STERIS plc

Thank you, Kaylin, and good morning, everyone. It’s my pleasure to welcome you to STERIS's Fiscal 2012 Fourth Quarter and Full Year Conference Call.

Thank you for taking the time to join us this morning. As usual, participating in the call this morning are Walt Rosebrough, our President and CEO, and Mike Tokich, our Senior Vice President and CFO.

Now just a few words of caution before we begin; this webcast contains time-sensitive information that is accurate only as of today, May 8, 2012. Any redistribution, retransmission or rebroadcast of this call without the express written consent of STERIS is strictly prohibited.

I would also like to remind you that this discussion may contain forward-looking statements related to the company, its performance or its industry that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results.

Actual results could differ materially from those in the forward-looking statements. The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results expressed or implied in this or other company statements will not be realized.

Investors are further cautioned not to place undue reliance on any forward-looking statements. These statements involve risks and uncertainties, many of which are beyond the company’s control.

Additional information concerning factors that could cause actual results to differ materially is contained in today’s earnings release. As a reminder, during the call we may refer to free cash flow, backlog, debt-to-capital and days sales outstanding, all of which are defined and reconciled as appropriate in our most recent 10-K filing.

With those cautions, I will hand the call over to Mike.

Thank you, Julie, and good morning, everyone. It is my pleasure again to be with you this morning to review our fourth quarter financial results.

Following my remarks, Walt will provide a recap of our full fiscal year results, along with a summary of our outlook for fiscal year 2013.

As you saw this morning in our earnings announcement, during the quarter we adjusted a portion of our original SYSTEM 1 rebate program liability. The total pre-tax adjustment was $17.4 million, of which $15.3 million is attributable to the customer rebate portion of the program, and was recorded as an increase to revenue.

And $2.1 million is attributable to the disposal costs related to the SYSTEM 1 units to be returned and was recorded as a reduction in cost of revenue.

In addition, during the quarter we have reserved $3 million of inventory for certain SYSTEM 1E components. These components can no longer be utilized due to the most recent special 510K clearance which contained a modification of the UV light intensity threshold.

And finally, restructuring was $0.8 million favorable during the quarter.

My comments as well as Walt’s comments on the full year performance will exclude all 3 of these factors in an effort to assist you in comparing results with the prior year. In addition, for fiscal year 2011, both Walt and I will also exclude the impact of the original SYSTEM 1 rebate program liability, the class action lawsuit settlement liability, as well as restructuring expenses.

Please see today’s earnings announcement for a complete reconciliation to GAAP numbers. I will now begin with a review of the income statement.

Total revenue declined 1% versus last year’s fourth quarter. Pricing improved 0.9% and we experienced a 0.8% favorable impact from our acquisition of Sercon.

Both of these items were more than offset by a 2% decline in volume along with a negative 0.4% impact from currency fluctuations. The decline in volume is attributable to fewer SYSTEM 1E shipments in the quarter versus the prior year along with the continued decline of S20 volumes.

Now if you exclude SYSTEM 1 and SYSTEM 1E revenue in the United States in both periods, total company revenue in the quarter would have increased 4%. Gross margin in the quarter declined 160 basis points to 39.7%.

The decline in gross margin is primarily due to a 44% reduction in the combined S20/S40 volumes. On a positive note, we continue to experience improvements in gross margin within both our Life Sciences and Isomedix segments.

EBIT for the quarter increased slightly, primarily as a result of lower SG&A expenses. As we told you last quarter, we were anticipating about $7 million in expenses related to our product reliability and consolidation programs during the quarter.

Our actual expenses in the quarter came in at $6 million for a total of $23 million for the full fiscal year. As you know, we have had some offsets to those expenses, most notably our bonus costs.

As we discussed last quarter, given our earnings in fiscal year 2012, we will not be paying bonuses as part of our annual incentive compensation plan. As a result, we have reduced our compensation expense by $4 million in the quarter and $12 million in the full fiscal year.

The effective tax rate in the quarter was 38.3% compared with 34% last year. The higher effective tax rate in the quarter is due to a discrete item adjustment recorded in the quarter.

Net income was $34.3 million or $0.59 per diluted share compared with net income of $36.4 million or $0.61 per diluted share last year.

Moving on to our segment results; in healthcare our service revenue grew 4%, due to increases in maintenance contract revenue for SYSTEM 1E units. Capital equipment revenue in the quarter grew 1%.

If you exclude the decline in SYSTEM 1E capital shipments year-over-year, the rest of our Healthcare segment capital equipment revenue grew 7%, as we experienced double-digit growth in our Infection Prevention products and mid-single digit growth in our surgical products.

During the quarter we shipped 700 SYSTEM 1E units, as compared to 1,300 units last year. We ended the quarter with approximately 800 units in backlog, representing a majority of the SYSTEM 1E units we had planned for in Fiscal 2013.

We have communicated to our customers our May 1 deadline for all orders to be received in order to guarantee installation by the August 2 deadline.

