10-K 1 ste3312015.htm 10-K STE 3.31.2015
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, 2015
OR
o Transition Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number 1-14643
STERIS Corporation
(Exact name of registrant as specified in its charter)
 
Ohio
 
34-1482024
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
5960 Heisley Road,
Mentor, Ohio
(Address of principal executive offices)
44060-1834
(Zip Code)
440-354-2600
(Registrant’s telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
Name of Exchange on Which Registered
Common Shares, without par value
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No   o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
 
Accelerated Filer  o
Non-Accelerated Filer  o
(Do not check if a smaller reporting company)
 
Smaller Reporting Company  o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No   x
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock as of September 30, 2014: 3,117,279,156
The number of Common Shares outstanding as of May 22, 2015: 59,724,004
DOCUMENTS INCORPORATED BY REFERENCE
None


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

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PART I
 
Throughout this Annual Report, STERIS Corporation and its subsidiaries together are called “STERIS,” “the Company,” “we,” “us,” or “our,” unless otherwise noted. References in this Annual Report to a particular “year” or “year-end” mean our fiscal year, which ends on March 31. For example, fiscal year 2015 ended on March 31, 2015.

ITEM 1.
BUSINESS

INTRODUCTION
STERIS Corporation is a leading provider of infection prevention and other procedural products and services, focused primarily on healthcare, pharmaceutical and research. Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe. We offer our Customers a unique mix of innovative capital equipment products, such as sterilizers and surgical tables, and connectivity solutions such as operating room (“OR”) integration; consumable products, such as detergents and skin care products, gastrointestinal ("GI") endoscopy accessories, and other products; services, including equipment installation and maintenance; and microbial reduction of medical devices, instrument and scope repair solutions, and laboratory testing services.
We were founded as Innovative Medical Technologies in Ohio in 1985, and renamed STERIS Corporation in 1987. However, some of our businesses that have been acquired and integrated into STERIS, notably American Sterilizer Company, have much longer operating histories. With global headquarters in Mentor, Ohio, we have approximately 7,600 employees worldwide and operate in more than 60 countries.
We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs.
In our largest segment, Healthcare, we make a difference for our Customers and their patients by providing innovative surgical, sterile processing, infection prevention and gastrointestinal solutions. We provide support directly to the operating room, as well as to the sterile processing functions where instruments are reprocessed between surgeries and gastrointestinal procedures. Our integrated offering of capital equipment, consumables and services used throughout healthcare facilities enables Customers to reduce costs and improve outcomes.
Our second largest segment, Life Sciences, primarily serves pharmaceutical manufacturers and research organizations by providing decontamination and sterilization technologies, products and services that help support the safety and effectiveness of the products they produce.
Our Isomedix services segment (“Isomedix”) provides gamma irradiation and ethylene oxide services on a contract basis through a network of facilities in North America, where we process medical devices and other products as designated by our Customers' specifications prior to their delivery to the end user. We also offer an array of laboratory testing services.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. 

INFORMATION RELATED TO BUSINESS SEGMENTS
Our chief operating decision maker is our President and Chief Executive Officer (“CEO”). The CEO is responsible for performance assessment and resource allocation. The CEO regularly receives discrete financial information about each reportable segment, and uses this information to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those described in note 1 to the Consolidated Financial Statements titled, “Nature of Operations and Summary of Significant Accounting Policies,” of this Annual Report. Segment performance information for fiscal years 2015, 2014, and 2013 is presented in note 12 to our Consolidated Financial Statements titled, “Business Segment

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Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), of this Annual Report.

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

Significant brand names for these products include SYSTEM 1E®, Amsco®, Hamo®, Reliance®, Cmax®, Harmony®, Kindest Kare®, Alcare®, Verify®, Cal Stat®, Roth Net®, Little Sister ®, and T-Series®.
Services Offered. Our Healthcare segment provides various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. We offer these corrective and preventive service solutions to Customers who have internal clinical/biomedical engineering departments and Customers who rely on us to provide those services. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We also offer comprehensive sterilization and surgical management consulting services allowing healthcare facilities to achieve safety, quality, and productivity improvements in the perioperative loop that flows between and among surgical suites and the SPD. We offer remote equipment monitoring technology to anticipate potential failure modes and take corrective action thereby improving Customers' equipment uptime.
In addition, we offer comprehensive instrument and endoscope repair solutions to Customers, either on site or at one of our dedicated repair facilities. These solutions extend instrument and endoscope life and reduce Customer's replacement costs. Finally, our Healthcare segment provides other support services such as construction and facility planning, engineering support, device testing, Customer education, hand hygiene process excellence, asset management/planning, and the sale of replacement parts. These solutions also include information management and decision support solutions to operating room and central sterilization managers to help in managing these environments and identifying opportunities to improve performance.
Customer Concentration. Our Healthcare segment sells capital equipment, consumables, and services to Customers in the United States and many other countries throughout the world. For the year ended March 31, 2015, no Customer represented more than 10% of the Healthcare segment's total revenues and the loss of any single Customer is not expected to have a material impact on the segment's results of operations or cash flows.
Competition. We compete with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. On a product basis, competitors include 3M, Belimed, Cantel Medical, Ecolab, Getinge, Go Jo, Johnson & Johnson, Kimberly-Clark, Skytron, and Stryker.



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LIFE SCIENCES SEGMENT
Description of Business.  Our Life Sciences segment manufactures and sells a broad range of capital equipment, formulated cleaning chemistries, and service solutions to pharmaceutical companies and private and public research facilities around the globe.
Products Offered.  These capital equipment and formulated cleaning chemistries include:
 
Formulated cleaning chemistries that are used to prevent biological and chemical contamination and to monitor sterilization and decontamination processes, including products used to clean components used in manufacturing, decontaminate systems, and disinfect or sterilize hard surfaces.
Vaporized Hydrogen Peroxide (“VHP”®) generators used to decontaminate many high value spaces, from small isolators to large pharmaceutical processing and laboratory animal rooms.
High-purity water equipment, which generates water for injection and pure steam.
Sterilizers used in the manufacture of pharmaceuticals and biopharmaceuticals as well as sterilizers for equipment and instruments used in research studies, mitigating the risk of contamination.
Washer/disinfectors that decontaminate various large and small components in pharmaceutical and industrial manufacturing processes and in research labs, such as glassware, vessels, equipment parts, drums, hoses, and animal cages.
Significant brand names for these products include Amsco®, Reliance®, Finn-Aqua®, VHP®, and the CIP® Products.
Services Offered.  Our Life Sciences segment offers various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We utilize remote equipment monitoring technology to improve Customers’ equipment uptime. We also offer consulting services and technical support to architecture and engineering firms and laboratory planners. Our services deliver expertise in decontamination and infection control technologies and processes to end users. Our service personnel also provide higher-end validation services in support of our pharmaceutical Customers.
Customer Concentration.  Our Life Sciences segment sells capital equipment, consumables, and services to Customers in the United States and many other countries throughout the world. For the year ended March 31, 2015, no Customer represented more than 10% of the Life Sciences segment’s total revenues and the loss of any single Customer is not expected to have a material impact on the segment’s results of operations or cash flows.
Competition.  Our Life Sciences segment operates in highly regulated environments where the most intense competition results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. In recent years, our pharmaceutical Customer base has also undergone consolidation and reduced capital spending, resulting in fewer project opportunities. We compete for pharmaceutical, research and industrial Customers with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. Competitors include Belimed, Ecolab, Fedegari, Getinge, MECO, Stilmas, and Techniplast.
ISOMEDIX SERVICES SEGMENT
Description of Business.  Our Isomedix segment operates through a network of 19 facilities located in North America. We sell a comprehensive array of contract processing services using gamma irradiation (“Gamma”) and ethylene oxide (“EO”) technologies as well as an array of laboratory testing services. We offer microbial reduction services based on Customer specifications to companies that supply products to the healthcare, industrial, and consumer product industries.
Services Offered. We use Gamma and EO technologies to provide a wide range of processing services at our facilities. Gamma is an irradiation process which utilizes cobalt-60. EO is a gaseous process. In addition, we offer an array of laboratory testing services that complements the manufacturing of terminally sterilized products. Our locations are in major population centers and core distribution corridors throughout North America, primarily in the Northeast, Midwest, Southwest, and southern California. We adapt to increasing imports and changes in manufacturing points-of-origin by monitoring trends in supply chain management. Demographics partially drive this segment's growth. The aging population and rising life expectancy increase the demand for surgical procedures, which increases the consumption of medical devices and surgical kits. Our technical services group supports Customers in all phases of product development, materials testing, and process validation.
Customer Concentration.  Our Isomedix segment’s services are offered to Customers throughout the footprint of its North American network. For the year ended March 31, 2015, no Customer represented more than 10% of the segment’s revenues.
Because of a largely fixed cost structure, the loss of a single Customer could have a material impact on the segment’s results of operations or cash flows but would not be expected to have a material impact on STERIS.

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Competition.  Isomedix operates in a highly regulated industry and competes in North America with Sterigenics International, Inc., and other smaller contract sterilization companies and manufacturers that sterilize products in-house.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Sources and Availability of Raw Materials.  We purchase raw materials, sub-assemblies, components, and other supplies needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials and supplies used in our operations include stainless steel, organic and inorganic chemicals, fuel, and plastic components. These raw materials and supplies are generally available from several suppliers and in sufficient quantities that we do not currently expect any significant sourcing problems in fiscal 2016. We have longer-term supply contracts for certain materials for which there are few suppliers. There is currently only a single supplier for ethylene oxide and radioisotope (cobalt-60) used by the Isomedix segment, although we do have a longer-term supply contract for the latter.
Intellectual Property.  We protect our technology and products by, among other means, obtaining United States and foreign patents. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position.
As of March 31, 2015, we held 376 United States patents and 970 foreign patents and had 71 United States patent applications and 316 foreign patent applications pending. Patents for individual products extend for varying periods according to the date of filing or grant and legal term of patents in various countries where a patent is obtained. The actual protection a patent provides, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in each country.
Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of March 31, 2015, we had a total of 1,336 trademark registrations in the United States and in various foreign countries.
Research and Development.  Research and development is an important factor in our long-term strategy. For the years ended March 31, 2015, 2014, and 2013, research and development expenses were $54.1 million, $48.6 million, and $41.3 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 portfolio to facilitate growth in healthcare, including a new smaller footprint V-PRO 60® Low Temperature Sterilization System and accessories, Harmony AIR ™ Surgical Lighting System and Harmony AIR™ Equipment Booms and Accessories and a number of new products in US Endoscopy.
Quality Assurance.  We manufacture, assemble, and package products in the United States and other countries. Each of our production facilities are dedicated to particular processes and products. Our success depends upon Customer confidence in the quality of our production process and the integrity of the data that supports our product safety and effectiveness. We have implemented quality assurance procedures to support the quality and integrity of scientific information and production processes. All of our manufacturing and contract sterilization facilities throughout the world are ISO9001 or ISO13485 certified, with the exception of a small recently acquired entity.
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

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products and operation. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition, or value."
We have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to other regulatory sanctions. At the beginning of fiscal 2011 a consent decree, the terms of which had been previously agreed to by the FDA and us, was approved by the Federal District Court for the Northern District of Ohio concerning our SYSTEM 1 processing system. See Part I, Item 1A of this Annual Report titled, “Risk Factors, We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree,” and “Risk Factors, Compliance with the Consent Decree may be more costly and burdensome than anticipated" and note 11 of our consolidated financial statements titled, "Commitments and Contingencies" for further information on SYSTEM 1 and other regulatory issues and their potential impact. We believe that we are currently compliant in all material respects with applicable regulatory requirements. However, there can be no assurance that future or current regulatory, governmental, or private action will not have a material adverse affect on us or on our performance, results, or financial condition.
Environmental Matters.  We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and in other countries. We have made, and continue to make, significant investments to comply with these laws and regulations. We cannot predict the future capital expenditures or operating costs required to comply with environmental laws and regulations. We believe that we are currently compliant with applicable environmental, health, and safety requirements in all material respects. However, we cannot assure you that future or current regulatory, governmental, or private action will not have a material adverse affect on our performance, results, or financial condition. Please refer to note 11 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 we assure you that such liabilities would not have a material adverse affect on our performance, results, or financial condition.

