| STERIS CORP Item 1A Risk Factors The following are certain risk factors that could affect the Company’s business, financial condition and results of operations |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and financial condition to differ materially from those projected in forward-looking statements |
| The risks that are highlighted below are not the only ones that the Company faces |
| Additional risks and uncertainties not presently known by the Company or that the Company currently deems immaterial may also affect the Company’s business |
| If any of the following risks actually occur, the Company’s business, financial condition, value, or results of operations could be negatively affected |
| The businesses in which the Company competes are highly competitive, and if the Company fails to compete successfully, the Company’s sales and results of operations may be negatively affected |
| The Company operates in a highly competitive global environment and competes in each of its businesses with other broad line manufacturers and many smaller competitors specializing in particular products, primarily on the basis of brand, product quality, price, warranty, delivery, service and technical support |
| The Company anticipates that it may face increased competition in the future as new infection prevention, sterile processing, contamination control and surgical support products and services enter the market |
| Numerous organizations are believed to be working with a variety of technologies and sterilizing agents |
| In addition, a number of companies have developed disposable medical instruments and other devices designed to address the risk of decontamination |
| If the Company’s products, services, support, distribution and/or cost structure do not enable it to compete successfully, the Company’s sales, results of operations, or value may be negatively affected |
| The Company’s success depends on its ability to design, manufacture, distribute and achieve market acceptance of new products with higher functionality and lower costs |
| The Company sells to customers in industries that are characterized by technological change, product innovation and evolving industry standards and in which product price is a key consideration in customers’ purchasing decisions |
| The Company is engaged in product development and improvement programs and must continue to design and improve innovative products, effectively distribute and achieve market acceptance of those products, and reduce the costs of producing its products to compete successfully with its competitors |
| If the Company’s competitors’ product development capabilities become more effective than the Company’s, if competitors’ new or improved products are accepted by the market before the Company’s products, or if competitors are able to produce products at a lower cost and thus offer products for sale at a lower price, the Company’s business, financial condition and results of operations could be adversely affected |
| The consolidation of health care and pharmaceutical customers and the Company’s competitors could result in a loss of customers or more significant pricing pressures |
| Numerous initiatives and reforms initiated by legislators, regulators and third-party payors to reduce health care costs have contributed to a consolidation trend among the Company’s customers |
| Some of the Company’s competitors have been able to reduce production costs and have lowered the purchase prices of their products in an effort to attract customers |
| This has resulted in greater pricing pressures |
| Further consolidation could result in a loss of customers or more significant pricing pressures |
| If the Company’s cost reduction and restructuring efforts are ineffective, the Company’s sales and profitability could be negatively impacted |
| The Company may not be successful in achieving expected operating efficiencies and operating cost reductions, and may experience business disruptions, associated with cost reduction and restructuring activities, including the restructuring 9 ______________________________________________________________________ [55]Table of Contents activities announced in January 2006 and, in particular, the transfer of the Erie, Pennsylvania manufacturing operations to Mexico |
| These efforts may not produce the full efficiency and cost reduction benefits that the Company expects |
| Additionally, any benefits may be realized later than expected, and the costs of implementing these efforts may be greater than anticipated |
| The Company may undertake additional cost reduction efforts, which could result in future charges |
| The Company may be adversely affected and could experience business disruptions with its customers and elsewhere if its cost reduction and restructuring efforts prove ineffective |
| Decreased availability or increased costs of raw materials or energy costs could increase the Company’s costs of producing its products or limit its ability to produce its products |
| The Company purchases raw materials, energy supplies, fabricated components and services from a variety of suppliers |
| Raw materials such as stainless steel and petroleum-based chemicals are considered key raw materials |
| The availability and prices for raw materials and energy supplies are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, and other factors |
| Where appropriate, the Company may employ contracts with suppliers, both domestically and internationally |
| From time to time, however, the prices and availability of raw materials or energy supplies fluctuate due to global market demands, which could impair the Company’s ability to procure necessary materials or produce products or could increase the cost of such materials or products |
| Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time |
| In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of energy |
| A reduction in the supply or increase in the cost of oil and gas could negatively impact the Company’s ability to manufacture its products and could increase the cost of production |
| The Company’s results of operations may be harmed by shortages in supply or increases in prices to the extent increased costs cannot be passed on to its customers |
| The Company’s operations and those of its suppliers are subject to hazards and other risks, any of which could interrupt production or operations or otherwise adversely affect the Company’s performance, results, or value |
| The Company’s operations and those of its suppliers are subject to business continuity and other risks, including, but not limited to: explosions, fires, inclement weather and disasters; mechanical failures; unscheduled downtime; labor difficulties; an inability to obtain or maintain any required licenses or permits; disruption of communications; inability to hire or retain key management or employees; loss of key executives; and disruption of supplies and distribution |
| The occurrence of any of these problems could cause disruption, delay, or otherwise adversely affect the productivity and profitability of a particular manufacturing facility, or the Company’s operations as a whole, during and after the period of these operating difficulties |
| Certain of these operating problems may also cause personal injury and loss of life, severe damage to or destruction of property and equipment |
| Furthermore, the Company is subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters |
| Although the Company maintains property and casualty insurance of the types and in the amounts that the Company believes are customary for its industries, the Company is not fully insured against all potential hazards incident to its business |
| 10 ______________________________________________________________________ [56]Table of Contents The Company conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to the risks associated with doing business outside the United States |
| The Company has significant international operations, including operations in Europe, Asia and Latin America |
| The Company is subject to a number of risks that are inherent in manufacturing, sales, services, and other operations internationally, including: risks associated with foreign currency exchange rate fluctuations; difficulties in enforcing agreements and collecting receivables through some foreign legal systems; foreign customers may have longer payment cycles than customers in the United States; tax rates in certain foreign countries that may exceed those in the United States and foreign earnings that may be subject to withholding requirements; tax laws that restrict the Company’s ability to use tax credits, offset gains, or repatriate funds; the imposition of tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country; general economic and political conditions in countries where we operate or where end users of the Company’s products reside; difficulties associated with managing a large organization spread throughout various countries; difficulties in enforcing intellectual property rights and weaker intellectual property rights protection in some countries; and difficulties associated with compliance with a variety of laws and regulations governing international trade |
| Many countries also have a significant degree of political, social, and economic uncertainty or unrest that may impede the Company’s ability to implement and achieve its international growth objectives |
| In addition, compliance with multiple and potentially conflicting international laws and regulations, import and export limitations and exchange controls is burdensome and expensive |
| Changes in government and other third-party payor reimbursement levels could negatively impact the Company’s sales and profitability |
| The Company’s products are sold to health care providers, hospitals, and other providers |
| Many of these providers are reimbursed for the health care services provided to their patients by third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans, and managed care programs |
| Many of these programs set maximum reimbursement levels for these health care services in the United States |
| If the third-party payors deny coverage or reduce their current levels of reimbursement for health care services or if the Company’s costs of production increase faster than increases in reimbursement levels, it may limit the ability of these providers to purchase the Company’s products, such as capital equipment, or the Company may be unable to sell its products on a profitable basis |
| Outside the United States, reimbursement systems vary significantly by country |
| Many foreign countries have government-managed health care systems that govern reimbursement for health care services |
| The ability of hospitals and other providers supported by such systems to purchase the Company’s products is dependent, in part, upon public budgetary constraints |
| If health care providers outside the United States do not obtain adequate levels of reimbursement from third-party payors, international sales of the Company’s products may decline, which could adversely affect the Company’s total sales and could have a material adverse effect on our business, financial condition and results of operations |
| 11 ______________________________________________________________________ [57]Table of Contents The Company is subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for certain products or operations |
