News Column

STERIS CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 29, 2014

INTRODUCTION

In Management's Discussion and Analysis ("MD&A"), we explain the general financial condition and the results of operations for STERIS and its subsidiaries including:

• what factors affect our business;

• what our earnings and costs were;

• why those earnings and costs were different from the year before;

• where our earnings came from;

• how this affects our overall financial condition;

• what our expenditures for capital projects were; and

• where cash will come from to fund future debt principal repayments, growth

outside of core operations, repurchase common shares, pay cash dividends

and fund future working capital needs.

The MD&A also analyzes and explains the annual changes in the specific line items in the Consolidated Statements of Income. As you read the MD&A, it may be helpful to refer to information in Item 1, "Business," Item 6, "Selected Financial Data," and our consolidated financial statements, which present the results of our operations for fiscal 2014, 2013 and 2012, as well as Part I, Item 1A, "Risk Factors" and Part I, Item 3, "Legal Proceedings", for a discussion of some of the matters that can adversely affect our business and results of operations. This information, discussion, and disclosure may be important to you in making decisions about your investments in STERIS.



FINANCIAL MEASURES

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



• Backlog - We define backlog as the amount of unfilled capital equipment

purchase orders at a point in time. We use this figure as a measure to

assist in the projection of short-term financial results and inventory

requirements. • Debt-to-total capital - We define debt-to-total capital as total debt divided by the sum of total debt and shareholders' equity. We use this



figure as a financial liquidity measure to gauge our ability to borrow and

fund growth.

• Net debt-to-total capital - We define net debt-to-total capital as total

debt less cash ("net debt") divided by the sum of net debt and

shareholders' equity. We also use this figure as a financial liquidity

measure to gauge our ability to borrow and fund growth.

• Days sales outstanding ("DSO") - We define DSO as the average collection

period for accounts receivable. It is calculated as net accounts

receivable divided by the trailing four quarters' revenues, multiplied by

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



REVENUES- DEFINED

As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms 22



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that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:

• Revenues - Our revenues are presented net of sales returns and allowances.

• Product Revenues - We define product revenues as revenues generated from

sales of consumable and capital equipment products.

• Service Revenues - We define service revenues as revenues generated from

parts and labor associated with the maintenance, repair, and installation

of our capital equipment, instrument and endoscope repair services, and revenues generated from contract sterilization offered through our Isomedix segment.



• Capital Revenues - We define capital revenues as revenues generated from

sales of capital equipment, which includes steam sterilizers, low

temperature liquid chemical sterilant processing systems, including SYSTEM

1 and 1E, washing systems, VHP® technology, water stills, and pure steam

generators; surgical lights and tables; and integrated OR.

• Consumable Revenues - We define consumable revenues as revenues generated

from sales of the consumable family of products, which includes SYSTEM 1

and 1E consumables, V-Pro consumables, gastrointestinal endoscopy

accessories, sterility assurance products, skin care products, cleaning

consumables, and surgical instruments.

• Recurring Revenues - We define recurring revenues as revenues generated

from sales of consumable products and service revenues.

GENERAL OVERVIEW AND EXECUTIVE SUMMARY

Our Business. Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers. The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. We are also investing in several manufacturing in-sourcing projects for the purpose of improving quality, cost and delivery of our products to our Customers. Highlights. During fiscal year 2014, we continued to invest in new products and in quality processes to defend and grow our core business. Simultaneously, we continued the execution of our strategy to expand into adjacent markets with acquisitions in the Healthcare segment. In December 2013, we purchased the assets of Florida Surgical Repair ("FSR"), a provider of surgical instrument and surgical equipment repair services. In February 2014, we purchased the assets of Life Systems, Inc. ("LSI"), a provider of sales and service in the endoscopy repair and certified pre-owned equipment markets. In February 2014, we also purchased the stock of Eschmann Holdings Ltd. ("Eschmann"), a provider of surgical and infection prevention solutions and services used primarily in hospitals, surgery centers and dental offices in the United Kingdom. In the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of our Hopkins manufacturing facility located in Mentor, Ohio (the "Fiscal 2014 Restructuring Plan"). As a result of this plan we will transfer operations located at Hopkins to other North American locations. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We expect that these actions, combined with additional actions taken in prior years, will allow us to make substantial progress in reducing our cost base. Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to $1,501.9 million for the year ended March 31, 2013. The fiscal 2013 period was positively impacted by the SYSTEM 1 Rebate Program adjustment of $22.4 million. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted revenues of $1,479.5 million for fiscal 2013, which exclude the impact of the SYSTEM 1 Rebate Program, reflecting growth in all three business segments (see subsection of MD&A titled "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Fiscal 2014 operating income was $206.8 million, a decrease of 14.8% over the fiscal 2013 operating income of $242.8 million. The primary drivers of the lower operating income was the positive impact of the $23.6 million SYSTEM 1 Rebate 23



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



MATTERS AFFECTING COMPARABILITY

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



NON-GAAP FINANCIAL MEASURES

We, at times, refer to financial measures which are considered to be "non-GAAP financial measures" under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented. 24



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These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures. These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented. We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies. We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to fund future debt principal repayments and growth outside of core operations, repurchase common shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the years ended March 31, 2014, 2013 and 2012: Years Ended March 31, (dollars in thousands) 2014 2013 2012 Net cash flows provided by operating activities $ 209,631$ 227,815$ 149,372 Purchases of property, plant, equipment and intangibles, net (86,367 ) (87,412 ) (66,682 ) Proceeds from the sale of property, plant, equipment and intangibles 4,774 34 42 Free cash flow $ 128,038$ 140,437$ 82,732 To supplement our financial results presented in accordance with U.S. GAAP, we have sometimes referred to certain measures of revenues, gross profit, gross profit percentage, and the Healthcare segment results of operations in the section of MD&A titled, "Results of Operations" excluding the impact of adjustments recorded in connection with the SYSTEM 1 Rebate Program and the SYSTEM 1 class action settlement. These items had a significant impact on the fiscal 2013 and fiscal 2012 measures and the corresponding trend in each of these measures. We provide adjusted measures to give the reader a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. These measures are used by management and the Board of Directors in making comparisons to our historical operating results and analyzing the underlying performance of our operations. The tables below provide a reconciliation of each of these measures to its most directly comparable GAAP financial measure. Years Ended March 31, (dollars in thousands) 2014 2013 2012 Reported revenues $ 1,622,252$ 1,501,902$ 1,406,810 Impact of the SYSTEM 1 Rebate Program - (22,367 ) (15,306 ) Adjusted revenues $ 1,622,252$ 1,479,535 $



1,391,504

Reported capital equipment revenues $ 603,579$ 613,378$ 626,959 Impact of the SYSTEM 1 Rebate Program

- (22,367 )



(15,306 ) Adjusted capital equipment revenues $ 603,579$ 591,011$ 611,653

Reported United States revenues $ 1,244,730$ 1,141,633$ 1,057,460 Impact of the SYSTEM 1 Rebate Program

- (22,367 )



(15,306 ) Adjusted United States Revenues $ 1,244,730$ 1,119,266$ 1,042,154

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Reported Healthcare revenues $ 1,180,051$ 1,074,790$ 1,013,102 Impact of the SYSTEM 1 Rebate Program - (22,367 ) (15,306 ) Adjusted Healthcare revenues $ 1,180,051$ 1,052,423



$ 997,796

Healthcare capital revenues $ 515,380$ 521,806$ 545,596 Impact of SYSTEM 1 Rebate Program - (22,367 )



(15,306 ) Adjusted Healthcare capital revenues $ 515,380$ 499,439$ 530,290

Reported gross profit $ 649,622$ 621,263$ 568,465 Impact of the SYSTEM 1 Rebate Program - (23,640 ) (17,403 ) Adjusted gross profit $ 649,622$ 597,623



$ 551,062

Reported gross profit percentage 40.0 % 41.4 % 40.4 % Impact of the SYSTEM 1 Rebate Program - % (1.0 )% (0.8 )% Adjusted gross profit percentage 40.0 % 40.4 %



