Edgar Filing: STERIS CORP

Quarterly Report

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, 2009

¨	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

LOGO

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 ¨

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 pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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 ¨

Non-Accelerated Filer ¨

(Do not check if a smaller reporting company)

Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of common shares outstanding as of October 30, 2009: 58,727,566

STERIS Corporation and Subsidiaries

Form 10-Q

Index


		Page
Part I—Financial Information

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

Part II—Other Information

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 4.	Submission of Matters to a Vote of Security Holders	47

Item 6.	Exhibits	48

	Signature	49

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STERIS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)


	September 30, 2009			March 31, 2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	223,758		$	154,180
Accounts receivable (net of allowances of $8,958 and $10,728, respectively)		214,359			238,438
Inventories, net		128,147			130,218
Current portion of deferred income taxes, net		4,593			7,195
Prepaid expenses and other current assets		22,594			23,099

Total current assets		593,451			553,130

Property, plant, and equipment, net		349,045			350,996
Goodwill and intangibles, net		312,521			305,189
Other assets		8,219			7,624

Total assets	$	1,263,236		$	1,216,939

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	56,828		$	68,573
Accrued payroll and other related liabilities		48,215			59,702
Accrued expenses and other		73,257			73,751

Total current liabilities		178,300			202,026

Long-term indebtedness		210,000			210,000
Deferred income taxes, net		13,808			18,109
Other liabilities		60,354			68,639

Total liabilities		462,462			498,774

Commitments and contingencies (see note 10)
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; 58,713 and 58,452 shares outstanding, respectively		232,438			232,282
Common shares held in treasury, 11,326 and 11,588 shares, respectively		(307,193	)		(313,105	)
Retained earnings		859,091			814,359
Accumulated other comprehensive income		15,658			(15,800	)

Total shareholders’ equity		799,994			717,736
Noncontrolling interest		780			429

Total equity		800,774			718,165

Total liabilities and equity	$	1,263,236		$	1,216,939

See notes to consolidated financial statements.

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,
	2009			2008			2009			2008
Revenues:
Product	$	199,135		$	203,856		$	372,635		$	399,438
Service		115,094			119,271			225,137			235,254

Total revenues		314,229			323,127			597,772			634,692
Cost of revenues:
Product		115,958			120,923			210,235			233,790
Service		65,616			69,841			130,046			138,038

Total cost of revenues		181,574			190,764			340,281			371,828

Gross profit		132,655			132,363			257,491			262,864

Operating expenses:
Selling, general, and administrative		74,516			77,290			149,121			164,638
Research and development		8,189			8,068			15,769			16,347
Restructuring expenses		(115	)		37			(327	)		(129	)

Total operating expenses		82,590			85,395			164,563			180,856


Income from operations		50,065			46,968			92,928			82,008

Non-operating expenses, net:
Interest expense		3,130			2,518			6,213			4,285
Interest and miscellaneous income		(278	)		(540	)		(495	)		(922	)

Total non-operating expenses, net		2,852			1,978			5,718			3,363

Income before income tax expense		47,213			44,990			87,210			78,645
Income tax expense		15,129			16,196			29,584			24,351

Net income	$	32,084		$	28,794		$	57,626		$	54,294

Net income per common share:
Basic	$	0.55		$	0.49		$	0.98		$	0.92

Diluted	$	0.54		$	0.48		$	0.97		$	0.90

Cash dividends declared per common share outstanding	$	0.11		$	0.08		$	0.22		$	0.14

See notes to consolidated financial statements.

STERIS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended September 30,
	2009			2008
Operating activities:
Net income	$	57,626		$	54,294
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization		27,839			29,575
Deferred income taxes		(2,089	)		3,790
Share based compensation		3,978			3,843
Loss (gain) on the disposal of property, plant, equipment and intangibles, net		10			(1,084	)
Other items		3,207			(1,517	)
Changes in operating assets and liabilities
Accounts receivable, net		31,040			34,247
Inventories, net		9,132			(19,318	)
Other current assets		1,168			13,476
Accounts payable		(13,586	)		(8,478	)
Accruals and other, net		(25,917	)		(40,137	)

Net cash provided by operating activities		92,408			68,691

Investing activities:
Purchases of property, plant, equipment, and intangibles, net		(18,543	)		(20,872	)
Procceds from the sale of property, plant, equipment, and intangibles		509			9,506

Net cash used in investing activities		(18,034	)		(11,366	)

Financing activities:
Proceeds from the issuance of long-term obligations		—			150,000
Payments under credit facilities, net		—			(79,180	)
Deferred financing fees and debt issuance costs		—			(476	)
Repurchases of common shares		(289	)		(50,210	)
Cash dividends paid to common shareholders		(12,894	)		(8,275	)
Stock option and other equity transactions, net		2,102			32,956
Tax benefit from stock options exercised		463			8,732

Net cash (used in) provided by financing activities		(10,618	)		53,547

Effect of exchange rate changes on cash and cash equivalents		5,822			(2,521	)

Increase in cash and cash equivalents		69,578			108,351
Cash and cash equivalents at beginning of period		154,180			51,868

Cash and cash equivalents at end of period	$	223,758		$	160,219

See notes to consolidated financial statements.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Months Ended September 30, 2009 and 2008

(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 critical care 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 11 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, 2009, filed with the Securities and Exchange Commission (“SEC”) on May 29, 2009. The Consolidated Balance Sheet at March 31, 2009 was derived from the audited consolidated financial statements at that date, 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. Consolidation means that we combine the accounts of our wholly-owned subsidiaries with our accounts. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts.

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.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

This means that operating results for the three and six month periods ended September 30, 2009 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2010.

Fair Value of Financial Instruments

The recorded value of financial instruments is approximately equal to the fair value. We estimate the fair value of our long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements. We determined that the recorded value of our long-term debt is approximately equal to the fair value at September 30, 2009 and March 31, 2009. The financial instruments that we hold could potentially expose us to a concentration of credit risk. We invest our excess cash in highly rated money market funds and other high-quality short-term investments placed with major banks and financial institutions. We have established guidelines related to diversification and maturities to maintain safety and liquidity.

We provide additional information regarding the fair value of our financial instruments in note 17 titled, “Fair Value Measurements.”

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued a new standard to define fair value, establish a framework for measuring fair value in accordance with U.S. GAAP and expand disclosures about fair value measurements. In February 2008, the FASB deferred the effective date of the standard for all nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. We adopted the required provisions of the standard for financial assets and liabilities on April 1, 2008 and for nonfinancial assets and liabilities on April 1, 2009. The adoption did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued a new standard regarding the accounting for business combinations. The standard retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. The changes will impact financial statements on the acquisition date and in subsequent periods, as well as prior to the acquisition date because of the accounting treatment for acquisition-related costs. The provisions will be applied prospectively to business combinations completed in fiscal years beginning after December 15, 2008.

In December 2007, the FASB issued a new standard regarding the accounting for noncontrolling interests in consolidated financial statements. The standard recharacterizes minority interests as noncontrolling interests and requires these interests to be classified as a separate component of equity in our consolidated financial statements. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income related to the noncontrolling interests will be included in our consolidated net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. The provisions of the standard will be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively, and are effective for the first annual reporting period beginning after December 15, 2008. We adopted the standard as of

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

April 1, 2009, applying the presentation and disclosure requirements retrospectively resulting in reclassification of noncontrolling interests from “Other liabilities” to “Total equity.” Income attributable to noncontrolling interests is included in “Selling, general and administrative expenses” in the Consolidated Statements of Income and is not material.

In March 2008, the FASB issued a new standard regarding disclosures about derivative instruments and hedging activities. The standard requires disclosures regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. The standard is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. We adopted the standard on April 1, 2009 and it did not have a material impact on our consolidated financial statements.

In December 2008, the FASB issued a staff position regarding employers’ disclosures about postretirement benefit plan assets. It requires us to disclose how investment allocation decisions are made, including the factors relevant to understanding investment policies and decisions, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of the plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and significant concentrations of risk within plan assets. The provisions are effective for fiscal years ending after December 15, 2009 and will increase the disclosures in the notes to our consolidated financial statements related to the assets of defined benefit pension plans.

In April 2008, the FASB issued a staff position which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The provisions apply prospectively to intangible assets acquired after the effective date in fiscal years beginning after December 15, 2008. The adoption did not have a material impact on the consolidated financial statements.

In June 2008, the FASB issued a staff position which provides that unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computed earnings per share. The position is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption did not have a material impact on our disclosure of earnings per share.

In April 2009, the FASB issued several staff positions related to the accounting and financial statement disclosures of financials instruments that are effective for interim periods ending after June 15, 2009. All are to be applied prospectively and require comparative disclosures only for periods ending after initial adoption. The positions 1) change existing accounting requirements for other than temporary impairment of debt securities, 2) provide guidance for valuation of assets and liabilities that have experienced a significant reduction in volume and activity in relation to normal market activity, and 3) prospectively extend the disclosure requirements regarding the fair value of financial instruments, to interim financial statements. The adoption of these positions did not have a material impact on the consolidated financial statements.

In May 2009, the FASB issued a new standard requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The provisions are effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on our consolidated financial statements.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

In June 2009, the FASB issued a standard that establishes only two levels of U.S. generally accepted accounting principles, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) is now the sole source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, the adoption did not have any impact on our consolidated financial statements.

Significant Accounting Policies

A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2009.

2. Restructuring

The following summarizes our restructuring plans announced in prior fiscal years. We recognize restructuring expenses as incurred. In addition, we assess the property, plant and equipment associated with the related facilities for impairment. Additional information regarding our respective restructuring plans is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

Fiscal 2009 Restructuring Plan

During the third quarter of fiscal 2009, we adopted a restructuring plan primarily focused on our international operations (the “Fiscal 2009 Restructuring Plan”). As part of this plan, we took actions to improve operations at our Pieterlen, Switzerland manufacturing facility, rationalized certain products, recorded impairment charges for certain assets no longer used, and made targeted workforce reductions. We have closed two sales offices in Japan. These actions directly impacted approximately 100 employees worldwide. These restructuring actions are intended to enhance our profitability and improve efficiency primarily by reducing ongoing international operating costs.

Since the inception of the Fiscal 2009 Restructuring Plan, we have incurred pre-tax expenses totaling $15,012 related to these actions, of which $4,441 was recorded as restructuring expenses and $10,571 was recorded in cost of revenues, with expenses of $12,268 and $2,745 related to the Healthcare and Life Sciences reporting segments, respectively. We do not expect to incur significant additional expenses related to the Fiscal 2009 Restructuring Plan. We are continuing to evaluate all of our operations for additional opportunities to improve performance, but we have not committed to any additional specific actions.