Healthcare consumable revenue declined 9%, but excluding the combined S20 and S40 volume decline of 44%, the rest of our Consumable business grew low single digits. So in total our Healthcare revenue declined less than 1% which was a direct result of both the reduction in the SYSTEM 1E capital shipments and the S40/S20 consumable decline, both of which were not quite fully offset by the growth in the rest of our business.

Healthcare backlog at the end of the quarter was $102.5 million. We believe that the decline in backlog is more a matter of timing than reflective of current market trends.

Healthcare operating margin in the quarter declined 110 basis points, due primarily to reductions in the combined S20/S40 volumes. Life Sciences revenue declined 8%, which was in line with our expectations due, to a tough capital equipment prior year comparison, which resulted in a 24% decline in capital equipment revenue.

Service revenue in the quarter declined 2%. However we did have another strong quarter of revenue growth in Consumables, which grew 10%.

Backlog in Life Sciences was $50.1 million at the end of the quarter, an increase of 23% as compared with last year, driven mainly by orders from our pharmaceutical manufacturing customers. We continue to see pharmaceutical manufacturing - manufacturers spending on replacement capital equipment more so than large projects, and believe that trend will continue in fiscal year 2013.

Life Science’s operating margin increased 270 basis points to 18.3%, primarily as a result of higher gross margin attainment, as well as lower operating expenses. Revenue for Isomedix increased 11% in the quarter.

Revenue benefited from an increased demand from our core medical device customers. Isomedix operating margin was 27.4%, driven by the increase in volume, which was made possible by the capacity expansion investments we have made over the past couple of years.

Moving onto the balance sheet; in terms of the balance sheet, we ended the fiscal year with $150.8 million of cash and $210 million in long-term debt. You may have seen our 8-K announcement in mid-April discussing our new credit facility terms.

We have replaced an expiring credit facility with a new $300 million line of credit, which expires in 2017. Our balance sheet remains strong and we believe that we are in a very good position to continue to invest in our businesses and return value to our shareholders.

During fiscal 2012 we invested $35 million in the acquisition of new businesses and returned $95 million to shareholders through our dividend and share repurchase programs. We continue to make progress on improving our working capital positions.

Our inventory levels at $157.7 million are lower both sequentially and year-over-year, while our DSO at 74 days has improved verse the prior year. Our accounts receivable balance of $280.3 million does not include $13 million of pending credits related to our SYSTEM 1 rebate program.

If AR is adjusted for these pending credits, our DSO would improve by another 4 days to 70 days. Capital spending was $12.4 million during the quarter, while depreciation and amortization was $16.6 million.

Our free cash flow for fiscal year 2012 was $82.7 million compared with $41.6 million last year. The improvement in free cash flow is due to lower working capital requirements and lower capital spending.

Included in free cash flow is the use of $41.2 million of cash for the SYSTEM 1 rebate program and class action settlement.

With that, I will now turn the call over to Walt for his remarks. Walt?

Thanks, Michael, and good morning, everyone. Thanks for taking the time to join us this morning.

Now that Mike has given you some perspective on the quarter I will discuss the full year and our outlook going forward. Heading into fiscal 2012, we anticipated growth in both revenue and earnings.

While we are pleased with a 6% increase in our top line, we experienced some unanticipated events that challenged our bottom line. These challenges included an extension of the SYSTEM 1 transition as well as the unanticipated expenses related to SYSTEM 1E uptime reliability, both of which hindered our profit in fiscal 2012.

Even though we did not grow profit we are pleased with what we have accomplished in the face of these significant challenges. We have been working through the SYSTEM 1 transition for 4 years now, from the warning letter in May 2008 to the anticipated last shipment of S20 in the United States in August of this year.

This transition has taken longer and been more costly than we originally anticipated and we have hit a few bumps in the road, but we have worked very hard to provide the most appropriate products and services for our customers and see them through a successful transition. At every turn, we have worked to do what is right for our customers and acceptable to the FDA even when it resulted in significant additional expense for STERIS.

We believe this long-run view will pay off over time.

At the same time we were working through the transition, the rest of our business, i.e. the business except for U.S.

SYSTEM 1 and 1E, has performed very well. We are especially pleased that we delivered solid top line growth in every STERIS business in 2012 with the exception of our Healthcare Consumable business, which was impacted by the decline in sterilant for SYSTEM 1.

We grew 7% in healthcare capital equipment revenue in 2012. That 7% is excluding 1 and 1E sales.

It would be 15% if the 1E capital were included.

It was a good year for several major product families including V-PRO, integrated operating rooms and LED lights. Combined, our new and next generation products reaffirmed our 100-year-old reputation as a technology leader.

This allows greater margins as customers find value in our more effective, more efficient, higher capacity and greener offerings. Outside of S20, our healthcare consumable franchise grew low single digits, with continued strength in Prolystica Chemistries, BHP consumables, which are related to our growing installed base of V-PRO Sterilizers, and our sterility assurance products.

Our Life Science business had a very good year in 2012, growing revenue 5%. We started the year anticipating that our Capital Equipment business would remain flat.