39.6 %

Reported operating income $ 206,807$ 242,829$ 222,316 Impact of the SYSTEM 1 Rebate Program and class action settlement - (40,422 ) (17,403 ) Adjusted operating income $ 206,807$ 202,407$ 204,913 Reported Healthcare operating income $ 109,714$ 153,343$ 141,742 Impact of the SYSTEM 1 Rebate Program and class action settlement - (40,422 )



(17,403 ) Adjusted Healthcare operating income $ 109,714$ 112,921$ 124,339

Reported income tax expense $ 58,934$ 67,121$ 74,993 Impact of the SYSTEM 1 Rebate Program and class action settlement - (15,765 ) (6,780 ) Adjusted income tax expense $ 58,934$ 51,356$ 68,213 Reported selling, general and administrative $ 380,970$ 337,694$ 309,552 Impact of the SYSTEM 1 class action settlement - 16,782 - Adjusted selling, general and administrative $ 380,970$ 354,476



$ 309,552

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



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

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FISCAL 2014 AS COMPARED TO FISCAL 2013

Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2014 to the year ended March 31, 2013: Years Ended March 31, Percent (dollars in thousands) 2014 2013 Change Change Total revenues $ 1,622,252$ 1,501,902$ 120,350 8.0 % Revenues by type: Capital equipment revenues 603,579 613,378 (9,799 ) (1.6 )% Consumable revenues 407,883 353,984 53,899 15.2 % Service revenues 610,790 534,540 76,250 14.3 % Revenues by geography: United States revenues 1,244,730 1,141,633 103,097 9.0 % International revenues 377,522 360,269 17,253 4.8 % Revenues increased $120.4 million, or 8.0%, to $1,622.3 million for the year ended March 31, 2014, as compared to $1,501.9 million for the year ended March 31, 2013. Fiscal 2014 revenues increased $142.8 million, or 9.7%, over adjusted revenues for fiscal 2013, which exclude the impact of the $22.4 million SYSTEM 1 Rebate Program adjustments (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase reflects growth in all three business segments. Capital equipment revenues decreased by $9.8 million, or 1.6%, to $603.6 million, during fiscal 2014 as compared to fiscal 2013. Capital equipment revenues for the fiscal year ended 2013 were favorably impacted by adjustments related to the SYSTEM 1 Rebate Program of $22.4 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Fiscal 2014 capital equipment revenues increased $12.6 million, or 2.1% over fiscal 2013 adjusted capital equipment revenues of $591.0 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). This increase was primarily driven by growth in the U.S. and the EMEA region, offset by declines in other international regions. Consumable revenues increased $53.9 million, or 15.2%, during fiscal 2014 from fiscal 2013. This increase was driven by growth within the Healthcare segment due in large part to our recent acquisitions, and growth within the Life Sciences business segment and reflects growth in all regions. Service revenues for fiscal 2014 increased $76.3 million, or 14.3%, over fiscal 2013 primarily driven by the recent acquisitions of the instrument repair businesses, other service offerings, and growth of $14.6 million, or 8.1%, within the Isomedix segment in fiscal 2014 over fiscal 2013. Isomedix revenues were favorably impacted by increased demand from our medical device Customers and the filling of recently added capacity. United States revenues for fiscal 2014 were $1,244.7 million, an increase of $103.1 million, or 9.0%, over fiscal 2013 revenues of $1,141.6 million. The fiscal 2013 period was favorably impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million. United States revenues for fiscal 2014 increased $125.5 million, or 11.2%, over the adjusted United States revenues for fiscal 2013 of $1,119.3 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase is driven by higher consumable and service revenues attributable, in part, to our recent acquisitions but also attributable to increased revenues from other products. These results reflect growth in all three business segments. International revenues for fiscal 2014 were $377.5 million, an increase of 4.8% over the fiscal 2013 revenues of $360.3 million. This increase reflects revenue growth in the Latin American and EMEA regions, partially offset by declines in Canada and the Asia Pacific regions.



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

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Table of Contents Years Ended March 31, Percent (dollars in thousands) 2014 2013 Change Change 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, Percent (dollars in thousands) 2014 2013 Change Change Operating expenses: Selling, general, and administrative $ 380,970$ 337,694$ 43,276 12.8 % Research and development 48,641 41,305 7,336 17.8 % Restructuring expenses 13,204 (565 ) 13,769 NM Total operating expenses $ 442,815$ 378,434$ 64,381 17.0 % NM - Not meaningful Significant components of total selling, general, and administrative expenses ("SG&A") are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 12.8% during fiscal 2014 over fiscal 2013. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The impact of the class action settlement aside, the increase in SG&A in fiscal 2014 over fiscal 2013 is primarily attributable to the addition of operating expenses incurred with our acquired businesses. In addition, we recorded a fair value adjustment of $1.0 million related to a deferred payment of purchase price for the 2012 purchase of Sercon Industria E Comercio De Aparelhos Medicos Hospitalares LTDA ("Sercon"). Research and development expenses increased $7.3 million during fiscal 2014, as compared to fiscal 2013. The majority of the increase is attributable to expenses for research and development incurred within the operations of the businesses acquired in fiscal 2013 and fiscal 2014. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. During fiscal 2014, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures. Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and 28



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equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets. Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of the Hopkins manufacturing facility located in Mentor, Ohio (the "Fiscal 2014 Restructuring Plan"). As a result of this plan we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will be able to more effectively utilize our existing North American manufacturing network while reducing operating costs. The plan also includes the rationalization of certain products and the elimination of certain positions across our operations impacting approximately 150 employees. These actions resulted in the impairment of related assets and inventory and severance and outplacement costs. We anticipate that these restructuring actions will result in annual savings of approximately $10.0 million. We expect to incur restructuring charges of approximately $1.0 million in fiscal 2015, as additional costs associated with the plan are incurred. Fiscal 2010 Restructuring Plan. During the fourth quarter of fiscal 2010 we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the "Fiscal 2010 Restructuring Plan"). In addition, we rationalized certain products and eliminated certain positions. The following tables summarize our total pre-tax restructuring expenses for fiscal 2014 and fiscal 2013: Year Ended March 31, 2014 Fiscal 2014 Fiscal 2010 Restructuring Restructuring (dollars in thousands) Plan (1)



Plan Total Severance and other compensation related costs $ 7,363 $

127 $ 7,490 Asset impairment and accelerated depreciation 3,621 990 4,611 Lease termination obligation and other 1,103 - 1,103 Product rationalization 8,144 - 8,144 Total restructuring charges $ 20,231 $ 1,117 $ 21,348 (1) Includes $8.1 million in charges recorded in cost of revenues on Consolidated Statements of Income. Year Ended March 31, 2013 Fiscal 2010 Restructuring (dollars in thousands) Plan Severance and other compensation related costs $ (918 ) Lease termination obligation and other 353 Total restructuring charges $ (565 ) Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within "Accrued payroll and other related liabilities" and "Accrued expenses and other." The following tables summarizes our restructuring liability balances and activity: Fiscal 2014 Restructuring Plan Fiscal 2014 March 31, Payments/ March 31, (dollars in thousands) 2013 Provision Impairments (1) 2014 Severance and termination benefits $ - $ 6,429 $ (40 ) $ 6,389 Lease termination obligations and other - 1,589 - 1,589 Total $ - $ 8,018 $ (40 ) $ 7,978



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

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Table of Contents Fiscal 2010 Restructuring Plan Fiscal 2013 March 31, Payments/ March 31, (dollars in thousands) 2012 Provision (1) Impairments (2) 2013



Severance and termination benefits $ 659 $ (918 )