Competition.  The markets in which we operate are highly competitive and generally highly regulated. Competition is intense in all of our business segments and includes many large and small competitors. Brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support are important competitive factors to us. We expect to face continued competition in the future as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services enter the market. We believe many organizations are working with a variety of technologies and sterilizing agents. Also, a number of companies have developed disposable medical instruments and other devices designed to address the risk of contamination.
We believe that our long-term competitive position depends on our success in discovering, developing, and marketing innovative, cost-effective products and services. We devote significant resources to research and development efforts and we believe STERIS is positioned as a global competitor in the search for technological innovations. In addition to research and development, we invest in quality control, Customer programs, distribution systems, technical services, and other information services.
We cannot assure you that we will develop significant new products or services, or that new products or services we provide or develop in the future will be more commercially successful than those provided or developed by our competitors. In addition, some of our existing or potential competitors may have greater resources than us. Therefore, a competitor may succeed in developing and commercializing products more rapidly than we do. Competition, as it relates to our business segments and product categories, is discussed in more detail in the section above titled, “Information Related to Business Segments.”
Employees.  As of March 31, 2015, we had approximately 7,600 employees throughout the world. We believe we 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.

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Seasonality.  Our financial results have been, from time to time, subject to seasonal patterns. We cannot assure you that these patterns will continue.
International Operations.  We believe we have opportunity to expand internationally, as we currently serve a small portion of the world that could benefit from our products. Through our subsidiaries, we operate in various international locations within the same business segments as in the United States. International revenues have recently represented approximately one-fourth of our total revenues. Revenues from Europe, Middle East and Africa ("EMEA"), Canada, and the Asia Pacific and Latin American regions were 51%, 18%, 22%, and 9%, respectively, of our total international revenues for the year ended March 31, 2015.
Also see note 12 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A”, for a geographic presentation of our revenues for the three years ended March 31, 2015, 2014 and 2013.
We conduct manufacturing in the United States, Canada, Mexico, Brazil, China and various European countries. International cost of revenues have represented approximately one-fourth of our total cost of revenues. There are, in varying degrees, a number of inherent risks to our international operations. We describe some of these risks in Part I, Item 1A of this Annual Report titled, “Risk Factors". We conduct manufacturing, sales, and distribution operations on a worldwide basis and are subject to a variety of risk associated with doing business outside the United States.
Fluctuations in the exchange rate of the U.S. dollar relative to the currencies of foreign countries in which we operate can also increase or decrease our reported net assets and results of operations. During fiscal 2015, revenues were unfavorably impacted by $10.4 million, or 0.6%, and income before taxes was favorably impacted by $10.8 million, or 5.4%, as a result of foreign currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or the effect they will have on our operations.
Backlog.  We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2015, we had a backlog of $143.2 million. Of this amount, $97.7 million and $45.5 million related to our Healthcare and Life Sciences segments, respectively. At March 31, 2014, we had backlog orders of $154.7 million. Of this amount $110.3 million and $44.4 million related to our Healthcare and Life Sciences segments, respectively. A significant portion of the backlog orders at March 31, 2015, is expected to ship in the next fiscal year.
Proposed Combination with Synergy Health plc. On October 13, 2014, we announced that we were commencing a “recommended offer” under U.K. law to acquire all outstanding shares of Synergy Health plc (“Synergy”) in a cash and stock transaction valued at £19.50 ($31.35) per Synergy share, or a total of approximately $1.9 billion based on STERIS’s closing stock price of $56.38 per share on October 10, 2014, through a newly formed U.K. entity that also would indirectly acquire all of the outstanding stock of STERIS (the “Combination”). Based on STERIS’s closing stock price of $67.00 and exchange rates as of February 3, 2015, the total value of the cash and stock transaction is approximately $2.1 billion or £23.42 ($35.52) per Synergy share. The Combination is subject to certain customary closing conditions, including approvals by STERIS and Synergy shareholders as well as regulatory approvals by the U.S. Federal Trade Commission (“FTC”), which is currently reviewing the Combination. Both companies have entered into a timing agreement with the FTC under the terms of which the companies have agreed not to close the Combination before June 2, 2015 unless the FTC first closes its investigation. Both companies are cooperating with the FTC staff in the review of the Combination. No assurance can be provided as to when or if the transaction will be completed.
Availability of Securities and Exchange Commission Filings.  We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to the Securities and Exchange Commission (“SEC”). You may access these documents, as well as other SEC filings related to the Company, on the Investor Relations page of our website at http://www.steris-ir.com. You may also obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 or by accessing the SEC’s website at http://www.sec.gov. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Code of Ethics, and our Code of Business Conduct, as well as the Charters of the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, and the Compliance Committee of the Company’s Board of Directors.

ITEM 1A.
RISK FACTORS
This item describes certain risk factors that could affect our business, financial condition and results of operations. You should consider these risk factors when evaluating the forward-looking statements contained in this Annual Report on Form 10-K, because our actual results and financial condition might differ materially from those projected in the forward-looking

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statements should these risks occur. We face other risks besides those highlighted below. These other risks include additional uncertainties not presently known to us or that we currently believe are immaterial, but may ultimately have a significant impact. Should any of these risks, described below or otherwise, actually occur, our business, financial condition, performance, prospects, value, or results of operations could be negatively affected.
The economic climate may adversely affect us.
Adverse economic cycles or conditions and Customer, regulatory or government response to those cycles or conditions, could affect our results of operations. There can be no assurance when these cycles or conditions will occur or when they will begin to improve after they occur. There also can be no assurance as to the strength or length of any recovery from a business downturn or recession. United States and worldwide financial and business conditions are uncertain, and recovery has been slow from the recent severe recession, which had a significant adverse effect on U.S. and global economies.
Credit and liquidity problems may make it difficult for some businesses to access credit markets and obtain financing and may cause some businesses to curtail spending to conserve cash in anticipation of persistent business slowdowns and liquidity needs. If our Customers have difficulty financing their purchases due to tight credit markets or related factors or because of other operational or utilization problems they may be experiencing or otherwise decide to curtail their purchases, our business could be adversely affected. Our exposure to bad debt losses could also increase if Customers are unable to pay for products previously ordered and delivered.
Global economic conditions, in Europe in particular, may have adverse effects on our business and financial condition. Many of our global Customers are governmental entities or other entities that rely on government healthcare systems or government funding. If government funding for healthcare becomes limited or restricted in countries in which we operate, our Customers may be unable to pay their obligations on a timely basis or to make payment in full and it may become necessary to increase reserves. In addition, there can be no assurance that there will not be an increase in collection difficulties. Prospectively, additional adverse effects resulting from these conditions may include decreased healthcare utilization, further pricing pressure on our products, and/or weaker overall demand for our products and services, particularly capital products. Should the current economic conditions continue or worsen, our business, performance, prospects, value, financial condition, bad debt expense or results of operations may be adversely affected.
In addition, economic conditions and market volatility impact the investment portfolio of our legacy defined benefit pension plan. Because the values of the pension plan investments have and will fluctuate in response to changing market conditions and the values of liabilities are determined on the basis of interest rates, the amount of gains or losses that will be recognized in subsequent periods and the impact on the funded status of the plan and future minimum required contributions, if any, might have a material adverse effect on our liquidity, value, financial conditions or result of operations.
Our businesses are highly competitive, and if we fail to compete successfully, our revenues and results of operations may be hurt.
We operate in a highly competitive global environment. Our businesses compete with other broad line manufacturers, as well as many smaller businesses specializing in particular products or services, primarily on the basis of brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support. We face increased competition from new infection prevention, sterile processing, contamination control, surgical support, cleaning consumables, gastrointestinal endoscopy accessories, contract sterilization, and other products and services entering the market. Competitors and potential competitors also are attempting to develop alternate technologies and sterilizing agents, as well as disposable medical instruments and other devices designed to address the risk of contamination. If our products, services, support, distribution and/or cost structure do not enable us to compete successfully, our business, performance, prospects, value, financial condition, and results of operations may be adversely affected.
Our success depends, in part, on our ability to design, manufacture, distribute, and achieve market acceptance of, new products with higher functionality and lower costs.
Many of our Customers operate businesses characterized by technological change, product innovation and evolving industry standards. Price is a key consideration in their purchasing decisions. To successfully compete, we must continue to design, develop, and improve innovative products. We also must achieve market acceptance of and effectively distribute those products, and reduce production costs. Our business, performance, prospects, value, financial condition, and results of operations might be adversely effected if our competitors' product development capabilities become more effective, if they introduce new or improved products that displace our products or gain market acceptance, or if they produce and sell products at lower prices.
Decreased availability or increased costs of raw materials or energy supplies or other supplies might increase our production costs or limit our production capabilities or curtail our operations.

9


We purchase raw materials, fabricated and other components, and energy supplies from a variety of suppliers. Key materials include stainless steel, organic and inorganic chemicals, fuel, cobalt-60, ethylene oxide, and plastic components. The availability and prices of raw materials and energy supplies are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, and other factors. In some situations, we may be able to temporarily limit price increases or support availability through supply agreements. Otherwise, raw material prices and availability are subject to numerous factors outside of our control, including those described above. Increases in prices or decreases in availability of raw materials and oil and gas might impair our procurement of necessary materials or our product production, or might increase production costs. In addition, energy costs impact our transportation and distribution and other supply and sales costs. Also, a number of our key materials and components have a limited number of suppliers. Some are single-sourced, such as cobalt-60 and ethylene oxide, which are necessary to our Isomedix operations; the unavailability or short supply of these products might disrupt or cause shutdowns of portions of our Isomedix operations or have other adverse consequences. Shortages in supply, regulatory or security requirements, or increases in the price of raw materials, components and energy supplies may adversely impact our business, performance, prospects, value, financial condition, or results of operations.
Our operations, and those of our suppliers, are subject to a variety of business continuity hazards and risks, any of which could interrupt production or operations or otherwise adversely affect our performance, results, or value.
Business continuity hazards and other risks include:
explosions, fires, earthquakes, inclement weather, and other disasters;
utility or other mechanical failures;
unscheduled downtime;
labor difficulties;
inability to obtain or maintain any required licenses or permits;
disruption of communications;
data security, preservation and redundancy disruptions;
inability to hire or retain key management or employees;
disruption of supply or distribution; and
regulation of the safety, security or other aspects of our operations.
The occurrence of any of these or other events might disrupt or shut down operations, or otherwise adversely impact the production or profitability of a particular facility, or our operations as a whole. Certain casualties also might cause personal injury and loss of life, or severe damage to or destruction of property and equipment, and for casualties occurring at our facilities, result in liability claims against us. Although we maintain property and casualty insurance and liability and similar insurance of the types and in the amounts that we believe are customary for our industries, our insurance coverages have limits and we are not fully insured against all potential hazards and risks incident to our business. Should any of the hazards or risks occur, or should our insurance coverage be inadequate or unavailable, our business, performance, prospects, value, financial condition, and results of operations might be adversely affected, both during and after the event.
 We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated with doing business outside the United States.
We maintain significant international operations, including operations in Canada, Mexico, Europe, Asia Pacific and Latin America. As a result, we are subject to a number of risks and complications associated with international manufacturing, sales, services, and other operations. These include:
risks associated with foreign currency exchange rate fluctuations;
difficulties in enforcing agreements and collecting receivables through some foreign legal systems;
enhanced credit risks in certain European countries as well as emerging market regions;
foreign Customers with longer payment cycles than Customers in the United States;
tax rates in certain foreign countries that exceed those in the United States, and foreign earnings subject to withholding tax requirements;
tax laws that restrict our ability to use tax credits, offset gains, or repatriate funds;
tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country;
general economic and political conditions in countries where we operate or where end users of our products are situated;
difficulties associated with managing a large organization spread throughout various countries;
difficulties in enforcing intellectual property rights or weaker intellectual property right protections in some countries; and

