 
16,211

 
30,082

 
 
 
 
Loss (gain) on fair value adjustment of acquisition related contingent consideration
 
(593
)
 
2,569

 
 
 
 
Net loss on divestiture of businesses (2)
 
14,547

 
86,574

 
 
 
 
Impact of the U.S. Tax Cuts and Jobs Act (4)
 
10,264

 

 
 
 
 
Restructuring charges
 
103

 
215

 
 
 
 
Total operating income
 
$
403,454

 
$
227,595

 
 
 
 
(1) For more information regarding our goodwill impairment loss see Note 3 to our consolidated financial statements titled, "Goodwill and Intangible Assets".
(2) For more information regarding our recent acquisitions and divestitures see Note 2 to our consolidated financial statements titled, "Business Acquisitions and Divestitures".
(3) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(4) Represents a one-time special employee bonus paid to most U.S. employees and associated professional fees.

Healthcare Products revenues increased 0.8% in the fiscal 2018 year, as compared to fiscal 2017, reflecting growth in consumable and service revenues of 2.2% and 7.2%, respectively, which were partially offset by a 4.0% decline in capital equipment revenues. The increase was attributable to organic growth, acquisitions and the positive impact of fluctuations in currencies, and was partially offset by divestitures. At March 31, 2018, the Healthcare Products segment’s backlog amounted to $133.0 million, increasing $23.3 million, or 21.3%, compared to the backlog of $109.7 million at March 31, 2017.

32


Healthcare Specialty Services revenues decreased 13.1% in the fiscal 2018 year, as compared to fiscal 2017. The negative impact of the divestitures was partially offset by organic growth and the positive impact of fluctuations in currencies.
Life Sciences revenues increased 10.0% in the fiscal 2018 year, as compared to fiscal 2017, reflecting growth of 19.6%, 5.2% and 8.6% in capital equipment, consumable and service revenues, respectively. The increase was primarily attributable to organic growth and the positive impact of fluctuations in currencies. Life Sciences backlog at March 31, 2018 amounted to $60.8 million, increasing $7.7 million compared to the backlog of $53.2 million at March 31, 2017.
Applied Sterilization Technologies revenues increased 7.4% in the fiscal year 2018, as compared to fiscal 2017. Revenues in fiscal 2018 were favorably impacted by increased volume from our core medical device Customers and the positive impact of fluctuations in currencies, which was partially offset by the impact of the divestitures.
The Healthcare Products segment’s operating income decreased $5.9 million to $221.8 million in fiscal year 2018, as compared to $227.7 million in fiscal year 2017. The segment's operating margin was 17.4% for fiscal year 2018 compared to 18.0% for fiscal year 2017. The decrease in operating income in fiscal 2018 was primarily due to increased spending on research and development, negative fluctuations in currencies, and higher allocated corporate costs, which more than offset organic growth.
The Healthcare Specialty Services segment’s operating income increased $18.3 million to $28.9 million for fiscal year 2018 as compared to $10.6 million in fiscal year 2017. The segment’s operating margin was 6.2% for fiscal year 2018 compared to 2.0% for fiscal year 2017. The increase in operating income in fiscal 2018 was primarily due to the divestiture of the low margin Linen Management Services operations and growth in retained businesses.
The Life Sciences business segment’s operating income increased $9.6 million to $106.7 million for fiscal year 2018 as compared to $97.2 million in fiscal year 2017. The segment’s operating margin was 29.5% for fiscal year 2018 compared to 29.6% for fiscal year 2017. The increase in operating income in fiscal 2018 was primarily attributable to higher volume which was partially offset by unfavorable product mix.
The Applied Sterilization Technologies segment’s operating income increased $15.0 million to $173.4 million for fiscal year 2018 as compared to $158.4 million for fiscal year 2017. The Applied Sterilization Technologies segment's operating margin was 33.8% for fiscal year 2018 compared to 33.1% for fiscal year 2017. The segment’s operating income increase in fiscal 2018 over fiscal 2017 was primarily due to increased volume from the segment’s core medical device Customers.

FISCAL 2017 AS COMPARED TO FISCAL 2016
Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2017 to the year ended March 31, 2016:
 
 
Years Ended March 31,
 
 
 
Percent
(dollars in thousands)
 
2017
 
2016
 
Change
 
Change
Total revenues
 
$
2,612,756

 
$
2,238,764

 
$
373,992

 
16.7
%
 
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
 
Service revenues
 
1,414,437

 
1,109,779

 
304,658

 
27.5
%
Consumable revenues
 
558,834

 
516,044

 
42,790

 
8.3
%
Capital equipment revenues
 
639,485

 
612,941

 
26,544

 
4.3
%
 
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
 
United Kingdom revenues
 
229,603

 
144,577

 
85,026

 
58.8
%
United States revenues
 
1,803,457

 
1,662,050

 
141,407

 
8.5
%
Other foreign revenues
 
579,696

 
432,137

 
147,559

 
34.1
%
Revenues increased $374.0 million, or 16.7%, to $2,612.8 million for the year ended March 31, 2017, as compared to $2,238.8 million for the year ended March 31, 2016. This increase is primarily attributable to the Combination, along with organic growth within all reportable business segments, partially offset by divestitures and the negative impact of foreign currency.

