10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______            
Commission File Number 1-14643
____________________________________________________
 STERIS Corporation
(Exact name of registrant as specified in its charter) 
____________________________________________________
Ohio
 
34-1482024
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
5960 Heisley Road,
Mentor, Ohio
 
44060-1834
(Address of principal executive offices)
 
(Zip code)
440-354-2600
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
  
Accelerated Filer  o
Non-Accelerated Filer  o
(Do not check if a smaller reporting company)
  
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of common shares outstanding as of October 23, 2015: 59,955,983

1

Table of Contents

STERIS Corporation and Subsidiaries
Form 10-Q
Index
 
 
 
Page
 
 
 
 
 


2

Table of Contents

PART I— FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
September 30,
2015
 
March 31,
2015
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
162,187

 
$
167,689

Accounts receivable (net of allowances of $11,035 and $9,415, respectively)
 
301,390

 
325,289

Inventories, net
 
183,951

 
160,818

Deferred income taxes, net
 
29,140

 
31,629

Prepaid expenses and other current assets
 
36,340

 
35,007

Total current assets
 
713,008

 
720,432

Property, plant, and equipment, net
 
505,355

 
493,053

Goodwill and intangibles, net
 
1,075,028

 
860,645

Other assets
 
15,687

 
23,161

Total assets
 
$
2,309,078

 
$
2,097,291

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
84,083

 
$
99,340

Accrued income taxes
 
349

 
7,154

Accrued payroll and other related liabilities
 
52,177

 
74,805

Accrued expenses and other
 
120,878

 
102,032

Total current liabilities
 
257,487

 
283,331

Long-term indebtedness
 
829,818

 
621,075

Deferred income taxes, net
 
77,146

 
71,905

Other liabilities
 
52,836

 
47,334

Total liabilities
 
$
1,217,287

 
$
1,023,645

Commitments and contingencies (see note 9)
 

 

Serial preferred shares, without par value; 3,000 shares authorized; no shares issued or outstanding
 

 

Common shares, without par value; 300,000 shares authorized; 70,040 shares issued; 59,914 and 59,675 shares outstanding, respectively
 
272,200

 
264,853

Common shares held in treasury, 10,126 and 10,364 shares, respectively
 
(319,802
)
 
(320,343
)
Retained earnings
 
1,198,030

 
1,193,791

Accumulated other comprehensive income
 
(59,463
)
 
(66,669
)
Total shareholders’ equity
 
1,090,965

 
1,071,632

Noncontrolling interest
 
826

 
2,014

Total equity
 
1,091,791

 
1,073,646

Total liabilities and equity
 
$
2,309,078

 
$
2,097,291

See notes to consolidated financial statements.

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Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Product
 
$
274,145

 
$
256,845

 
$
506,452

 
$
487,285

Service
 
215,752

 
205,884

 
423,347

 
388,087

Total revenues
 
489,897

 
462,729

 
929,799

 
875,372

Cost of revenues:
 
 
 
 
 
 
 
 
Product
 
148,088

 
142,991

 
277,944

 
272,966

Service
 
132,488

 
125,746

 
258,444

 
238,321

Total cost of revenues
 
280,576

 
268,737

 
536,388

 
511,287

Gross profit
 
209,321

 
193,992

 
393,411

 
364,085

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
172,459

 
126,292

 
299,294

 
239,980

Research and development
 
14,255

 
13,006

 
28,020

 
25,415

Restructuring expenses
 
(56
)
 
1,271

 
(782
)
 
1,099

Total operating expenses
 
186,658

 
140,569

 
326,532

 
266,494

Income from operations
 
22,663

 
53,423

 
66,879

 
97,591

Non-operating expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
7,485

 
4,948

 
13,605

 
9,630

Interest income and miscellaneous expense
 
(663
)
 
(36
)
 
(1,125
)
 
(256
)
Total non-operating expenses, net
 
6,822

 
4,912

 
12,480

 
9,374

Income before income tax expense
 
15,841

 
48,511

 
54,399

 
88,217

Income tax expense
 
7,154

 
17,507

 
21,421

 
32,676

Net income
 
$
8,687

 
$
31,004

 
$
32,978

 
$
55,541

 
 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.15

 
$
0.52

 
$
0.55

 
$
0.94

Diluted
 
$
0.14

 
$
0.52

 
$
0.55

 
$
0.93

Cash dividends declared per common share outstanding
 
$
0.25

 
$
0.23

 
$
0.48

 
$
0.44


See notes to consolidated financial statements.


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Table of Contents

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

 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
8,687

 
31,004

 
32,978

 
55,541

Unrealized gain (loss) on available for sale securities, (net of taxes of ($46), $0, ($263), $0, respectively)
 
(552
)
 
(44
)
 
(1,400
)
 
59

Amortization of pension and postretirement benefit plans costs, (net of taxes of $95, $137, $189 and $275, respectively)
 
(227
)
 
(221
)
 
(380
)
 
(443
)
Pension settlement, (net of taxes of $10,563,$0, $10,563, $0, respectively)
 
17,029

 

 
17,029

 

Change in cumulative foreign currency translation adjustment
 
(21,841
)
 
(21,362
)
 
(8,043
)
 
(16,691
)
Total other comprehensive income (loss)
 
(5,591
)
 
(21,627
)
 
7,206

 
(17,075
)
Comprehensive income
 
$
3,096

 
$
9,377

 
$
40,184

 
$
38,466


See notes to consolidated financial statements.




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Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Six Months Ended September 30,
 
 
2015
 
2014
Operating activities:
 
 
 
 
Net income
 
$
32,978

 
$
55,541

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
46,098

 
47,835

Deferred income taxes
 
(8,903
)
 
(1,005
)
Share-based compensation expense
 
7,865

 
7,606

Pension settlement expense
 
26,515

 

Pension contributions
 
(4,687
)
 

Loss (gain) on the disposal of property, plant, equipment, and intangibles, net
 
103

 
(373
)
Excess tax benefit from share-based compensation
 
(4,676
)
 
(4,505
)
Other items
 
2,540

 
(4,985
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable, net
 
31,621

 
39,447

Inventories, net
 
(19,986
)
 
(24,251
)
Other current assets
 
(675
)
 
552

Accounts payable
 
(17,325
)
 
(15,241
)
Accruals and other, net
 
(11,996
)
 
4,287

Net cash provided by operating activities
 
79,472

 
104,908

Investing activities:
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(39,928
)
 
(36,527
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
38

 
796

Acquisition of business, net of cash acquired
 
(220,840
)
 
(179,380
)
Net cash used in investing activities
 
(260,730
)
 
(215,111
)
Financing activities:
 
 
 
 
Proceeds from issuance of long-term obligations
 
350,000

 

          Deferred financing fees and debt issuance costs
 
(2,426
)
 

(Payments) proceeds under credit facilities, net
 
(139,750
)
 
126,470

Repurchases of common shares
 
(12,974
)
 
(5,440
)
Cash dividends paid to common shareholders
 
(28,740
)
 
(26,118
)
Stock option and other equity transactions, net
 
8,111

 
8,686

Excess tax benefit from share-based compensation
 
4,676

 
4,505

Net cash provided by (used in) financing activities
 
178,897

 
108,103

Effect of exchange rate changes on cash and cash equivalents
 
(3,141
)
 
(3,289
)
Increase (decrease) in cash and cash equivalents
 
(5,502
)
 
(5,389
)
Cash and cash equivalents at beginning of period
 
167,689

 
152,802

Cash and cash equivalents at end of period
 
$
162,187

 
$
147,413


See notes to consolidated financial statements.