| The Company’s operations are subject to extensive regulation in the United States and in other countries where the Company does business |
| Government regulation applies to nearly all aspects of testing, manufacture, safety, labeling, storage, recordkeeping, reporting, promotion, distribution, and the import or export of medical devices |
| In general, unless an exemption applies, a sterilization, decontamination, or medical device must receive regulatory approval or clearance before it can be marketed or sold |
| The Company can offer no assurance that a particular device will be approved or cleared or that such approval or clearance will be maintained by any applicable regulatory agency |
| Additionally, the Company may be required to obtain approvals, approval supplements or clearances to market modifications to existing products or market existing products for new uses |
| Regulatory agencies may require manufacturers themselves to make and document determination of whether or not a modification requires an approval, supplement or clearance; however, the regulatory agencies may review and disagree with a manufacturer’s decision |
| The Company has applied for and received many such approvals in the past |
| The Company can offer no assurance that it will be successful in receiving approvals in the future or that any regulatory agency will agree with its decisions not to seek approvals, supplements or clearances for particular device modifications |
| The FDA or other regulatory agencies may require approval or clearances for past or any future modifications or new uses for the Company’s existing products |
| These submissions may require the submission of additional clinical or pre-clinical data and may be time consuming and costly, and may not ultimately be cleared or approved by the regulatory agencies |
| If the Company is unable to obtain any required approvals, approval supplements or clearances for any modification to a previously cleared or approved device, the Company may be required to cease manufacturing the modified device or to recall such modified device until appropriate clearance or approval is obtained |
| Regulatory agencies may also change policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay approval or clearance of devices, or could impact the Company’s ability to market a device that was previously cleared or approved |
| If the Company fails to comply with the regulatory requirements of the FDA or other applicable regulatory requirements in the United States or elsewhere, the Company may be subject to administratively or judicially imposed sanctions, which could have a material adverse effect on the Company’s business, financial condition and results of operations |
| These sanctions include warning letters, fines, civil penalties, criminal penalties, injunctions, debarment, product seizure or detention, product recalls and total or partial suspension of production |
| In many of the foreign countries where the Company markets its products, the Company is subject to extensive regulations that are comparable to those of the FDA The failure to receive, or delays in the receipt of, relevant international qualifications could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Most notably, the regulation of the Company’s products in Europe falls primarily within the European Economic Area |
| Only medical devices that comply with certain conformity requirements are allowed to be marketed within the European Economic Area |
| The Company’s products are subject to recalls, even after receiving FDA or foreign regulatory clearance or approval |
| The Company is subject to ongoing medical device reporting regulations that require the Company to report to the FDA or governmental authorities in other countries if its products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to a death or serious injury if the malfunction were to recur |
| The FDA and similar governmental authorities in other countries have the authority to require the recall of the Company’s products in the event of material deficiencies or defects in design or manufacturing |
| In addition, in light of a material deficiency or design defect or defect in labeling, the Company may 12 ______________________________________________________________________ [58]Table of Contents voluntarily elect to recall one of its products |
| A government mandated or voluntary recall could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling |
| Any recall would divert managerial and financial resources and could harm the Company’s reputation with its customers and with health care professionals who use and recommend the Company’s products |
| The Company can offer no assurance that it will not have any product recalls in the future or that such recalls would not have a material adverse effect on the Company’s business, financial condition, results of operations, or value |
| The Company’s business and financial condition could be adversely affected by the difficulties in acquiring and maintaining a proprietary intellectual ownership position |
| The Company’s ability to compete effectively with other companies depends in part on its ability to maintain and enforce the Company’s patents and other proprietary rights, which are essential to its business |
| The Company relies on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of its technology |
| These measures afford only limited protection, and competitors may gain access to the Company’s intellectual property and proprietary information |
| The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions |
| Litigation has been and may continue to be necessary to enforce the Company’s intellectual property rights, to protect the Company’s trade secrets and to determine the validity and scope of the Company’s proprietary rights |