10


difficulties associated with compliance with a variety of laws and regulations governing international trade, including the Foreign Corrupt Practices Act.
Implementation and achievement of international growth objectives also may be impeded by political, social, and economic uncertainties or unrest in countries in which we conduct operations or market or distribute our products. In addition, compliance with multiple, and potentially conflicting, international laws and regulations, import and export limitations, anti-corruption laws, and exchange controls may be difficult, burdensome or expensive.
For example, we are subject to compliance with various laws and regulations, including the Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot assure you that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of events may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
Consolidations among our healthcare and pharmaceutical Customers may result in a loss of Customers or more significant pricing pressures.
A number of our Customers have consolidated. These consolidations are due in part to healthcare cost reduction measures initiated by competitive pressures as well as legislators, regulators and third-party payors. In an effort to attract Customers, some of our competitors have also reduced production costs and lowered prices. This has resulted in greater pricing pressures on us and in some cases loss of Customers. Additional consolidations could result in a loss of Customers or more significant pricing pressures. Additional consolidations and pricing pressures also may occur as a result of recent healthcare legislation and economic conditions. A loss of Customers or more significant pricing pressure also could have an adverse effect on our business, performance, prospects, value, financial conditions or results of operations.
Changes in healthcare laws or government and other third-party payor reimbursement levels to healthcare providers, or failure to meet healthcare reimbursement or other requirements might negatively impact our business.
We sell many of our products to hospitals and other healthcare providers and pharmaceutical manufacturers. Many of these Customers are subject to or supported by government programs or receive reimbursement for services from third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans, and managed care programs. In the United States, many of these programs set maximum reimbursement levels for these healthcare services and can have complex reimbursement requirements. Outside the United States, reimbursement systems vary significantly by country. However, government-managed healthcare systems control reimbursement for healthcare services in many foreign countries. In these countries, as well as in the United States, public budgetary constraints may significantly impact the ability of hospitals, pharmaceutical manufacturers, and other Customers supported by such systems to purchase our products. If government or other third-party payors deny or change coverage, reduce their current levels of reimbursement for healthcare services, or otherwise implement measures to regulate pricing or contain costs or if our costs increase more rapidly than reimbursement level or permissible pricing increases or we do not satisfy the standards or requirements for reimbursement, our revenues or profitability may suffer and our business, performance, value, prospects, financial condition or results of operations may be adversely affected.
In addition, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, contains provisions that could have a material impact on our business. Among other provisions, this legislation imposes an excise tax on medical devices manufactured or offered for sale in the United States. We incurred $7.9 million and $7.4 million in medical device excise taxes for fiscal 2015 and fiscal 2014, respectively. In addition, we have been required to commit significant resources to “Sunshine Act” compliance. Various health care reform proposals have also emerged at the state level, and we are unable to predict which, if any, of those proposals will be enacted. However, the ultimate effect of health care reform legislation or any future legislation or regulation could have a material adverse affect on our business, performance, value, prospects, financial condition or results of operation.
We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition, or value.
Our operations are subject to extensive regulation in both the United States and in other countries where we do business. In the U.S, our products and services are regulated by the FDA and other regulatory authorities. In many foreign countries, sales of our products are subject to extensive regulations that may or may not be comparable to those of the FDA. In Europe, our products are regulated primarily by country and community regulations of those countries within the European Economic Area and must conform to the requirements of those authorities.
Government regulation applies to nearly all aspects of testing, manufacturing, safety, labeling, storing, recordkeeping, reporting, promoting, distributing, and importing or exporting of medical devices, products, and services. In general, unless an

11


exemption applies, a sterilization, decontamination or medical device or product or service must receive regulatory approval or clearance before it can be marketed or sold. Modifications to existing products or the marketing of new uses for existing products also may require regulatory approvals, approval supplements or clearances. If we are unable to obtain any required approvals, approval supplements or clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and sale, or recall or restrict the use of such modified device, pay fines, or take other action until such time as appropriate clearance or approval is obtained.
Regulatory agencies may refuse to grant approval or clearance, or review and disagree with our interpretation of approvals or clearances, or with our decision that regulatory approval is not required or has been maintained. Regulatory submissions may require the provision of additional data and may be time consuming and costly, and their outcome is uncertain. Regulatory agencies may also change policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay approval or clearance of devices, or could impact our ability to market a previously cleared, approved, or unregulated device. Our failure to comply with the regulatory requirements of the FDA or other applicable regulatory requirements in the United States or elsewhere might subject us to administratively or judicially imposed sanctions. These sanctions include, among others, warning letters, fines, civil penalties, criminal penalties, injunctions, debarment, product seizure or detention, product recalls and total or partial suspension of production, sale and/or promotion. The failure to receive or maintain, or delays in the receipt of, relevant United States or international qualifications could have a material adverse affect on our business, performance, prospects, value, financial condition or results of operations.
Refer also for further information to the “Risk Factor” below titled, “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree” and the “Risk Factor” below titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated" and note 11 of our consolidated financial statements titled, "Commitments and Contingencies".
Our products are subject to recalls and restrictions, even after receiving United States or foreign regulatory clearance or approval.
Ongoing medical device reporting regulations require that we report to appropriate governmental authorities in the United States and/or other countries when our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to a death or serious injury if the malfunction were to recur. Governmental authorities can require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues. For the same reasons, we may voluntarily elect to recall or restrict the use of a product. Any recall or restriction could divert managerial and financial resources and might harm our reputation among our Customers and other healthcare professionals who use or recommend the products. Product recalls, restrictions, suspensions, re-labeling, or other change might have a material adverse affect on our business, performance, prospects, value, financial condition, or results of operations.
We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree (as defined below).
We face an inherent business risk of exposure to product liability claims and other legal and regulatory actions. A significant increase in the number, severity, amount, or scope of these claims and actions may result in substantial costs and harm our reputation or otherwise adversely affect product sales and our business. Product liability claims and other legal and regulatory actions may also distract management from other business responsibilities.
We are also subject to a variety of other types of claims, proceedings, investigations, and litigation initiated by government agencies or third parties and other potential risks and liabilities. These include compliance matters, product regulation or safety, taxes, employee benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar or different matters. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial costs, restrictions on product use or sales, or otherwise injure our business.
Administratively or judicially imposed or agreed sanctions might include warning letters, fines, civil penalties, criminal penalties, loss of tax benefits, injunctions, product seizure, recalls, suspensions or restrictions, re-labeling, detention, and/or debarment. We also might be required to take actions such as payment of substantial amounts, or revision of financial statements, or to take the following types of actions with respect to our products, services, or business:
redesign, re-label, restrict, or recall products;
cease manufacturing and selling products;
seizure of product inventory;
comply with a court injunction restricting or prohibiting further marketing and sale of products or services;
comply with a consent decree, which could result in further regulatory constraints;

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dedication of significant internal and external resources and costs to respond to and comply with legal and regulatory issues and constraints;
respond to claims, litigation, and other proceedings brought by Customers, users, governmental agencies, and others;
disruption of product improvements and product launches;
discontinuation of certain product lines or services; or
other restrictions or limitations on product sales, use or operation, or other activities or business practices.
Some product replacements or substitutions may not be possible or may be prohibitively costly or time consuming.
Examples of the types of matters described above are the warning letter we received from the FDA on May 16, 2008 regarding our SYSTEM 1 sterile processing system, and the Consent Decree entered into on April 20, 2010. In summary, the warning letter outlined the FDA's assertion that significant changes or modifications had been made in the design, components, method of manufacture or intended use of the device, beyond the FDA's 1988 clearance of the device, such that the FDA asserted a new premarket notification submission was required. After extensive discussion, negotiation and interaction between FDA and us, a consent decree was agreed upon and approved by the Federal District Court for the Northern District of Ohio on April 20, 2010 (the “Consent Decree”). As a consequence of these interactions and the Consent Decree, there are numerous restrictions on us with respect to SYSTEM 1 and other liquid chemical sterilizing and disinfecting devices, components and accessories. For example, we have discontinued all sales of our SYSTEM 1 processor and the provision of service, parts, accessories and sterilant for the processor to U.S. Customers. As a result of these current and future restrictions and commitments, our revenues, earnings, business, performance, prospects or value may be negatively impacted. The Consent Decree also prohibits the sale of liquid chemical sterilizing or disinfecting products that do not have FDA clearance, describes various process and compliance issues, and defines penalties for non-compliance. (For more information regarding this warning letter and the Consent Decree, see the “Risk Factor” titled “Compliance with the Consent Decree may be more costly and burdensome than anticipated” and note 11 of our consolidated financial statements titled, "Commitments and Contingencies"). The Consent Decree, claims by Customers and other parties, and other events or impact associated with these matters could materially affect our business, performance, prospects, value, financial condition, or results of operations.
The ongoing impact of the Consent Decree, or the impact of any legal, regulatory, or compliance claims, proceeding, investigation, or litigation, is difficult to predict. The occurrence of any new legal, regulatory or compliance claim or problem respecting any of our significant products, particularly should such events occur in the near term, could adversely affect our reputation with current and prospective Customers and could otherwise materially and adversely affect our business, performance, prospects, value, financial condition, or results of operations.
We maintain product liability and other insurance with coverages believed to be adequate. However, product liability or other claims may exceed insurance coverage limits, fines, penalties and regulatory sanctions may not be covered by insurance, or insurance may not continue to be available or available on commercially reasonable terms. Additionally, our insurers might deny claim coverage for valid or other reasons or may become insolvent.
Compliance with the Consent Decree may be more costly and burdensome than anticipated.
The Consent Decree contains numerous requirements that could create significant costs and compliance risks. The Consent Decree, which continues to remain in force, includes provisions permitting the government to take corrective actions against us if it determines we have violated the Consent Decree, including the right to issue an order requiring cessation of production or take other corrective action, and in some cases we may be required to implement the order before bringing the matter before a court. Failures to comply with the Consent Decree or FDA regulations respecting liquid chemical sterilizing or disinfecting devices also may result in liquidated damages specified in the Consent Decree of up to ten million dollars per calendar year. If costs associated with compliance with the Consent Decree significantly exceed the amounts anticipated, or if we violate the terms of the Consent Decree, our business, performance, value, financial condition, prospects or results of operations may be adversely affected.
We engage in acquisitions and affiliations, divestitures, and other business arrangements. Our growth may be adversely affected if we are unable to successfully identify, price, and integrate strategic business candidates or otherwise optimize our business portfolio.
Our success depends, in part, on strategic acquisitions and joint ventures, which are intended to complement or expand our businesses, divestiture of non-strategic businesses, and other actions to optimize our portfolio of businesses. This strategy depends upon our ability to identify, appropriately price, and complete these types of business development transactions or arrangements and to obtain any necessary financing. In fiscal 2013 we consummated three such acquisitions: United States Endoscopy Group, Inc., Spectrum Surgical Instruments Corp., and Total Repair Express, as well as buying out the interest of our joint venture partner in VTS Medical Systems, LLC. In fiscal 2014 we acquired the assets of Florida Surgical Repair, Inc., and Life Systems, Inc., and purchased the shares of Eschmann Holdings Ltd. In fiscal 2015 we acquired the shares of Integrated Medical Systems International, Inc., and made other fiscal 2015 purchases as described in the "General Overview and Executive Summary" of Item 7. Our success will also depend on our ability to integrate the businesses acquired, retain key