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Table of Contents

STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands, except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

STERIS Corporation, an Ohio corporation, develops, manufactures and markets infection prevention, contamination control, microbial reduction, and surgical and gastrointestinal support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental Customers throughout the world. As used in this Quarterly Report, STERIS Corporation and its subsidiaries together are called “STERIS,” the “Company,” “we,” “us,” or “our,” unless otherwise noted.

We operate in three reportable business segments: Healthcare, Life Sciences, and STERIS Isomedix Services (“Isomedix”). We describe our business segments in note 10 to our consolidated financial statements titled, “Business Segment Information.” Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:

Interim Financial Statements

We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.

These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2015 dated May 27, 2015. The Consolidated Balance Sheet at March 31, 2015 was derived from the audited consolidated financial statements at March 31, 2015, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Principles of Consolidation

We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Income attributable to non-controlling interests is reported in the "Interest income and miscellaneous expense" line of our Consolidated Statements of Income and is not material.

Use of Estimates

We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three and six month periods ended September 30, 2015 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2016.

Recent Accounting Pronouncements


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Table of Contents
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)




Recently issued accounting standards impacting the Company are presented in the following table:
Standard
 
Date of Issuance
 
Description
 
Date of Adoption
 
Effect on the financial statements or other significant matters
Standards that have recently been adopted
ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs"
 
April 2015
 
The update requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt instead of being classified as a deferred charge, as currently required. This update is effective for all annual and interim periods beginning after December 15, 2015 and is required to be adopted retroactively for all periods presented. Early adoption is permitted.
 
First Quarter Fiscal 2016
 
This update did not have a material impact on our consolidated financial position, results of operations or cash flows.
Standards that have not yet been adopted
ASU 2014-09, "Revenue from Contracts with Customers"
 
May 2014
 
The standard will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. The standard update is effective for annual periods beginning after December 15, 2017 and interim periods within that period. Early adoption is not permitted before the original public entity effective date of December 15, 2016.
 
N/A
 
We are currently in the process of evaluating the impact that the standard will have on our consolidated financial position, results of operations and cash flows.
ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement- Period Adjustments
 
September 2015
 
The FASB issued guidance that requires an acquirer in a business combination to recognize a measurement-period adjustment during the period in which it determines the amount, and eliminates the requirement for an acquirer to account for measurement-period adjustments retrospectively. The acquirer must also disclose the amounts and reasons for adjustments to the provisional amounts. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted.
 
N/A
 
We are currently in the process of evaluating the impact that the guidance will have on our consolidated financial position, results of operations and cash flows.

A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015 dated May 27, 2015. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2015.

2. Restructuring

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 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. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs.
Since the inception of the Restructuring Plan we have incurred pre-tax expenses totaling $19,008 related to these actions, of which $10,914 was recorded as restructuring expenses and $8,094 was recorded in cost of revenues, with restructuring expenses of $16,932, $796, and $1,280 related to the Healthcare, Life Sciences and Isomedix segments, respectively. We do not

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Table of Contents
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



expect to incur any significant additional restructuring expenses related to this plan. These actions are intended to enhance profitability and improve efficiencies.
The following tables summarize our total pre-tax restructuring expenses for the second quarter and first six months of fiscal 2016 and fiscal 2015:
 
Fiscal 2014
Restructuring
Plan
 
Three months ended September 30, 2015 (1)
 
Six months ended September 30, 2015 (2)
Severance and other compensation related costs
$
(43
)
 
$
(849
)
Asset impairment and accelerated depreciation
19

 
19

Lease termination obligation and other
(13
)
 
67

Product rationalization
22

 
299

Total restructuring expenses
$
(15
)
 
$
(464
)
(1) Includes $41 in expense recorded to cost to revenues on Consolidated Statements of Income.
(2) Includes $318 in expense recorded to cost to revenues on Consolidated Statements of Income.

 
Fiscal 2014
Restructuring
Plan
 
Three months ended September 30, 2014 (1)
 
Six months ended September 30, 2014 (2)
Severance and other compensation related costs
$
1,176

 
$
980

Asset impairment and accelerated depreciation

 
(38
)
Lease termination obligation and other
95

 
157

Product rationalization
(336
)
 
(450
)
Total restructuring expenses
$
935

 
$
649

(1) Includes ($336) in expense recorded to cost to revenues on Consolidated Statements of Income.
(2) Includes ($450) in expense recorded to cost to revenues on Consolidated Statements of Income.

Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following table summarizes our restructuring liability balances and activity:
 
 
Fiscal 2014 Restructuring Plan
 
 
 
 
Fiscal 2016
 
 
 
 
March 31,
2015
 
Provision (1)
 
Payments (1)
 
September 30,
2015
Severance and termination benefits
 
$
2,531

 
$
(700
)
 
$
(239
)
 
$
1,592

Lease termination obligations and other
 
356

 

 
(86
)
 
270

Total
 
$
2,887

 
$
(700
)
 
$
(325
)
 
$
1,862

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

3. Property, Plant and Equipment

Information related to the major categories of our depreciable assets is as follows:

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Table of Contents
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



 
 
 
September 30,
2015
 
March 31,
2015
Land and land improvements (1)
 
$
38,415

 
$
40,668

Buildings and leasehold improvements
 
272,408

 
263,007

Machinery and equipment
 
386,004

 
375,555

Information systems
 
106,725

 
104,049

Radioisotope
 
298,852

 
289,778

Construction in progress (1)
 
57,951

 
47,690

Total property, plant, and equipment
 
1,160,355

 
1,120,747

Less: accumulated depreciation and depletion
 
(655,000
)
 
(627,694
)
Property, plant, and equipment, net
 
$
505,355

 
$
493,053

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


4. Inventories, Net

Inventories, net are stated at the lower of cost or market. We use the last-in, first-out (“LIFO”) and first-in, first-out cost methods. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
 
 
September 30,
2015
 
March 31,
2015
Raw materials
 
$
76,165

 
$
67,095

Work in process
 
23,885

 
22,696

Finished goods
 
121,201

 
107,695

LIFO reserve
 
(17,972
)
 
(19,071
)
Reserve for excess and obsolete inventory
 
(19,328
)
 
(17,597
)
Inventories, net
 
$
183,951

 
$
160,818


5. Debt

Indebtedness was as follows: 
 
 
September 30,
2015
 
March 31,
2015
Private Placement
 
$
686,318

 
$
337,825

Credit Agreement and Swing Line Facility
 
143,500

 
283,250

Total long term debt
 
$
829,818

 
$
621,075


Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, dated August 7, 2015, and our Annual Report on Form 10-K for the year ended March 31, 2015, dated May 27, 2015.