| Litigation can be costly and can divert management’s attention from the growth of the business |
| Additionally, the Company may have difficulties maintaining and enforcing its patents and other proprietary rights in some foreign jurisdictions with weaker intellectual property rights |
| The Company can offer no assurance that its patents and other proprietary rights will not be successfully challenged or that others will not independently develop substantially equivalent information and technology or otherwise gain access to the Company’s proprietary technology |
| The Company may be adversely affected by product liability claims, legal actions or other regulatory or compliance matters |
| The Company may be subject to a variety of claims, lawsuits, regulatory proceedings, investigations, debarment or other potential risks or liabilities |
| The Company may be exposed to risks of claims, proceedings, investigations or litigation by government agencies or third parties based on or relating to compliance matters, such as product regulation, tax, employee welfare or benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, product safety, financial controls or reporting, intellectual property, and other matters |
| Any such claims, proceedings, investigations or litigation, regardless of the merits, could result in substantial costs and could harm the Company’s business |
| Among other risks, proceedings, investigations, litigation or claims also could require the Company to: cease manufacturing and selling any of the affected products; redesign or recall the Company’s products, which may not be possible and could be costly and time consuming; restrict or suspend product sales or other Company activities; or pay substantial amounts, revise financial statements, or otherwise adversely affect Company performance, results or value |
| Additionally, the Company could be the subject of regulatory or other proceedings that could result in the imposition of administratively or judicially imposed sanctions, such as warning letters, fines, civil penalties, criminal penalties, loss of tax benefits, injunctions, product seizure or detention, debarment, product recalls and total or partial suspension of production |
| The Company has been, and is currently, the subject of product liability claims and lawsuits relating to its products |
| The Company faces an inherent business risk of exposure to product liability claims in the event that one of the Company’s products is alleged to have resulted in adverse effects |
| If there is a significant increase in the number, amount or scope of 13 ______________________________________________________________________ [59]Table of Contents the product liability claims, the Company’s business could be adversely affected |
| Even if the Company is successful in defending against any liability claims, such claims could nevertheless distract management, result in substantial costs, harm the Company’s reputation, adversely affect sales of the Company’s products and otherwise harm the Company’s business, financial condition, results of operations, or value |
| Although the Company maintains product liability and other insurance with coverage the Company believes to be adequate, the Company can offer no assurance that any product liability or other claims made against it will not exceed the coverage limits of the Company’s insurance policies or that such insurance will continue to be available on terms the Company views as commercially reasonable or at all |
| Additionally, the Company is subject to the risk that its insurers will exclude claim coverage for any reason or that the insurers may become insolvent |
| The results of legal or regulatory claims, proceedings, investigations or litigation are difficult to predict, and the Company cannot provide any assurance that such matters will not be commenced against it, or that the Company will prevail in any claim, proceeding, investigation or litigation |
| An unfavorable resolution of any legal, regulatory or compliance matter could materially and adversely affect the Company’s business, results of operations, liquidity, financial condition or value |
| The Company may be unable to successfully identify, acquire and integrate strategic acquisition candidates |
| The Company’s ability to successfully grow through acquisitions depends upon the Company’s ability to identify, negotiate, complete and integrate suitable acquisitions, and to obtain any necessary financing |
| The costs of acquiring other businesses could increase if competition for acquisition candidates increases |
| Additionally, the success of any acquisition is subject to other risks and uncertainties, including: the Company’s ability to realize operating efficiencies, synergies or other benefits expected from an acquisition, and possible delays in realizing the benefits of the acquired company or products; diversion of management’s time and attention from other business concerns; difficulties in retaining key employees, customers or suppliers of the acquired businesses; difficulties in maintaining uniform standards, controls, procedures and policies throughout acquired companies; adverse effects on existing business relationships with suppliers or customers; the risks associated with the assumption of contingent or undisclosed liabilities of acquisition targets; and ability to generate future cash flows or the availability of financing |
| In addition, an acquisition could materially impair the Company’s results of operations by causing the Company to incur debt or requiring the amortization of acquisition expenses and acquired assets |