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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission file number 0-20165
STERIS Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1482024
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5960 Heisley Road, 440-354-2600
Mentor, Ohio 44060-1834 (Registrant's telephone number,
(Address of principal executive offices) including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 [ ].
The number of Common Shares outstanding as of July 31, 2000: 67,459,548
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STERIS Corporation
Index
Part I - Financial Information Page
------------------------------
Item 1. Financial Statements 3-9
Item 2. Management's Discussion and Analysis of 10-12
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 13
About Market Risk
Part II - Other Financial Information
-------------------------------------
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security 14
Holders
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
STERIS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
================================================================================
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 25,853 $ 35,476
Accounts receivable (net of allowances of $5,646 and $6,047, respectively) 195,684 209,448
Inventories 93,678 104,624
Current portion of deferred income taxes 21,950 23,923
Prepaid expenses and other assets 15,989 15,648
----------- -----------
Total current assets 353,154 389,119
Property, plant, and equipment 458,712 443,608
Accumulated depreciation (147,687) (138,603)
----------- -----------
Net property, plant, and equipment 311,025 305,005
Intangibles 282,828 282,639
Accumulated amortization (80,098) (78,300)
----------- -----------
Net intangibles 202,730 204,339
Other assets 5,348 5,111
----------- -----------
Total assets $ 872,257 $ 903,574
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term indebtedness $ 1,816 $ 1,816
Accounts payable 32,625 51,374
Accrued expenses and other 102,614 102,712
----------- -----------
Total current liabilities 137,055 155,902
Long-term indebtedness 255,700 268,700
Deferred income taxes 8,880 8,880
Other long-term liabilities 49,067 48,998
----------- -----------
Total liabilities 450,702 482,480
Shareholders' equity:
Serial preferred shares, without par value, 3,000,000 shares authorized; no
shares outstanding
Common Shares, without par value; 300,000,000 shares authorized;
68,285,740 and 68,567,146 shares issued and outstanding, respectively 197,829 198,253
Retained earnings 231,176 230,348
Cumulative translation adjustment (7,450) (7,507)
----------- -----------
Total shareholders' equity 421,555 421,094
----------- -----------
Total liabilities and shareholders' equity $ 872,257 $ 903,574
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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STERIS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
================================================================================
3 Months Ended
June 30
--------------------
2000 1999
--------- ---------
Net revenues $183,813 $176,813
Cost of goods and services sold 105,604 94,801
--------- ---------
Gross profit 78,209 82,012
Costs and expenses:
General and administrative expenses 66,782 57,651
Research and development 5,821 6,208
--------- ---------
72,603 63,859
--------- ---------
Income from operations 5,606 18,153
Interest expense, net (4,271) (3,097)
--------- ---------
Income before income taxes 1,335 15,056
Income tax expense 507 5,721
--------- ---------
Net income $ 828 $ 9,335
========= =========
Net income per share - basic $0.01 $0.14
========= =========
Net income per share - diluted $0.01 $0.14
========= =========
See notes to consolidated financial statements.
4
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STERIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
================================================================================
3 Months Ended
June 30
--------------------
2000 1999
--------- ---------
Operating activities
Net income $ 828 $ 9,335
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization 11,012 9,878
Deferred income taxes 1,973 0
Other items 168 (614)
Changes in operating assets and liabilities:
Accounts receivable 13,764 18,987
Inventories 10,946 (22,152)
Other assets (340) 2,354
Accounts payable and accruals (18,848) (22,738)
--------- ---------
Net cash (used in) provided by operating activities 19,503 (4,950)
Investing activities
Purchases of property, plant, equipment, and patents (15,803) (14,290)
Proceeds from sales of assets 44 0
--------- ---------
Net cash used in investing activities (15,759) (14,290)
Financing activities
Payments on long-term obligations 0 (25)
Borrowing (payments) under credit facility (13,000) 35,000
Purchase of treasury shares 0 (28,712)
Stock option and other equity transactions (424) 7,359
--------- ---------
Net cash (used in) provided by financing activities (13,424) 13,622
Effect of exchange rate changes on cash and cash 57 (422)
equivalents
--------- ---------
(Decrease) in cash and cash equivalents (9,623) (6,040)
Cash and cash equivalents at beginning of period 35,476 23,680
--------- ---------
Cash and cash equivalents at end of period $ 25,853 $ 17,640
========= =========
See notes to consolidated financial statements.