6. Additional Consolidated Balance Sheet Information

Additional information related to our Consolidated Balance Sheets is as follows:

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Table of Contents
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



 
 
September 30,
2015
 
March 31,
2015
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
15,941

 
$
16,680

Accrued vacation/paid time off
 
6,832

 
5,539

Accrued bonuses
 
15,202

 
30,159

Accrued employee commissions
 
10,504

 
12,842

 Accrued pension
 

 
6,186

Other postretirement benefit obligations-current portion
 
2,789

 
2,789

Other employee benefit plans' obligations-current portion
 
909

 
610

Total accrued payroll and other related liabilities
 
$
52,177

 
$
74,805

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
36,938

 
$
34,910

Self-insured risk reserves-current portion
 
7,460

 
6,897

Accrued dealer commissions
 
13,336

 
13,591

Accrued warranty
 
5,326

 
5,579

Asset retirement obligation-current portion
 

 
1,092

Other
 
57,818

 
39,963

Total accrued expenses and other
 
$
120,878

 
$
102,032

Other liabilities:
 
 
 
 
Self-insured risk reserves-long-term portion
 
$
12,052

 
$
12,052

Other postretirement benefit obligations-long-term portion
 
17,358

 
18,489

Defined benefit pension plans obligations-long-term portion
 
177

 
119

Other employee benefit plans obligations-long-term portion
 
5,449

 
6,634

Asset retirement obligation-long-term portion
 
8,504

 
6,991

Other
 
9,296

 
3,049

Total other liabilities
 
$
52,836

 
$
47,334



7. Income Tax Expense

Income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for the three-month periods ended September 30, 2015 and 2014 were 45.2% and 36.1%, respectively. During the second quarter of fiscal 2016, we were unfavorably impacted by acquisition costs that are capitalized for tax purposes. The effective income tax rates for the six-month periods ended September 30, 2015 and 2014 were 39.4% and 37.0%, respectively.

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.

As of March 31, 2015 and September 30, 2015, we had no unrecognized tax benefits and have not recorded any liability for interest and penalties.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local authorities, as well as foreign jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2015 and, with limited exceptions, we are no longer subject to United States state and local or non-United States income tax examinations by tax authorities for years before fiscal 2011. We remain subject to tax authority audits in various jurisdictions wherever we do business. We do not expect the results of these examinations to have a material adverse effect on our consolidated financial statements.

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



8. Benefit Plans

We provide defined benefit pension plans for certain former manufacturing and plant administrative personnel as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. In addition to providing pension benefits to certain employees, we sponsor an unfunded postretirement welfare benefits plan for two groups of United States employees, including some of the same employees who receive pension benefits. Benefits under this plan include retiree life insurance and retiree medical coverage, including prescription drug coverage.
In July 2014, the Board of Directors of American Sterilizer Company (“AMSCO”) approved the termination of the American Sterilizer Company Retirement Income Plan (“Plan”) effective October 1, 2014.  An Application for Determination was filed with the Internal Revenue Service (IRS) on August 22, 2014, with respect to the Plan termination. A Form 500 Standard Termination Notice was filed with the Pension Benefit Guaranty Corporation ("PBGC") on November 17, 2014. The 60-day PBGC waiting period lapsed without objection by the PBGC.  AMSCO received a favorable determination from the IRS regarding the termination. On August 19, 2015, an annuity contract was purchased from Massachusetts Mutual Life Insurance Company to provide Plan benefits. Plan assets were converted to cash to fund the purchase. The purchase price of the annuity contract was $51,805. An additional employer contribution of $4,687 was made to the Plan to fund the annuity purchase obligation on August 26, 2015. As a result the purchase of the annuity, we recognized a pension settlement of $26,515. In addition, plan benefits and benefit administration became the responsibility of the annuity provider. The assumptions used to measure the benefit obligation as of March 31, 2015 reflect this effort.
Additional information regarding our defined benefit pension plans and other postretirement benefits plan is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015, dated May 27, 2015.
Components of the net periodic benefit cost for our defined benefit pension plans and other postretirement medical benefits plan were as follows: 
 
 
Defined Benefit Pension Plans
 
Other
Postretirement
Benefits Plan
 
 
 
Three Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
11

 
$
35

 
$

 
$

Interest cost
 
224

 
471

 
148

 
173

Expected return on plan assets
 
(403
)
 
(785
)
 

 

Amortization of loss
 
241

 
277

 
207

 
180

Settlement
 
26,515

 

 

 

Amortization of prior service cost
 

 

 
(815
)
 
(816
)
Net periodic benefit cost
 
$
26,588

 
$
(2
)
 
$
(460
)
 
$
(463
)

 
 
Defined Benefit Pension Plans
 
Other
Postretirement
Benefits Plan
 
 
 
Six Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
27

 
$
70

 
$

 
$

Interest cost
 
560

 
944

 
296

 
346

Expected return on plan assets
 
(1,008
)
 
(1,570
)
 

 

Amortization of loss
 
602

 
553

 
414

 
360

Settlement
 
26,515

 

 

 

Amortization of prior service cost
 

 

 
(1,631
)
 
(1,631
)
Net periodic benefit cost
 
$
26,696

 
$
(3
)
 
$
(921
)
 
$
(925
)

We contribute amounts to the defined benefit pension plans at least sufficient to meet the minimum requirements as stated in applicable employee benefit laws and local tax laws. We record liabilities for the difference between the fair value of the plan

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement benefits plans) on our accompanying Consolidated Balance Sheets.