33


Service revenues for fiscal 2017 increased $304.7 million, or 27.5%, over fiscal 2016 driven by the Combination and organic growth in all reportable business segments. Consumable revenues increased $42.8 million, or 8.3%, during fiscal 2017 from fiscal 2016. The increase was due, in part, to recent acquisitions, but also strong organic growth in both the Healthcare Products and Life Sciences business segments, partially offset by the sale of the Applied Infection Control (AIC) product line. Capital equipment revenues increased by $26.5 million, or 4.3%, during fiscal 2017 as compared to fiscal 2016. This increase was driven primarily by growth within the Healthcare Products business segment.
United Kingdom revenues for fiscal 2017 were $229.6 million, an increase of $85.0 million, or 58.8%, over fiscal 2016 revenues of $144.6 million. This increase reflects growth in capital equipment, consumable and service revenues of 9.6%, 71.2% and 62.8%, respectively. The increases are attributable to acquisitions, including the Combination with Synergy, partially offset by divestitures and the negative impact of foreign currency.
United States revenues for fiscal 2017 were $1,803.5 million, an increase of $141.4 million, or 8.5%, over fiscal 2016 revenues of $1,662.1 million. This increase reflects growth in capital equipment, consumable and service revenues of 7.2%, 3.5%, and 11.5%, respectively. The increases are attributable to acquisitions, including the Combination, as well as organic growth, partially offset by divestitures.
Revenues from other foreign locations for fiscal 2017 were $579.7 million, an increase of 34.1% over the fiscal 2016 revenues of $432.1 million. This increase reflects revenue growth in Canada, the EMEA region outside of the United Kingdom, as well as in the Asia Pacific and Latin American regions. Service revenues attributable to the Combination were the most significant driver of the growth in these regions.
Gross Profit. The following table compares our gross profit for the year ended March 31, 2017 to the year ended March 31, 2016: 
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2017
 
2016
 
Gross profit:
 
 
 
 
 
 
 
 
Product
 
$
574,299

 
$
511,617

 
$
62,682

 
12.3
%
Service
 
451,333

 
383,864

 
67,469

 
17.6
%
Total gross profit
 
$
1,025,632

 
$
895,481

 
$
130,151

 
14.5
%
Gross profit percentage:
 
 
 
 
 
 
 
 
Product
 
47.9
%
 
45.3
%
 
 
 
 
Service
 
31.9
%
 
34.6
%
 
 
 
 
Total gross profit percentage
 
39.3
%
 
40.0
%
 
 
 
 
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 $130.2 million and gross profit percentage decreased 70 basis points to 39.3% for fiscal 2017 as compared to 40.0% for fiscal 2016. The decrease in our gross profit percentage was primarily due to the addition of Synergy's hospital sterilization services and linen management business (240 basis points), partially offset by the favorable impact of the divestiture of lower margin operations (110 basis points) and foreign currency (50 basis points). We have applied our "four walls" approach to the operation of Synergy, which reports all direct and indirect costs related to the delivery of services as costs of goods sold. This approach caused additional costs to be included in costs of goods sold rather than in selling, general and administrative costs as Synergy would have previously reported.
Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2017 to the year ended March 31, 2016:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2017
 
2016
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
680,069

 
$
626,710

 
$
53,359

 
8.5
%
Goodwill impairment loss
 
58,356

 

 
58,356

 
NM

Research and development
 
59,397

 
56,664

 
2,733

 
4.8
%
Restructuring expenses
 
215

 
(820
)
 
1,035

 
NM

Total operating expenses
 
$
798,037

 
$
682,554

 
$
115,483

 
16.9
%
NM - Not meaningful

34


Selling, General, and Administrative Expenses. 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, gains or losses from divestitures, and other general and administrative expenses. SG&A increased 8.5% in fiscal 2017 over fiscal 2016. Contributing to this increase was the loss on the sale of businesses of $86.6 million and the acceleration of amortization associated with the Synergy Health trade name, partially offset by lower acquisition related expenses.
Goodwill impairment loss. Goodwill impairment loss of $58.4 million was recorded during fiscal 2017 as a result of our annual goodwill impairment review in the third quarter relative to the Synergy Health Netherlands linen management reporting unit.
Research and Development. Research and development expenses increased $2.7 million during fiscal 2017, as compared to fiscal 2016. Contributing to these increases was the additional spending in connection with the development of Healthcare Products and Life Sciences products and accessories. 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 2017, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, procedural products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
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, 2017 to the year ended March 31, 2016:
 