13


personnel and otherwise execute our strategies. Our success will also depend on our ability to develop satisfactory working arrangements with our strategic partners in joint ventures or other affiliations, or to divest or realign businesses. Competition for strategic business candidates may result in increases in costs and price for acquisition candidates and market valuation issues may reduce the value available for divestiture of non-strategic businesses. These types of transactions are also subject to a number of other risks and uncertainties, including:
delays in realizing or failure to realize anticipated benefits of the transactions;
diversion of management's time and attention from other business concerns;
difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses;
difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture difficulties;
adverse effects on existing business relationships with suppliers or Customers;
other events contributing to difficulties in generating future cash flows;
risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for divested businesses; and
difficulties in obtaining financing.
If we are unable to realize the anticipated operating efficiencies and synergies or other expected transaction benefits, our business, prospects, performance, value, financial condition or results of operation may be adversely impacted.
Our acquisition activity and ability to grow organically may be adversely affected if we are unable to continue to access the financial markets.
The Company’s recent acquisitions have been financed largely through borrowings under the Company’s bank credit facilities and private placements. Future acquisitions or other capital requirements, including cash needed for the Combination, 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 the sale of equity securities. There can be no assurance that we will be able to obtain additional funds beyond existing bank credit facilities on terms favorable to us, or at all.
If our cost reduction and restructuring efforts are ineffective, our profitability may be hurt or our business otherwise might be adversely affected.
We have undertaken various cost reduction and restructuring activities, including the targeted restructuring activities announced in March 2014. This latter restructuring involves primarily the closure of our Hopkins Production Facility in Mentor, Ohio and the transfer of the System 1E manufacturing operations conducted there to other North American manufacturing facilities. The Company has recorded a $20 million charge for the restructuring. These efforts may not produce the full efficiencies and cost reduction benefits we expect or efficiencies and benefits might be delayed. Implementation costs also might exceed expectations and further cost reduction measures might become necessary, resulting in additional future charges. If these cost reduction and restructuring efforts are not properly implemented or are unsuccessful, we might experience business disruptions or our business otherwise might be adversely affected.
If our continuing efforts to create a Lean business and in-source production to reduce costs are not successful, our profitability may be hurt or our business otherwise might be adversely affected.
We have undertaken various activities to create a Lean business. One of those activities is in-sourcing. We have major projects underway to in-source production that is currently provided by third parties. We have made investments during fiscal 2013, 2014 and 2015. There have been delays in the in-sourcing projects and, as a result, the expected savings have been delayed due to a variety of reasons. These activities may not produce the full efficiencies and cost reduction benefits that we expect or efficiencies and benefits might be further delayed. Implementation costs also might exceed expectations. If these in-sourcing or other Lean activities are not properly implemented or are unsuccessful, we might experience business disruptions, unanticipated additional expense or our business otherwise might be adversely affected.
Our business and results of operations may be adversely affected if we are unable to recruit and retain qualified management and other personnel, or if the Consent Decree or other compliance matters adversely impact our personnel.
Our continued success depends, in large part, on our ability to hire and retain highly qualified people and if we are unable to do so, our business and operations may be impaired or disrupted. Competition for highly qualified people is intense and there is no assurance that we will be successful in attracting or retaining replacements to fill vacant positions, successors to fill retirements or employees moving to new positions, or other highly qualified personnel. Our CEO is a party to the Consent Decree, and other officers and directors are also subject to its terms. If the Consent Decree or other legal, regulatory or compliance matters create significant distraction or diversion of significant or unanticipated resources or attention, that could have a material adverse effect on the responsibilities and retention of these persons, and on our business, performance, prospects, value, financial condition or results of operation.

14


Our business and financial condition could be adversely affected by difficulties in acquiring or maintaining a proprietary intellectual ownership position.
To maintain our competitive position, we need to obtain patent or other proprietary rights for new and improved products and to maintain and enforce our existing patents and other proprietary rights. We typically apply for patents in the United States and in strategic foreign countries. We may also acquire patents through acquisitions. A 2007 United States Supreme Court decision increases the difficulty of obtaining patent protection in the United States.
We rely on a combination of patents, trade secrets, know-how, and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information. Litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of our proprietary rights. Litigation may also be brought against us claiming that we have violated the intellectual property rights of others. Litigation may be costly and may divert management's attention from other matters. Additionally, in some foreign countries with weaker intellectual property rights, it may be difficult to maintain and enforce patents and other proprietary rights or defend against claims of infringement. If we are unable to obtain necessary patents, our patents and other proprietary rights are successfully challenged, or competitors independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology, our business, performance, value, financial condition, or results of operations may be adversely affected.
The following risk factors relate to the proposed Combination. Additional Synergy transaction-related risk factors are set forth in the Company’s Proxy Statement relating to the special meeting of shareholders that was scheduled for March 12, 2015, filed with the SEC February 9, 2015 (the “Proxy Statement”), a copy of which may be found at http://www.steris.com/synergy.
Risks Relating to the Combination
STERIS must obtain required approvals and governmental and regulatory consents to consummate the Combination, which, if delayed, not granted or granted with unacceptable conditions, may delay or jeopardize the completion of the Combination, result in additional expenditures of money and resources and/or reduce the anticipated benefits of the Combination. Consummation of the Combination is also conditioned on the approval by STERIS shareholders, Synergy shareholders and the approval of the High Court of Justice in England and Wales (the “Court”).
The completion of the Combination is conditioned on, among other things, the clearance by antitrust and competition authorities in the United States. The responsible governmental authorities have broad discretion in administering the governing regulations. STERIS can provide no assurance that all required approvals and consents will be obtained. Moreover, as a condition to their approval of the Combination, agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the business of New STERIS Limited ("New STERIS") (which, if the Combination is completed, will become the parent company of STERIS and of which current STERIS shareholders will become shareholders, after the closing). These requirements, limitations, costs, divestitures or restrictions could jeopardize or delay the completion of the Combination or reduce the anticipated benefits of the Combination. Further, no assurance can be given that the required shareholder approvals will be obtained or that the required closing conditions will be satisfied, and, if all required consents and approvals are obtained and the closing conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals. If STERIS and Synergy agree to any material requirements, limitations, costs, divestitures or restrictions in order to obtain any approvals required to consummate the Combination, these requirements, limitations, costs, divestitures or restrictions could adversely affect New STERIS’s ability to integrate Synergy’s operations with STERIS’s operations and/or reduce the anticipated benefits of the Combination. This could have a material adverse effect on New STERIS’s business and results of operations.
The Combination remains subject to other conditions that STERIS cannot control.
The Combination is subject to other conditions, including the approval of the scheme of arrangement proposed to be made under Part 26 of the Companies Act between Synergy and the Synergy shareholders (the “Scheme”), with or subject to any modification, addition or condition approved or imposed by the Synergy shareholders, the sanction of the Scheme by the Court, the adoption of a proposed merger agreement by the affirmative vote of the holders of a majority of the outstanding STERIS shares, the Scheme becoming effective by July 12, 2015 (or such later date (if any) as may be agreed by STERIS and Synergy and (if required) the consent of the U.K. Panel on Takeovers and Mergers (the “Takeover Panel”) and the Court), the Registration Statement on Form S-4 not having been the subject of any stop order suspending its effectiveness and no proceedings seeking any such stop order having been initiated or threatened by the SEC, and the NYSE having authorized the listing of the New STERIS ordinary shares upon official notice of issuance and not having withdrawn such authorization. Additional conditions are set out in Appendix 2 to the Rule 2.7 Announcement entitled “Conditions to and Certain Further Terms of the Combination,” which is attached as Annex B to the Proxy Statement. No assurance can be given that all of the

15


conditions to the Combination will be satisfied, or if they are, as to the timing of such satisfaction. If the conditions to the Combination are not satisfied, then the Combination may not be consummated.
While the Combination is pending, STERIS will be subject to business uncertainties that could adversely affect its business.
Uncertainty about the effect of the Combination on employees, Customers and suppliers may have an adverse effect on STERIS and, consequently, on New STERIS. These uncertainties may impair STERIS’s ability to attract, retain and motivate key personnel until the Combination is consummated and for a period of time thereafter, and could cause Customers, suppliers and others who deal with STERIS to seek to change existing business relationships with STERIS. Employee retention may be particularly challenging during the pendency of the Combination because employees may experience uncertainty about their future roles with New STERIS. If, despite STERIS’s retention efforts, key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with New STERIS, New STERIS’s business could be harmed.
In certain circumstances STERIS may not be able to invoke the transaction conditions and terminate the Combination, which could reduce the value of New STERIS shares.
The Takeover Code provides that certain conditions may only be invoked where the circumstances underlying the failure of the condition are of material significance to STERIS in the context of the Combination. Therefore, with the exceptions of certain antitrust conditions as described in the Section of the Proxy Statement entitled “Regulatory Approvals” and certain conditions relating to (i) the approval of the Scheme by Synergy shareholders and the Court, (ii) the approval of the Merger Agreement by STERIS shareholders and (iii) the listing of New STERIS ordinary shares on the NYSE, STERIS may be required to obtain agreement of the Takeover Panel that the circumstances giving rise to the right to invoke the condition were of material significance to STERIS in the context of the Combination before STERIS would be permitted to rely on that condition.
If a material adverse change affecting Synergy occurs and the Takeover Panel does not allow STERIS to invoke a condition to cause the Combination not to proceed, the market price of STERIS shares may decline or STERIS’s business or STERIS’s financial condition may be materially adversely affected. As a result, the value of the New STERIS ordinary shares received by STERIS shareholders may be reduced and/or the business or financial condition of New STERIS may be adversely affected.
The Takeover Code may limit STERIS’s ability to cause Synergy to consummate the transaction and may otherwise limit the relief STERIS may obtain in the event Synergy’s board withdraws its support of the Scheme.
The Takeover Code limits the contractual commitments that may be obtained from Synergy to take actions in furtherance of the Combination, and the Synergy Board may, if its fiduciary and other directors’ duties so require, withdraw its recommendation in support for the Scheme, and withdraw the Scheme itself, at any time before the Court hearing to approve the reduction of Synergy’s share capital provided for as part of the Scheme. The Takeover Code does not permit Synergy to pay any break fee if it does so, nor can it be subject to any restrictions on soliciting or negotiating other offers or transactions involving Synergy other than the restrictions against undertaking actions or entering into agreements which are similar to or have a similar effect to “poison pills” and which might frustrate STERIS’s offer for Synergy.
STERIS shareholders will have a reduced ownership and voting interest after the Combination and may exercise less influence over management in New STERIS than they currently have in STERIS.
Upon the completion of the Combination, a STERIS shareholder will hold a percentage ownership of New STERIS that is smaller than such shareholder’s current percentage ownership of STERIS as it exists today. It is currently expected that the former shareholders of STERIS as a group will receive shares in the Combination constituting approximately 70% of the outstanding New STERIS ordinary shares immediately after the consummation of the Combination. Because of this, current STERIS shareholders may have less influence on the management and policies of New STERIS than they currently have on the management and policies of STERIS.

ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES

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The following table sets forth the principal plants and other materially important properties of the Company and its subsidiaries as of March 31, 2015. The Company believes that its facilities are adequate for operations and are maintained in good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially reasonable rates.
In the table below, “Contract Sterilization” refers to locations of the Isomedix segment. “Manufacturing,” “Warehousing,” “Operations,” or “Sales Offices” refer to locations serving both the Healthcare and Life Sciences segments.
 
United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.S./INTL
  
Use
  
Owned/Leased
Montgomery, AL
  
U.S.
  
Manufacturing
  
Owned
Ontario, CA
  
U.S.
  
Contract Sterilization
  
Owned
San Diego, CA
  
U.S.
  
Contract Sterilization
  
Owned
Temecula, CA
  
U.S.
  
Contract Sterilization
  
Owned
Libertyville, IL (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Northborough, MA
  
U.S.
  
Contract Sterilization
  
Owned
Brooklyn Park, MN
 
U.S.
 
Contract Sterilization
 
Owned
St. Louis, MO
  
U.S.
  
Manufacturing
  
Owned
South Plainfield, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Whippany, NJ
  
U.S.
  
Contract Sterilization
  
Owned
Chester, NY
  
U.S.
  
Contract Sterilization
  
Owned
Groveport, OH
  
U.S.
  
Contract Sterilization
  
Owned
Mentor, OH (11 locations)
  
U.S.
  
Corporate Headquarters
  
Owned
 
  
U.S.
  
Sales/Marketing Offices
  
Owned
 
  
U.S.
  
Administrative Offices
  
Owned
 
  
U.S.
  
Manufacturing/Warehousing
  
Owned
 
 
U.S.
 
Manufacturing/Operations
 
Owned
 
  
U.S.
  
Research and Development
  
Owned
 
 
U.S.
  
Lobby, Showroom and Customer Service
  
Owned
 
 
U.S.
  
Education Center
  
Owned
Spartanburg, SC
  
U.S.
  
Contract Sterilization
  
Owned
El Paso, TX (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Grand Prairie, TX
  
U.S.
  
Contract Sterilization
  
Owned
Sandy, UT
  
U.S.
  
Contract Sterilization
  
Owned
Minneapolis, MN (2 locations)
  
U.S.
  
Contract Sterilization
  
Owned
Birmingham, AL (4 locations)
 
U.S.
 