9. Commitments and Contingencies
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
On May 23, 2014, the Company received a warning letter from the FDA regarding an inspection that the FDA concluded on January 8, 2014 at our STERIS Isomedix Services facility located in Libertyville, Illinois. The facility primarily provides microbial reduction services for certain medical device Customers. Among other matters, the FDA warning letter asserts that certain processes and procedures observed during the inspection did not conform to current Good Manufacturing Practices for medical devices as required by Title 21 CFR Part 820 and, as a result, that certain devices processed at the subject facility are adulterated within the meaning of the Federal Food, Drug and Cosmetic Act. Since the inspection, the Company has provided detailed responses to the FDA regarding its corrective actions, and has continued to work diligently to remediate the FDA’s concerns. We do not believe that this inspection was a result of Customer complaints and there have been no reports of patient injury. We do not expect this situation to have a material adverse effect on our operations or financial condition.
On December 19, 2014 a purported shareholder of STERIS filed a Verified Stockholder Derivative Complaint in the Court of Common Pleas, Cuyahoga County, Ohio (the “Court”), against the members of STERIS’s board of directors and certain officers of STERIS, challenging the excise tax make-whole payments approved by STERIS’s board of directors in connection with the proposed combination of Synergy Health plc (“Synergy”) and STERIS (the “Combination”). STERIS was named as a nominal defendant in the action. The case is captioned St. Lucie County Fire District Firefighters’ Pension Trust Fund v. Rosebrough, Jr., et al., Case No. CV 14 837749 (the “Action”). On September 28, 2015, the defendants reached an agreement in principle with plaintiff, regarding a settlement of the Action, and that agreement is reflected in a memorandum of understanding. In connection with the contemplated settlement, STERIS agreed to make certain additional disclosures related to the make-whole payments, which disclosures were reported on the Company’s Form 8-K dated September 28, 2015, and also agreed not to grant any new stock compensation subject to Section 4985 of the Internal Revenue Code to any of the individual defendants in the Action until six months following the closing date of the Combination. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including the approval of the Court. In addition, in connection with the settlement, the parties have agreed to negotiate in good faith regarding the amount of attorneys’ fees and expenses that shall be paid to plaintiff’s counsel in connection with the Action. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



any stipulation of settlement. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.
On May 28, 2015, the Federal Trade Commission (“FTC”) brought an administrative complaint against STERIS and Synergy, seeking to block the Combination. The next day the FTC filed suit against STERIS and Synergy in the United District Court for the Northern District of Ohio (“District Court”) seeking to enjoin the Combination until the administrative challenge was adjudicated. Both complaints alleged that Synergy was an “actual potential competitor” with STERIS in the market for contracted sterilization services. The FTC contended that, but for the Combination, Synergy would enter the U.S. market with a new sterilization modality and compete against STERIS at some point in the future. On September 24, 2015, the District Court issued an Opinion and Order that denied the FTC’s request to enjoin the Combination. On October 1, 2015, the FTC stated publicly that it has decided to not appeal the decision of the District Court. Also on October 1, 2015, STERIS and Synergy filed a motion in the FTC’s administrative law proceeding requesting that the FTC withdraw its administrative challenge to the Combination. On October 7, 2015, the FTC issued an order withdrawing the matter from adjudication, the effect of which is to stay the administrative proceeding until the FTC determines whether it will proceed with the administrative challenge. The FTC has not issued its decision to date.
On July 8, 2015, the United States District Court for the Northern District of Ohio issued an Order terminating the April 20, 2010 consent decree entered into by two Company employees and the United States. The consent decree related to U.S. Food and Drug Administration (FDA) allegations regarding the Company’s now discontinued SYSTEM 1® liquid chemical sterilization system. As a result of the termination of the consent decree, the Company is no longer subject to any court order related to its FDA regulatory compliance.
Other civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2015 dated May 27, 2015: “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters, including the Consent Decree”.
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of the applicable statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates.
Additional information regarding our contingencies is included in Item 7 of Part II titled, “Management's Discussion and Analysis of Financial Conditions and Results of Operations,” of our Annual Report on Form 10-K for the year ended March 31, 2015 dated May 27, 2015, and in Item 1 of Part II of this Form 10-Q titled, “Legal Proceedings.”

10. Business Segment Information

We operate and report in three business segments: Healthcare, Life Sciences, and Isomedix. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare segment manufactures and sells capital equipment, accessory, consumable, and service solutions to healthcare providers, including acute care hospitals, surgery and gastrointestinal centers. These solutions aid our Customers in improving the safety, quality, and productivity of their surgical, sterile processing, gastrointestinal, and emergency environments.
Our Life Sciences segment manufactures and sells capital equipment, formulated cleaning chemistries, and service solutions to pharmaceutical companies, and private and public research facilities around the globe.
Our Isomedix segment operates through a network of facilities located in North America. We sell a comprehensive array of contract sterilization services using gamma irradiation and ethylene oxide (“EO”) technologies as well as an array of laboratory

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



testing services. We provide microbial reduction services based on Customer specifications to companies that supply products to the healthcare, industrial, and consumer products industries.
Financial information for each of our segments is presented in the following table. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which results in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare segment is responsible for the management of all but one manufacturing facility and uses standard cost to sell products to the Life Sciences segment. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. The fiscal 2016 periods include expense of $26,515 resulting from the settlement of the legacy American Sterilizer Company Retirement Income Plan obligation (please refer to Note 8 titled, "Benefit Plans" for more information).
The accounting policies for reportable segments are the same as those for the consolidated Company. For the three and six month periods ended September 30, 2015, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015 dated May 27, 2015.
Financial information for each of our segments is presented in the following tables:
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Healthcare
 
$
362,289

 
$
351,169

 
$
691,616

 
$
653,979

Life Sciences
 
71,040

 
59,148

 
127,812

 
117,762

Isomedix
 
55,839

 
51,850

 
109,528

 
103,043

Total reportable segments
 
489,168

 
462,167

 
928,956

 
874,784

Corporate and other
 
729

 
562

 
843

 
588

Total revenues
 
$
489,897

 
$
462,729

 
$
929,799

 
$
875,372

Operating income:
 
 
 
 
 
 
 
 
Healthcare
 
$
20,336

 
$
29,943

 
$
38,011

 
$
47,909

Life Sciences
 
18,092

 
13,048

 
31,325

 
24,993

Isomedix
 
14,784

 
14,399

 
30,034

 
30,590

Total reportable segments
 
53,212

 
57,390

 
99,370

 
103,492

Corporate and other
 
(30,549
)
 
(3,967
)
 
(32,491
)
 
(5,901
)
Total operating income
 
$
22,663

 
$
53,423

 
$
66,879

 
$
97,591



11. Common Shares

We calculate basic earnings per common share based upon the weighted average number of common shares outstanding. We calculate diluted earnings per share based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method. The following is a summary of common shares and common share equivalents outstanding used in the calculations of basic and diluted earnings per share: 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Denominator (shares in thousands):
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
 
59,897

 
59,375

 
59,832

 
59,272

Dilutive effect of common share equivalents
 
473

 
645

 
496

 
645

Weighted average common shares outstanding and common share equivalents—diluted
 
60,370

 
60,020

 
60,328

 
59,917


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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)




Options to purchase the following number of common shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the common shares during the periods, so including these options would be anti-dilutive: 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
(shares in thousands)
 
 
 
 
 
 
Number of common share options
 
419

 
486

 
235

 
416


12. Repurchases of Common Shares

During the first half of fiscal 2016, we obtained 191,959 of our common shares in connection with stock based compensation award programs. At September 30, 2015, $86,939 of STERIS common shares remained authorized for repurchase pursuant to the most recent Board approved repurchase authorization (the March 2008 Board Authorization). Also, 10,125,519 common shares were held in treasury at September 30, 2015.