Fiscal 2008 Restructuring Plan

During the fourth quarter of fiscal 2008, we announced an expense reduction initiative which was primarily focused on our North American operations, and was intended to enhance our profitability and improve efficiency by reducing ongoing operating costs (the “Fiscal 2008 Restructuring Plan”). We did not incur any restructuring expenses related to the Fiscal 2008 Restructuring Plan in the three and six month periods ended September 30, 2009.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

Since the inception of the Fiscal 2008 Restructuring Plan, we have incurred pre-tax restructuring expenses totaling $14,333 related to these actions, of which $9,883 was recorded as restructuring expenses and $4,450 was recorded in cost of revenues, with restructuring expenses and cost of revenues of $11,856, $1,296, $429, and $752 related to the Healthcare, Life Sciences, and Isomedix reporting segments, and Corporate and other, respectively. We do not expect to incur any significant additional restructuring expenses related to the Fiscal 2008 Restructuring Plan.

European Restructuring Plan

During the third quarter of fiscal 2007, we adopted a restructuring plan related to certain of our European operations (the “European Restructuring Plan”). During the first quarter of fiscal 2009, we settled the remaining obligations associated with this plan.

Fiscal 2006 Restructuring Plan

During fiscal 2006, we announced the transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico and other restructuring actions (the “Fiscal 2006 Restructuring Plan”), which were intended to improve our cost structure. We settled all obligations associated with this plan in fiscal 2009.

The following tables summarize our total restructuring expenses for the second quarter and first half of fiscal 2010 and fiscal 2009:


Three Months Ended September 30, 2009	Fiscal 2009 Restructuring Plan (1)
Severance, payroll, and other related costs	$	33
Lease termination obligations and other		(321	)
Asset impairment		(14	)

Total restructuring charges	$	(302	)

(1)	Includes $(187) in charges recorded in cost of revenues on Consolidated Statements of Income.


Three Months Ended September 30, 2008	Fiscal 2008 Restructuring Plan		Fiscal 2006 Restructuring Plan			Total
Severance, payroll, and other related costs	$	29	$	(29	)	$	—
Lease termination obligations		37		—			37

Total restructuring charges	$	66	$	(29	)	$	37


Six Months Ended September 30, 2009	Fiscal 2009 Restructuring Plan (2)
Severance, payroll, and other related costs	$	(13	)
Product rationalization		(234	)
Lease termination obligations and other		(308	)
Asset impairment		(14	)

Total restructuring charges	$	(569	)

(2)	Includes $(242) in charges recorded in cost of revenues on Consolidated Statements of Income.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)


Six Months Ended September 30, 2008	Fiscal 2008 Restructuring Plan			European Restructuring Plan		Fiscal 2006 Restructuring Plan			Total
Severance, payroll, and other related costs	$	(87	)	$	—	$	(178	)	$	(265	)
Lease termination obligations		37			99		—			136

Total restructuring charges	$	(50	)	$	99	$	(178	)	$	(129	)

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


	Fiscal 2009 Restructuring Plan
	March 31, 2009		Fiscal 2010						September 30, 2009
	March 31, 2009		Provision			Payments/ Impairments			September 30, 2009
Severance and termination benefits	$	1,920	$	(13	)	$	(1,459	)	$	448
Product rationalization		75		(234	)		159			—
Lease termination obligations and other		578		(308	)		(199	)		71
Asset impairment		—		(14	)		14			—

Total	$	2,573	$	(569	)	$	(1,485	)	$	519


	Fiscal 2008 Restructuring Plan
	March 31, 2009		Fiscal 2010					September 30, 2009
	March 31, 2009		Provision		Payments/ Impairments			September 30, 2009
Severance and termination benefits	$	501	$	—	$	(388	)	$	113
Asset impairments		409		—		(120	)		289
Lease termination obligations and other		881		—		(315	)		566
Asset impairment		—		—		—			—

Total	$	1,791	$	—	$	(823	)	$	968

3. Comprehensive Income

Comprehensive income includes net income as currently reported under U.S. GAAP and other comprehensive income. Other comprehensive income considers the effects of additional economic events that are not required to be recorded in determining net income, but rather are reported as a separate component of shareholders’ equity. The following table illustrates the components of our comprehensive income:


	Three Months Ended September 30,						Six Months Ended September 30,
	2009			2008			2009			2008
Net income	$	32,084		$	28,794		$	57,626		$	54,294
Cumulative foreign currency translation adjustment		7,610			(23,769	)		31,594			(24,370	)
Reduction in the unrecognized postretirement benefit plan obligation, net of taxes		—			22,194			—			22,194
Amortization of pension and postretirement benefit plans costs, net of taxes		(246	)		(494	)		(405	)		(245	)
Unrealized losses on investments		152			(152	)		269			(273	)

Total comprehensive income	$	39,600		$	26,573		$	89,084		$	51,600

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

The reduction in the unrecognized postretirement benefit plan obligation, net of taxes recorded in the three and six month periods ended September 30, 2008 is a result of amending and restating our United States postretirement welfare benefits plan during the second quarter of fiscal 2009. Additional information regarding the amendment and restatement of our United States postretirement welfare benefits plan is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

4. Property, Plant and Equipment

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


	September 30, 2009			March 31, 2009
Land and land improvements (1)	$	26,221		$	25,795
Buildings and leasehold improvements		192,138			188,136
Machinery and equipment		275,542			271,122
Information systems		98,328			92,966
Radioisotope		167,998			161,415
Construction in progress (1)		22,704			17,667

Total property, plant, and equipment		782,931			757,101
Less: accumulated depreciation and depletion		(433,886	)		(406,105	)

Property, plant, and equipment, net	$	349,045		$	350,996

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

5. 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 (“FIFO”) 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, 2009		March 31, 2009
Raw materials	$	35,687	$	37,270
Work in process		25,205		24,314
Finished goods		67,255		68,634

Inventories, net	$	128,147	$	130,218

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

6. Debt

Indebtedness was as follows:


	September 30, 2009		March 31, 2009
Private Placement	$	210,000	$	210,000
Credit facility		—		—

Long-term indebtedness	$	210,000	$	210,000

7. Additional Consolidated Balance Sheets Information

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


	September 30, 2009		March 31, 2009
Accrued payroll and other related liabilities:
Compensation and related items	$	18,552	$	17,395
Accrued vacation		6,820		5,916
Accrued bonuses		10,898		22,973
Accrued employee commissions		7,617		9,100
Other postretirement benefit plan obligation-current portion		3,777		3,777
Other employee benefit plan obligations-current portion		551		541

Total accrued payroll and other related liabilities	$	48,215	$	59,702

Accrued expenses and other:
Deferred revenues	$	27,734	$	25,491
Self-insured risk retention-current portion		6,484		6,083
Accrued dealer commissions		6,082		6,389
Accrued warranty		6,531		7,573
Other		26,426		28,215

Total accrued expenses and other	$	73,257	$	73,751

Other liabilities:
Self-insured risk retention-long-term portion	$	11,041	$	11,041
Other postretirement benefit plan obligation-long-term portion		25,314		26,105
Defined benefit pension plan obligations		11,866		18,356
Other employee benefit plan obligations-long-term portion		1,964		1,240
Accrued long-term income taxes		10,169		11,897

Total other liabilities	$	60,354	$	68,639

8. Income Tax Expense

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

ended September 30, 2009 and 2008, the effective income tax rates from continuing operations were 33.9% and 31.0%, respectively. The lower effective income tax rate for the three month period ended September 30, 2009 resulted principally from discrete item adjustments due to the settlement of certain tax years under examination in the United States.

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 carryforwards, and available tax planning alternatives.

As of March 31, 2009, we had $10,926 in unrecognized tax benefits, of which $2,223 would favorably impact the effective tax rate if recognized. As of September 30, 2009, we had $9,242 in unrecognized tax benefits, of which $699 would impact the effective tax rate if recognized. The decrease in unrecognized tax benefits for the three and the six month periods ended September 30, 2009 is primarily due to the settlement of certain tax years under examination in the United States. We currently do not anticipate any significant increase or decrease in unrecognized tax benefits within 12 months of September 30, 2009. As of September 30, 2009, we have recognized a liability for interest of $778 and penalties of $163.

We file income tax returns in the United States and in various state, local, and foreign jurisdictions. For United States federal income tax purposes, we are closed through examination for years through fiscal 2007. With limited exceptions, we are no longer subject to state and local income tax examinations within the United States, or income tax examinations outside the United States for years before fiscal 2005.

9. Benefit Plans

We provide defined benefit pension plans for certain manufacturing and plant administrative personnel throughout the world 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 the same employees who receive pension benefits under the United States defined benefit pension plans. Benefits under this plan include retiree life insurance and retiree medical coverage, including prescription drug coverage. Additional information regarding our defined benefit pension plans and other postretirement benefits plan is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

Components of the net periodic benefit cost of our defined benefit pension plans and other postretirement medical benefit plan were as follows:


	Defined Benefit Pension Plans												Other Postretirement Benefits Plan
	United States Qualified						International						Other Postretirement Benefits Plan
Three Months Ended September 30,	2009			2008			2009			2008			2009			2008
Service cost	$	59		$	53		$	137		$	114		$	—		$	—
Interest cost		761			690			81			134			487			506
Expected return on plan assets		(617	)		(718	)		(89	)		(148	)		—			—
Recognized losses		290			159			—			—			157			363
Curtailment/Settlement		—			—			(19	)		—			—			—
Amortization of transition obligation		(18	)		(28	)		—			—			—			—
Prior service cost		—			—			—			—			(816	)		(1,295	)

Net periodic benefit cost	$	475		$	156		$	110		$	100		$	(172	)	$	(426	)


	Defined Benefit Pension Plans												Other Postretirement Benefits Plan
	United States Qualified						International						Other Postretirement Benefits Plan
Six Months Ended September 30,	2009			2008			2009			2008			2009			2008
Service cost	$	119		$	105		$	216		$	227		$	—		$	—
Interest cost		1,522			1,381			162			269			974			1,691
Expected return on plan assets		(1,234	)		(1,437	)		(186	)		(295	)		—			—
Recognized losses		580			318			—			—			313			639
Curtailment/Settlement		—			—			(19	)		—			—			—
Amortization of transition obligation		(36	)		(55	)		—			—			—			—
Prior service cost		—			—			—			—			(1,631	)		(1,295	)

Net periodic benefit cost	$	951		$	312		$	173		$	201		$	(344	)	$	1,035

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 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.