$ 730 $ 471 Lease termination obligations 947 - (791 ) 156 Other 76 353 (429 ) - Total $ 1,682$ (565 ) $ (490 ) $ 627 (1) Includes curtailment benefit of $0.9 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans." (2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar. Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table compares our non-operating expense (income), net for the year ended March 31, 2014 to the year ended March 31, 2013: Years Ended March 31, (dollars in thousands) 2014 2013 Change Non-operating expenses, net: Interest expense $ 18,770$ 15,675$ 3,095 Interest income and miscellaneous expense (339 ) 56 (395 ) Non-operating expenses, net $ 18,431$ 15,731$ 2,700 Interest expense during fiscal 2014 increased due to higher outstanding borrowings due to acquisitions. Interest income and miscellaneous expense are immaterial. Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled, "Debt," and in the subsection of MD&A titled, "Liquidity and Capital Resources." Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended March 31, 2014 and March 31, 2013: Years Ended March 31, Percent (dollars in thousands) 2014 2013 Change Change



Income tax expense $ 58,934$ 67,121$ (8,187 ) (12.2)% Effective income tax rate 31.3 % 29.6 %

The effective income tax rate for fiscal 2014 was 31.3% as compared to 29.6% for fiscal 2013. The effective tax rate in fiscal 2013 was impacted by a U.S. tax benefit resulting from European restructuring. Specifically, a U.S. tax deduction was taken relating to the rationalization of operations in Switzerland. The effective tax rate in 2014 includes the benefit from the recognition of previously unrecognized tax benefits due to the settlement of a federal tax examination. Additional information regarding our income tax expense is included in note 9 to our consolidated financial statements titled, "Income Taxes." Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled "Business Segment Information," and Item 1, "Business," provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2014 to the year ended March 31, 2013: 30



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Table of Contents Years Ended March 31, Percent (dollars in thousands) 2014 2013 Change Change 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, Percent (dollars in thousands) 2014 2013 Change Change Operating income (loss): Healthcare $ 109,714$ 153,343$ (43,629 ) (28.5 )% Life Sciences 50,049 47,453 2,596 5.5 % Isomedix 55,186 51,455 3,731 7.3 % Total reportable segments 214,949 252,251 (37,302 ) (14.8 )% Corporate and other (8,142 ) (9,422 ) 1,280



(13.6 )% Total operating income (loss) $ 206,807$ 242,829$ (36,022 ) (14.8 )%

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



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



FISCAL 2013 AS COMPARED TO FISCAL 2012

Revenues. The following table compares our revenues, in total and by type and geography, for the year ended March 31, 2013 to the year ended March 31, 2012: Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change Total revenues $ 1,501,902$ 1,406,810$ 95,092 6.8 % Revenues by type: Capital equipment revenues 613,378 626,959 (13,581 ) (2.2 )% Consumable revenues 353,984 301,171 52,813 17.5 % Service revenues 534,540 478,680 55,860 11.7 % Revenues by geography: United States revenues 1,141,633 1,057,460 84,173 8.0 % International revenues 360,269 349,350 10,919 3.1 % Revenues increased $95.1 million, or 6.8%, to $1,501.9 million for the year ended March 31, 2013, as compared to $1,406.8 million for the year ended March 31, 2012. The fiscal 2013 and fiscal 2012 periods were impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted revenues for the year ended March 31, 2013, excluding the impact of the adjustment related to the SYSTEM 1 Rebate Program, were $1,479.5 million, a 6.3% increase over adjusted revenues for fiscal 2012 (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase reflects growth in all three business segments. Capital equipment revenues decreased by $13.6 million, or 2.2%, to $613.4 million, during fiscal 2013 as compared to fiscal 2012. Capital equipment revenues for the fiscal years ended 2013 and 2012 were favorably impacted by adjustments related to the SYSTEM 1 Rebate Program of $22.4 million and $15.3 million, respectively. Adjusted capital equipment revenues for fiscal 2013 were $591.0 million, a 3.4% decrease over adjusted capital equipment revenues for fiscal 2012. This decrease was primarily driven by the expected post-transition decline in SYSTEM 1E unit sales (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Consumable revenues increased $52.8 million, or 17.5%, during 2013 from fiscal 2012, as increases within the Healthcare segment, driven largely by recent acquisitions, and the Life Sciences business segment more than offset the anticipated decline in SYSTEM 1 consumable volume. Service revenues for fiscal 2013 increased $55.9 million, or 11.7%, over fiscal 2012 primarily driven by the recent acquisition of the instrument repair businesses and other service offerings. United States revenues for fiscal 2013 were $1,141.6 million, an increase of $84.2 million, or 8.0%, over fiscal 2012 revenues of $1,057.5 million. The fiscal 2013 and 2012 periods were impacted by the SYSTEM 1 Rebate Program adjustments of $22.4 million and $15.3 million, respectively. Adjusted United States revenues for fiscal 2013 were $1,119.3 million, an increase of $77.1 million, or 7.4%, over adjusted United States revenues for fiscal 2012 (see subsection of MD&A titled, "Non- 32



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



Gross Profit. The following table compares our gross profit for the year ended March 31, 2013 to the year ended March 31, 2012:

Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change Gross profit: Product $ 416,463$ 376,134$ 40,329 10.7 % Service 204,800 192,331 12,469 6.5 % Total gross profit $ 621,263$ 568,465$ 52,798 9.3 % Gross profit percentage: Product 43.1 % 40.5 % Service 38.3 % 40.2 %



Total gross profit percentage 41.4 % 40.4 %

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



Operating Expenses. The following table compares our operating expenses for the year ended March 31, 2013 to the year ended March 31, 2012:

Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change Operating expenses: Selling, general, and administrative $ 337,694$ 309,552$ 28,142 9.1 % Research and development 41,305 35,953 5,352 14.9 % Restructuring expenses (565 ) 644 (1,209 ) NM Total operating expenses $ 378,434$ 346,149$ 32,285 9.3 % NM - Not meaningful Significant components of total selling, general, and administrative expenses ("SG&A") are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 9.1% during fiscal 2013 over fiscal 2012. During fiscal 2013, we adjusted the liability related to the SYSTEM 1 class action settlement. The pre-tax adjustment of $16.8 million was recorded as a reduction to operating expenses. Adjusted SG&A expenses, excluding the impact of the SYSTEM 1 class action settlement for fiscal 2013 were $354.5 million (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial 33



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measures to the most comparable GAAP measures). Fiscal 2012 operating expenses reflect lower costs for our annual incentive compensation plan since fiscal 2012 bonuses were not paid as performance targets for fiscal 2012 were not met. Fiscal 2013 SG&A includes transaction costs and incremental amortization of acquired intangible assets associated with the recent acquisitions. SG&A also increased due to the operating expenses incurred within the operations of recently acquired businesses. Research and development expenses increased $5.4 million during fiscal 2013, as compared to fiscal 2012. The majority of the increase is attributable to expenses for research and development incurred by the recently acquired US Endoscopy. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. During fiscal 2013, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical products and accessories, and the areas of emerging infectious agents such as Prions and Nanobacteria. Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the inventory and property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets. During the fourth quarter of fiscal 2010, we adopted a restructuring plan primarily related to the transfer of the remaining operations in our Erie, Pennsylvania facility to the U.S. headquarters in Mentor, Ohio and the consolidation of our European Healthcare manufacturing operations into two central locations within Europe (the "Fiscal 2010 Restructuring Plan"). In addition, we rationalized certain products and eliminated certain positions. We do not expect to incur any significant additional restructuring expenses related to this plan. During the fourth quarter of fiscal 2008, we adopted a restructuring plan primarily focused on our North American operations (the "Fiscal 2008 Restructuring Plan"). As part of this plan, we announced the closure of two sales offices, reduced the workforce in certain support functions, and rationalized certain products. These actions are intended to enhance profitability and improve efficiency by reducing ongoing operating costs. Across all of our reporting segments, approximately 90 employees, primarily located in North America, were directly impacted. We do not expect to incur any significant additional restructuring expenses related to this plan. We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not committed to any additional specific actions. Further information regarding our restructuring actions is included in note 2 to our consolidated financial statements titled, "Restructuring." The following tables summarize our total restructuring charges for fiscal 2013, and 2012: Year Ended March 31, 2013 Fiscal 2010 Restructuring (dollars in thousands) Plan Severance and other compensation related costs $ (918 ) Lease termination obligation and other 353 Total restructuring charges $ (565 ) 34