13. Share-Based Compensation

We maintain a long-term incentive plan that makes available common shares for grants, at the discretion of the Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and common share grants. Stock options provide the right to purchase our common shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally may cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date. As of September 30, 2015, 2,245,941 shares remained available for grant under the long-term incentive plan.

The fair value of share-based compensation awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.

The following weighted-average assumptions were used for options granted during the first half of fiscal 2016 and fiscal 2015: 
 
 
Fiscal 2016
 
Fiscal 2015
Risk-free interest rate
 
1.51
%
 
1.89%
Expected life of options
 
5.69 years
 
5.75 years
Expected dividend yield of stock
 
1.40
%
 
1.87%
Expected volatility of stock
 
25.06
%
 
29.86%

The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of our historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 1.55% and 1.46% was applied in fiscal 2016 and 2015, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.

A summary of share option activity is as follows:
 
 
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at March 31, 2015
 
1,759,890

 
$
37.03

 
 
 
 
Granted
 
366,700

 
66.88

 
 
 
 
Exercised
 
(242,345
)
 
33.39

 
 
 
 
Forfeited
 
(31,837
)
 
54.31

 
 
 
 
Canceled
 
(500
)
 
24.45

 
 
 
 
Outstanding at September 30, 2015
 
1,851,908

 
$
43.12

 
6.5 years
 
$
41,164

Exercisable at September 30, 2015
 
1,090,975

 
$
33.87

 
4.9 years
 
$
33,928


We estimate that 746,415 of the non-vested stock options outstanding at September 30, 2015 will ultimately vest.

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $64.97 closing price of our common shares on September 30, 2015 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of our common shares.

The total intrinsic value of stock options exercised during the first half of fiscal 2016 and fiscal 2015 was $8,295 and $8,245, respectively. Net cash proceeds from the exercise of stock options were $8,111 and $8,686 for the first half of fiscal 2016 and fiscal 2015, respectively. The tax benefit from shared-based compensation was $4,676 and $4,505 for the first half of fiscal 2016 and fiscal 2015, respectively.

The weighted average grant date fair value of stock option grants was $14.66 and $13.41 for the first half of fiscal 2016 and fiscal 2015, respectively.

Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of September 30, 2015 and 2014 was $1,954 and $1,506, respectively. The fair value of outstanding SARs is revalued at each reporting date and the related liability and expense are adjusted appropriately.

A summary of the non-vested restricted share activity is presented below: 
 
 
Number of
Restricted
Shares
 
Number of Restricted Share Units
 
Weighted-Average
Grant Date
Fair Value
Non-vested at March 31, 2015
 
851,173

 
32,800

 
$
42.98

Granted
 
223,601

 
18,369

 
66.48

Vested
 
(202,353
)
 
(12,071
)
 
39.84

Canceled
 
(37,964
)
 

 
49.38

Non-vested at September 30, 2015
 
834,457

 
39,098

 
$
49.98


Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that vested during the first half of fiscal 2016 was $7,814.

Restricted share units carry generally the same terms and vesting requirements as restricted stock except that they may be settled in stock or cash upon vesting. Those that are settled in cash are classified as liabilities. All outstanding cash-settled

17

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



restricted share units vested in the first quarter of fiscal 2016. The fair value of outstanding cash-settled restricted share units as of March 31, 2015 was $334. The fair value of each cash-settled restricted share unit is revalued at each reporting date and the related liability and expense are adjusted appropriately.

As of September 30, 2015, there was a total of $36,547 in unrecognized compensation cost related to nonvested share-based compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average period of 2.39 years.

14. Financial and Other Guarantees

We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Changes in our warranty liability during the first half of fiscal 2016 were as follows:
 
 
Balance, March 31, 2015
$
5,579

Warranties issued during the period
5,078

Settlements made during the period
(5,331
)
Balance, September 30, 2015
$
5,326


We also sell product maintenance contracts to our Customers. These contracts range in terms from one to five years and require us to maintain and repair the product over the maintenance contract term. We initially record amounts due from Customers under these contracts as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” The liability recorded for such deferred service revenue was $34,023 and $30,720 as of September 30, 2015 and March 31, 2015, respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenues is excluded from the table presented above.

15. Forward and Swap Contracts

From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. We do not use derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At September 30, 2015, we held foreign currency forward contracts to buy 50 million Mexican pesos, and 3 million British pounds sterling. At September 30, 2015, we held commodity swap contracts to buy 317.1 thousand pounds of nickel.

 
 
Asset Derivatives
 
Liability Derivatives
 
 
Fair Value at
 
Fair Value at
 
Fair Value at
 
Fair Value at
Balance Sheet Location
 
September 30, 2015
 
March 31, 2015
 
September 30, 2015
 
March 31, 2015
Prepaid & Other
 
$

 
$
12

 
$

 
$

Accrued expenses and other
 
$

 
$

 
$
723

 
$
616


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

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



 
 
 
Location of gain (loss) recognized in income
 
Amount of gain (loss)
recognized in income
Three Months Ended September 30,
 
Six Months Ended September 30,
2015
 
2014
 
2015
 
2014
Foreign currency forward contracts
 
Selling, general and administrative
 
$
(693
)
 
$
(426
)
 
$
(261
)
 
$
(147
)
Commodity swap contracts
 
Cost of revenues
 
$
(288
)
 
$
(347
)
 
$
(333
)
 
$
314


16. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions. The following table shows the fair value of our financial assets and liabilities at September 30, 2015 and March 31, 2015:
 
 
 
 
 
 
Fair Value Measurements at September 30, 2015 and March 31, 2015 Using
 
 
Carrying Value
 
Quoted Prices
in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
Level 1
 
Level 2
 
Level 3
September 30
March 31
September 30
March 31
 
September 30
March 31
 
September 30
March 31
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
 
$
162,187

$
167,689

 
$
140,176

$
148,944

 
$
22,011

$
18,745

 
$

$

Forward and swap contracts (2)
 

12

 


 

12

 


Investments (3)
 
6,549

8,332

 
6,549

8,332

 


 


Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Forward and swap contracts (2)
 
$
723

$
616

 
$

$

 
$
723

$
616

 
$

$

Deferred compensation plans (3)
 
3,150

3,757

 
3,150

3,757

 


 


Long term debt (4)
 
829,818

621,075

 


 
830,967

641,131

 


Contingent consideration obligations (5)
 
7,071

2,500

 


 


 
7,071

2,500


(1) Money market fund holdings are classified as level two as active market quoted prices are not available.
(2) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(3) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying investments. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Changes in the value of the investment are recognized each period based on the fair value of the investment.