10. 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, Customers, regulatory environment, and industries in which we participate. These legal proceedings, government 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

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

leaking equipment, fire, vehicles, chemicals), economic loss (e.g., breach of contract, other commercial claims), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.

We record accruals for such contingencies to the extent that we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have estimated the likelihood of unfavorable outcomes and the amounts of such potential losses. In management’s opinion, the ultimate outcome of these proceedings and claims is not expected to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of claims, litigation, and other proceedings is unpredictable and actual results could be materially different from our estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery.

The United States Food and Drug Administration (“FDA”) and the United States Department of Justice had been conducting an investigation to our knowledge since 2003 involving our STERIS SYSTEM 1^® sterile processing system. We had received requests for documents, including the subpoena received in January 2005, and were aware of interviews of current and former employees in connection with the investigation. We responded to these requests and cooperated with the government agencies regarding this matter. We were advised by the United States Attorney’s Office for the Northern District of Ohio in May 2009 that it was declining to pursue the investigation.

On May 16, 2008, we received a warning letter (the “warning letter”) from the FDA regarding our STERIS SYSTEM 1^® sterile processor and the STERIS™ 20 sterilant used with the processor (referred to collectively in the FDA letter and in this note as the “device”). We believe this warning letter arose from the previously disclosed investigation. In summary, the warning letter included the FDA’s assertion that significant changes or modifications have been made in the design, components, method of manufacture, or intended use of the device beyond the FDA’s 1988 clearance, such that the FDA believes a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made. The warning letter referenced a number of changes to the device that, according to the FDA, require a new premarket notification submission, and asserted that our failure to make such a submission resulted in violations of applicable law. The warning letter also requested documentation and explanation regarding various corrective actions related to the device prior to 2003, and whether those actions should be considered corrections or removals requiring notice under applicable FDA regulations. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed response contending that the assertions in the warning letter were not correct.

On November 4, 2008, we received a letter from the FDA (dated November 3, 2008) in which the FDA stated without elaboration that, after reviewing our response, it disagreed with our position and that a new premarket notification submission is required. The agency did not address the removal and correction reporting issues and invited a meeting with STERIS to discuss the warning letter, based on our earlier request. After discussions with the FDA regarding the November 3rd letter, we received an additional letter on November 6, 2008 from the FDA. The November 6th letter stated that the intent of the November 3rd letter was to inform us of the FDA’s preliminary disagreement with our response to the warning letter and, before finalizing a position, the FDA reiterated that it wanted to meet with us to discuss the Company’s response, issues related to the warning letter and next steps to resolve any differences between the Company and the FDA.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

submission issues raised in the warning letter related to our existing device. The new liquid chemical sterilization system submitted to the FDA addresses the changes referenced by the FDA in the warning letter and includes additional technology updates.

We communicated to Customers that STERIS will continue supporting the existing STERIS SYSTEM 1^® installed base by providing accessories, sterilant, service and parts, and replacement processor units for at least a two year period. In the United States, STERIS is continuing sales of STERIS SYSTEM 1^® processors only as replacements for existing units. Once the new liquid chemical sterilization system is cleared for market use by the FDA, we will work with Customers to transition to the new product.

For fiscal 2009, this development did not have a material impact on our consolidated financial results. Subsequent annualized revenues could be impacted by approximately $20,000 until the new product is cleared and commercialized.

We continue to believe that the changes described in the warning letter from the FDA do not significantly affect the safety or effectiveness of the device and, therefore, did not and do not require a new premarket notification submission, and further, that the corrective actions were compliant with FDA regulations. However, if the FDA’s assertions are ultimately determined to be correct, the device would be considered adulterated and misbranded under United States law, in which case, we would be required to make a new premarket notification submission. The FDA also could take enforcement action immediately without providing the opportunity to make a new 510(k) submission. If we did not make that 510(k) submission, if the FDA rejected that 510(k) submission, if the FDA took immediate enforcement action, or if governmental agencies and/or third parties otherwise considered the device to be non-compliant, civil, administrative, or criminal proceedings could be initiated. These or other proceedings involving our STERIS SYSTEM 1^® sterile processing system and the STERIS™ 20 sterilant, a significant product to us, could possibly result in judgments requiring re-labeling or restriction on the manufacturing, sale, or distribution of products, or could require us to take other actions, including recalls, to pay fines or civil damages, or to be subject to other governmental or third party claims or remedies, which could materially affect our business, performance, value, financial condition, and results of operations. We intend to continue our discussions with the FDA to seek resolution of all issues regarding the warning letter and any related investigation.

The STERIS SYSTEM 1^® sterile processing system has been in use since its clearance by the FDA in the late 1980’s. We estimate that the devices currently in operation are used by approximately 5,000 users in excess of 30,000 times per day in the aggregate and that over 275 million medical instruments have been processed using the STERIS SYSTEM 1^® sterile processing system. For additional information regarding this matter, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the SEC on May 29, 2009: “Business—Information with respect to our Business in General—Recent Events—Government Regulations”, “Risk Factors—We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition or value”, “Risk Factors—We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters”, “Risk Factors—Most of our products, including our new liquid chemical sterilization system, must receive regulatory approvals before they can be marketed and sold in the United States and other countries,” and “Risk Factors—Existing and new Customers may not purchase or use the new liquid chemical sterilization system consistent with the purchase and use of the existing STERIS SYSTEM 1^®.”

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

We believe we have adequately reserved for our current litigation and that the ultimate outcome of pending lawsuits and claims will not have a material adverse affect 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 of current or future litigation, claims, proceedings, investigations, including the previously discussed investigation, or their effect. We presently maintain product liability insurance coverage, 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. Additional information regarding our contingencies is included in Item 2 of this Part I titled, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and in Item 1 of Part II titled, “Legal Proceedings” contained in this Quarterly Report on Form 10-Q.

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 a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in note 8 to our consolidated financial statements titled, “Income Tax Expense” and in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

11. 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 and surgery 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 engineered capital equipment, formulated cleaning chemistries, and service solutions to pharmaceutical companies, and public and private research facilities around the globe.

Our Isomedix segment operates through a network of 20 facilities located in North America. We sell a comprehensive array of contract sterilization services using Gamma Irradiation, Electron Beam Irradiation, and Ethylene Oxide (“EO”) technologies. We provide sterilization, microbial reduction, and materials modification services to companies that supply products to the healthcare, industrial, and consumer products industries.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

Corporate and other includes the gross profit and direct expense of the Defense and Industrial business unit, as well as certain unallocated corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees and legacy pension and postretirement benefit costs from our former Erie manufacturing operations.

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, 2009, 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 Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

Financial information for each of our segments is presented in the following tables:


	Three Months Ended September 30,						Six Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Healthcare	$	223,006		$	227,836		$	423,610		$	451,901
Life Sciences		54,401			57,151			100,517			105,190
Isomedix		34,735			36,971			70,142			73,834

Total reportable segments		312,142			321,958			594,270			630,925
Corporate and other		2,087			1,169			3,503			3,767

Total revenues	$	314,229		$	323,127		$	597,772		$	634,692

Operating income (loss):
Healthcare	$	36,366		$	32,698		$	68,469		$	61,928
Life Sciences		8,540			6,228			13,319			7,275
Isomedix		7,401			10,211			15,740			18,398

Total reportable segments		52,307			49,137			97,528			87,601
Corporate and other		(2,242	)		(2,169	)		(4,600	)		(5,593	)

Total operating income	$	50,065		$	46,968		$	92,928		$	82,008

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

12. Common Shares

Basic earnings per common share are calculated based upon the weighted average number of common shares outstanding. Diluted earnings per common share are calculated 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 table summarizes the determination of earnings available to common shareholders, common share and common share equivalents outstanding used to calculate basic and diluted earnings per common share:


	Three Months Ended September 30,						Six Months Ended September 30,
	2009			2008			2009			2008
	(shares in thousands)
Numerator:
Net income	$	32,084		$	28,794		$	57,626		$	54,294
Less: distributed and undistributed earnings allocated to nonvested stock		(34	)		(19	)		(64	)		(25	)

Earnings available to common shareholders	$	32,050		$	28,775		$	57,562		$	54,269

Denominator (shares in thousands):
Weighted average common shares outstanding—basic		58,654			59,312			58,585			59,003
Dilutive effect of common share equivalents		764			1,064			616			1,008

Weighted average common shares outstanding and common share equivalents—diluted		59,418			60,376			59,201			60,011

Options to purchase the following number of common shares at the following weighted average exercise prices were outstanding but excluded from the computation of diluted earnings per common 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,
	2009		2008		2009		2008
	(shares in thousands)
Number of common share options		1,145		719		2,003		849
Weighted average exercise price	$	28.31	$	35.00	$	26.48	$	32.11

13. Repurchases of Common Shares

We obtained 10,566 of our common shares during the first six months of fiscal 2010 in connection with stock-based compensation award programs. We did not repurchase any shares under the authorization provided by our Board of Directors. At September 30, 2009, $203,864 of STERIS common shares remained authorized for repurchase and 11,326,265 common shares were held in treasury.

14. Share-Based Compensation

STERIS has 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

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

stock options, restricted shares, restricted share units, and stock appreciation rights. 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. Certain option agreements have provisions that provide for an adjustment to the normal vesting schedule allowing the options to vest on a prorated basis as defined by the agreement in the event of employee termination. Restricted shares and restricted share units generally cliff vest over an approximately three-year period. We generally use the common shares held in treasury for restricted share and share unit grants for the stock option exercises on a first-in, first-out basis. As of September 30, 2009, 3,762,936 shares remain available for grant under the long-term incentive plan.

We estimate the fair value of share-based awards on the date of the grant using an option pricing model. 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 share-based compensation granted during the first half of fiscal 2010 and fiscal 2009:


	Fiscal 2010	Fiscal 2009
Risk-free interest rate	1.89%	2.65%
Expected life of options	5.50 years	5.64 years
Expected dividend yield of stock	1.49%	0.86%
Expected volatility of stock	27.96%	27.72%

The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant. The expected life of options is reflective of 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 timeframe similar to that of the expected life of the grant. We applied estimated forfeiture rates of 2.39 percent and 2.86 percent during fiscal 2010 and 2009, 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 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.