5
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STERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the 3 Months Ended
June 30, 2000 and 1999
Significant Accounting and Reporting Policies
---------------------------------------------
1. Reporting Entity
STERIS Corporation (the "Company" or "STERIS") develops, manufactures, and
markets infection prevention, contamination prevention, microbial reduction, and
therapy support systems, products, services, and technologies for health care,
scientific, research, food, and industrial Customers throughout the world. The
Company has over 4,500 employees worldwide, including more than 2,200 direct
sales, service, field, and Customer Support personnel. Customer Support
facilities are located in major global market centers with production and
manufacturing operations in the United States, Australia, Canada, Germany,
Finland, and Sweden. STERIS operates in a single business segment.
2. Basis of Presentation
The Company's unaudited consolidated financial statements for the 3 months ended
June 30, 2000 and June 30, 1999 included in this Quarterly Report on Form 10-Q,
have been prepared in accordance with the accounting policies described in the
Notes to Consolidated Financial Statements for the fiscal year ended March 31,
2000 which were included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on June 22, 2000, and in management's
opinion contain all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Form 10-K referred to above. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated upon consolidation. Certain
reclassifications have been made to prior year amounts to conform to the
current presentation.
3. Earnings per Share
Following is a summary of Common Shares and Common Share equivalents outstanding
used in the calculations of earnings per share (in thousands):
Three Months Ended
June 30
------------------
2000 1999
-------- --------
Weighted average Common Shares 67,517 67,501
outstanding - basic
Dilutive effect of stock options 769 1,555
-------- --------
Weighted average Common Shares and
equivalents - diluted 68,286 69,056
======== ========
6
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STERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the 3 Months Ended
June 30, 2000 and 1999
4. Comprehensive Income
Comprehensive income amounted to $885,000 and $8,913,000, net of tax, for the
quarters ended June 30, 2000 and 1999, respectively. The difference between net
income and comprehensive income for the periods resulted from the change in the
cumulative translation adjustment.
5. Inventories
Inventories are stated at cost, which does not exceed market. The Company uses
the last-in, first-out (LIFO) and first-in, first-out (FIFO) cost methods.
Inventory costs include material, labor, and overhead. Inventories were as
follows (in thousands):
June 30, March 31,
2000 2000
---------- ----------
Raw material $27,603 $ 29,346
Work in process 26,908 24,743
Finished goods 39,167 50,535
---------- ----------
Total Inventories $93,678 $104,624
========== ==========
6. Financing
On June 19, 2000, the Company entered into a $325,000,000 Revolving Credit
Facility (the "Facility") which replaced the prior credit facility. The
Facility matures on June 29, 2003 and provides financial covenants and borrowing
alternatives which are more appropriate for the Company's strategic objectives.
The Facility may be used to refinance existing indebtedness, as well as for
general corporate purposes. The Facility bears interest at LIBOR plus 1.25 to
2.25 percent or KeyBank National Association's prime rate. The Facility contains
customary covenants which include maintenance of certain financial ratios such
as a fixed charge covenant and consolidated leverage ratios. The Facility also
places restrictions on the Company's ability to pay dividends.