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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



(4) We estimate the fair value of our principal amount of long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(5) Contingent consideration obligations arise from prior business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at September 30, 2015 are summarized as follows:
 
Contingent Consideration
Balance at March 31, 2015
$
2,500

Additions
5,000

Payments
(122
)
Foreign currency translation adjustments (1)
(307
)
Balance at September 30, 2015
$
7,071

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


Information regarding our investments is as follows:
 
 
 
 
 
 
Investments at September 30, 2015 and March 31, 2015
 
 
Cost
 
Unrealized Gains
 
Unrealized Losses (2)
 
Fair Value
 
 
 
 
 
 
 
 
September 30
 
March 31
September 30
 
March 31
 
September 30
 
March 31
 
September 30
 
March 31
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities (1)
 
$
4,681

 
$
4,681

 
$

 
$

 
$
(1,224
)
 
$

 
$
3,457

 
$
4,681

Mutual funds
 
2,414

 
2,677

 
678

 
974

 

 

 
3,092

 
3,651

Total available-for-sale securities
 
$
7,095

 
$
7,358

 
$
678

 
$
974

 
$
(1,224
)
 
$

 
$
6,549

 
$
8,332

(1) Our marketable equity securities have been in a unrealized loss position for less than 12 months.
(2) Amounts reported include the impact of foreign currency movements relative to the U.S. dollar.

17. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Foreign Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three and six months ended September 30, 2015 were as follows:


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STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Foreign Currency Translation
 
Total Accumulated Other Comprehensive Income
(Loss)
 
Three Months
 
Six Months
 
Three Months
 
Six Months
 
Three Months
 
Six Months
 
Three Months
 
Six Months
Beginning Balance
$
220

 
$
1,068

 
$
(9,042
)
 
$
(8,889
)
 
$
(45,050
)
 
$
(58,848
)
 
$
(53,872
)
 
$
(66,669
)
Other Comprehensive Income (Loss) before reclassifications
(587
)
 
(1,517
)
 
34,066

 
33,913

 
(21,841
)
 
(8,043
)
 
11,638

 
24,353

Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
35

 
117

 
(17,264
)
 
(17,264
)
 

 

 
(17,229
)
 
(17,147
)
Net current-period Other Comprehensive Income (Loss)
(552
)
 
(1,400
)
 
16,802

 
16,649

 
(21,841
)
 
(8,043
)
 
(5,591
)
 
7,206

Balance at September 30, 2015
$
(332
)
 
$
(332
)
 
$
7,760

 
$
7,760

 
$
(66,891
)
 
$
(66,891
)
 
$
(59,463
)
 
$
(59,463
)

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

(1) Realized gain (loss) on available for sale securities is reported in the interest income and miscellaneous expense line of the Consolidated Statements of Income.
(2) Amortization (gain) and settlement of defined benefit pension items is reported in the selling, general and administrative expense line of the Consolidated Statements of Income.

18. Business Acquisitions

Proposed Combination with Synergy Health plc
On October 13, 2014, we announced that we were commencing a "recommended offer" under U.K. law to acquire all outstanding shares of Synergy Health plc (“Synergy”) in a cash and stock transaction valued at £19.50 ($31.35) per Synergy share, or a total of approximately $1.9 billion based on STERIS’s closing stock price of $56.38 per share on October 10, 2014, through a newly formed U.K. entity that also would indirectly acquire all of the outstanding stock of STERIS (the "Combination"). Based on STERIS’s closing stock price of $67.00 and exchange rates as of February 3, 2015, the total value of the cash and stock transaction is approximately $2.1 billion or £23.42 ($35.52) per Synergy share. The Combination is subject to certain customary closing conditions. We are endeavoring to close the Combination on or about November 2, 2015.
Total costs of approximately $29,767 before tax, were incurred during the first six months of fiscal year 2016 related to the Combination and are reported in selling, general and administrative expense.
Fiscal 2016 Acquisitions
On July 31, 2015 we acquired all of the outstanding shares of General Econopak, Inc. (“Gepco”) for a purchase price of $176,260 in cash, subject to a customary working capital adjustment. Gepco is a Pennsylvania-based manufacturer of product solutions in the areas of sterility maintenance, barrier protection, and sterile cleanroom products for pharmaceutical, biotechnology and veterinary Customers. Gepco will be integrated into our Life Sciences business segment. The purchase price was financed through a combination of credit facility borrowings and cash on hand. The allocation of premium to intangibles and goodwill is preliminary and will be finalized after the valuation reports are completed. We anticipate that the acquisition will qualify for joint election tax benefit under Section 338 (h)(10) of the Internal Revenue Code. We recorded $2,350 of acquisition related costs, which are reported in selling, general and administrative expense.
On June 12, 2015 we acquired the capital stock of Black Diamond Video, Inc. ( "Black Diamond"), a California-based developer and provider of operating room integration systems. The purchase price was approximately $51,096, which includes deferred consideration of $6,000, to be paid approximately twelve months after the closing date, and contingent consideration of $5,000, and is subject to a working capital adjustment. The transaction consideration paid at closing was funded with cash on hand. Black Diamond is being integrated into our Healthcare business segment. The allocation of premium to intangibles and goodwill is preliminary and will be finalized after the valuation reports are completed.

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Table of Contents
STERIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Six Months Ended September 30, 2015 and 2014
(dollars in thousands)



We also completed four other minor purchases that continued to expand our service offerings in the Healthcare and Life Sciences segments. The aggregate purchase price associated with these transactions was approximately $6,940, including potential contingent consideration of $1,760.
The Consolidated Financial Statements include the operating results of the fiscal 2016 acquisitions from the acquisition dates. Pro-forma results of operations for the fiscal 2015 periods have not been presented because the effects of the acquisition were not material to our financial results. Acquisition related costs associated with fiscal 2016 acquisitions with the exception of Gepco, have not been significant. The table below summarizes the preliminary allocation of the purchase price to the net assets acquired based on fair values at the acquisition date.
 