Stock option activity for the first half of fiscal 2010 is as follows:


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2009	3,695,931		$	24.72
Granted	614,747			23.13
Exercised	(139,410	)		19.43
Forfeited	(16,605	)		27.92
Canceled	(12,637	)		24.57

Outstanding at September 30, 2009	4,142,026		$	24.64	6.15	$	24,386
Exercisable at September 30, 2009	2,809,097		$	23.89	4.86	$	18,605

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $30.45 closing price of our common shares on September 30, 2009 over the exercise price of the stock option, 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 2010 and fiscal 2009 were $1,286 and $24,254, respectively. Net cash proceeds from the exercise of stock options were $2,102 and $32,956 for the first half of fiscal 2010 and fiscal 2009, respectively. An income tax benefit of $463 and $8,732 was realized from stock option exercises during the first half of fiscal 2010 and fiscal 2009, respectively.

The weighted average grant date fair value of option grants was $5.66 and $8.78 for the first half of fiscal 2010 and fiscal 2009, respectively.

Stock appreciation rights (“SARS”) were also granted during the first half of fiscal 2010. The 47,560 SARS granted carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise. The fair value of the SARS at the grant date was an aggregate amount of $263 and was determined utilizing the same assumptions as those used for the valuation of stock options. The fair value of the outstanding SARS will be revalued at each reporting date and related expense will be adjusted appropriately.

Restricted share and restricted share unit activity for the first half of fiscal 2010 is as follows:


	Number of Restricted Shares		Number of Restricted Share Units		Weighted-Average Grant Date Fair Value
Non-vested at March 31, 2009	188,671		54,850		$	27.31
Granted	112,206					23.68
Vested	(51,685	)	(20,850	)		23.55
Canceled	(625	)	—			28.94

Non-vested at September 30, 2009	248,567		34,000		$	26.78

Restricted shares and restricted share units granted were valued based on the closing stock price at the grant date and are estimated to cliff vest over an approximately three-year period based upon the terms of the grants. The value of restricted shares and restricted share units that vested during the first half of fiscal 2010 and fiscal 2009 was $1,636 and $969, respectively, which is calculated as the number of restricted shares and restricted share units vested during the period multiplied by the weighted-average grant date fair value.

We granted 6,800 and 3,300 cash-settled restricted share units in the first half of fiscal 2010 and fiscal 2009, respectively. The fair value of these restricted share units at the grant date was $155 and $102, respectively.

As of September 30, 2009, there was $10,849 of total unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average period of 1.78 years.

15. 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 country where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized.

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

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 within “Accrued expenses and other.” 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 2010 were as follows:


Balance, March 31, 2009	$	7,573
Warranties issued during the period		3,798
Settlements made during the period		(4,840	)

Balance, September 30, 2009	$	6,531

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 $19,275 and $17,477 as of September 30, 2009 and March 31, 2009, respectively. Such deferred revenues are then amortized on a straight-line basis over the contract term and recognized as service revenues on the accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenues has been excluded from the table presented above.

16. Forward 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 also enter into forward contracts to hedge price changes in commodities 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.


	Balance Sheet Location	Asset Derivatives				Liability Derivatives
	Balance Sheet Location	Fair Value at September 30, 2009		Fair Value at March 31, 2009		Fair Value at September 30, 2009		Fair Value at March 31, 2009
Forward contracts	Prepaid & Other	$	69	$	—	$	—	$	—
Forward contracts	Accrued expenses and other	$	—	$	—	$	158	$	183

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


	Location of gain (loss) recognized in income	Amount of gain (loss) recognized in income
		Six months ended September 30,
		2009		2008
Foreign currency forward contracts	Selling, general and administrative	$	66	$	(497	)
Commodity forward contracts	Cost of Revenues	$	71	$	—
Commodity forward contracts	Cost of Revenues	$	71	$	—

STERIS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

17. 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 instruments 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 our financial assets and liabilities accounted for at fair value on a recurring basis at September 30, 2009:


	September 30, 2009		Fair Value Measurements at September 30, 2009 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
					Significant Other Observable Inputs		Significant Unobservable Inputs
			Level 1		Level 2		Level 3
Assets:
Forward contracts (1)	$	69	$	—	$	69	$	—
Investments (2)		1,558		1,558		—		—
Liabilities:
Forward contracts (1)	$	158	$	—	$	158	$	—
Deferred compensation plans (2)		1,562		1,562		—		—

(1)	The fair values of forward 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.

(2)

We provide a domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options. 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 making deferrals are entitled to receive distributions of their account balances (amounts deferred, together with earnings (losses)).

18. Subsequent Events

We have evaluated events occurring subsequent to September 30, 2009 through November 3, 2009, the date of issuance of these consolidated financial statements, to determine whether they require recognition or disclosure in the consolidated financial statements. Based upon this evaluation, we have determined that no material subsequent events occurred that require recognition or disclosure in the financial statements, except for a special dividend authorized by the Board of Directors of $2.00 per common share payable December 22, 2009 to shareholders of record on November 24, 2009.

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 as of September 30, 2009, and the related consolidated statements of income for the three and six-month periods ended September 30, 2009 and 2008, and the consolidated statements of cash flows for the six-month periods ended September 30, 2009 and 2008. These financial statements are the responsibility of the Company’s 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, 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 upon 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, 2009, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated May 29, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2009, 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

November 3, 2009

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 the prior periods;

•

where our earnings came from;

•

how this affects our overall financial condition; and

•

where cash will come from to pay for future capital expenditures.

As you read the MD&A, you should refer to information in our consolidated financial statements, which present the results of our operations for the second quarter and first half of fiscal 2010 and fiscal 2009. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. 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, fund growth, and measure the risk of our financial structure.

•

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 and to measure the risk of our financial structure.

•

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.

In the following sections of MD&A, we may, at times, also refer to financial measures which are considered to be “non-GAAP financial measures” under the rules of the SEC. Non-GAAP financial measures we may use are as follows:

•

Free cash flow – We define free cash flow as net cash flows provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles, net, plus proceeds from the sale of property, plant, equipment, and intangibles, which is also presented in the Consolidated Statements of Cash Flows. We use this measure to gauge our ability to fund future growth outside of core operations, repurchase common shares, pay cash

dividends, and reduce debt. The following table reconciles the calculations of our free cash flow for the six months ended September 30, 2009 and 2008:


*(dollars in thousands)*	Six Months Ended September 30,
*(dollars in thousands)*	2009			2008
Net cash provided by operating activities	$	92,408		$	68,691
Purchases of property, plant, equipment, and intangibles, net		(18,543	)		(20,872	)
Proceeds from the sale of property, plant, equipment, and intangibles		509			9,506

Free cash flow	$	74,374		$	57,325

We may, at times, 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 comparative analysis between the periods presented. For example, when discussing changes in revenues, we may, at times, exclude the impact of recently completed acquisitions.

We present these financial measures because we believe that understanding these additional factors underlying our performance provides meaningful analysis of our financial performance. These financial measures should not be considered alternatives to measures required by U.S. GAAP. Our calculations of these measures may be different from the calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies.

Revenues – Defined

As required by Regulation S-X under the Securities Exchange Act of 1934 (“Regulation S-X”), we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:

•

Revenues – We present revenues net of sales returns and allowances.

•

Product Revenues – We define product revenues as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP^® technology, water stills, and pure steam generators; integrated OR; surgical lights and tables; and the consumable family of products, which includes STERIS SYSTEM 1^® consumables, sterility assurance products, skin care products, and cleaning consumables.

•

Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment, as well as revenues generated from contract sterilization offered through our Isomedix segment.

•

Capital Revenues – We define capital revenues, a subset of product revenues, as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP^® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.

•

Consumable Revenues – We define consumable revenues, a subset of product revenues, as revenues generated from sales of the consumable family of products, which includes STERIS SYSTEM 1^® consumables, sterility assurance products, skin care products, and cleaning consumables.

•

Recurring Revenues – We define recurring revenues as consumable revenues and service revenues.

General Company Overview and Executive Summary

Our mission is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products, and services. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of 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 also benefits from specific trends that contribute toward 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 regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where our Isomedix segment competes, the aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits.

Fiscal 2010 second quarter and first half revenues were $314.2 million and $597.8 million, respectively, representing decreases of 2.8% and 5.8%, driven by declines in all three reportable business segments. Our gross margin percentages were 42.2% and 43.1% for the second quarter and first half of fiscal 2010, which was an increase of 120 basis points compared to the same prior year quarter and an increase of 170 basis points from the first half of fiscal 2009. Gross margins during both fiscal 2010 periods benefited from price increases, lower raw material costs and favorable foreign currency fluctuations.

Free cash flow was $74.4 million in the first half of fiscal 2010 compared to $57.3 million in the prior year first half, reflecting an increase in cash earnings during fiscal 2010 and improved cash flow from operating assets and liabilities. Our debt-to-total capital ratio was 20.8% at September 30, 2010 as compared to 22.6% at March 31, 2009, reflecting no additional borrowings and increased operating income. We also declared and paid cash dividends totaling $0.22 per common share in the first half of fiscal 2010. In the first half of fiscal 2009, we declared and paid cash dividends totaling $0.14 per common share.

Additional information regarding the Company’s fiscal 2010 second quarter and first half financial performance is included in the subsection below titled “Results of Operations.”

Matters Affecting Comparability

Restructuring. During the second quarter and first half of fiscal 2010, we did not incur any significant additional pre-tax expenses related to previously announced restructuring actions, and we settled certain obligations for less than originally expected.

Additional information regarding our restructuring actions is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

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 2010, our revenues were unfavorably impacted by $3.5 million, or 1.1%, and income before taxes was favorably impacted by $2.1 million, or 4.9%, as a result of foreign currency movements relative to the U.S. dollar. During the first half of fiscal 2010, our revenues were unfavorably impacted by $10.0 million, or 1.7%, and income before taxes was favorably impacted by $5.3 million, or 6.7%, as compared to the same prior year period.