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Table of Contents Year Ended March 31, 2012 Fiscal 2010 Fiscal 2008 Restructuring Restructuring (dollars in thousands) Plan Plan Total



Severance and other compensation related costs $ (776 ) $ - $ (776 ) Product rationalization

335 - 335 Asset impairment and accelerated depreciation 1,103 - 1,103 Lease termination obligation and other 143 (152 ) (9 ) Total restructuring charges $ 805$ (152 )$ 653



Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within "Accrued payroll and other related liabilities" and "Accrued expenses and other." The following table summarizes our liabilities related to these restructuring activities:

Fiscal 2010 Restructuring Plan Fiscal 2013 March 31, Payments/ March 31, (dollars in thousands) 2012 Provision (1) Impairments (2) 2013 Severance and termination benefits $ 659$ (918 ) $ 730 $ 471 Lease termination obligations 947 - (791 ) 156 Other 76 353 (429 ) - Total $ 1,682$ (565 ) $ (490 ) $ 627 (1) Includes curtailment benefit of $0.9 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans." (2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar. Fiscal 2010 Restructuring Plan Fiscal 2012 March 31, Payments/ March 31, (dollars in thousands) 2011 Provision (1) Impairments (2) 2012 Severance and termination benefits $ 1,993$ (776 ) $ (558 ) $ 659 Product rationalization - 335 (335 ) - Asset impairments and accelerated depreciation - 1,103 (1,103 ) - Lease termination obligations 1,790 139 (982 ) 947 Other 193 4 (121 ) 76 Total $ 3,976 $ 805 $ (3,099 )$ 1,682 (1) Includes curtailment benefit of $1.3 million related to International defined benefit plan. Additional information is included in note 10, "Benefit Plans." (2) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar. Non-Operating Expenses, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous expense. The following table compares our non-operating expense (income), net for the year ended March 31, 2013 to the year ended March 31, 2012: Years Ended March 31, (dollars in thousands) 2013 2012 Change Non-operating expenses, net: Interest expense $ 15,675$ 12,065$ 3,610 Interest income and miscellaneous expense 56 (857 ) 913 Non-operating expenses, net $ 15,731$ 11,208$ 4,523 35



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Interest expense during fiscal 2013 periods increased due to higher outstanding borrowings due to acquisitions. Interest income and miscellaneous expense is immaterial. Additional information regarding our outstanding debt is included in note 7 to our consolidated financial statements titled, "Debt," and in the subsection of MD&A titled, "Liquidity and Capital Resources." Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the years ended March 31, 2013 and March 31, 2012: Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change



Income tax expense $ 67,121$ 74,993$ (7,872 ) (10.5)% Effective income tax rate 29.6 % 35.5 %

The effective income tax rate for fiscal 2013 was 29.6% as compared to 35.5% for fiscal 2012. The effective tax rate in fiscal 2013 was impacted by a U.S. tax benefit resulting from European restructuring. Specifically, a U.S. tax deduction was taken relating to the rationalization of operations in Switzerland. Additional information regarding our income tax expense is included in note 9 to our consolidated financial statements titled, "Income Taxes." Business Segment Results of Operations. We operate in three reportable business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees, and legacy pension and post-retirement benefit costs. Note 12 to our consolidated financial statements titled "Business Segment Information," and Item 1, "Business," provide detailed information regarding each business segment. The following table compares business segment and Corporate and other revenues for the year ended March 31, 2013 to the year ended March 31, 2012: Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change Revenues: Healthcare $ 1,074,790$ 1,013,102$ 61,688 6.1 % Life Sciences 244,421 226,658 17,763 7.8 % Isomedix 179,550 164,257 15,293 9.3 % Total reportable segments 1,498,761 1,404,017 94,744 6.7 % Corporate and other 3,141 2,793 348 12.5 % Total Revenues $ 1,501,902$ 1,406,810$ 95,092 6.8 % Healthcare segment revenues increased $61.7 million, or 6.1% to $1,074.8 million for the year ended March 31, 2013, as compared to $1,013.1 million for the prior fiscal year. Adjusted Healthcare revenues, excluding the impact of the adjustments in each fiscal year related to the SYSTEM 1 Rebate Program, were $1,052.4 million in fiscal 2013, representing an increase of 5.5% compared to $997.8 million for fiscal 2012 (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The increase in adjusted Healthcare revenues are attributable to the addition of consumable and service revenues from our recent acquisitions as well as organic growth in capital equipment, consumable and service revenues. These increases were partially offset by the expected post-transition decline in SYSTEM 1E unit sales and the decline in SYSTEM 1 consumable volumes. At March 31, 2013, the Healthcare segment's backlog amounted to $105.2 million, increasing $2.7 million, or 2.6%, compared to the backlog of $102.5 million at March 31, 2012. Life Science segment revenues increased $17.8 million or 7.8% to $244.4 million for the year ended March 31, 2013, as compared to the prior fiscal year, driven by growth in capital equipment, consumable and service revenues of 12.7%, 5.8% and 4.5%, respectively. The demand for capital equipment reflects replacement product purchases by our pharmaceutical Customers. At March 31, 2013, the Life Sciences segment's backlog amounted to $48.4 million, decreasing $1.7 million, or 3.4%, compared to the backlog of $50.1 million at March 31, 2012. Isomedix segment revenues increased $15.3 million or 9.3% to $179.6 million for the year ended March 31, 2013, as compared to prior fiscal year. Revenues were favorably impacted by increased demand from our medical device Customers, as 36



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well as the acquisition of Biotest in March 2012. With lab operations in Minneapolis, Minnesota, Biotest provides validation services to our Customers. The following tables compare our business segment and Corporate and other operating results for the year ended March 31, 2013 to the year ended March 31, 2012: Years Ended March 31, Percent (dollars in thousands) 2013 2012 Change Change Operating Income (loss): Healthcare $ 153,343$ 141,742$ 11,601 8.2 % Life Sciences 47,453 41,633 5,820 14.0 % Isomedix 51,455 47,596 3,859 8.1 % Total reportable segments 252,251 230,971 21,280 9.2 % Corporate and other (9,422 ) (8,655 ) (767 ) 8.9 % Total Operating Income (loss) $ 242,829$ 222,316$ 20,513



9.2 %

Segment operating income is calculated as the segment's gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. Corporate cost allocations are based on each segment's percentage of revenues, headcount, or other variables in relation to those of the total Company. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the revenues, gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits, as previously discussed. The Healthcare segment's operating income increased $11.6 million, or 8.2% to $153.3 million for the year ended March 31, 2013, as compared to $141.7 million for the prior fiscal year. Adjusted Healthcare operating income, excluding the impact of the SYSTEM 1 Rebate Program and class action settlement, was $112.9 million as compared to an adjusted $124.3 million during the prior fiscal year (see subsection of MD&A titled, "Non-GAAP Financial Measures" for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). The decline in adjusted Healthcare operating income reflects the impact of the expected post-transition decline in SYSTEM 1E unit sales, decline in SYSTEM 1 consumable volumes, the negative impact of the Medical Device Excise Tax, and expenses related to the recent acquisitions. Also, fiscal 2012 operating expenses reflect lower costs for our annual compensation plan since fiscal 2012 bonuses were not paid as performance targets for fiscal 2012 were not met. The Life Science segment's operating income increased $5.8 million, or 14.0% to $47.5 million for the year ended March 31, 2013, as compared to $41.6 million for the prior fiscal year. The segment's operating margins were 19.4% and 18.4%, respectively, for the years ended March 31, 2013 and March 31, 2012. The improvement was primarily attributable to higher revenues. The Isomedix segment's operating income increased $3.9 million or 8.1% to $51.5 million for the year ended March 31, 2013, as compared to $47.6 million for the prior fiscal year, reflecting the benefits of increased revenues and improved operating efficiencies. The segment's operating margins were 28.7% and 29.0%, respectively, for the years ended March 31, 2013 and March 31, 2012. 37