 Gepco (1)
Black Diamond (1)
Other Acquisitions
Cash
$
1,108

$

$

Accounts receivable
4,161

2,966

647

Inventory
1,926

3,309

109

Property, plant and equipment
946

607

140

Other assets
1,621

43


Intangible assets
67,189

15,035

2,169

Goodwill
100,782

39,449

4,127

Total assets acquired
177,733

61,409

7,192

 
 
 
 
Accounts payable
(236
)
(2,567
)
(251
)
Current liabilities
(1,237
)
(1,958
)
(1
)
Non-current liabilities

(5,788
)

Total liabilities assumed
(1,473
)
(10,313
)
(252
)
 
 
 
 
Net assets acquired
$
176,260

$
51,096

$
6,940

(1) Purchase price allocation is still preliminary as of September 30, 2015, as valuations have not been finalized.

19. U.K. Takeover Code Directors’ Confirmation

Under Rule 28.1 of the U.K.’s City Code on Takeovers and Mergers (the “Takeover Code”) which applies in light of our proposed acquisition of Synergy Health, our directors must provide a so-called “directors’ confirmation” in respect of our Consolidated Net Income for the three months ended September 30, 2015 reported in this Quarterly Report on Form 10-Q (the “Net Income Statement”) since it constitutes an unaudited profit estimate for the purposes of the Takeover Code. Accordingly, our directors confirm that:
(i)        the Consolidated Statement of Income for the three months ended September 30, 2015, has been properly compiled on the basis of the assumptions contained or referred to in this Quarterly Report; and
(ii)       the basis of accounting used for the purposes of preparing the Consolidated Statement of Income for the three months ended September 30, 2015, is consistent with our accounting policies.


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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
STERIS Corporation


We have reviewed the consolidated balance sheet of STERIS Corporation and subsidiaries (“STERIS”) as of September 30, 2015 and the related consolidated statements of income and comprehensive income for the three- and six-month periods ended September 30, 2015 and 2014, and the consolidated statements of cash flows for the six-month periods ended September 30, 2015 and 2014. These financial statements are the responsibility of STERIS management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of STERIS Corporation and subsidiaries as of March 31, 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified opinion on those consolidated financial statements in our report dated May 27, 2015. In our opinion, the accompanying consolidated balance sheet of STERIS Corporation and subsidiaries as of March 31, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.




/s/ Ernst & Young LLP


Cleveland, Ohio
October 30, 2015


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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), we explain the general financial condition and the results of operations for STERIS including:
 
what factors affect our business;
what our earnings and costs were in each period presented; 
why those earnings and costs were different from prior periods;
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.

As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the second quarter and first six months of fiscal 2016 and fiscal 2015. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2015, dated May 27, 2015. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis 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 that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
 


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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 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 Company Overview and Executive Summary

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. In addition, each of our core industries is experiencing specific trends that could increase demand. Within healthcare, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. The aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits processed by our Isomedix segment.
We are actively pursuing new opportunities to adapt our proven technologies to meet the changing needs of the global marketplace.
On October 13, 2014, we announced that we were commencing a "recommended offer" under U.K. law to acquire all outstanding shares of Synergy Health plc (“Synergy”) in a cash and stock transaction valued at £19.50 ($31.35) per Synergy share, or a total of approximately $1.9 billion based on STERIS’s closing stock price of $56.38 per share on October 10, 2014, through a newly formed U.K. entity that also would indirectly acquire all of the outstanding stock of STERIS (the "Combination"). Based on STERIS’s closing stock price of $67.00 and exchange rates as of February 3, 2015, the total value of the cash and stock transaction is approximately $2.1 billion or £23.42 ($35.52) per Synergy share. The Combination is subject to certain customary closing conditions. We are endeavoring to close the Combination on or about November 2, 2015.
We also are pursuing a strategy of expanding into adjacent markets with acquisitions in the Healthcare and Life Sciences segments. On July 31, 2015 we acquired all of the outstanding shares of General Econopak, Inc. (“Gepco”) a Pennsylvania-based manufacturer of consumable product solutions in the areas of sterility maintenance, barrier protection, and sterile cleanroom products for pharmaceutical, biotechnology and veterinary Customers. On June 12, 2015 we acquired the capital stock of Black Diamond Video, Inc. ("Black Diamond"), a California-based developer and provider of operating room integration systems. We also completed four other minor purchases that continued to expand our service offerings in the Healthcare and Life Sciences segments.
Fiscal 2016 second quarter revenues were $489.9 million representing an increase of 5.9% over the fiscal 2015 second quarter revenues of $462.7 million, reflecting growth within all three business segments. Fiscal 2016 first half revenues were $929.8 million representing an increase of 6.2% over the first half of fiscal 2015 revenues of $875.4 million, also reflecting growth within all three business segments.
Fiscal 2016 second quarter gross margin percentage was 42.7% compared with 41.9% for the fiscal 2015 second quarter, while fiscal 2016 first half gross margin percentage was 42.3% compared with 41.6% for the first half of fiscal 2015. The improved gross margin percentages in the second quarter and first half of fiscal 2016 were due in part to the positive gross

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margin impact of foreign currency and favorable material costs, which was offset by the negative impact of unfavorable product mix and other costs.
Fiscal 2016 second quarter operating income was $22.7 million, compared to fiscal 2015 second quarter operating income of $53.4 million. Fiscal 2016 first half operating income was $66.9 million compared to the fiscal 2015 first half operating income of $97.6 million. Contributing to these decreases were additional acquisition costs related to our proposed Combination with Synergy of $20.2 million and $29.5 million, quarter and year to date respectively, over the prior year periods. In addition, we incurred $26.5 million in the second quarter of fiscal 2016 in connection with a settlement of a legacy pension obligation (see Note 8 to our financial statements titled ,"Benefit Plans" for more information).
Cash flows from operations were $79.5 million and free cash flow was $39.6 million in the first six months of fiscal 2016 compared to cash flows from operations of $104.9 million and free cash flow of $69.2 million in the first six months of fiscal 2015. The decreases in cash flow from operations and free cash flow are primarily due to an increased payout level in regards to our annual compensation program paid in fiscal 2016 over fiscal 2015, a pension contribution made in connection with the settlement of a legacy pension obligation and additional expenses related to the proposed Combination with Synergy (see Note 8 to our financial statements titled,"Benefit Plans" for more information on the pension obligation settlement, and 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 43.2% at September 30, 2015 and 36.7% at March 31, 2015. During the first six months of fiscal 2016, we declared and paid quarterly cash dividends of $0.48 per common share.
Additional information regarding our financial performance during the fiscal second quarter and first six months of 2016 is included in the subsection below titled “Results of Operations.”