Results of Operations

In the following subsections, we discuss our earnings and the factors affecting them for the second quarter and first half of fiscal 2010 compared with the same fiscal 2009 periods. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following table contains information regarding our revenues for the second quarter and first half of fiscal 2010 and 2009:


	Three Months Ended September 30,				Change			Percent Change		Percent of Total Revenues
*(dollars in thousands)*	2009		2008		Change			Percent Change		2009 (1)		2008 (1)
Capital Revenues	$	119,147	$	130,313	$	(11,166	)	-8.6	%	37.9	%	40.3	%
Consumable Revenues		79,988		73,543		6,445		8.8	%	25.5	%	22.8	%

Product Revenues		199,135		203,856		(4,721	)	-2.3	%	63.4	%	63.1	%
Service Revenues		115,094		119,271		(4,177	)	-3.5	%	36.6	%	36.9	%

Total Revenues	$	314,229	$	323,127	$	(8,898	)	-2.8	%	100.0	%	100.0	%

Service Revenues	$	115,094	$	119,271	$	(4,177	)	-3.5	%	36.6	%	36.9	%
Consumable Revenues		79,988		73,543		6,445		8.8	%	25.5	%	22.8	%

Recurring Revenues		195,082		192,814		2,268		1.2	%	62.1	%	59.7	%
Capital Revenues		119,147		130,313		(11,166	)	-8.6	%	37.9	%	40.3	%

Total Revenues	$	314,229	$	323,127	$	(8,898	)	-2.8	%	100.0	%	100.0	%

United States	$	238,292	$	245,139	$	(6,847	)	-2.8	%	75.8	%	75.9	%
International		75,937		77,988		(2,051	)	-2.6	%	24.2	%	24.1	%

Total Revenues	$	314,229	$	323,127	$	(8,898	)	-2.8	%	100.0	%	100.0	%


	Six Months Ended September 30,				Change			Percent Change		Percent of Total Revenues
	2009		2008		Change			Percent Change		2009 (1)		2008 (1)
Capital Revenues	$	211,850	$	250,430	$	(38,580	)	-15.4	%	35.4	%	39.5	%
Consumable Revenues		160,785		149,008		11,777		7.9	%	26.9	%	23.5	%

Product Revenues		372,635		399,438		(26,803	)	-6.7	%	62.3	%	62.9	%
Service Revenues		225,137		235,254		(10,117	)	-4.3	%	37.7	%	37.1	%

Total Revenues	$	597,772	$	634,692	$	(36,920	)	-5.8	%	100.0	%	100.0	%

Service Revenues	$	225,137	$	235,254	$	(10,117	)	-4.3	%	37.7	%	37.1	%
Consumable Revenues		160,785		149,008		11,777		7.9	%	26.9	%	23.5	%

Recurring Revenues		385,922		384,262		1,660		0.4	%	64.6	%	60.5	%
Capital Revenues		211,850		250,430		(38,580	)	-15.4	%	35.4	%	39.5	%

Total Revenues	$	597,772	$	634,692	$	(36,920	)	-5.8	%	100.0	%	100.0	%

United States	$	462,098	$	486,358	$	(24,260	)	-5.0	%	77.3	%	76.6	%
International		135,674		148,334		(12,660	)	-8.5	%	22.7	%	23.4	%

Total Revenues	$	597,772	$	634,692	$	(36,920	)	-5.8	%	100.0	%	100.0	%

(1)	Certain percentages may not calculate precisely due to rounding.

Quarter over Quarter Comparison

Revenues decreased $8.9 million, or 2.8%, to $314.2 million for the quarter ended September 30, 2009, as compared to $323.1 million for the comparable prior year quarter. Capital equipment revenues decreased 8.6% as a result of decreased sales within the United States, Europe and the Asia Pacific region offset by growth in the Latin America region. Recurring revenues increased 1.2%, with an increase of 8.8% in consumable revenues partially offset by a decrease in service revenues of 3.5%, primarily driven by growth in United States consumables and declines in United States services.

International revenues decreased $2.1 million, or 2.6%, to $75.9 million, for the quarter ended September 30, 2009, as compared to $78.0 million for the comparable prior year quarter. International revenues were negatively affected by declines in capital equipment revenues, which decreased 2.2% primarily due to decreases within Europe for both our Healthcare and Life Sciences segments. International recurring revenues also fell during the second quarter of fiscal 2010 by 3.1%, driven by a decline of 5.7% in service revenues. We experienced declines in service revenues in Canada, Europe and the Asia Pacific region.

United States revenues decreased $6.8 million, or 2.8%, to $238.3 million, for the quarter ended September 30, 2009, as compared to $245.1 million for the comparable prior year quarter. The decrease in United States revenues reflects a 11.7% decrease in capital equipment revenues. United States recurring revenues increased 2.2% with an 11.6% increase in consumable revenues partially offset by a decrease of 3.1% in service revenues. The prior period service revenues include revenues from two Isomedix facilities sold in fiscal 2009.

First Half over First Half Comparison

Revenues decreased $36.9 million, or 5.8%, to $597.8 million for the first half of fiscal 2010, as compared to $634.7 million during the first half of fiscal 2009. Capital equipment revenues decreased 15.4%, primarily driven by weaker demand within the United States in all reportable business segments. Recurring revenues increased less than 1.0%.

International revenues for the first half of fiscal 2010 were $135.7 million, a decrease of $12.7 million, or 8.5%, as compared to the first half of fiscal 2009. Fiscal 2010 year-to-date international revenues were negatively impacted by an 11.3% decrease in capital equipment revenue and a decline of 5.5% in recurring revenues, reflecting declines in both consumable and service revenues.

United States revenues for the first half of fiscal 2010 were $462.1 million, a decrease of $24.3 million, or 5.0%, as compared to the first half of fiscal 2009. The fiscal 2010 year-to-date decrease in United States revenues was primarily driven by our Healthcare segment, with a 20.0% decrease in capital equipment revenues. United States recurring revenues grew 1.8% as an 11.9% growth in consumable revenues was offset by a decline in service revenues of 3.9%. The service revenue decline included a reduction in revenues resulting from the fiscal 2009 sale of two Isomedix facilities.

Revenues are further discussed on a segment basis in the section of MD&A titled, “Business Segment Results of Operations.”

Gross Profit. The following table compares our gross profit for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2009			2008			Change			Percent Change
Gross Profit:
Product	$	83,177		$	82,933		$	244		0.3	%
Service		49,478			49,430			48		0.1	%

Total Gross Profit	$	132,655		$	132,363		$	292		0.2	%

Gross Profit Percentage:
Product		41.8	%		40.7	%
Service		43.0	%		41.4	%

Total Gross Profit Percentage		42.2	%		41.0	%


	Six Months Ended September 30,						Change			Percent Change
	2009			2008			Change			Percent Change
Gross Profit:
Product	$	162,400		$	165,648		$	(3,248	)	-2.0	%
Service		95,091			97,216			(2,125	)	-2.2	%

Total Gross Profit	$	257,491		$	262,864		$	(5,373	)	-2.0	%

Gross Profit Percentage:
Product		43.6	%		41.5	%
Service		42.2	%		41.3	%

Total Gross Profit Percentage		43.1	%		41.4	%

Our gross profit (margin) is affected by the volume, pricing, and mix of our products and services, as well as the costs associated with the products and services that are sold. Gross margin for the second quarter of fiscal 2010 amounted to 42.2%, representing an increase of 120 basis points as compared to the same prior year period. For the first half of fiscal 2010, gross margin amounted to 43.1%, representing an increase of 170 basis points as compared to the same prior year period. During both fiscal 2010 periods, we benefited from price increases, lower raw material costs, and foreign currency fluctuations.

Operating Expenses. The following table compares our operating expenses for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,					Change			Percent Change
*(dollars in thousands)*	2009			2008		Change			Percent Change
Operating Expenses:
Selling, General, and Administrative	$	74,516		$	77,290	$	(2,774	)	-3.6	%
Research and Development		8,189			8,068		121		1.5	%
Restructuring Expense		(115	)		37		(152	)	NM

Total Operating Expenses	$	82,590		$	85,395	$	(2,805	)	-3.3	%


	Six Months Ended September 30,						Change			Percent Change
	2009			2008			Change			Percent Change
Operating Expenses:
Selling, General, and Administrative	$	149,121		$	164,638		$	(15,517	)	-9.4	%
Research and Development		15,769			16,347			(578	)	-3.5	%
Restructuring Expense		(327	)		(129	)		(198	)	NM

Total Operating Expenses	$	164,563		$	180,856		$	(16,293	)	-9.0	%

NM - Not Meaningful

Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenues, SG&A decreased 20 basis points to 23.7% for the second quarter of fiscal 2010 and decreased 100 basis points to 24.9% for the first half of fiscal 2010, as compared to the same prior year periods. The decrease in SG&A in both fiscal 2010 periods reflects improved operating expense leverage and the benefit of efficiency initiatives previously implemented. Included in the fiscal 2009 second quarter and first half SG&A results is a $2.1 million gain on the sale of an Isomedix facility located in the Chicago, Illinois area to a privately held Customer.

As a percentage of total revenues, research and development expenses were 2.6% for each of the three and six month periods ended September 30, 2009, as compared to 2.5% and 2.6%, respectively, for the same prior year periods. For the three month period ended September 30, 2009, research and development expenses increased 1.5% to $8.2 million as compared to $8.1 million during the same prior year period. The second quarter of fiscal 2010 includes a government subsidy of $0.8 million received for research and development expenses incurred by one of our international locations. For the first half of fiscal 2010, research and development expenses decreased 3.5% to $15.8 million, as compared to $16.3 million, during the same prior year period. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological innovations. During the second quarter and first half of fiscal 2010, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of new chemistries and delivery systems for disinfection and sterilization, sterile processing combination technologies, surgical tables and accessories, and the areas of emerging infectious agents such as Prions and Nanobacteria.

Our operating expenses include restructuring expenses. We recognize restructuring expenses as incurred. In addition, we assess the property, plant and equipment associated with the related facilities for impairment.

The total pre-tax restructuring expenses recorded during the second quarter and first half of fiscal 2010 and fiscal 2009 are summarized in the following tables:


*(dollars in thousands)*	Fiscal 2009 Restructuring Plan (1)
*Three Months Ended September 30, 2009*	Fiscal 2009 Restructuring Plan (1)
Severance, payroll, and other related costs	$	33
Lease termination obligations and other		(321	)
Asset impairment		(14	)

Total restructuring charges	$	(302	)

(1)	Includes $(187) in charges recorded in cost of revenues on Consolidated Statements of Income.


*Three Months Ended September 30, 2008*	Fiscal 2008 Restructuring Plan		Fiscal 2006 Restructuring Plan			Total
Severance, payroll, and other related costs	$	29	$	(29	)	$	—
Lease termination obligations		37		—			37

Total restructuring charges	$	66	$	(29	)	$	37


*Six Months Ended September 30, 2009*	Fiscal 2009 Restructuring Plan (2)
Severance, payroll, and other related costs	$	(13	)
Product rationalization		(234	)
Lease termination obligations and other		(308	)
Asset impairment		(14	)

Total restructuring charges	$	(569	)

(2)	Includes $(242) in charges recorded in cost of revenues on Consolidated Statements of Income.