Manufacturing/ Office Space/ Warehouse
 
Owned
Vega Alta, PR
  
INTL
  
Contract Sterilization
  
Owned
Bordeaux, France
 
INTL
 
Manufacturing/Sales Office/Showroom
 
Owned
Quebec City, Canada
  
INTL
  
Manufacturing
  
Owned
Whitby, Canada
  
INTL
  
Contract Sterilization
  
Owned
Leicester, England
  
INTL
  
Manufacturing
  
Owned
Mogi das Cruzes, Brazil
 
INTL
 
Manufacturing/Sales Office
 
Owned
Tuusula, Finland
  
INTL
  
Manufacturing/Sales Office
  
Owned
Lancing, England
 
INTL
 
Manufacturing/Administration Offices
 
Owned
St. Louis, MO
  
U.S.
  
Warehousing/Distribution
  
Leased
Reno, NV
  
U.S.
  
Warehousing
  
Leased
Mentor, OH (2 locations)
  
U.S.
  
Administrative Offices
  
Leased
Stow, OH (2 locations)
 
U.S.
 
Sales/Administration Offices
 
Leased

17


United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL)
Location
  
U.S./INTL
  
Use
  
Owned/Leased
Hillsborough, NJ
 
U.S.
 
Sales/Administration Offices
 
Leased
Keller, TX
 
U.S.
 
Sales/Administration Offices
 
Leased
Houston, TX
 
U.S.
 
Sales/Administration Offices
 
Leased
Tustin, CA
 
U.S.
 
Sales/Administration Offices
 
Leased
Montgomery Village, MD
 
U.S.
 
Sales/Administration Offices
 
Leased
Melville, NY
 
U.S.
 
Sales/Administration Offices
 
Leased
Santa Clara, CA
 
U.S.
 
Sales Office
 
Leased
Chesterfield, MO
 
U.S.
 
Sales/Administration Offices
 
Leased
Homewood, AL (3 locations)
 
U.S.
 
Administration Offices
 
Leased
Cooper City, FL
 
U.S.
 
R&D, Engineering, Repair
 
Leased
Rockville, MD
 
U.S.
 
Repair Lab
 
Leased
Charlotte, NC
 
U.S.
 
Administration Offices
 
Leased
Springdale, OH
 
U.S.
 
Instrument Repair Lab
 
Leased
Tampa, FL
 
U.S.
 
Instrument Repair Lab
 
Leased
Stone Mountain, GA
 
U.S.
 
Instrument Repair Lab
 
Leased
Longwood, FL
 
U.S.
 
Sales/Administration Offices
 
Leased
Franklin Park, IL
 
U.S.
 
Manufacturing/ Administration Offices
 
Leased
Bensenville, IL
 
U.S.
 
Offices/ Warehouse/ Lab
 
Leased
Montgomery, AL
 
U.S.
 
Warehouse
 
Leased
Antwerpen, Belgium
 
INTL
 
Sales Office/Service
 
Leased
Sao Paulo, Brazil
  
INTL
  
Sales Office
  
Leased
Mississauga, Canada
  
INTL
  
Sales Office/Warehousing
  
Leased
Beijing, China
  
INTL
  
Sales Office
  
Leased
Guangzhou, China
 
INTL
 
Sales/Administration Offices/ Assembly
 
Leased
Shanghai, China
  
INTL
  
Sales Office/ Manufacturing
  
Leased
Basingstoke, England
  
INTL
  
Sales Office
  
Leased
Leicester, England
 
INTL
 
Warehousing
 
Leased
La Chapelle St. Mesmin, France
  
INTL
  
Sales Office
  
Leased
Orleans, France
 
INTL
 
Showroom
 
Leased
Saint Jean d'illac, France
 
INTL
 
Warehousing
 
Leased
Paris, France
 
INTL
 
Sales Office
 
Leased
Toussieu, France
 
INTL
 
Warehousing
 
Leased
Cologne, Germany
  
INTL
  
Sales Office
  
Leased
Gokul Nagar, India
  
INTL
  
Sales Office
  
Leased
Segrate, Italy
  
INTL
  
Sales Office
  
Leased
Tokyo, Japan
  
INTL
  
Sales Office
  
Leased
Petaling Jaya, Malaysia
  
INTL
  
Sales Office
  
Leased
Guadalupe, Mexico
  
INTL
  
Manufacturing
  
Leased
Moscow, Russia
  
INTL
  
Sales Office
  
Leased
Singapore (3 locations)
  
INTL
  
Sales Office, Warehousing
  
Leased
Madrid, Spain
  
INTL
  
Sales Office
  
Leased
United Arab Emirates
  
INTL
  
Sales Office
  
Leased

ITEM 3.
LEGAL PROCEEDINGS


18


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

ITEM 4.    MINE SAFETY DISCLOSURES

None.

19



PART II

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

Market Information. Our common shares are traded on the New York Stock Exchange under the symbol “STE.” The following table presents, for the quarters ending on the dates indicated, the high and low sales prices for our common shares.
 
Quarters Ended
March 31
 
December 31
 
September 30
 
June 30
Fiscal 2015
 
 
 
 
 
 
 
High
$
70.65

 
$
68.04

 
$
57.72

 
$
55.36

Low
62.56

 
52.29

 
49.78

 
47.24

Fiscal 2014
 
 
 
 
 
 
 
High
$
49.92

 
$
48.50

 
$
46.10

 
$
46.59

Low
39.90

 
42.74

 
40.46

 
38.85


Holders.  As of March 31, 2015, there were approximately 1,287 holders of record of our common shares. However, we believe that we have a significantly larger number of beneficial holders of common shares.
Dividend Policy.  The Company’s Board of Directors decides the timing and amount of any dividends we may pay. During fiscal 2015, we paid cash dividends totaling $0.90 per outstanding common share ($0.21 per outstanding common share to common shareholders of record on June 5, 2014, and $0.23 per outstanding common share to common shareholders of record on the following dates: August 26, 2014, November 26, 2014 and February 25, 2015). During fiscal 2014, we paid cash dividends totaling $0.82 per outstanding common share ($0.19 per outstanding common share to common shareholders of record on June 4, 2013, and $0.21 per outstanding common share to common shareholders of record on the following dates: August 28, 2013, November 20, 2013 and February 26, 2014).
Recent Sales of Unregistered Securities.  None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.  The following table presents information with respect to purchases STERIS made of its shares of common stock during the fourth quarter of the 2015 fiscal year:
 
 
 
(a)
Total Number  of
Shares Purchased
 
(b)
Average Price Paid
Per Share
 
(c)
Total Number  of
Shares Purchased as
Part of Publicly
Announced Plans (2)
 
(d)
Maximum Dollar Value  of
Shares that May Yet Be
Purchased Under the
Plans at Period End (dollars in thousands)
January 1-31
 

  
$

  

 
$
86,939

February 1-28
 

  

  

 
86,939

March 1-31
 

  

  

 
86,939

Total
 

(1) 
$

(1) 

 
$
86,939


(1)
Does not include 56 shares purchased during the quarter at an average price of $66.04 per share by the STERIS Corporation 401(k) Plan on behalf of certain executive officers of the Company who may be deemed to be affiliated purchasers.
(2)
On March 14, 2008 we announced that, the Board of Directors had authorized the repurchase of up to $300.0 million of our common shares. As of March 31, 2015, $86.9 million remained authorized for repurchase of our common shares under the current share repurchase authorization. This authorization does not have a stated maturity date. We provide information about our full year fiscal 2015 share repurchase activity in note 14 to our consolidated financial statements titled, “Repurchases of Common Shares.”


20



ITEM 6.    SELECTED FINANCIAL DATA

 
Years Ended March 31,
(in thousands, except per share data)
2015 (1)
 
2014 (1)
 
2013(1)(2)
 
2012(2)
 
2011(2)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,850,263

 
$
1,622,252

 
$
1,501,902

 
$
1,406,810

 
$
1,207,448

Gross profit
774,301

 
649,622

 
621,263

 
568,465

 
446,162

Restructuring expenses
(391
)
 
13,204

 
(565
)
 
644

 
1,202

Income from continuing operations
227,211

 
206,807

 
242,829

 
222,316

 
85,212

Income taxes
73,756

 
58,934

 
67,121

 
74,993

 
22,554

Net income
$
135,064

 
$
129,442

 
$
159,977

 
$
136,115

 
$
51,265

Basic income per common share:
 
 
 
 
 
 
 
 
 
Net income
$
2.27

 
$
2.20

 
$
2.74

 
$
2.33

 
$
0.86

Shares used in computing net income per common share – basic
59,413

 
58,966

 
58,305

 
58,367

 
59,306

Diluted income per common share:
 
 
 
 
 
 
 
 
 
Net income
$
2.25

 
$
2.17

 
$
2.72

 
$
2.31

 
$
0.85

Shares used in computing net income per common share – diluted
60,045

 
59,745

 
58,884

 
58,963

 
60,148

Dividends per common share
$
0.90

 
$
0.82

 
$
0.74

 
$
0.66

 
$
0.56

Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Working capital
$
437,101

 
$
420,239

 
$
395,103

 
$
373,488

 
$
361,060

Total assets
2,099,466

 
1,887,162

 
1,761,109

 
1,405,696

 
1,426,685

Long-term indebtedness
623,250

 
493,480

 
492,290

 
210,000

 
210,000

Total liabilities
1,025,820

 
845,916

 
814,129

 
583,032

 
638,020

Total shareholders’ equity
1,071,632

 
1,038,705

 
944,942

 
821,401

 
787,569


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

21



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

INTRODUCTION
In Management’s Discussion and Analysis (“MD&A”), we explain the general financial condition and the results of operations for STERIS and its subsidiaries including:
 
what factors affect our business;
what our earnings and costs were;
why those earnings and costs were different from the year before;
where our earnings came from;
how this affects our overall financial condition;
what our expenditures for capital projects were; and
where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchase common shares, pay cash dividends and fund future working capital needs.
The MD&A also analyzes and explains the annual changes in the specific line items in the Consolidated Statements of Income. As you read the MD&A, it may be helpful to refer to information in Item 1, “Business,” Item 6, “Selected Financial Data,” and our consolidated financial statements, which present the results of our operations for fiscal 2015, 2014 and 2013, as well as Part I, Item 1A, “Risk Factors” and note 11 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; net debt-to-total capital; and days sales outstanding. We define these financial measures as follows:
 
Backlog – We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements.
Debt-to-total capital – We define debt-to-total capital as total debt divided by the sum of total debt and shareholders’ equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth.
Net debt-to-total capital – We define net debt-to-total capital as total debt less cash (“net debt”) divided by the sum of net debt and shareholders’ equity. We also use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth.
Days sales outstanding (“DSO”) – We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters’ revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect.

We, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the United States. Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies. Additional information regarding these financial measures, including reconciliations of each non- GAAP financial measure, is available in the subsection of MD&A titled, "Non-GAAP Financial Measures."

REVENUES– DEFINED

As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms

22


that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
 
Revenues – Our revenues are presented net of sales returns and allowances.
Product Revenues – We define product revenues as revenues generated from sales of consumable and capital equipment products.
Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment, instrument and endoscope repair services, and revenues generated from contract sterilization offered through our Isomedix segment.
Capital Revenues – We define capital revenues as revenues generated from sales of capital equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1 and 1E, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.
Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products, which includes SYSTEM 1 and 1E consumables, V-Pro consumables, gastrointestinal endoscopy accessories, sterility assurance products, skin care products, cleaning consumables, and surgical instruments.
Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues.