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LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes significant components of our cash flows for the years ended March 31, 2014, 2013 and 2012:

Years Ended March 31, (dollars in thousands) 2014 2013 2012 Operating activities: Net income $ 129,442$ 159,977$ 136,115 Non-cash items 107,138 97,877 88,854 Change in Accrued SYSTEM 1 Rebate Program and class action settlement (245 ) (68,812 ) (58,618 ) Changes in operating assets and liabilities (26,704 ) 38,773 (16,979 ) Net cash provided by operating activities $ 209,631$ 227,815$ 149,372 Investing activities: Purchases of property, plant, equipment, and intangibles, net $ (86,367 )$ (87,412 )$ (66,682 ) Proceeds from the sale of property, plant, equipment, and intangibles 4,774 34 42 Investments in businesses, net of cash acquired (67,059 ) (399,676 ) (34,635 ) Net cash used in investing activities $ (148,652 )$ (487,054 )$ (101,275 ) Financing activities: Proceeds from the issuance of long-term obligations $ - $ 200,000



$ -

Payments on long-term obligations (70,000 ) - - Proceeds under credit facilities, net 71,190 82,290 - Repurchases of common shares (25,469 ) (8,002



) (56,751 )

Deferred financing fees and debt issuance costs (43 ) (1,924 ) - Cash dividends paid to common shareholders (48,385 ) (43,195 ) (38,560 ) Stock option and other equity transactions, net 15,660 23,019



5,723

Excess Tax benefit from stock options exercised 2,841 2,058



1,514

Net cash provided by (used in ) in financing activities $ (54,206 )$ 254,246$ (88,074 ) Debt-to-total capital ratio 32.2 % 34.3 % 20.4 % Free cash flow $ 128,038$ 140,437$ 82,732 Net Cash Provided By Operating Activities -The net cash provided by our operating activities was $209.6 million for the year ended March 31, 2014 compared to $227.8 million for the year ended March 31, 2013 and $149.4 million for the year ended March 31, 2012. The following discussion summarizes the significant changes in our operating cash flows for the years ended March 31, 2014, 2013 and 2012:



• Net cash provided by operating activities decreased 8.0% in fiscal 2014

compared to fiscal 2013. The decrease is primarily attributable to payments

made in connection with our annual incentive compensation program which did

not occur in fiscal 2013. In addition, the fiscal 2013 period reflected

strong improvements in working capital management.

• Net cash provided by operating activities increased 52.5% in fiscal 2013

compared to fiscal 2012. The increase is attributable to lower accounts

receivable and inventory levels, and the cash benefit from a tax deduction

related to the closure of our Swiss manufacturing operations.

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



• Purchases of property, plant, equipment, and intangibles, net - Capital

expenditures totaled $86.4 million during fiscal 2014, $87.4 million during

fiscal 2013 and $66.7 million during fiscal 2012. Fiscal 2014 capital

expenditures were essentially flat as compared to fiscal 2013. Fiscal 2013

capital expenditures were higher than fiscal 2012 as a result of investments

in our manufacturing centers and higher purchases of radioisotope (cobalt-60). 38



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• Proceeds from the sale of property, plant, equipment, and intangibles -

During the third quarter of fiscal 2014 we sold our former Pieterlen,

Switzerland manufacturing facility in conjunction with our 2010 Restructuring

Plan. Total proceeds and net loss on the sale were $4.7 million and $0.8

million, respectively. Proceeds from fiscal 2013 and 2012 proceeds relate to

minor disposals.

• Investments in business, net of cash acquired - During fiscal 2014, we used

$64.4 million of cash for the acquisitions of the assets of FSR and LSI, and

the capital stock of Eschmann. For more information on these acquisitions

refer to note 4 to our consolidated financial statements titled, "Business

Acquisitions". During fiscal 2014, we also used $3.2 million in cash for a

deferred purchase price payment related to the fiscal 2012 Brazil acquisition

described below. During fiscal 2013, we used $399.7 million of cash for the

acquisitions of the capital stock of United States Endoscopy Group Inc., and

Spectrum Surgical Instruments Corp, the assets of Total Repair Express, and

the remaining VTS Medical Systems, LLC interests not already owned by us.

During fiscal 2012, we used $34.6 million of cash to acquire two businesses.

We acquired the stock of a privately held company with operations located

near Sao Paulo, Brazil which designs and manufactures small, medium, and

large sterilizers used by public hospitals, clinics, dental offices and

industrial companies (e.g., research laboratories and pharmaceutical research

and production companies). We also acquired the stock of privately held Biotest with lab operations in Minneapolis, Minnesota which provides validation services to our Customers and is a natural extension of our Isomedix segment. Net Cash Provided By (Used In) Financing Activities - Net cash used by financing activities was $54.2 million for the year ended March 31, 2014, compared to net cash provided by financing activities of $254.2 million, and net cash used by financing activities of $88.1 million for the years ended March 31, 2013 and March 31, 2012, respectively. The following discussion summarizes the significant changes in our financing cash flows for the years ended March 31, 2014, 2013 and 2012: • Proceeds from the issuance of long-term obligations - During fiscal year 2013



we issued $200 million of senior notes in a private placement, which are

long-term obligations. We provide additional information about our debt

structure in note 7 to our consolidated financial statements titled, "Debt,"

and in this section of the MD&A titled, "Liquidity and Capital Resources" in

the subsection titled, "Sources of Credit."

• Payments on long term obligations- During the second quarter of fiscal 2014

we repaid $30.0 million for the senior notes issued in August 2008, which

matured in August 2013. During the third quarter of fiscal 2014 we repaid

$40.0 million for the senior notes issued in December 2003, which matured in

December 2013.

• Proceeds under credit facilities, net - At the end of fiscal 2014, $153.5

million of debt was outstanding under our credit facilities.

• Repurchases of common shares - During fiscal 2014, we paid for the repurchase

of 565,887 commons shares at an average purchase price of $43.63 and obtained

common shares in connection with our stock-based compensation award programs

in the amount $0.8 million. During fiscal 2013, we paid for the repurchase of

204,349 common shares at an average purchase price of $33.42 and obtained

common shares in connection with our stock-based compensation award programs

in the amount of $1.2 million. During fiscal 2012, we paid for the repurchase

of 1,851,510 common shares at an average purchase price of $30.21 and

obtained common shares in connection with our stock-based compensation award

programs in the amount of $0.8 million. We provide additional information

about our common share repurchases in note 14 to our consolidated financial

statements titled, "Repurchases of Common Shares."

• Cash dividends paid to common shareholders - During fiscal 2014, we paid cash

dividends totaling $48.4 million or $0.82 per outstanding common share.

During fiscal 2013, we paid cash dividends totaling $43.2 million or $0.74

per outstanding common share. During fiscal 2012, we paid cash dividends

totaling $38.6 million, or $0.66 per outstanding common share.

• Stock option and other equity transactions, net - We receive cash for issuing

common shares under our various employee stock option programs. During fiscal

2014, fiscal 2013 and fiscal 2012, we received cash proceeds totaling $14.2

million $23.0 million, and $5.7 million, respectively, under these programs.

In fiscal 2014, we also issued $1.5 million of STERIS restricted stock in

conjunction with the LSI acquisition.

• Excess Tax benefit from stock options exercised - For the years ended March

31, 2014, 2013 and 2012, our income taxes were reduced by $2.8 million, $2.1

million, and $1.5 million, respectively, as a result of excess deductions

allowed for stock options exercised.