*Six Months Ended September 30, 2008*	Fiscal 2008 Restructuring Plan			European Restructuring Plan		Fiscal 2006 Restructuring Plan			Total
Severance, payroll, and other related costs	$	(87	)	$	—	$	(178	)	$	(265	)
Lease termination obligations		37			99		—			136

Total restructuring charges	$	(50	)	$	99	$	(178	)	$	(129	)


	Fiscal 2009 Restructuring Plan
	March 31, 2009		Fiscal 2010						September 30, 2009
*(dollars in thousands)*	March 31, 2009		Provision			Payments/ Impairments			September 30, 2009
Severance and termination benefits	$	1,920	$	(13	)	$	(1,459	)	$	448
Product rationalization		75		(234	)		159			—
Lease termination obligations and other		578		(308	)		(199	)		71
Asset impairment		—		(14	)		14			—

Total	$	2,573	$	(569	)	$	(1,485	)	$	519


	Fiscal 2008 Restructuring Plan
	March 31, 2009		Fiscal 2010					September 30, 2009
	March 31, 2009		Provision		Payments/ Impairments			September 30, 2009
Severance and termination benefits	$	501	$	—	$	(388	)	$	113
Asset impairments		409		—		(120	)		289
Lease termination obligations and other		881		—		(315	)		566
Asset impairment		—		—		—			—

Total	$	1,791	$	—	$	(823	)	$	968

Non-Operating Expenses, Net. Non-operating expenses (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. The following table compares our non-operating expenses (income), net for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,						Change
*(dollars in thousands)*	2009			2008			Change
Non-Operating Expenses (Income):
Interest Expense	$	3,130		$	2,518		$	612
Interest and Miscellaneous Income		(278	)		(540	)		262

Total Non-Operating Expenses, Net	$	2,852		$	1,978		$	874


	Six Months Ended September 30,						Change
	2009			2008			Change
Non-Operating Expenses (Income):
Interest Expense	$	6,213		$	4,285		$	1,928
Interest and Miscellaneous Income		(495	)		(922	)		427

Total Non-Operating Expenses, Net	$	5,718		$	3,363		$	2,355

Interest expense increased $0.6 million and $1.9 million during the second quarter and first half of fiscal 2010, respectively, as compared to the same prior year periods as a result of higher average debt levels during both fiscal 2010 periods. Interest and miscellaneous income decreased $0.3 million and $0.4 million for the second quarter and first half of fiscal 2010, respectively, as compared to same prior year periods.

Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2009			2008			Change			Percent Change
Income Tax Expense	$	15,129		$	16,196		$	(1,067	)	-6.6	%
Effective Income Tax Rate		32.0	%		36.0	%

	Six Months Ended September 30,						Change			Percent Change
	2009			2008			Change			Percent Change
Income Tax Expense	$	29,584		$	24,351			$5,233		21.5	%
Effective Income Tax Rate		33.9	%		31.0	%

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 from continuing operations for the three and six month periods ended September 30, 2009 were 32.0% and 33.9%, respectively, as compared to 36.0% and 31.0%, respectively, for the same prior year periods. The lower effective income tax rate for the second quarter of fiscal 2010 resulted principally from discrete item adjustments due to the settlement of certain tax years under examination in the United States.

We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual

effective income tax rate, 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 carryforwards, and available tax planning alternatives.

Business Segment Results of Operations. 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 Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009, provides additional information about each business segment. The following table compares business segment revenues for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,				Change			Percent Change
*(dollars in thousands)*	2009		2008		Change			Percent Change
Revenues:
Healthcare	$	223,006	$	227,836	$	(4,830	)	-2.1	%
Life Sciences		54,401		57,151		(2,750	)	-4.8	%
Isomedix		34,735		36,971		(2,236	)	-6.0	%

Total reportable segments		312,142		321,958		(9,816	)	-3.0	%
Corporate and other		2,087		1,169		918		78.5	%

Total Revenues	$	314,229	$	323,127	$	(8,898	)	-2.8	%


	Six Months Ended September 30,				Change			Percent Change
	2009		2008		Change			Percent Change
Revenues:
Healthcare	$	423,610	$	451,901	$	(28,291	)	-6.3	%
Life Sciences		100,517		105,190		(4,673	)	-4.4	%
Isomedix		70,142		73,834		(3,692	)	-5.0	%

Total reportable segments		594,269		630,925		(36,656	)	-5.8	%
Corporate and other		3,503		3,767		(264	)	-7.0	%

Total Revenues	$	597,772	$	634,692	$	(36,920	)	-5.8	%

Healthcare Segment

Healthcare segment revenues represented 71.0% of total revenues for the second quarter of fiscal 2010 compared with 70.5% for the same prior year period. Healthcare revenues decreased $4.8 million, or 2.1%, to $223.0 million for the quarter ended September 30, 2009, compared with $227.8 million for the second quarter of the prior year. Consumable revenues increased 6.7% in part because of increased demand for our products. This increase was more than offset by declines in revenues from capital equipment and service of 6.4% and 3.3%, respectively. At September 30, 2009, the Healthcare segment’s backlog amounted to $129.9 million, decreasing $2.5 million, or 1.9%, compared to the backlog of $132.4 million at June 30, 2009 and increasing $5.8 million, or 4.7%, compared to the backlog of $124.1 million at September 30, 2008.

Healthcare segment revenues represented 70.9% of total revenues for the first six months of fiscal 2010 compared with 71.2% for the same prior year period. Healthcare revenues decreased $28.3 million, or 6.3%, to $423.6 million for the six months ended September 30, 2009, as compared to $451.9 million for the same prior year period. The decrease is primarily attributed to lower capital equipment and service revenues within the United States, which decreased 14.9% and 4.5% respectively. Consumable revenue grew 6.6%, primarily within the United States and Europe.

Life Sciences Segment

Life Sciences segment revenues represented 17.3% of total revenues for the second quarter of fiscal 2010 compared with 17.7% for the same prior year period. Life Sciences revenues decreased $2.8 million, or 4.8%, to $54.4 million for the quarter ended September 30, 2009, as compared to $57.2 million for the second quarter of the prior year. Consumable revenues grew 17.7% as demand in the United States increased. This increase was more than offset by decreases in capital equipment and service revenues of 19.2% and 2.8%, respectively. Capital equipment revenues continue to be impacted by project delays, by our pharmaceutical and research customers. At September 30, 2009, the Life Sciences segment’s backlog amounted to $46.5 million, a decrease of $0.3 million, or 0.7%, compared to the backlog of $46.2 million at June 30, 2009 and a decrease of $2.2 million, or 4.5%, compared to the backlog of $48.7 million at September 30, 2008.

Life Sciences segment revenues represented 16.8% of total revenues for the first six months of fiscal 2010, compared with 16.6% for the same prior year period. Life Sciences revenues decreased $4.7 million, or 4.4%, to $100.5 million for the first half of fiscal 2010, as compared to $105.2 million for the same prior year period. The decrease in Life Sciences revenues was primarily driven by a 17.5% decrease in capital equipment revenues reflecting declines in all geographic regions but most significantly in Europe. The declines reflect continued project delays by our pharmaceutical and research customers. Recurring revenues grew 4.5% with consumable revenues growth of 14.0% partially offset by a decline in service revenues of 2.5%.

Isomedix Segment

Isomedix segment revenues represented 11.1% of total revenues for the second quarter of fiscal 2010, compared with 11.4% for the comparable prior year quarter. The segment’s revenues decreased $2.2 million, or 6.0% to $34.7 million during the second quarter of fiscal 2010, as compared to $37.0 million during the comparable prior year quarter. Revenues were affected by the previously disclosed sale of two facilities during fiscal 2009.

Isomedix segment revenues represented 11.7% of total revenues for the first six months of fiscal 2010 compared with 11.6% for the comparable prior year period. The segment experienced decreased revenue of $3.7 million, or 5.0%, to $70.1 million during the first half of fiscal 2010 as compared to $73.8 million for the same prior year period. Revenues were affected by the previously disclosed sale of two facilities during fiscal 2009, which were partially offset by a modest improvement in demand from medical device customers.

The following table compares our business segment operating results for the three and six month periods ended September 30, 2009 to the three and six month periods ended September 30, 2008:


	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2009			2008			Change			Percent Change
Operating Income:
Healthcare	$	36,366		$	32,698		$	3,668		11.2	%
Life Sciences		8,540			6,228			2,312		37.1	%
Isomedix		7,401			10,211			(2,810	)	-27.5	%

Total reportable segments		52,307			49,137			3,170		6.5	%
Corporate and other		(2,242	)		(2,169	)		(73	)	NM

Total Operating Income	$	50,065		$	46,968		$	3,097		6.6	%


	Six Months Ended September 30,						Change			Percent Change
	2009			2008			Change			Percent Change
Operating Income:
Healthcare	$	68,469		$	61,928		$	6,541		10.6	%
Life Sciences		13,319			7,275			6,044		83.1	%
Isomedix		15,740			18,398			(2,658	)	-14.4	%

Total reportable segments		97,528			87,601			9,927		11.3	%
Corporate and other		(4,600	)		(5,593	)		993		NM

Total Operating Income	$	92,928		$	82,008		$	10,920		13.3	%

NM - Not meaningful

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 to the segments. 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 expense of the Defense and Industrial business unit, as well as certain unallocated corporate costs. These costs include executive office costs, Board of Directors compensation, shareholder services and investor relations, external audit fees and legacy pension and postretirement benefit costs from our former Erie manufacturing operations.

Healthcare Segment

The Healthcare segment’s operating income increased $3.7 million and $6.5 million for the second quarter and first six months of fiscal 2010, respectively, as compared to the same prior year periods. The segment’s operating margins were 16.3% and 16.2% for the second quarter and first half of fiscal 2010, respectively, representing increases of 190 basis points and 250 basis points, respectively, as compared to prior year periods. The improvement in operating income was driven by efficiency initiatives, lower raw material costs and favorable foreign currency exchange fluctuations.

Life Sciences Segment

The Life Sciences segment’s operating income increased $2.3 million and $6.0 million for the second quarter and first six months of fiscal 2010, respectively, as compared to the same prior year periods. The segment’s operating margins were 15.7% and 13.3% for the second quarter and first half of fiscal 2010, respectively, representing increases of 480 basis points and 640 basis points, respectively, over the comparable prior year periods. The improvement was driven by operating efficiencies.