GENERAL OVERVIEW AND EXECUTIVE SUMMARY

Our Business. Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. 
We are also investing in several manufacturing in-sourcing projects for the purpose of improving quality, cost and delivery of our products to our Customers.
Highlights.  During fiscal year 2015, we continued to invest in new products and in quality processes to defend and grow our core business. Simultaneously, we continued the execution of our strategy to expand into adjacent markets with acquisitions in the Healthcare and Life Sciences segments. On May 9, 2014, the Company acquired Integrated Medical Systems International, Inc. ("IMS"). IMS has facilities located in Alabama, Florida and Maryland and provides a variety of services, including: endoscope repair, surgical instrument management and sterile processing consulting. IMS has been integrated into our Healthcare segment as part of our Specialty Services reporting unit. On December 31, 2014, a newly formed subsidiary of the Company acquired the assets of and assumed certain liabilities of AGAPE Instruments Service, Inc. ("AGAPE"), a provider of certification services located near Cincinnati, Ohio. AGAPE will be integrated into our Life Sciences business segment. On March 9, 2015 the Company purchased all the outstanding shares of capital stock of Dana Products, Inc. ("Dana"), a manufacturer of chemical indicators located near Chicago, Illinois. Dana will be integrated into our Healthcare segment as part of our Healthcare business.
On October 13, 2014, we announced that we were commencing a “recommended offer” under U.K. law to acquire all outstanding shares of Synergy Health plc ("Synergy") in a cash and stock transaction valued at £19.50 ($31.35) per Synergy share, or a total of approximately $1.9 billion based on STERIS’s closing stock price of $56.38 per share on October 10, 2014, through a newly formed U.K. entity that also would indirectly acquire all of the outstanding stock of STERIS (the “Combination”). Based on STERIS’s closing stock price of $67.00 and exchange rates as of February 3, 2015, the total value of the cash and stock transaction is approximately $2.1 billion or £23.42 ($35.52) per Synergy share. The Combination is subject to certain customary closing conditions, including approvals by STERIS and Synergy shareholders as well as regulatory approvals by the U.S. Federal Trade Commission (“FTC”), which is currently reviewing the Combination. Both companies have entered into a timing agreement with the FTC under the terms of which the companies have agreed not to close the Combination before June 2, 2015 unless the FTC first closes its investigation. Both companies are cooperating with the FTC staff in the review of the Combination. No assurance can be provided as to when or if the transaction will be completed.

23


Revenues increased $228.0 million, or 14.1%, to $1,850.3 million for the year ended March 31, 2015, as compared to $1,622.3 million for the year ended March 31, 2014, reflecting growth within all three business segments.
Fiscal 2015 operating income was $227.2 million, an increase of 9.9% over the fiscal 2014 operating income of $206.8 million. This increase in operating income is primarily attributable to the higher gross margin attainment as well as the increase in volume in fiscal 2015 over fiscal 2014.
Net cash flows from operations were $246.0 million and free cash flow was $161.6 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). As a result of the acquisition activity, we increased our leverage by borrowing under our revolving credit facility. With this additional leverage, our debt-to-total capital ratio was 36.8% at March 31, 2015. We increased our dividend double digits for the ninth consecutive year to $0.23 per share per quarter.
Outlook. Fluctuations in foreign currency rates can impact revenues and costs outside of the United States, creating variability in our results for fiscal 2016 and beyond.
In fiscal 2016 and beyond, we expect to continue to manage our costs, grow our business with internal product development, invest in greater capacity, and augment these value creating methods with acquisitions of adjacent products and services. We plan to continue our efforts to in-source some of the production that we have traditionally out-sourced.

MATTERS AFFECTING COMPARABILITY

SYSTEM 1 Rebate Program and class action settlement. In April 2010, we introduced the SYSTEM 1 Rebate Program ("Rebate Program") to Customers as a component of our Transition Plan for SYSTEM 1. Generally, U.S. Customers that purchased SYSTEM 1 processors directly from us or who were current users of SYSTEM 1 and who returned their units had the option of either a pro-rated cash value or rebate toward the future purchase of new STERIS capital equipment or consumable products. In addition, we provided credits for SYSTEM 1 service contracts and consumables in unbroken packaging.
During the first quarter of fiscal 2011, we recorded a pre-tax liability related to the SYSTEM 1 Rebate Program. Of the $110.0 million recorded, $102.3 million was attributable to the Customer Rebate portion of the Program and was recorded as a reduction to revenue, and $7.7 million was attributable to the disposal liability of the SYSTEM 1 units to be returned and was recorded in cost of revenues.
During fiscal 2012 and fiscal 2013, based on the actual experience at the time, we adjusted a portion of the original estimated liability related to the Rebate Program. The total fiscal 2012 pre-tax adjustment was $17.4 million, of which $15.3 million was recorded as an increase to revenue for the Customer rebate portion, and $2.1 million was recorded as a reduction in cost of revenues related to the disposal liability. The total fiscal 2013 pre-tax adjustments amounted to $23.7 million, of which $22.4 million was recorded as increases to revenue for the Customer rebate portion, and $1.3 million was recorded as reductions to cost of revenues related to the disposal portion of the liability. These adjustments resulted primarily from a lower number of eligible Customers electing to participate in the Rebate Program than previously estimated.
In fiscal 2011 we recorded a pre-tax charge of $19.8 million related to the initial recognition of the settlement of SYSTEM 1 class action litigation. The impact of the charge was a reduction in net income of $13.1 million (after tax of $6.7 million). As a result of the passage of the claim submission deadline during fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement by $16.8 million based on actual claims submitted.
International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During fiscal 2015, our revenues were unfavorably impacted by $10.4 million, or 0.6%, and income before taxes was favorably impacted by $10.8 million, or 5.4%, as a result of foreign currency movements relative to the U.S. dollar.

NON-GAAP FINANCIAL MEASURES

We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented.
These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures.

24


These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to fund future debt principal repayments and growth outside of core operations, repurchase common shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2015, 2014 and 2013:
 
Years Ended March 31,
(dollars in thousands)
2015
 
2014
 
2013
Net cash flows provided by operating activities
$
246,040

 
$
209,631

 
$
227,815

Purchases of property, plant, equipment and intangibles, net
(85,255
)
 
(86,367
)
 
(87,412
)
Proceeds from the sale of property, plant, equipment and intangibles
829

 
4,774

 
34

Free cash flow
$
161,614

 
$
128,038

 
$
140,437


To supplement our financial results presented in accordance with GAAP, we have sometimes referred to certain measures of revenues, gross profit, gross profit percentage, and the Healthcare segment results of operations in the section of MD&A titled, "Results of Operations" excluding the impact of adjustments recorded in connection with the SYSTEM 1 Rebate Program and the SYSTEM 1 class action settlement. These items had a significant impact on the fiscal 2013 measures and the corresponding trend in each of these measures. We provide adjusted measures to give the reader a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. These measures are used by management and the Board of Directors in making comparisons to our historical operating results and analyzing the underlying performance of our operations. The tables below provide a reconciliation of each of these measures to its most directly comparable GAAP financial measure.
 
Years Ended March 31,
(dollars in thousands)
2015
2014
2013
Reported revenues
$
1,850,263

$
1,622,252

$
1,501,902

Impact of the SYSTEM 1 Rebate Program


(22,367
)
Adjusted revenues
$
1,850,263

$
1,622,252

$
1,479,535

 
 
 
 
Reported capital equipment revenues
$
597,809

$
603,579

$
613,378

Impact of the SYSTEM 1 Rebate Program


(22,367
)
Adjusted capital equipment revenues
$
597,809

$
603,579

$
591,011

 
 
 
 
Reported United States revenues
$
1,449,223

$
1,244,730

$
1,141,633

Impact of the SYSTEM 1 Rebate Program


(22,367
)
Adjusted United States Revenues
$
1,449,223

$
1,244,730

$
1,119,266

 
 
 
 
Reported Healthcare revenues
$
1,391,874

$
1,180,051

$
1,074,790

Impact of the SYSTEM 1 Rebate Program


(22,367
)

25


Adjusted Healthcare revenues
$
1,391,874

$
1,180,051

$
1,052,423

 
 
 
 
Healthcare capital revenues
$
517,007

$
515,380

$
521,806

Impact of SYSTEM 1 Rebate Program


(22,367
)
Adjusted Healthcare capital revenues
$
517,007

$
515,380

$
499,439

 
 
 
 
Reported gross profit
$
774,301

$
649,622

$
621,263

Impact of the SYSTEM 1 Rebate Program


(23,640
)
Adjusted gross profit
$
774,301

$
649,622

$
597,623

 
 
 
 
Reported gross profit percentage
41.8
%
40.0
%
41.4
 %
Impact of the SYSTEM 1 Rebate Program
%
%
(1.0
)%
Adjusted gross profit percentage
41.8
%
40.0
%
40.4
 %
 
 
 
 
Reported operating income
$
227,211

$
206,807

$
242,829

Impact of the SYSTEM 1 Rebate Program and class action settlement


(40,422
)
Adjusted operating income
$
227,211

$
206,807

$
202,407

 
 
 
 
Reported Healthcare operating income
$
125,505

$
109,714

$
153,343

Impact of the SYSTEM 1 Rebate Program and class action settlement


(40,422
)
Adjusted Healthcare operating income
$
125,505

$
109,714

$
112,921

 
 
 
 
Reported income tax expense
$
73,756

$
58,934

$
67,121

Impact of the SYSTEM 1 Rebate Program and class action settlement


(15,765
)
Adjusted income tax expense
$
73,756

$
58,934

$
51,356

 
 
 
 
Reported selling, general and administrative
$
493,342

$
380,970

$
337,694

Impact of the SYSTEM 1 class action settlement


16,782

Adjusted selling, general and administrative
$
493,342

$
380,970

$
354,476

 
 
 
 
Reported effective income tax rate
35.3
%
31.3
%
29.6
 %
Impact of the SYSTEM 1 Rebate Program and class action settlement
%
%
(2.1
)%
Adjusted effective income tax rate
35.3
%
31.3
%
27.5
 %

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.

26



FISCAL 2015 AS COMPARED TO FISCAL 2014

Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2015 to the year ended March 31, 2014:

 
Years Ended March 31,
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
Change
 
Change
Total revenues
$
1,850,263

 
$
1,622,252

 
$
228,011

 
14.1
 %
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
Capital equipment revenues
597,809

 
603,579

 
(5,770
)
 
(1.0
)%
Consumable revenues
449,996

 
407,883

 
42,113

 
10.3
 %
Service revenues
802,458

 
610,790

 
191,668

 
31.4
 %
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
United States revenues
1,449,223

 
1,244,730

 
204,493

 
16.4
 %
International revenues
401,040

 
377,522

 
23,518

 
6.2
 %

Revenues increased $228.0 million, or 14.1%, to $1,850.3 million for the year ended March 31, 2015, as compared to $1,622.3 million for the year ended March 31, 2014. This increase is primarily attributable to our recent acquisitions and growth within all three business segments.
Capital equipment revenues decreased by $5.8 million, or 1.0%, to $597.8 million, during fiscal 2015 as compared to fiscal 2014. Growth within the Europe, Middle East, and Africa ("EMEA") and Asia Pacific regions was more than offset by declines within the North American and Latin American regions. Consumable revenues increased $42.1 million, or 10.3%, during fiscal 2015 from fiscal 2014. This increase was driven by growth within the Healthcare and Life Sciences business segments and reflects growth in all regions. Service revenues for fiscal 2015 increased $191.7 million, or 31.4%, over fiscal 2014 primarily driven by the fiscal 2015 acquisition of IMS, other service offerings, and growth of $11.5 million, or 5.9%, within the Isomedix segment in fiscal 2015 over fiscal 2014. Isomedix revenues were favorably impacted by increased demand from our medical device Customers.
United States revenues for fiscal 2015 were $1,449.2 million, an increase of $204.5 million, or 16.4%, over fiscal 2014 revenues of $1,244.7 million. This increase is primarily attributable to the fiscal 2015 acquisition of IMS but also reflects growth in other service revenues in all three business segments, growth in capital equipment revenues within the Life Science business segment and growth in consumable revenues within the Healthcare and Life Science business segments.
International revenues for fiscal 2015 were $401.0 million, an increase of 6.2% over the fiscal 2014 revenues of $377.5 million. This increase reflects revenue growth in the EMEA and Asia Pacific regions, partially offset by declines in Canada and the Latin American region.