Matters Affecting Comparability

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 the second quarter of fiscal 2016, our revenues were unfavorably impacted by $9.2 million, or 1.9%, and income before taxes was favorably impacted by $6.1 million, or 16.9%, as a result of foreign currency movements relative to the U.S. dollar. During the first half of fiscal 2016, our revenues were unfavorably impacted by $16.4 million, or 1.7%, and income before taxes was favorably impacted by $10.9 million, or 15.7%, as a result of foreign currency movements relative to the U.S. dollar.

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

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September 30, 2015 and 2014:
 
 
Six Months Ended September 30,
(dollars in thousands)
 
2015
 
2014
Net cash flows provided by operating activities
 
$
79,472

 
$
104,908

Purchases of property, plant, equipment and intangibles, net
 
(39,928
)
 
(36,527
)
Proceeds from the sale of property, plant, equipment and intangibles
 
38

 
796

Free cash flow
 
$
39,582

 
$
69,177


Results of Operations

In the following subsections, we discuss our earnings and the factors affecting them for the second quarter and the first half of fiscal 2016 compared with the same fiscal 2015 periods. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following tables compare our revenues for the three and six months ended September 30, 2015 to the revenues for the three and six months ended September 30, 2014:
 
 
Three Months Ended September 30,
 
  
 
Percent
(dollars in thousands)
2015
 
2014
 
Change
 
Change
Total revenues
$
489,897

 
$
462,729

 
$
27,168

 
5.9
 %
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
Capital equipment revenues
152,037

 
143,488

 
8,549

 
6.0
 %
Consumable revenues
122,108

 
113,357

 
8,751

 
7.7
 %
Service revenues
215,752

 
205,884

 
9,868

 
4.8
 %
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
United States revenues
395,220

 
365,482

 
29,738

 
8.1
 %
International revenues
94,677

 
97,247

 
(2,570
)
 
(2.6
)%

 
Six Months Ended September 30,
 
 
 
Percent
(dollars in thousands)
2015
 
2014
 
Change
 
Change
Total revenues
$
929,799

 
$
875,372

 
$
54,427

 
6.2
 %
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
Capital equipment revenues
270,257

 
263,883

 
6,374

 
2.4
 %
Consumable revenues
236,195

 
223,402

 
12,793

 
5.7
 %
Service revenues
423,347

 
388,087

 
35,260

 
9.1
 %
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
United States revenues
755,689

 
682,833

 
72,856

 
10.7
 %
International revenues
174,110

 
192,539

 
(18,429
)
 
(9.6
)%
Quarter over Quarter Comparison

Revenues increased $27.2 million, or 5.9%, to $489.9 million for the quarter ended September 30, 2015, as compared to $462.7 million for the same quarter in the prior year. This increase is attributable to growth within all three business segments including our recent acquisitions. Capital equipment revenues increased 6.0% in the fiscal 2016 second quarter over the fiscal 2015 second quarter. This increase is primarily attributable to strong growth within the North America region. Consumable

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revenues increased 7.7% for the quarter ended September 30, 2015, as compared to the prior year quarter, driven largely by growth within all geographic regions. Service revenues increased 4.8% in the second quarter of fiscal 2016 primarily driven by growth within the North America region including an increase of 7.7% in the Isomedix business segment.
United States revenues increased $29.7 million, or 8.1%, to $395.2 million for the quarter ended September 30, 2015, as compared to $365.5 million for the same prior year quarter. This increase reflects growth in all three business segments and growth in capital equipment, consumable and service revenues.
International revenues decreased $2.6 million, or 2.6%, to $94.7 million for the quarter ended September 30, 2015, as compared to $97.2 million for the same prior year quarter. This decrease reflects declines within the Asia Pacific, Europe, Middle East, and Africa ("EMEA"), Asia Pacific and Latin America regions, which were partially offset by growth in Canada.
First Half over First Half Comparison

Revenues increased $54.4 million or 6.2% to $929.8 million for the first half of fiscal 2016, as compared to $875.4 million for the same prior year period. This increase is attributable to growth within all three segments including our recent acquisitions. Capital equipment revenues for the first half of fiscal 2016 increased $6.4 million or 2.4% compared to the prior year period. This increase is primarily attributable to strong growth within the North America region. Consumable revenues for the first half of fiscal 2016 increased 5.7% over the first half of fiscal 2015, driven largely by growth within all geographic regions. Service revenues during the first half of fiscal 2016 increased 9.1% over the first half of fiscal 2015 primarily driven by growth within the North America region including an increase of 6.3% in the Isomedix business segment.
United States revenues for the first half of fiscal 2016 were $755.7 million, an increase of $72.9 million or 10.7% over the the first half of fiscal 2015 revenues of $682.8 million. This increase reflects growth in all three business segments, and growth in capital equipment, consumable and service revenues.
International revenues for the first half of fiscal 2016 were $174.1 million, an decrease of 9.6% over the first half of fiscal 2015 revenues of $192.5 million, due to declines within the EMEA, Asia Pacific and Latin America regions.
Revenues by segment are further discussed in the section of MD&A titled, "Business Segment Results of Operations."

Gross Profit. The following tables compare our gross profit for the three and six months ended September 30, 2015 to the three and six months ended September 30, 2014:
 
 
 
Three Months Ended September 30,
 
Change
 
Percent
Change
(dollars in thousands)
 
2015
 
2014
 
Gross profit:
 
 
 
 
 
 
 
 
Product
 
$
126,057

 
$
113,854

 
$
12,203

 
10.7
%
Service
 
83,264

 
80,138

 
3,126

 
3.9
%
Total gross profit
 
$
209,321

 
$
193,992

 
$
15,329

 
7.9
%
Gross profit percentage:
 
 
 
 
 
 
 
 
Product
 
46.0
%
 
44.3
%
 
 
 
 
Service
 
38.6
%
 
38.9
%
 
 
 
 
Total gross profit percentage
 
42.7
%
 
41.9
%
 
 
 
 


 
 
Six Months Ended September 30,
 
Change
 
Percent
Change
(dollars in thousands)
 
2015
 
2014
 
Gross profit:
 
 
 
 
 
 
 
 
Product
 
$
228,508

 
$
214,319

 
$
14,189

 
6.6
%
Service
 
164,903

 
149,766

 
15,137

 
10.1
%
Total gross profit
 
$
393,411

 
$
364,085

 
$
29,326

 
8.1
%