7. Contingencies
In December 1999, STERIS received a warning letter from the United States Food
and Drug Administration ("FDA") in connection with the FDA's inspection of
STERIS's manufacturing facility in Mentor, Ohio. Since the inspection and
receipt of the warning letter, STERIS has been working diligently to resolve the
FDA's concerns. STERIS submitted a timely formal response to the warning letter
and has continued to communicate with the FDA both in writing and orally with
respect to this matter. The Company will continue to cooperate with the FDA to
reach a final resolution of all concerns. Although no assurance can be given
regarding further actions by the FDA or the timing of any such final resolution,
management believes this matter will not have a material adverse effect on
STERIS's financial condition, results of operations, or cash flow.
There are various pending lawsuits and claims arising out of the conduct of
STERIS's business. In the opinion of management, the ultimate outcome of these
lawsuits and claims will not have a material adverse effect on STERIS's
consolidated financial position or results of operations. STERIS presently
maintains
7
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STERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the 3 Months Ended
June 30, 2000 and 1999
product liability insurance coverage in amounts and with deductibles that it
believes are prudent.
8. Revenues
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition", which explains how the SEC staff believes existing
revenue recognition rules should be applied. It is anticipated that the SEC
will issue SAB No. 101 interpretive guidance by the end of the third calendar
quarter of 2000. The Company is currently studying the provisions of SAB No.
101 and plans to utilize this interpretive guidance to determine if any change
is required to ensure compliance with this SAB.
9. Non-recurring Transactions
During the fourth quarter of fiscal 2000 the Company recorded a special charge
of $39,722,000. This charge related to plans for manufacturing consolidations,
productivity improvements in both manufacturing and support functions,
restructuring of the remanufactured equipment business, and associated workforce
reductions in the manufacturing and support functions (approximately 200
employees). At June 30, 2000, these plans have been or are in the process of
being implemented with a remaining accrued balance of approximately $20,637,000.
8
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
STERIS Corporation
We have reviewed the accompanying consolidated balance sheet of STERIS
Corporation and subsidiaries as of June 30, 2000, and the related consolidated
statements of income and cash flows for the three months ended June 30, 2000 and
1999. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of STERIS
Corporation and subsidiaries as of March 31, 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended, not presented herein, and in our report dated April 20, 2000, except for
Note E, as to which the date is June 19, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of March
31, 2000, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 17, 2000
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
Results of Operations
---------------------
Net revenue for the 3 months ended June 30, 2000 increased 4% to $183,813,000
from $176,813,000 for the comparable period last year. The increase in net
revenues was attributable to an 11.5% growth in overall revenues from
consumables and service, offset by a decline in capital revenues of 6.5%. The
Scientific and Industrial Group net revenues increased 17.7% to $53,740,000 for
the 3 months ended June 30, 2000 as compared to $45,658,000 for the 3 months
ended June 30, 1999. Health Care Group net revenues decreased 0.8% to
$130,073,000 from $131,155,000 in the prior year first quarter.
The costs of products and services sold increased to $105,604,000 in the first
quarter fiscal 2001 from $94,801,000 in the first quarter fiscal 2000. The cost
of products and services sold as a percentage of net revenue was 57.5% for the 3
months ended June 30, 2000 compared to 53.6% for the comparable period last
year. The increase in the cost of products and services sold as a percentage of
net revenue in the first quarter fiscal 2001 was primarily due to the Company's
initiative to improve the efficiency and productivity of its manufacturing
operations. As part of this efficiency improvement program, first quarter
inventories were reduced by $10,946,000 as compared to year-end March 31, 2000.
This inventory decline led to higher plant overhead expense recognition of
$4,070,000 for the 3 months ended June 30, 2000.
General and administrative expenses were $66,782,000 or 36.3% of net revenue for
the 3 months ended June 30, 2000 compared to $57,651,000 or 32.6% for the 3
months ended June 30, 1999. This increase reflects the Company's efforts to
implement programs which are targeted at improving the sales and operating
planning process as well as improving the efficiency and productivity of its
major manufacturing operations.
Research and development expenses decreased by 6.2% to $5,821,000 in the first
quarter fiscal 2001 from $6,208,000 in the first quarter fiscal 2000.