Cash Flow Measures. Free cash flow was $128.0 million in fiscal 2014 compared to $140.4 million in fiscal 2013. Our free cash flow decreased in fiscal 2014 primarily due to payments made in connections with our annual incentive compensation in fiscal 2014, which did not occur in fiscal 2013, and due to higher working capital requirements, specifically in accounts receivable (see subsection of MD&A titled, "Non-GAAP Financial Measures", for additional information and related reconciliation of non-GAAP financial measures to the most comparable GAAP measures). Our debt-to-total capital ratio was 32.2% at March 31, 2014 and 34.3% at March 31, 2013. 39



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Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated from operations, and our existing credit facilities for short-term and long-term capital expenditures and our other liquidity needs. We believe that these amounts will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, our capital requirements will depend on many uncertain factors, including our rate of sales growth, our Customers' acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, and changes in our operating expenses. To the extent that our existing sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or selling equity securities. We cannot assure you that we will be able to obtain additional funds on terms favorable to us, or at all. At March 31, 2014, approximately 94% of our consolidated cash and cash equivalents were held in locations outside of the United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States. We do not intend to repatriate any significant amounts of cash in the foreseeable future. Sources of Credit. Our sources of credit as of March 31, 2014 are summarized in the following table: Reductions in Maximum Available Credit March 31, 2014 March 31, 2014 Amounts Facility for Other Amounts Amounts (dollars in thousands) Available Financial Instruments Outstanding Available Sources of Credit Private placement $ 340,000 $ - 340,000 - Credit Agreement and Swing Line Facility (1) 415,000 - 153,480 261,520 Total Sources of Credit 755,000 $ - 493,480 261,520



(1) Our $400.0 million revolving credit facility contains a sub-limit that

reduces the maximum amount available to us for borrowings by letters of

credit outstanding.

Our sources of funding from credit are summarized below:

• In December 2003, we issued $100.0 million of senior notes, of which $20.0

million are still outstanding, to certain institutional investors in a

private placement that was not required to be registered with the SEC. The

agreements related to these notes require us to meet certain financial

covenants, including limitations on debt and a minimum consolidated net worth

requirement. The remaining outstanding $20.0 million of senior notes have a

maturity of 12 years at an annual interest rate of 5.38%.

• On August 15, 2008, we issued $150.0 million of senior notes, of which $120.0

million are still outstanding, to certain institutional investors in a

private placement that was not required to be registered with the SEC. The

agreements related to these notes require us to meet certain financial

covenants, including limitations on debt and a minimum consolidated net worth

requirement. Of the $120.0 million remaining in outstanding notes, $85.0

million have a maturity of 10 years at an annual interest rate of 6.33%, and

the remaining $35.0 million have a maturity of 12 years at an annual interest

rate of 6.43%.

• In December 2012, we issued $100.0 million of senior notes to certain

institutional investors in a private placement that was not required to be

registered with the SEC. Of the $100.0 million of notes, $47.5 million have a

maturity of 10 years at an annual interest rate of 3.20%, an additional $40.0

million have a maturity of 12 years at an annual interest rate of 3.35%, and

the remaining $12.5 million have a maturity of 15 years at an annual interest

rate of 3.55%. These borrowings were used primarily for the repayment of

existing credit facility debt. The agreements related to these notes require

us to meet certain financial covenants regarding limitations on debt.

• In February 2013, we issued $100.0 million of senior notes to certain

institutional investors in a private placement that was not required to be

registered with the SEC. Of the $100.0 million of notes, $47.5 million have a

maturity of nine years and 10 months at an annual interest rate of 3.20%, an

additional $40.0 million have a maturity of 11 years and 10 months at an

annual interest rate of 3.35%, and the remaining $12.5 million have a

maturity of 14 years and 10 months at an annual interest rate of 3.55%. These

borrowings were used primarily for the repayment of existing credit facility

debt. The agreements related to these notes require us to meet certain

financial covenants regarding limitations on debt.

• On April 13, 2012 we signed a Third Amended and Restated Credit Agreement

(the "Credit Agreement") with KeyBank National Association, as administrative

agent ("Agent") for the lenders from time to time party thereto ("Lenders")

and such Lenders. The Credit Agreement amended, restated and replaced our

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initially provided a $300.0 million credit facility and was amended in October 2012, to increase the credit facility to $400.0 million (which may be increased by up to an additional $100.0 million in specified circumstances, and subject to certain Lender consent requirements) for borrowings and letters of credit, and will mature April 13, 2017. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable on that date. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the Credit Agreement. Borrowings bear interest at floating rates based upon the Base Rate (as defined) or fixed rates based upon the Eurodollar Rate or Alternate Currency Rate (as defined), plus the Applicable Margin (as defined) in effect from time to time under the Credit Agreement based upon the Company's Leverage Ratio (as defined). Interest on floating rate loans is payable quarterly in arrears and interest on fixed rate loans is payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. The Credit Agreement also requires the payment of a facility fee on the total facility commitment amount, which fee is determined based on the Company's Leverage Ratio. There is no premium or penalty for prepayment of floating rate loans but prepayments of fixed rate loans may be subject to a prepayment fee. The Credit Agreement also permits the Company to make short term "Swing Loan" borrowings from the Agent in an aggregate amount not to exceed $35.0 million outstanding at any time. Swing Loans bear interest at the Agent's cost of funds plus the applicable margin in effect from time to time. The Credit Agreement requires the Company to maintain compliance with certain financial covenants, including a maximum Leverage Ratio and a minimum Interest Coverage Ratio. The Company's obligations under the Credit Agreement are unsecured but guaranteed by its material domestic subsidiaries. • On December 6, 2013 we executed an agreement with PNC Bank, National



Association (the "Bank"), providing for the extension of a $15.0 million line

of credit (the "Swing Line Facility") to the Company. Borrowings under the

Swing Line Facility are evidenced by a promissory note issued by the Company

(the "Note"). The Company may borrow, repay and reborrow from time to time

under the Swing Line Facility until its maturity date. The maturity date is

the earlier of (i) December 5, 2014, or such later date as may be designated

by the Bank, or (ii) the date on which the Bank is no longer a lender under

the Credit Agreement, as amended, or a replacement credit agreement. The

maturity date may be accelerated in the case of certain defaults. Borrowings

bear interest at a rate per annum from time to time equal to the sum of the

Daily LIBOR Rate (as defined in the Note) and the Applicable Margin

(calculated as provided in the Note) and the interest is payable monthly.

At March 31, 2014, we had $261.5 million of funding available under the Credit Agreement and Swing Line Facility. The Credit Agreement includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. At March 31, 2014, there were no letters of credit outstanding under the Credit Agreement. At March 31, 2014, we were in compliance with all financial covenants associated with our indebtedness. We provide additional information regarding our debt structure and payment obligations in the section of the MD&A titled, "Liquidity and Capital Resources" in the subsection titled, "Contractual and Commercial Commitments" and in note 7 to our consolidated financial statements titled, "Debt." CAPITAL EXPENDITURES Our capital expenditure program is a component of our long-term strategy. This program includes, among other things, investments in new and existing facilities, business expansion projects, radioisotope (cobalt-60) and information technology enhancements and research and development advances. During fiscal 2014, our capital expenditures amounted to $86.4 million. We use cash provided by operating activities and our cash and cash equivalent balances to fund capital expenditures. We expect fiscal 2015 capital expenditures to be comparable to fiscal 2014 levels with continued investment in projects intended to improve quality, provide expansion, reduce operating costs and add value to the current product offering. CONTRACTUAL AND COMMERICAL COMMITMENTS At March 31, 2014, we had commitments under non-cancelable operating leases totaling $48.4 million. Our contractual obligations and commercial commitments as of March 31, 2014 are presented in the following tables. Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies, and other potential cash outflows resulting from events that require us to fulfill commitments. 41



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Table of Contents Payments due by March 31, 2019 and (in thousands) 2015 2016 2017 2018 thereafter Total Contractual Obligations: Debt $ 12,980$ 20,000 $ - $ 140,500$ 320,000$ 493,480 Operating leases 16,425 13,261 9,475 6,263 3,023 48,447 Purchase obligations 13,985 14,377 14,809 11,350 - 54,521 Benefit payments under defined benefit plans 4,069 3,975 3,866 3,755 20,428 36,093 Trust assets available for benefit payments under defined benefit plans (4,069 ) (3,975 ) (3,866 ) (3,755 ) (20,428 ) (36,093 ) Benefit payments under other post-retirement welfare benefit plans 2,950 2,765 2,414 2,147 8,714 18,990 Other obligations 186 165 167 - - 518