Gross Profit. The following table compares our gross profit for the year ended March 31, 2015 to the year ended March 31, 2014:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
2015
 
2014
 
Gross profit:
 
 
 
 
 
 
 
Product
$
463,595

 
$
425,286

 
$
38,309

 
9.0
%
Service
310,706

 
224,336

 
86,370

 
38.5
%
Total gross profit
$
774,301

 
$
649,622

 
$
124,679

 
19.2
%
Gross profit percentage:
 
 
 
 
 
 
 
Product
44.2
%
 
42.0
%
 
 
 
 
Service
38.7
%
 
36.7
%
 
 
 
 
Total gross profit percentage
41.8
%
 
40.0
%
 
 
 
 

27



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 $124.7 million and gross profit percentage increased 180 basis points to 41.8% for fiscal 2015 as compared to 40.0% for fiscal 2014. Our gross profit percentage was impacted by the positive impact of foreign currency (60 basis points) and favorable product mix and other (160 basis points). Although our recent acquisitions added value in terms of dollars, they negatively impacted our gross margin percentage by approximately 10 basis points. Rising material costs (10 basis points) and inflation (20 basis points) negatively impacted our gross margin percentage.

Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2015 to the year ended March 31, 2014:
  
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2015
 
2014
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
493,342

 
$
380,970

 
$
112,372

 
29.5
%
Research and development
 
54,139

 
48,641

 
5,498

 
11.3
%
Restructuring expenses
 
(391
)
 
13,204

 
(13,595
)
 
NM

Total operating expenses
 
$
547,090

 
$
442,815

 
$
104,275

 
23.5
%
NM - Not meaningful
  
Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 29.5% during fiscal 2015 over fiscal 2014. This increase is primarily attributable to the addition of operating expenses incurred within our recently acquired businesses and costs of approximately $22.2 million incurred in connection with the proposed Combination of Synergy. For additional information regarding this proposed transaction see note 3 of our consolidated financial statements titled, "Business Acquisitions". Also, during the second quarter of fiscal 2015, SG&A was impacted by the adoption of a new branding strategy as part of the integration of IMS into the Specialty Services reporting unit for surgical instrument and endoscope repair services. This strategy resulted in the reduction in the carrying value of the Spectrum Surgical Instruments Corp. ("Spectrum") trade-name which will be used solely for Specialty Services product revenues going forward. We have estimated the fair value of the Spectrum trade-name using the relief from royalty method and concluded that the carrying value of the trade-name exceeded its fair value. As a result, an impairment charge of approximately $5.6 million was recorded to reduce the carrying value of the intangible asset.
Research and development expenses increased $5.5 million during fiscal 2015, as compared to fiscal 2014. The increase in the fiscal 2015 period is primarily attributable to additional spending in connection with the development of surgical 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 2015, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets.
Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs. We have incurred pre-tax expenses totaling $19.5 million related to these actions, of which $11.7 million was recorded as restructuring expenses and $7.8 million was recorded in cost of revenues, with restructuring expenses of $17.4 million, $0.8 million, and $1.3 million related to the Healthcare, Life Sciences and Isomedix segments, respectively.

28


Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions. Since the inception of the Fiscal 2010 Restructuring Plan, we have incurred pre-tax expenses totaling $9.3 million related to these actions, of which $8.2 million was recorded as restructuring expenses and $1.1 million was recorded in cost of revenues. We do not expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.
For more information regarding our Restructuring activities please refer to note 2 of our consolidated financial statements titled, "Restructuring".
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, 2015 to the year ended March 31, 2014:

 
 
Years Ended March 31,
 
 
(dollars in thousands)
 
2015
 
2014
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
19,187

 
$
18,770

 
$
417

Interest income and miscellaneous expense
 
(796
)
 
(339
)
 
(457
)
Non-operating expenses, net
 
$
18,391

 
$
18,431

 
$
(40
)

Interest expense essentially remained flat in fiscal 2015 over fiscal 2014. Interest income and miscellaneous expense are immaterial.
Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled, “Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”

Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended March 31, 2015 and March 31, 2014:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2015
 
2014
 
Income tax expense
 
$
73,756

 
$
58,934

 
$
14,822

 
25.2%
Effective income tax rate
 
35.3
%
 
31.3
%
 
 
 
 

The effective income tax rate for fiscal 2015 was 35.3% as compared to 31.3% for fiscal 2014. The effective tax rate in 2014 includes the benefit from the recognition of previously unrecognized tax benefits due to the settlement of a federal tax examination. Additional information regarding our income tax expense is included in note 9 to our consolidated financial statements titled, “Income Taxes.”

Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2015 to the year ended March 31, 2014:

29


(dollars in thousands)
 
Years Ended March 31,
 
Change
 
Percent
Change
2015
 
2014
 
Revenues:
 
 
 
 
 
 
 
 
Healthcare
 
$
1,391,874

 
$
1,180,051

 
$
211,823

 
18.0
 %
Life Sciences
 
250,845

 
246,122

 
4,723

 
1.9
 %
Isomedix
 
205,675

 
194,183

 
11,492

 
5.9
 %
Total reportable segments
 
1,848,394

 
1,620,356

 
228,038

 
14.1
 %
Corporate and other
 
1,869

 
1,896

 
(27
)
 
(1.4
)%
Total Revenues
 
$
1,850,263

 
$
1,622,252

 
$
228,011

 
14.1
 %

Healthcare segment revenues increased $211.8 million, or 18.0% to $1,391.9 million for the year ended March 31, 2015, as compared to $1,180.1 million for the prior fiscal year. The addition of service revenues from our recent acquisition of IMS combined with growth in other product and service offerings drove total growth in capital equipment, consumable and service revenues of 0.3%, 10.4% and 52.0%, respectively. At March 31, 2015, the Healthcare segment’s backlog amounted to $97.7 million, decreasing $12.7 million, or 11.5%, compared to the backlog of $110.3 million at March 31, 2014. This decrease is partially the result of our success in reducing our manufacturing lead times allowing us to fulfill orders on a timelier basis. In addition, replacement orders represent a larger percentage of our order pattern and pipeline, and those orders tend to be filled quicker and reside in backlog for less time.
Life Science segment revenues increased $4.7 million or 1.9% to $250.8 million for the year ended March 31, 2015, as compared to the prior fiscal year, driven by growth in consumable and service revenues of 10.1% and 5.0%, respectively, which was offset by a 8.4% decline in capital equipment revenues. At March 31, 2015, the Life Sciences segment’s backlog amounted to $45.5 million, decreasing $1.1 million, or 2.4%, compared to the backlog of $44.4 million at March 31, 2014. The March 31, 2015 backlog is consistent with historic levels.
Isomedix segment revenues increased $11.5 million or 5.9% to $205.7 million for the year ended March 31, 2015, as compared to the prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers.
The following tables compare our business segment and Corporate and other operating results for the year ended March 31, 2015 to the year ended March 31, 2014:

 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
 
2015
 
2014
 
Operating income (loss):
 
 
 
 
 
 
 
 
Healthcare
 
$
125,505

 
$
109,714

 
$
15,791

 
14.4
%
Life Sciences
 
55,723

 
50,049

 
5,674

 
11.3
%
Isomedix
 
55,524

 
55,186

 
338

 
0.6
%
Total reportable segments
 
236,752

 
214,949

 
21,803

 
10.1
%
Corporate and other
 
(9,541
)
 
(8,142
)
 
(1,399
)
 
17.2
%
Total operating income (loss)
 
$
227,211

 
$
206,807

 
$
20,404

 
9.9
%
Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the revenues, gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
The Healthcare segment's operating income increased $15.8 million, or 14.4% to $125.5 million for the year ended March 31, 2015, as compared to $109.7 million for the prior fiscal year. The increase in operating income in fiscal 2015 over fiscal 2014 was driven by our recent acquisition of IMS, increased volume, favorable foreign currency, and favorable product mix. These increases were somewhat offset by the Spectrum trade name impairment, rising material costs and the Medical Device Excise Tax.
The Life Science segment's operating income increased $5.7 million, or 11.3% to $55.7 million for the year ended March 31, 2015, as compared to $50.0 million for the prior fiscal year. The segment's operating margins were 22.2% and

30


20.3%, respectively, for the years ended March 31, 2015 and March 31, 2014. The improvement was primarily attributable to higher revenues, favorable foreign currency and favorable product mix.
The Isomedix segment's operating income increased $0.3 million or 0.6% to $55.5 million for the year ended March 31, 2015, as compared to $55.2 million for the prior fiscal year, reflecting the benefits of increased revenues. The segment's operating margins were 27.0% and 28.4%, respectively, for the years ended March 31, 2015 and March 31, 2014. The operating margin decline is primarily due to higher regulatory costs.

FISCAL 2014 AS COMPARED TO FISCAL 2013

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

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

 
$
1,501,902

 
$
120,350

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

 
613,378

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

 
353,984

 
53,899

 
15.2
 %
Service revenues
610,790

 
534,540

 
76,250

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

 
1,141,633

 
103,097

 
9.0
 %
International revenues
377,522

 
360,269

 
17,253

 
4.8
 %

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

31


International revenues for fiscal 2014 were $377.5 million, an increase of 4.8% over the fiscal 2013 revenues of $360.3 million. This increase reflects revenue growth in the Latin American and EMEA regions, partially offset by declines in Canada and the Asia Pacific regions.

Gross Profit. The following table compares our gross profit for the year ended March 31, 2014 to the year ended March 31, 2013:
 
 
Years Ended March 31,
 
Change
 
Percent
Change
(dollars in thousands)
2014
 
2013
 
Gross profit:
 
 
 
 
 
 
 
Product
$
425,286

 
$
416,463

 
$
8,823

 
2.1
%
Service
224,336

 
204,800

 
19,536

 
9.5
%
Total gross profit
$
649,622

 
$
621,263

 
$
28,359

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

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

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

 
$
337,694

 
$
43,276

 
12.8
%
Research and development
 
48,641

 
41,305

 
7,336

 
17.8
%
Restructuring expenses
 
13,204

 
(565
)
 
13,769

 
NM

Total operating expenses
 
$
442,815

 
$
378,434

 
$
64,381

 
17.0
%
NM - Not meaningful
  
Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 12.8% during fiscal 2014 over fiscal 2013. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The impact of the class action settlement aside, the increase in SG&A in fiscal 2014 over fiscal 2013 is primarily attributable to the addition of operating expenses incurred with our acquired businesses. In addition, we recorded a fair value adjustment of $1.0 million related to a deferred payment of purchase price for the 2012 purchase of Sercon Industria E Comercio De Aparelhos Medicos Hospitalares LTDA (“Sercon”).
Research and development expenses increased $7.3 million during fiscal 2014, as compared to fiscal 2013. The majority of the increase is attributable to expenses for research and development incurred within the operations of the businesses acquired in fiscal 2013 and fiscal 2014. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. During fiscal 2014, our investments in research and

32


development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets.
Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We have incurred pre-tax expenses totaling $20.2 million related to these actions, of which $12.1 million was recorded as restructuring expenses and $8.1 million was recorded in cost of revenues, with restructuring expenses of $18.2 million, $0.6 million, and $1.4 million related to the Healthcare, Life Sciences and Isomedix segments, respectively. We do not expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.
Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the “Fiscal 2010 Restructuring Plan”). In addition, we rationalized certain products and eliminated certain positions.Since the inception of the Fiscal 2010 Restructuring Plan, we have incurred pre-tax expenses totaling $9.3 million related to these actions, of which $8.2 million was recorded as restructuring expenses and $1.1 million was recorded in cost of revenues. We do not expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.
For more information regarding our restructuring activities please refer to note 2 titled, "Restructuring".
Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table compares our non-operating expense (income), net for the year ended March 31, 2014 to the year ended March 31, 2013:

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

 
$
15,675

 
$
3,095

Interest income and miscellaneous expense
 
(339
)
 
56

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

 
$
15,731

 
$
2,700


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

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

 
$
67,121

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


33


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

Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2014 to the year ended March 31, 2013:
(dollars in thousands)
 
Years Ended March 31,
 
Change
 
Percent
Change
2014
 
2013
 
Revenues:
 
 
 
 
 
 
 
 
Healthcare
 
$
1,180,051

 
$
1,074,790

 
$
105,261

 
9.8
 %
Life Sciences
 
246,122

 
244,421

 
1,701

 
0.7
 %
Isomedix
 
194,183

 
179,550

 
14,633

 
8.1
 %
Total reportable segments
 
1,620,356

 
1,498,761

 
121,595

 
8.1
 %
Corporate and other
 
1,896

 
3,141

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

 
$
1,501,902

 
$
120,350

 
8.0
 %

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

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

 
$
153,343

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

 
47,453

 
2,596

 
5.5
 %
Isomedix
 
55,186

 
51,455

 
3,731

 
7.3
 %
Total reportable segments
 
214,949

 
252,251

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

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

 
$
242,829

 
$
(36,022
)
 
(14.8
)%

34


Segment operating income is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. Corporate cost allocations are based on each segment’s percentage of revenues, headcount, or other variables in relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the revenues, gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed.
The Healthcare segment's operating income decreased $43.6 million, or 28.5% to $109.7 million for the year ended March 31, 2014, as compared to $153.3 million for the prior fiscal year. The Healthcare segment’s operating income for fiscal 2014 decreased $3.2 million, or 2.8%, compared to adjusted fiscal 2013 Healthcare operating income of $112.9 million, which excludes the $40.4 million impact of the adjustment related to the SYSTEM 1 Rebate Program and class action settlement (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The decline in adjusted Healthcare operating income reflects the negative impact of the Fiscal 2014 Restructuring Plan, the Medical Device Excise Tax and investments in in-sourcing. Healthcare operating income was favorably impacted by increased revenues driven largely by our recent acquisitions and a reduction in warranty costs.
The Life Science segment's operating income increased $2.6 million, or 5.5% to $50.0 million for the year ended March 31, 2014, as compared to $47.5 million for the prior fiscal year. The segment's operating margins were 20.3% and 19.4%, respectively, for the years ended March 31, 2014 and March 31, 2013. The improvement was primarily attributable to higher revenues and favorable product mix.
The Isomedix segment's operating income increased $3.7 million or 7.3% to $55.2 million for the year ended March 31, 2014, as compared to $51.5 million for the prior fiscal year, reflecting the benefits of increased revenues. The segment's operating margins were 28.4% and 28.7%, respectively, for the years ended March 31, 2014 and March 31, 2013.