Interest expense, net increased by 37.9% to $4,271,000 in the first quarter
fiscal 2001 from $3,097,000 in the first quarter fiscal 2000. The increase was
due to higher average outstanding borrowings under the Facility as well as the
effects of higher interest rates.
Net income, as a result of the foregoing factors, was $828,000 for the 3 months
ended June 30, 2000, as compared to $9,335,000 for the comparable prior year
period.
Liquidity and Capital Resources
-------------------------------
The Company's operating activities generated $19,503,000 of cash during the 3
months ended June 30, 2000, which was an increase of $24,453,000 over the
comparable period last year. Decreases in accounts receivable and inventory
were the primary source of the year-over-year increase. Accounts receivable
decreased $13,764,000 or 6.6% and inventory decreased $10,946,000 or 10.5% since
the year ended March 31, 2000. The decrease in inventory was due to the
enhancement of the sales and operating planning process, coupled with the
Company's manufacturing initiatives described above. Major uses of working
capital included accounts payable and accrued expenses, which decreased
$18,848,000 or 12.1%.
Net cash used for investing activities was $15,759,000 for the 3 months ended
June 30, 2000 versus $14,290,000 in the comparable prior year period. The
increase was due primarily to the investment in the Company's new Isomedix
facility located in Ontario, California.
Net cash used for financing activities was $13,424,000 for the 3 months ended
June 30, 2000. Current year financing activities primarily represent the
repayment of $13,000,000 to reduce the outstanding
10
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balance of the Facility. Net cash provided by financing in the comparable prior
year period primarily represented borrowings under the Company's prior credit
facility and the payment of $28,712,000 for the purchase of treasury shares.
On June 19, 2000, the Company entered into a $325,000,000 Facility which
replaced the prior credit facility. The Facility matures on June 29, 2003 and
provides financial covenants and borrowing alternatives which are more
appropriate for the Company's strategic objectives. The Facility may be used to
refinance existing indebtedness, as well as for general corporate purposes. The
Facility bears interest at LIBOR plus 1.25 to 2.25 percent or KeyBank National
Association's prime rate. The Facility contains customary covenants which
include maintenance of certain financial ratios such as a fixed charge covenant
and consolidated leverage ratios. The Facility also places restrictions on the
Company's ability to pay dividends. As of June 30, 2000, the Company had
outstanding borrowings of $250,000,000 under its Facility at an average weighted
interest rate of 6.7%.
The Company has no material commitments for capital expenditures. The Company
believes that its cash requirements will increase due to increased sales
requiring more working capital, accelerated research and development, and
potential acquisitions or investments in complementary businesses. However, the
Company believes that its available cash, cash flow from operations, and sources
of credit will be adequate to satisfy its capital needs for the foreseeable
future.
Contingencies
-------------
For a discussion of contingencies, see Note 7 to the consolidated financial
statements.
Seasonality
-----------
Historical data indicates that financial results were subject to recurring
seasonal fluctuations. A number of factors have contributed to the seasonal
patterns, including sales promotion and compensation programs, Customer buying
patterns of capital equipment, and international business practices. Sales and
profitability of certain of the acquired and consolidated product lines have
historically been disproportionately weighted toward the latter part of each
quarter and generally weighted toward the latter part of each fiscal year.
Various changes in business practices resulting from the integration of acquired
businesses into STERIS may alter the historical patterns of the previously
independent businesses.
Euro
----
On January 1, 1999, eleven of the fifteen member countries of the European
Monetary Union (EMU) began a three-year transition phase during which a common
currency called the Euro was adopted. The Euro trades on currency exchanges and
is available for non-cash transactions. During the transition period, parties
may pay for goods and services using either the Euro or the participating
country's legacy currency on a "no compulsion, no prohibition" basis. The
conversion rates between the existing legacy currencies and the Euro were fixed
on January 1, 1999. The legacy currencies will remain legal tender for cash
transactions between January 1, 1999, and January 1, 2002, at which time all
legacy currencies will be withdrawn from circulation and the new Euro
denominated bills and coins will be used for cash transactions.