 
Years Ended March 31,
 
 
(dollars in thousands)
 
2017
 
2016
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
44,520

 
$
42,708

 
$
1,812

Interest income and miscellaneous expense
 
(1,571
)
 
(1,665
)
 
94

Non-operating expenses, net
 
$
42,949

 
$
41,043

 
$
1,906

Interest expense during fiscal 2017 increased as compared to 2016 primarily due to higher debt levels resulting from additional borrowings to fund acquisitions, including the Combination and the operations of acquired companies. This increase was partially offset by one-time payments made in the third quarter of fiscal 2016 associated with paying off Synergy's debt. Additionally, the weighted average interest rate was higher as of March 31, 2017 compared to March 31, 2016. Interest income and miscellaneous expense is immaterial.
Additional information regarding our outstanding debt is included in Note 6 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, 2017 and March 31, 2016:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2017
 
2016
 
Income tax expense
 
$
74,015

 
$
60,299

 
$
13,716

 
22.7%
Effective income tax rate
 
40.1
%
 
35.1
%
 
 
 
 
The effective income tax rate for fiscal 2017 was 40.1% as compared to 35.1% for fiscal 2016. The fiscal 2017 effective tax rate increased when compared to fiscal 2016 primarily due to nondeductible costs related to divestitures offset by a decrease in nondeductible or capitalized acquisition costs. Additional information regarding our income tax expense is included in Note 8 to our consolidated financial statements titled, “Income Taxes.”
Business Segment Results of Operations. We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including consumable products, equipment maintenance and installation services, and capital equipment.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services and instrument and scope repairs. Linen Management Services were divested in fiscal 2017.

35


Our Life Sciences segment offers consumable products, equipment maintenance, specialty services and capital equipment primarily for pharmaceutical manufacturers.
Our Applied Sterilization Technologies segment offers contract sterilization and laboratory services primarily for medical device and pharmaceutical Customers.
Certain minor organizational changes were made during fiscal 2018 to better align with our Customers, resulting in several smaller operations shifting among the segments. The prior period revenues and operating income measures have been recast for comparability.
The accounting policies for reportable segments are the same as those for the consolidated Company. Management will evaluate performance and allocate resources based on a segment operating income measure. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which result 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 Products segment is responsible for the management of all but two manufacturing facilities and uses standard cost to sell products to the other segments. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain non-allocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. Segment operating income excludes certain adjustments which include acquisition related costs, amortization of acquired intangibles, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by adjusting for these items they gain better insight and greater transparency of the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making. For more information regarding our segments please refer to Note 11 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 and operating income for the year ended March 31, 2017 to the year ended March 31, 2016:
 
 
Years ended March 31,
 
 
 
Percent
(dollars in thousands)
 
2017
 
2016
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
1,266,517

 
$
1,204,774

 
$
61,743

 
5.1
 %
Healthcare Specialty Services
 
539,536

 
420,220

 
119,316

 
28.4
 %
Life Sciences
 
328,866

 
297,733

 
31,133

 
10.5
 %
Applied Sterilization Technologies
 
477,837

 
316,037

 
161,800

 
51.2
 %
Total revenues
 
$
2,612,756

 
$
2,238,764

 
$
373,992

 
16.7
 %
Operating income (loss):
 
 
 
 
 
 
 
 
Healthcare Products
 
227,707

 
181,265

 
46,442

 
25.6
 %
Healthcare Specialty Services
 
10,573

 
24,299

 
(13,726
)
 
(56.5
)%
Life Sciences
 
97,180

 
84,564

 
12,616

 
14.9
 %
Applied Sterilization Technologies
 
158,379

 
99,854

 
58,525

 
58.6
 %
Corporate
 
(17,307
)
 
(11,320
)
 
(5,987
)
 
NM

Total operating income before adjustments
 
$
476,532


$
378,662


$
97,870


25.8
 %
Less: Adjustments
 
 
 
 
 
 
 
 
Goodwill impairment loss (1)
 
58,356

 

 

 
 
Amortization of inventory and property "step up" to fair value (2)
 
4,743

 
9,907

 
 
 
 
Amortization and impairment of purchased intangible assets (2)
 
66,398

 
47,704

 
 
 
 
Acquisition related transaction and integration charges (3)
 
30,082

 
82,891

 
 
 
 
Loss (gain) on fair value adjustment of acquisition related contingent consideration
 
2,569

 
(736
)
 
 
 
 
Net loss on divestiture of businesses (2)
 
86,574

 

 
 
 
 
Settlement of pension obligation (4)