Total Contractual Obligations $ 46,526$ 50,568$ 26,865$ 160,260$ 331,737$ 615,956

The table above includes only the principal amounts of our contractual obligations. We provide information about the interest component of our long-term debt in the subsection of MD&A titled, "Liquidity and Capital Resources," and in note 7 to our consolidated financial statements titled, "Debt." Purchase obligations shown in the table above relate to minimum purchase commitments with suppliers for materials purchases. The table above excludes contributions we make to our defined contribution plan. Our future contributions to this plan depend on uncertain factors, such as the amount and timing of employee contributions and discretionary employer contributions. We provide additional information about our defined benefit pension plan, defined contribution plan, and other post-retirement medical benefit plan in note 10 to our consolidated financial statements titled, "Benefit Plans." Amount of Commitment Expiring March 31, 2019 and (in thousands) 2015 2016 2017 2018 thereafter Totals Commercial Commitments: Performance and surety bonds $ 39,147$ 3,591$ 115$ 15$ 756$ 43,624 Letters of credit as security for self-insured risk retention policies 5,961 - - - - 5,961 Total Commercial Commitments $ 45,108$ 3,591



$ 115$ 15$ 756$ 49,585

CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS

The following subsections describe our most critical accounting policies, estimates, and assumptions. Our accounting policies are more fully described in note 1 to our consolidated financial statements titled, "Nature of Operations and Summary of Significant Accounting Policies." Estimates and Assumptions. Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements that were prepared in accordance with United States generally accepted accounting principles. We make certain estimates and assumptions that we believe to be reasonable when preparing these financial statements. These estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could be materially different from these estimates. We periodically review these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit Committee of the Company's Board of Directors. Revenue Recognition. We recognize revenue for products when ownership passes to the Customer, which is based on contract or shipping terms and for services when the service is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor. We have no further obligations related to bringing about resale, and our standard return and restocking fee policies are applied. We also have individual Customer contracts that offer extended payment terms and/or discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, 42



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rebates, and other similar allowances in the same period the related revenues are recorded. Returns, rebates, and similar allowances are estimated based on historical experience and trend analysis. In transactions that contain multiple elements, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each element based on its relative fair value, based on the price for the product or service when it is sold separately. We offer preventative maintenance agreements to our Customers with contract terms that range from one to five years, which require us to maintain and repair our products during this time. Amounts received under these Customer contracts are initially recorded as deferred service revenues and then recognized as service revenues ratably over the contract term. We classify shipping and handling amounts billed to Customers in sales transactions as revenues. Allowance for Doubtful Accounts Receivable. We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by Customers. We estimate the allowance based on analyzing a number of factors, including amounts written off historically, Customer payment practices, and general economic conditions. We also analyze significant Customer accounts on a regular basis and record a specific allowance when we become aware of a specific Customer's inability to pay. As a result, the related accounts receivable are reduced to an amount that we reasonably believe is collectible. These analyses require a considerable amount of judgment. If the financial condition of our Customers worsens, or economic conditions change, we may be required to make changes to our allowance for doubtful accounts receivable. Allowance for Sales Returns. We maintain an allowance for sales returns based upon known returns and estimated returns for both capital equipment and consumables. We estimate returns of capital equipment and consumables based upon historical experience less the estimated inventory value of the returned goods. Inventories and Reserves. Inventories are stated at the lower of their cost or market value. We determine cost based upon a combination of the last-in, first-out ("LIFO") and first-in, first-out ("FIFO") cost methods. We determine the LIFO inventory value at the end of the year based on inventory levels and costs at that time. For inventories valued using the LIFO method, we believe that the use of the LIFO method results in a matching of current costs and revenues. Inventories valued using the LIFO method represented approximately 34.6% and 38.6% of total inventories at March 31, 2014 and 2013, respectively. Inventory costs include material, labor, and overhead. If we had used only the FIFO method of inventory costing, inventories would have been $19.5 million and $18.9 million higher than those reported at March 31, 2014 and 2013, respectively. We review the net realizable value of inventory on an ongoing basis, considering factors such as deterioration, obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues. Asset Impairment Losses. Property, plant, equipment, and identifiable intangible assets are reviewed for impairment when events and circumstances indicate that the carrying value of such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We conduct this review on an ongoing basis and, if impairment exists, we record the loss in the Consolidated Statements of Income during that period. When we evaluate assets for impairment, we make certain judgments and estimates, including interpreting current economic indicators and market valuations, evaluating our strategic plans with regards to operations, historical and anticipated performance of operations, and other factors. If we incorrectly anticipate these factors, or unexpected events occur, our operating results could be materially affected. Restructuring. We have recorded specific accruals in connection with plans for restructuring elements of our business. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, and contractual obligations. Actual amounts could differ from the original estimates. We review our restructuring-related accruals on a quarterly basis and changes to plans are appropriately recognized in the Consolidated Statements of Income in the period the change is identified. Note 2 to our consolidated financial statements titled, "Restructuring," summarizes our restructuring plans. Purchase Accounting and Goodwill. Assets and liabilities of the business acquired are accounted for at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. We supplement management expertise with valuation specialists in performing appraisals to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We generally amortize our intangible assets over their useful lives with the exception of indefinite lived intangible assets. We do not amortize goodwill, but we evaluate it annually for impairment. Therefore, the allocation of acquisition costs to intangible assets and goodwill has a significant impact on future operating results. 43



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We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. We may consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We calculate the fair value of our reporting units based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants. We performed our annual goodwill and indefinite lived intangible asset impairment evaluation as of October 31, 2013. Based on this evaluation, we determined that there was no impairment of the recorded amounts and we do not believe that any of our reporting units are at a significant risk of failing goodwill impairment testing. We evaluate indefinite lived intangible assets annually, or when evidence of potential impairment exists. We evaluate several qualitative indicators and assumptions, and trends that influence the valuation of the assets to determine if any evidence of potential impairment exists. Income Taxes. Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, income tax rates, changes in uncertain tax benefits, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and the respective governmental taxing authorities. We use significant judgment in determining our annual effective income tax rate and evaluating our tax positions. We prepare and file tax returns based on our interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. We cannot be sure that the tax authorities will agree with all of the tax positions taken by us. The actual income tax liability for each jurisdiction in any year can, in some instances, be ultimately determined several years after the tax return is filed and the financial statements are published. We evaluate our tax positions using the recognition threshold and measurement attribute in accordance with current accounting guidance. We determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority and that the taxing authority will have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The appropriate unit of account for determining what constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. We review and adjust our tax estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance, which would increase our effective income tax rate and could result in an adverse impact on our consolidated financial position, results of operations, or cash flows. We believe that adequate accruals have been made for income taxes. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations or cash flow for any one period. Additional information regarding income taxes is included in note 9 to our consolidated financial statements titled, "Income Taxes." SYSTEM 1 Rebate Program and Class Action Settlement. The SYSTEM 1 Rebate Program (the "Rebate Program") was initially recognized during the first quarter of fiscal 2011. The rebate portion of the Rebate Program was recognized as contra-revenue consistent with other returns and allowances offered to Customers. The estimated costs to facilitate the disposal of the returned SYSTEM 1 processors portion of the Rebate Program were recognized as cost of revenues. Both components were recorded as current liabilities. The key assumptions involved in the estimates associated with the Rebate Program included: the number and age of SYSTEM 1 processors eligible for rebates under the Rebate Program, the number of Customers that would 44