Isomedix Segment

The Isomedix segment’s operating income decreased $2.8 million and $2.7 million for the second quarter and first six months of fiscal 2010, respectively, as compared to the same prior year periods. The segment’s operating margins were 21.3% and 22.4% for the second quarter and first half of fiscal 2010, representing decreases of 630 basis points and 250 basis points, respectively, over the comparable prior year periods. Included in the segment’s fiscal 2009 second quarter and first half operating income is a $2.1 million gain on the sale of a facility located in the Chicago, Illinois area to a privately held Customer.

Liquidity and Capital Resources. The following table summarizes significant components of our cash flows for the six months ended September 30, 2009 and 2008:

Cash Flows


	Six Months Ended September 30,
*(dollars in thousands)*	2009			2008
Operating activities:
Net income	$	57,626		$	54,294
Non-cash items		32,945			34,607
Changes in operating assets and liabilities		1,837			(20,210	)

Net cash provided by operating activities	$	92,408		$	68,691

Investing activities:
Purchases of property, plant, equipment, and intangibles, net	$	(18,543	)	$	(20,872	)
Proceeds from the sale of property, plant, equipment, and intangibles		509			9,506

Net cash used in investing activities	$	(18,034	)	$	(11,366	)

Financing activities:
Proceeds from the issuance of long-term obligations	$	—		$	150,000
Payments under credit facilities, net		—			(79,180	)
Deferred financing fees and debt issuance costs		—			(476	)
Repurchases of common shares		(289	)		(50,210	)
Cash dividends paid to common shareholders		(12,894	)		(8,275	)
Stock option and other equity transactions, net		2,102			32,956
Tax benefit from stock options exercised		463			8,732

Net cash (used in) provided by financing activities	$	(10,618	)	$	53,547

Debt-to-total capital ratio		20.8	%		25.2	%
Free cash flow	$	74,374		$	57,325

Net Cash Provided by Operating Activities. The net cash provided by our operating activities was $92.4 million for the first six months of fiscal 2010 compared with $68.7 million for the first six months of fiscal 2009. The following discussion summarizes the significant changes in our operating cash flows:

Non-cash items – Our non-cash items include depreciation, depletion, and amortization, share-based compensation expense, changes in deferred income taxes, and other items. Non-cash items were $32.9 million for the first six months of fiscal 2010 compared with $34.6 million for the first six months of fiscal 2009. Significant changes in these items for the first half of fiscal 2010 as compared to the same prior year period are summarized below:

•

Depreciation, depletion, and amortization – Depreciation, depletion, and amortization are the most significant component of non-cash items. This expense totaled $27.8 million and $29.6 million for the first six months of fiscal 2010 and 2009, respectively.

•

Share-based compensation expense – We recorded share-based compensation expense of $4.0 million and $3.8 million for the first six months of fiscal 2010 and fiscal 2009, respectively.

•

Deferred income taxes- Our deferred income tax benefits increased $2.1 million for the first half of fiscal 2010, compared with a decrease of $3.8 million for the first half of fiscal 2009 due to the timing and recognition of settlements and changes in provisions.

Changes in operating assets and liabilities – Changes to our operating assets and liabilities amounted to a positive $1.8 million and a negative $20.2 million during the first six months of fiscal 2010 and fiscal 2009, respectively. Significant changes in the first half of fiscal 2010 as compared to the first half of fiscal 2009 are summarized below:

•

Accounts receivable, net – Changes in our net accounts receivable balances provided cash of $31.0 million and $34.2 million during the first six months of fiscal 2010 and fiscal 2009, respectively. Our accounts receivable balances may change from period to period due to the timing of revenues and customer payments.

•

Inventories, net – Decreases in our net inventory balances provided cash of $9.1 million for the first six months of fiscal 2010 whereas increases in our net inventory balance drove uses of cash of $19.3 million during the first six months of fiscal 2009. Inventory balances in fiscal 2010 reflect lower raw material costs, lower production levels and the impact of foreign exchange rate fluctuations.

•

Prepaid expenses and other current assets – Our other current assets primarily consist of prepaid expenses for insurance, taxes, and other general corporate items. Changes in our other current asset balances provided cash of $1.2 million and $13.5 million for the first six months of fiscal 2010 and 2009, respectively. The higher amount during the first half of fiscal 2009 was primarily a result of the application of taxes on deposit with the IRS toward the settlement of certain tax years under examination.

•

Accounts payable, net – Decreases in our net accounts payable balances drove uses of cash of $13.6 million and $8.5 million during the first six months of fiscal 2010 and fiscal 2009, respectively. Cash flows related to accounts payable may change from period to period due to varying payment due dates and other terms of our accounts payable obligations.

•

Accruals and other, net – Changes in our net accruals and other liabilities balances drove uses of cash of $25.9 million and $40.1 million during the first six months of fiscal 2010 and fiscal 2009, respectively. The higher cash usage in the first half of fiscal 2009 primarily reflects payments made in fiscal 2009 against amounts accrued in fiscal 2008 for incentive compensation and severance, and the payment of income taxes previously accrued. Cash flows related to our accruals and other liabilities balances will change from period to period due to the timing of accruals and payments under our incentive compensation programs. Accruals under our various incentive compensation programs rise during the course of the fiscal year and decline significantly in the first fiscal quarter as payments are made under these programs. Changes in accruals for deferred revenues also contribute to the increase or decrease in these balances.

Net Cash Used In Investing Activities. The net cash we used in investing activities totaled $18.0 million for the first six months of fiscal 2010 compared with $11.4 million for the first six months of fiscal 2009. The following discussion summarizes the significant changes in our investing cash flows for the first half of fiscal 2010 as compared to the first half of fiscal 2009:

•

Purchases of property, plant, equipment, and intangibles, net- Capital expenditures were $18.5 million for the first half of fiscal 2010 compared with $20.9 million during the same prior year period.

•

Proceeds from the sale of property, plant, equipment, and intangibles – During the first six months of fiscal 2010, we recorded proceeds of $0.5 million. During the prior year, we recorded proceeds of $9.5 million related to the sale of an Isomedix facility located in the Chicago, Illinois area to a privately-held Customer.

Net Cash (Used In) Provided By Financing Activities. The net cash used in financing activities totaled $10.6 million for the first six months of fiscal 2010 compared with net cash provided by our financing activities of $53.5 million for the first six months of fiscal 2009. The following discussion summarizes the significant changes in our financing cash flows for the first half of fiscal 2010 as compared to the first half of fiscal 2009:

•

Proceeds from the issuance of long-term obligations – We did not issue additional debt during fiscal 2010, whereas, $150.0 million of senior notes were issued in fiscal 2009 in an offering that was exempt

from the registration requirements of the Securities Act of 1933. Proceeds from the senior notes issued during the second quarter of fiscal 2009 were used in part to repay amounts outstanding under our revolving credit facility. The senior notes allowed the Company to lock-in favorable long-term rates. Amounts borrowed are generally used to fund common share repurchases and working capital changes, and for other corporate purposes.

•

Net proceeds under credit facilities – We did not engage in any credit facility transactions during fiscal 2010, however, during fiscal 2009, the Company repaid $79.2 million under a revolving credit facility.

•

Repurchases of common shares – We obtained 10,566 of our common shares during the first six months of fiscal 2010 in connection with stock-based compensation award programs. We did not repurchase any shares under the authorization provided by our Board of Directors. During the first half of fiscal 2009, we paid for the repurchase of 1,645,900 of our common shares at an average purchase price of $30.51 per common share.

•

Cash dividends paid to common shareholders – During the first six months of fiscal 2010 and fiscal 2009, we paid cash dividends totaling $0.22 and $0.14 per outstanding common share, respectively. Total cash dividends paid during the first half of fiscal 2010 and fiscal 2009 amounted to $12.9 million and $8.3 million, respectively.

•

Stock option and other equity transactions, net – We receive cash for issuing common shares under our various employee stock option programs. During the first six months of fiscal 2010 and 2009, we received cash proceeds totaling $2.1 million and $33.0 million, respectively, under these programs.

•

Tax benefit from stock options exercised – During the first half of fiscal 2010 and fiscal 2009, our income taxes were reduced by $0.5 million and $8.7 million, respectively, as a result of deductions allowed for stock options exercised.

Cash Flow Measures. Free cash flow was $74.4 million in the first half of fiscal 2010 compared to $57.3 million in the prior year first half, reflecting an increase in cash earnings in fiscal 2010 and improved cash flow from operating assets and liabilities. Our debt-to-total capital ratio was 20.8% at September 30, 2009 and 22.6% at March 31, 2009.

Sources of Credit and Contractual and Commercial Commitments. Information related to our sources of credit and contractual and commercial commitments is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. Our commercial commitments were approximately $31.4 million at September 30, 2009 reflecting a net decrease of $1.2 million in surety bonds and other commercial commitments from March 31, 2009. Except as described, our contractual commitments have not changed materially from March 31, 2009. The maximum aggregate borrowing limits under our revolving credit facility (“Facility”) have not changed since March 31, 2009. At September 30, 2009, the maximum amount available for borrowing under this Facility was $374.8 million. The maximum aggregate borrowing limit of $400.0 million under the Facility is reduced by outstanding borrowings and letters of credit issued under a sub-limit within the Facility ($25.2 million at September 30, 2009). The Facility matures on September 13, 2012.

Cash Requirements. Currently, we intend to use our existing cash and cash equivalent balances, cash generated from operations, and our existing credit facilities for short-term and long-term capital expenditures and our other liquidity needs. We believe that these amounts will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, our capital requirements will depend on many uncertain factors, including our rate of sales growth, our Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, and changes in our operating expenses. To the extent that our existing sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or selling equity securities. We cannot assure you that we will be able to obtain additional funds on terms favorable to us, or at all.

Critical Accounting Policies, Estimates, and Assumptions

Information related to our critical accounting policies, estimates, and assumptions is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. Our critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2009.

Contingencies

We are involved in various patent, product liability, consumer, commercial, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the ordinary course of our business. We record a liability for such contingencies to the extent that we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of claims, litigation, and other proceedings is unpredictable and actual results could be materially different from our estimates. We record anticipated recoveries under applicable insurance contracts when assured of recovery. Refer to Part II, Item 1, “Legal Proceedings” for additional information.

We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of our federal income tax returns. In the first quarter of fiscal 2009, we reached a settlement with the IRS for all material tax matters for fiscal 2002 through fiscal 2005. In the second quarter of fiscal 2010, we reached a settlement with the IRS on all material tax matters for fiscal 2006 through fiscal 2007. We remain subject to tax authority audits in various other jurisdictions in which we operate. If we prevail in matters for which accruals have been recorded, or are required to pay amounts in excess of recorded accruals, our effective income tax rate in a given financial statement period could be materially impacted.