35



LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes significant components of our cash flows for the years ended March 31, 2015, 2014 and 2013:
 
 
Years Ended March 31,
(dollars in thousands)
 
2015
 
2014
 
2013
Net cash provided by operating activities
 
$
246,040

 
$
209,631

 
$
227,815

Net cash used in investing activities
 
$
(283,769
)
 
$
(148,652
)
 
$
(487,054
)
Net cash provided by (used in) in financing activities
 
$
69,750

 
$
(54,206
)
 
$
254,246

Debt-to-total capital ratio
 
36.8
%
 
32.2
%

34.3
%
Free cash flow
 
$
161,614

 
$
128,038

 
$
140,437


Net Cash Provided By Operating Activities –The net cash provided by our operating activities was $246.0 million for the year ended March 31, 2015 compared to $209.6 million for the year ended March 31, 2014 and $227.8 million for the year ended March 31, 2013. The following discussion summarizes the significant changes in our operating cash flows for the years ended March 31, 2015, 2014 and 2013:

Net cash provided by operating activities increased 17.4% in fiscal 2015 compared to fiscal 2014. The increase in net cash provided by operating activities in fiscal 2015 is primarily due to increased net income and working capital improvements.

Net cash provided by operating activities decreased 8.0% in fiscal 2014 compared to fiscal 2013. The decrease is primarily attributable to payments made in connection with our annual incentive compensation program which did not occur in fiscal 2013. In addition, the fiscal 2013 period reflected strong improvements in working capital management.

Net Cash Used In Investing Activities – The net cash used in our investing activities was $283.8 million for the year ended March 31, 2015, compared to $148.7 million for the year ended March 31, 2014 and $487.1 million for the year ended March 31, 2013. The following discussion summarizes the significant changes in our investing cash flows for the years ended March 31, 2015, 2014 and 2013:

Purchases of property, plant, equipment, and intangibles, net – Capital expenditures totaled $85.3 million during fiscal 2015, $86.4 million during fiscal 2014 and $87.4 million during fiscal 2013.
Proceeds from the sale of property, plant, equipment, and intangibles – During the third quarter of fiscal 2014 we sold our former Pieterlen, Switzerland manufacturing facility in conjunction with our 2010 Restructuring Plan. Total proceeds and net loss on the sale were $4.7 million and $0.8 million, respectively. Proceeds from fiscal 2015 and 2013 proceeds relate to minor disposals.
Purchases of investments– During the third quarter of fiscal 2015, we invested $4.7 million in common stock of Servizi Italia, S.p.A., a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers.
Investments in business, net of cash acquired – During fiscal 2015, we used $173.6 million of cash for the acquisition of IMS and related real estate. We also used $3.4 million of cash for the acquisition of the assets of AGAPE and $11.9 million for the acquisition of Dana. For more information on acquisitions refer to note 3 to our consolidated financial statements titled, "Business Acquisitions". During the first quarter of fiscal 2015, we also paid a working capital settlement of $0.8 million and deferred consideration of $5.0 million for the acquisition of Eschmann Holdings Ltd ("Eschmann") which occurred in fiscal 2014. During fiscal 2014, we used $64.4 million of cash for the acquisitions of the assets of Florida Surgical Repair, Inc. ("FSR") and Life Systems, Inc. ("LSI"), and the capital stock of Eschmann. For more information on these acquisitions refer to note 3 to our consolidated financial statements titled, "Business Acquisitions". During fiscal 2014, we also used $3.2 million in cash for a deferred purchase price payment related to the fiscal 2012 acquisition of the stock of a privately held company with operations located near Sao Paulo, Brazil which designs and manufactures small, medium, and large sterilizers used by public hospitals, clinics, dental offices and industrial companies (e.g., research laboratories and pharmaceutical research and production companies). During fiscal 2013, we used $399.7 million of cash for the acquisitions of the capital stock of United States Endoscopy Group Inc., and Spectrum Surgical Instruments Corp, the assets of Total Repair Express ("TRE"), and the remaining VTS Medical Systems, LLC interests not already owned by us.


36


Net Cash Provided By (Used In) Financing Activities – Net cash provided by financing activities was $69.8 million for the year ended March 31, 2015, compared to net cash used by financing activities of $54.2 million, and net cash provided by financing activities of $254.2 million for the years ended March 31, 2014 and March 31, 2013, respectively. The following discussion summarizes the significant changes in our financing cash flows for the years ended March 31, 2015, 2014 and 2013:
Proceeds from the issuance of long-term obligations – During fiscal year 2013 we issued $200 million of senior notes in a private placement, which are long-term obligations. We provide additional information about our debt structure in note 7 to our consolidated financial statements titled, “Debt,” and in this section of the MD&A titled, “Liquidity and Capital Resources” in the subsection titled, “Sources of Credit.”
Payments on long term obligations- During the second quarter of fiscal 2014 we repaid $30.0 million for the senior notes issued in August 2008, which matured in August 2013. During the third quarter of fiscal 2014 we repaid $40.0 million for the senior notes issued in December 2003, which matured in December 2013.
Proceeds under credit facilities, net – At the end of fiscal 2015, $283.3 million of debt was outstanding under our credit facilities.
Repurchases of common shares – During fiscal 2015, we obtained common shares in connection with our stock-based compensation award programs in the amount $30.7 million. During fiscal 2014, we paid for the repurchase of 565,887 common shares at an average purchase price of $43.63 and obtained common shares in connection with our stock-based compensation award programs in the amount of $0.8 million. During fiscal 2013, we paid for the repurchase of 204,349 common shares at an average purchase price of $33.42 and obtained common shares in connection with our stock-based compensation award programs in the amount of $1.2 million. We provide additional information about our common share repurchases in note 14 to our consolidated financial statements titled, “Repurchases of Common Shares.”
Deferred financing fees and debt issuance costs- During fiscal 2015, we paid $14.4 million in financing fees and debt issuance costs related to our Credit Agreement and Bridge Credit Agreement and Private Placement debt. For more information on this agreement refer to note 7 to our consolidated financial statements titled, "Debt".
Cash dividends paid to common shareholders – During fiscal 2015, we paid cash dividends totaling $53.5 million or $0.90 per outstanding common share. During fiscal 2014, we paid cash dividends totaling $48.4 million or $0.82 per outstanding common share. During fiscal 2013, we paid cash dividends totaling $43.2 million, or $0.74 per outstanding common share.
Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee stock option programs. During fiscal 2015, fiscal 2014 and fiscal 2013, we received cash proceeds totaling $28.3 million $14.2 million, and $23.0 million, respectively, under these programs. In fiscal 2014, we also issued $1.5 million of STERIS restricted stock in conjunction with the LSI acquisition.
Excess tax benefit from share-based compensation – For the years ended March 31, 2015, 2014 and 2013, our income taxes were reduced by $11.5 million, $2.8 million, and $2.1 million, respectively, as a result of excess deductions allowed for stock options exercised. The increase in fiscal 2015 was primarily due to an increase in both the quantity and value of restricted shares vesting and stock options exercised.
Cash Flow Measures. Free cash flow was $161.6 million in fiscal 2015 compared to $128.0 million in fiscal 2014. Our free cash flow increased in fiscal 2015 primarily due to working capital improvements (see subsection of MD&A titled, "Non-GAAP Financial Measures", for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Our debt-to-total capital ratio was 36.8% at March 31, 2015 and 32.2% at March 31, 2014.
Cash Requirements. We intend to use our existing cash and cash equivalent balances and cash generated from operations for short-term and long-term capital expenditures and our other liquidity needs. In addition, in light of cash needs relating to our proposed Combination with Synergy (see "Proposed Combination with Synergy Health plc" under "General Overview and Executive Summary"), and other cash requirements, it was necessary to replace our existing bank credit facilities with an expanded bank credit facility providing for additional credit availability and to obtain additional debt. Our capital requirements depend on many uncertain factors, including our rate of sales growth, our Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, changes in our operating expenses and other factors. To the extent that existing and anticipated sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or the sale of equity securities. We have a bridge facility available to us should the referenced Combination close without or with insufficient permanent financing in place. There can be no assurance that the foregoing financing arrangements will provide us with sufficient additional funds or that we will be able to obtain any additional funds we may need on terms favorable to us or at all.

37


At March 31, 2015, approximately 94% of our consolidated cash and cash equivalents were held in locations outside of the United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States. We do not intend to repatriate any significant amounts of cash in the foreseeable future.
Sources of Credit.  Our sources of credit as of March 31, 2015 are summarized in the following table:
 
(dollars in thousands)
Maximum
Amounts
Available
 
Reductions in
Available Credit
Facility for Other
Financial  Instruments
 
March 31, 2015 Amounts
Outstanding
 
March 31, 2015 Amounts
Available
Sources of Credit
 
 
 
 
 
 
 
Private placement
$
340,000

 
$

 
340,000

 

Credit Agreement (1)
500,000

 

 
283,250

 
216,750

Bridge Agreement (2)
1,033,331

 

 

 
1,033,331

Total Sources of Credit
$
1,873,331

 
$


$
623,250


$
1,250,081


(1)
Our $500.0 million revolving credit facility contains a sub-limit that reduces the maximum amount available to us for borrowings by letters of credit outstanding.
(2)
The Bridge Agreement contains a USD commitment of $530.0 million and a GBP commitment of £340.0 million (approximately $503.3 million USD equivalent at March 31, 2015). No funds are available under the Bridge Credit Agreement unless the Combination (see "Proposed Combination with Synergy Health plc" under "General Overview and Executive Summary"), occurs and in that event there are limitations on the use and timing of borrowings.

Our sources of funding from credit as of March 31, 2015 are summarized below:

In December 2003, we issued $100.0 million of senior notes, of which $20.0 million currently remain outstanding, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. The remaining $20.0 million have a maturity of 12 years from issuance at an annual interest rate of 5.38%. The agreements governing these notes and the notes were amended and restated in their entirety on March 31, 2015. The amended and restated agreements, which have been consolidated into a single agreement, contain leverage and interest coverage covenants.
On August 15, 2008, we issued $150.0 million of senior notes, of which $120.0 million currently remain outstanding, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. Of the outstanding notes $85.0 million have a maturity of 10 years from issuance at an annual interest rate of 6.33%, and the remaining $35.0 million have a maturity of 12 years from issuance at an annual interest rate of 6.43%. The agreements governing these notes and the notes were amended and restated in their entirety on March 31, 2015. The amended and restated agreements, which have been consolidated into a single agreement, contain leverage and interest coverage covenants.