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elect to participate in the Rebate Program, the proportion of Customers that would choose each rebate option, and the estimated per unit costs of disposal. The Rebate Program ended August 2, 2012. Customers utilized rebates totaling approximately $66.6 million on orders placed since the initiation of the Rebate Program. The costs associated with the Rebate Program were lower than originally estimated because fewer Customers elected to participate in the Rebate Program than anticipated. The SYSTEM 1 class action settlement was initially recognized during the third quarter of fiscal 2011. The claim submission deadline was December 31, 2012. As a result, during fiscal 2013 we reduced the liability related to the SYSTEM 1 class action settlement by $16.8 million. The adjustment was recorded as a reduction to operating expenses. Self-Insurance Liabilities. We record a liability for self-insured risks that we retain for general and product liabilities, workers' compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and actuarial methods to calculate the estimated liability. This liability includes estimated amounts for both losses and incurred but not reported claims. We review the assumptions used to calculate the estimated liability at least annually to evaluate the adequacy of the amount recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are subject to the terms and conditions of those policies. The obligation covered by insurance contracts will remain on the balance sheet as we remain liable to the extent insurance carriers do not meet their obligation. Estimated amounts receivable under the contracts are included in the "Other assets" line, of our consolidated balance sheets. Our accrual for self-insured risk retention as of March 31, 2014 and 2013 was $14.4 million and $14.1 million, respectively. We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based upon recent claims experience. Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual results are not consistent with these assumptions and judgments, we could be exposed to additional costs in subsequent periods. Warranty Reserves. We generally offer a limited one-year parts and labor warranty on our capital equipment. The specific terms and conditions of warranties may vary depending on the product sold and the country where we conduct business. We record a liability for the estimated cost of product warranties in the period revenues are recognized. We estimate warranty expenses based primarily on historical warranty claim experience. While we have extensive quality programs and processes and actively monitor and evaluate the quality of suppliers, actual warranty experience could be different from our estimates. If actual product failure rates, material usage, or service costs are different from our estimates, we may have to record an adjustment to the estimated warranty liability. As of March 31, 2014 and 2013, we had accrued $7.8 million and $12.7 million, respectively, for warranty exposures. Contingencies. We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief. We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Part I, Item 3, "Legal Proceedings" for additional information. We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of our federal income tax returns. Additional information regarding our commitments and contingencies is included in note 11 to our consolidated financial statements titled, "Commitments and Contingencies." 45



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Benefit Plans. We provide defined benefit pension plans for certain former manufacturing and plant administrative personnel as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. As of March 31, 2014, we sponsored a defined benefit pension plan for eligible participants in the United States. In addition, as of March 31, 2014, we sponsored an unfunded post-retirement welfare benefits plan for two groups of United States retirees, including the same retirees who receive pension benefits under the United States defined benefit pension plan. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage. Employee pension and post-retirement welfare benefits plans are a cost of conducting business and represent obligations that will be settled far in the future and therefore, require us to use estimates and make certain assumptions to calculate the expense and liabilities related to the plans. Changes to these estimates and assumptions can result in different expense and liability amounts. Future actual experience may be significantly different from our current expectations. We believe that the most critical assumptions used to determine net periodic benefit costs and projected benefit obligations are the expected long-term rate of return on plan assets and the discount rate. A summary of significant assumptions used to determine the March 31, 2014 projected benefit obligations and the fiscal 2014 net periodic benefit costs is as follows: U.S. Defined Benefit Pension Other Post- Plan Retirement Plan Funding Status Funded Unfunded Assumptions used to determine March 31, 2014 benefit obligations: Discount rate 4.00 % 3.50 % Assumptions used to determine fiscal 2014 net periodic benefit costs: Discount rate 3.50 % 3.00 % Expected return on plan assets 7.75 % n/a NA - Not applicable. We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios, and the long-term asset class return expectations. Generally, net periodic benefit costs increase as the expected long-term rate of return on plan assets assumption decreases. Holding all other assumptions constant, lowering the expected long-term rate of return on plan assets assumption for our funded defined benefit pension plans by 50 basis points would have increased the fiscal 2014 benefit costs by $0.2 million. We develop our discount rate assumptions by evaluating input from third-party professional advisors, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as our projected benefit obligations. Generally, the projected benefit obligations and the net periodic benefit costs both increase as the discount rate assumption decreases. Holding all other assumptions constant, lowering the discount rate assumption for our defined benefit pension plans and for the other post-retirement plan by 50 basis points would have decreased the fiscal 2014 net periodic benefit costs by approximately $0.05 million and would have increased the projected benefit obligations by approximately $3.0 million at March 31, 2014. We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five year-period from the assumed current year healthcare cost trend rate of 7% to the assumed long-term healthcare cost trend rate. A 100 basis point change in the assumed healthcare cost trend rate (including medical, prescription drug, and long-term rates) would have had the following effect at March 31, 2014: 100 Basis Point (dollars in thousands) Increase Decrease Effect on total service and interest cost components $ 3$ (3 ) Effect on postretirement benefit obligation 90



(88 )

We recognize an asset for the overfunded status or a liability for the underfunded status of defined benefit pension and post-retirement benefit plans in our balance sheets. This amount is measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement benefit plans). Changes in the funded status of the plans are recorded in other comprehensive income in the year they occur. We measure plan assets and obligations as of the balance sheet date. Note 10 to 46



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our consolidated financial statements titled, "Benefit Plans," contains additional information about our pension and other post-retirement welfare benefits plans. Share-Based Compensation. We measure the estimated fair value for share-based compensation awards, including grants of employee stock options at the grant date and recognize the related compensation expense over the period in which the share-based compensation vests. We selected the Black-Scholes-Merton option pricing model as the most appropriate method for determining the estimated fair value of our share-based stock option compensation awards. This model involves assumptions that are judgmental and affect share-based compensation expense. Share-based compensation expense was $11.1 million in fiscal 2014, $8.9 million in fiscal 2013 and $7.9 million in fiscal 2012. Note 15 to our consolidated financial statements titled, "Share-Based Compensation," contains additional information about our share-based compensation plans. RECENTLY ISSUED ACCOUNTING STANDARDS IMPACTING THE COMPANY Recently issued accounting standards that are relevant to us are presented in note 1 to our consolidated financial statements titled, "Nature of Operations and Summary of Significant Accounting Policies."



INFLATION

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

FORWARD-LOOKING STATEMENTS This Form 10-K may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry, products or activities that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "outlook," "impact," "potential," "confidence," "improve," "optimistic," "deliver," "comfortable," "trend", and "seeks," or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws, government regulations, labeling or product approvals or the application or interpretation thereof. Other risk factors are described herein and in the Company's other securities filings. Many of these important factors are outside STERIS's control. No assurances can be provided as to any result or the timing of any outcome regarding matters described herein or otherwise with respect to any regulatory action, administrative proceedings, government investigations, litigation, warning letters, consent decree, transition, cost reductions, business strategies, earnings or revenue trends or future financial results. References to products, the consent decree, the transition or rebate program, or the class action settlement, are summaries only and should not be considered the specific terms of the decree, settlement, program or product clearance or literature. Unless legally required, the Company does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing or costs that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, certifications, regulations, regulatory actions, including without limitation those relating to FDA warning notices or letters, government investigations, the outcome of any pending FDA requests, inspections or submissions, or other requirements or standards may delay, limit or prevent new product introductions, affect the production and marketing of existing products or services or otherwise affect Company performance, results, prospects or value, (d) the potential of international unrest, economic downturn or effects of currencies, tax assessments, adjustments or anticipated rates, raw material costs or availability, benefit or retirement plan costs, or other regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company's products and services, (f) the possibility that anticipated growth, cost savings, new product acceptance, performance or approvals, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with our business, industry or initiatives including, without limitation, the consent decree, and those matters described in this Form 10-K for the year ended March 31, 2014 and other securities filings, may adversely impact Company performance, results, prospects or value, (g) the possibility that anticipated financial results or benefits of recent acquisitions or our restructuring efforts will not be realized or will be other than anticipated, (h) the effects of 47



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contractions in credit availability, as well as the ability of our Customers and suppliers to adequately access the credit markets when needed, and (i) those risks described in our securities filings including this Annual Report on Form 10-K for the year ended March 31, 2014. 48



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