International Operations

Since we conduct operations outside 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 2010, our revenues were unfavorably impacted by $3.5 million, or 1.1%, and income before taxes was favorably impacted by $2.1 million, or 4.9%, when compared to the same period in fiscal 2009, as a result of foreign currency movements relative to the U.S. dollar. During the first half of fiscal 2010, our revenues were unfavorably impacted by $10.0 million, or 1.7%, and income before taxes was favorably impacted by $5.3 million, or 6.7%, when compared to the same period in fiscal 2009, as a result of foreign currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or the effect they will have on our operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to STERIS or our industry that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “potential,” “confidence,” “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many

important factors could cause actual results to be materially different from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in government regulations or the application or interpretation thereof. Many of these important factors are outside of our control. No assurances can be provided as to any outcome from litigation, regulatory actions, administrative proceedings, governmental investigations, warning letters, cost reductions, business strategies, level of share repurchases or dividends, earnings and revenue trends, or future financial results. Unless legally required, we do not undertake to update or revise any forward- looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to be materially different from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing, raw material, and energy costs that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or that our business initiatives will take longer, cost more, or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, regulatory actions, including, without limitation, the previously disclosed FDA warning letter, certifications or other requirements or standards may delay or prevent new product introductions, affect the production and marketing of existing products, or otherwise affect our performance, results, or value, (d) the potential of international unrest, or effects of fluctuations in currencies, tax assessments or rates, raw material costs, benefit or retirement plan costs, or other regulatory compliance costs, (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for our products and services as a result of the current economic downturn and/or due to other factors, (f) the possibility that anticipated growth, alignment, cost savings, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with our business, industry, or other issues, activities, or initiatives, including any impacting the sterilization system currently in use or the ability to obtain clearance or market acceptance of the new sterilization system, may adversely impact our performance, results, or value, and (g) the effect of the credit crisis on our ability, as well as the ability of our Customers and suppliers, to adequately access the credit markets when needed, and (h) those risks described in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009, under Item 1A, “Risk Factors.”

Availability of Securities and Exchange Commission Filings

We make available free of charge on or through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish such material to, the SEC. You may access these documents on the Investor Relations page of our website at http://www.steris-ir.com. The information on our website is not incorporated by reference into this report. You may also obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by accessing the SEC’s website at http://www.sec.gov. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of business, we are subject to interest rate, foreign currency, and commodity risks. Information related to these risks and our management of these exposures is included in this Quarterly Report on Form 10-Q in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the subsection titled, “Liquidity and Capital Resources.” Additional information related to these risks and our management of these exposures is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. Our exposures to market risks have not changed materially since March 31, 2009.

ITEM 4.

CONTROLS AND PROCEDURES

Under the supervision of and with the participation of our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on that evaluation, including the assessment and input of our management, the PEO and PFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are, and will likely continue to be involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise from the ordinary course of our business, given our size, history, complexity, and the nature of our business, 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), economic loss (e.g., breach of contract, other commercial claims), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.

The FDA and the United States Department of Justice had been conducting an investigation to our knowledge since 2003 involving our STERIS SYSTEM 1^® sterile processing system. We had received requests for documents, including the subpoena received in January 2005, and were aware of interviews of current and former employees in connection with the investigation. We responded to these requests and cooperated with the government agencies regarding this matter. We were advised by the United States Attorney’s Office for the Northern District of Ohio in May 2009 that it was declining to pursue the investigation.

On May 16, 2008, we received a warning letter (the “warning letter”) from the FDA regarding our STERIS SYSTEM 1^® sterile processor and the STERIS™ 20 sterilant used with the processor (referred to collectively in the FDA letter and in this Item 3 as the “device”). We believe this warning letter arose from the previously disclosed investigation. In summary, the warning letter included the FDA’s assertion that significant changes or modifications have been made in the design, components, method of manufacture, or intended use of the device beyond the FDA’s 1988 clearance, such that the FDA believes a new premarket notification submission (known within FDA regulations as a 510(k) submission) should have been made. The warning letter referenced a number of changes to the device that, according to the FDA, require a new premarket notification submission, and asserted that our failure to make such a submission resulted in violations of applicable law. The warning letter also requested documentation and explanation regarding various corrective actions related to the device prior to 2003, and whether those actions should be considered corrections or removals requiring notice under applicable FDA regulations. On July 30, 2008 (with an Addendum on October 9, 2008), we provided a detailed response contending that the assertions in the warning letter were not correct.

On January 20, 2009, we announced that we submitted to the FDA a new liquid chemical sterilization system for 510(k) clearance. The new submission follows discussions with the FDA regarding the prior 510(k) submission issues raised in the warning letter related to our existing device. The new liquid chemical sterilization system submitted to the FDA addresses the changes referenced by the FDA in the warning letter and includes additional technology updates.

For fiscal 2009, this development did not have a material impact on our consolidated financial results. Subsequent annualized revenues could be impacted by approximately $20.0 million until the new product is cleared and commercialized.

We continue to believe that the changes described in the warning letter from the FDA do not significantly affect the safety or effectiveness of the device and, therefore, did not and do not require a new premarket notification submission, and further, that the corrective actions were compliant with FDA regulations. However, if the FDA’s assertions are ultimately determined to be correct, the device would be considered adulterated and misbranded under United States law, in which case, we would be required to make a new premarket notification submission. The FDA also could take enforcement action immediately without providing the opportunity to make a new 510(k) submission. If we did not make that 510(k) submission, if the FDA rejected that 510(k) submission, if the FDA took immediate enforcement action or if governmental agencies and/or third parties otherwise considered the device to be non-compliant, civil, administrative, or criminal proceedings could be initiated. These or other proceedings involving our STERIS SYSTEM 1^® sterile processing system and STERIS’s S20TM sterilant, a significant product to us, could possibly result in judgments requiring re-labeling or restriction on the manufacturing, sale, or distribution of products, or could require us to take other actions, including recalls, to pay fines or civil damages, or to be subject to other governmental or third party claims or remedies, which could materially affect our business, performance, value, financial condition, and results of operations. We intend to continue our discussions with the FDA to seek resolution of all other issues regarding the warning letter and any related investigation.

The STERIS SYSTEM 1^® sterile processing system has been in use since its clearance by the FDA in the late 1980’s. We estimate that the devices currently in operation are used by approximately 5,000 users in excess of 30,000 times per day in the aggregate and that over 275 million medical instruments have been processed using the STERIS SYSTEM 1^® sterile processing system. For additional information regarding this matter, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the SEC on May 29, 2009: “Business—Information with respect to our Business in General—Recent Events—Government Regulations”, “Risk Factors—We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition or value”, “Risk Factors—We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters”, “Risk Factors—Most of our products, including our new liquid chemical sterilization system, must receive regulatory approvals before they can be marketed and sold in the United States and other countries”, and “Risk Factors—Existing and new Customers may not purchase or use the new liquid chemical sterilization system consistent with the purchase and use of existing SYSTEM 1^®.”

Except as noted above, we believe there have been no material recent developments concerning our legal proceedings since March 31, 2009 and no new material pending legal proceedings that are required to be reported.

ITEM 1A.

RISK FACTORS

We believe there have been no material changes in the risk factors included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed with the SEC on May 29, 2009, that may materially affect our business, results of operations, or financial condition.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the second quarter of fiscal 2010, we did not repurchase any of our common shares under our repurchase program. A repurchase program was approved by the Company’s Board of Directors and announced on March 14, 2008, which authorized the repurchase of up to $300 million of our common shares. As of September 30, 2009, $203.9 million in common shares remained available for repurchase under this authorization. This common share repurchase authorization does not have a stated maturity date. The following table summarizes the common shares repurchased during the second quarter of fiscal 2010 under our common share repurchase program:


	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans	(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans at Period End
July 1-31	—		$	—		—	$	203,864
August 1-31	—			—		—		203,864
September 1-30	—			—		—		203,864

Total	—	(*)	$	—	(*)	—	$	203,864

(*)

Does not include 10,566 common shares obtained by the Company in payment of the required income tax withholdings related to the vesting of certain Company restricted stock awards of which 896 common shares were obtained from executive officers who may be deemed to be affiliated purchasers. Also does not include 500 common shares purchased during the quarter at an average price of $27.24 by an IRA brokerage account on behalf of an executive officer who may be deemed to be an affiliated purchaser or the approximately 568 common shares purchased during the quarter at an average price per share of $26.89 by the STERIS Corporation 401(k) Plan on behalf of executive officers who may be deemed to be affiliated purchasers.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The shareholders of the Company voted on the following items at the Annual Meeting of Shareholders held on July 23, 2009:

(a) All of the persons named below were elected as Directors of the Company for a term expiring at the Annual Meeting of Shareholders in 2010. Votes cast for and withheld from each of such persons were as follows:


	FOR	WITHHELD
Richard C. Breeden	54,454,947	473,352
Cynthia L. Feldmann	54,556,497	371,802
Robert H. Fields	54,541,250	387,049
Jacqueline B. Kosecoff	54,346,631	581,667
Kevin M. McMullen	54,559,614	368,685
Walter M Rosebrough, Jr.	54,566,108	362,191
Mohsen M. Sohi	47,469,247	7,459,052
John P. Wareham	54,552,143	376,156
Loyal W. Wilson	53,644,803	1,283,495
Michael B. Wood	54,568,313	359,985

(b) Votes regarding the proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ended March 31, 2010 were as follows:


FOR	AGAINST	ABSTAIN	BROKER NON-VOTES
54,736,241	105,326	86,731	—

ITEM 6.

EXHIBITS

Exhibits required by Item 601 of Regulation S-K


Exhibit Number		Exhibit Description
3.1		1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).

3.2		Amended and Restated Regulations of STERIS Corporation, as amended on July 26, 2007 (filed as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 2007 (Commission File No. 1-14643), and incorporated herein by reference).

4.1		Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

15.1		Letter Re: Unaudited Interim Financial Information.

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STERIS Corporation

/S/ MICHAEL J. TOKICH

Michael J. Tokich

Senior Vice President and Chief Financial Officer

November 3, 2009

EXHIBIT INDEX


Exhibit Number		Exhibit Description
3.1		1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).

3.2		Amended and Restated Regulations of STERIS Corporation, as amended on July 26, 2007 (filed as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 2007 (Commission File No. 1-14643), and incorporated herein by reference).

4.1		Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

15.1		Letter Re: Unaudited Interim Financial Information.

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.