The Company has several operations within the eleven participating countries
that are utilizing the Euro. Additionally, the Company's operations in other
countries will be conducting business transactions with Customers and suppliers
that will be denominated in the Euro. Euro denominated bank accounts have been
established to accommodate Euro transactions.
The Company has established and implemented certain plans to review strategic
and tactical areas arising from the Euro conversion. Initial efforts were
focused on aspects of the Euro conversion that required adjustment or compliance
by January 1, 1999, and for conducting Euro-denominated business. These aspects
included transacting business in the Euro, the competitive impact on product
pricing, and adjustments to billing systems to handle parallel currencies. The
Company has determined that these
11
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systems have the capability to handle Euro transactions and is currently in a
position to transact business in Euros. Continuing analysis and development
efforts will help ensure that the implementation of the Euro meets the timetable
and regulations established by the EMU. Based on current estimates, the Company
does not expect the costs incurred to address the Euro will have a material
impact on its financial condition or results of operations.
Cautionary Statements Regarding Forward-Looking Statements
----------------------------------------------------------
This discussion contains statements concerning certain trends and other forward-
looking information affecting or relating to the Company and its industry that
are intended to qualify for the protections afforded "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may be identified by the use of forward-looking terms
such as "may," "will," "expects," "believes," "anticipates," "plans,"
"estimates," "projects," "targets," "forecasts," or "seeks" or the negative of
such terms or other variations on such terms or comparable terminology. There
are many important factors that could cause actual results to differ materially
from those in the forward-looking statements. Many of these important factors
are outside STERIS's control. Changes in market conditions, including
competitive factors and changes in government regulations, could cause actual
results to differ materially from the Company's expectations. No assurance can
be provided as to any future financial results. Other potentially negative
factors that could cause actual results to differ materially from those in the
forward-looking statements include (a) the possibility that the continuing
integration of acquired businesses will take longer than anticipated, (b) the
potential for increased pressure on pricing that leads to erosion of profit
margins, (c) the possibility that market demand will not develop for new
technologies, products, and applications, (d) the possibility that compliance
with the regulations and certification requirements of domestic and foreign
authorities may delay or prevent new product introductions or affect the
production and marketing of existing products, (e) the potential effects of
fluctuations in foreign currencies where the Company does a sizable amount of
business, (f) the possibility that the Company's activities related to changes
in its sales force will take longer or incur greater expense than anticipated,
and (g) the possibility of reduced demand, or reductions in the rate of growth
in demand, for the Company's products.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
A discussion of market risk exposures is included in Part II, Item 7a,
"Quantitative and Qualitative Disclosure about Market Risk," of the Company's
2000 Annual Report and Form 10-K. There were no material changes during the
three months ended June 30, 2000.
13
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Reference is made to Part I, Item 1., Note 7 of this Report on Form 10-Q, which
is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Company held its Annual Meeting of Shareholders on July 21, 2000, at the
Radisson Hotel & Conference Center, 35000 Curtis Boulevard, Eastlake, Ohio. At
the Annual Meeting, shareholders re-elected two Class II directors and elected
one new Class II director to serve for terms expiring at the Annual Meeting of
Shareholders in 2002. Results of the voting for the re-elected directors were:
Jerry E. Robertson 56,465,377 votes for, 3,769,292 withheld, Loyal W. Wilson
56,475,562 votes for, 3,759,107 withheld. Results of the voting for the newly
elected director were: Kevin M. McMullen 57,792,953 votes for, 2,441,716
withheld.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit Number Exhibit Description
-------------- -------------------
15.1 Letter RE: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None
14
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERIS Corporation
(Registrant)
/s/ Laurie Brlas
--------------------------
Laurie Brlas
Senior Vice President and
Chief Financial Officer
August 11, 2000
15