Not only did our Capital Equipment business grow 6%, but the profitability of the Life Science business in total improved over 300 basis points. This improvement was achieved even with a significant mix shift toward traditionally lower margin capital equipment.

The Life Science consumables franchise delivered another year of high single-digit growth.

Isomedix grew a solid 8% as we have continued to invest in this business by adding capacity to meet customer demand. During fiscal 2012 we began expanding a gamma facility in the Northeast, which we will complete in the next few months.

And we will be adding additional capacity in the Southwest in fiscal 2013 as well. Two months ago we bought a contract laboratory service provider for medical device and pharma manufacturers called Biotest, which provides validation services to our customers.

It is a natural extension of our Isomedix business. We spent about $12 million on the deal, or about 1.5x revenue, and anticipate that Biotest will add several hundred basis points to our top line Isomedix growth, and will be neutral to modestly accretive to STERIS’s bottom line in fiscal 2013.

We made the decision to make several strategic investments in our business in fiscal 2012, which has impacted our profitability to date. But they’re the right decisions for the business over the long term.

In addition, we have continued - we have seen continued impact on our margins from the SYSTEM 1 transition. As a result of these factors, fiscal 2012 adjusted operating profit margins declined to 15% of revenue.

And adjusted earnings per share were $2.16, a slight decline from the prior year, but in line with our expectations.

Over the last year, we have improved our working capital performance and ended the year with a strong balance sheet and improved cash flow. We have returned value to our shareholders by increasing our dividend during fiscal 2012 to $0.17 per quarter, representing the sixth year in a row of double-digit increases in our dividend payment.

We currently plan to continue this approach of double-digit percentage dividend growth.

We also purchased close to 2 million shares of stock at a cost of $56 million. Fiscal 2012 was a challenging year for us, and our people did a nice job meeting customer needs.

We anticipate that fiscal 2013 will be a pivot year for the company as we complete the SYSTEM 1 transition in the U.S. and establish a new baseline of revenue and profitability off of which we will grow in the future.

However, compared to the $57 million in SYSTEM 1E capital sales, which is about 5 years of normal unit sales, as well as sales of S20 sterilant during fiscal 2012, we have one last year of difficult comparisons due to the SYSTEM 1 transition.

Our forecast for fiscal 2013 is to grow the business, excluding U.S. SYSTEM 1 and 1E fast enough to offset the SYSTEM 1/1E decline in revenue in order to remain flat from a top line perspective.

I will now map out in more detail how we plan to meet those revenue growth expectations.

Let’s first start with SYSTEM 1 and 1E. We shipped 3,800 SYSTEM 1E units in the U.S.

during fiscal 2012, totaling $57 million in revenue. And we anticipate that we will ship approximately 1,000 units during fiscal 2013, or around $15 million in revenue.

In addition, given how strong the S20 franchise was at the beginning of fiscal 2012, we anticipate that the revenue of the combined S20 and S40 sterilant franchise will decline $10 million during fiscal 2013. In sum that is a $52 million reduction in revenue.

But the good news is that we believe we can fill that gap with the strength of the rest of the business.

To start we are anticipating mid, single-digit revenue growth in the rest of our healthcare business with balanced performance in the infection prevention and surgical businesses. We hear from our hospital customers that procedures in capital spending will be flat to slightly up for the year.

We expect our growth will stem from low single-digit market growth and additional success with our newer products.

Our Life Science segment is anticipated to grow revenue in the mid-single digits as pharmaceutical manufacturers continue to spend on replacement capital equipment. We anticipate another good year for the consumables in Life Science as well.

We believe we will have another attractive year, revenue year, for Isomedix in 2013, with low, double-digit growth driven in part by the recent Biotest acquisition, and by the increased capacity that I mentioned earlier.

From a profitability perspective, we anticipate a number of things moving in the right direction during fiscal 2013. We believe we can improve gross margins from fiscal 2012 levels, driven by a mix shift in our product sales and success with new products.

SG&A should grow low single digits in fiscal 2013, as the benefits of our consolidation efforts and reduced spending on SYSTEM 1E will be offset by anticipated payments of our management incentive compensation and modest impacts of inflation.

Our previously announced consolidation efforts are now virtually complete. So we do not believe we will incur additional meaningful expenses for those consolidations going forward.

In addition, the $12 million that we spent during fiscal '12 to improve up-time performance of SYSTEM 1E will be reduced to approximately $7 million on more than double the average installed base, and should largely occur in the first half of the year.

We believe the culmination of all these factors will result in earnings per diluted share of $2.00 to $2.20 for the year. We do anticipate that earnings will be weighted toward the second half of the year, with approximately 40% of earnings in the first half and the balance in the second half.

Our outlook does not include any impact from the medical device excise tax, which we believe could negatively impact earnings per share by as much as $0.02 to $0.04 in the fourth quarter of the fiscal year.

We believe there’s enough uncertainty regarding this tax, the timing of implementation, the ultimate tax rate, what products and services are included and excluded, not to mention the judicial and political future of the tax as part of healthcare reform. But since it only impacts one quarter of our fiscal year, we are treating it as a one-time unusual event at this time and removing it from our guidance.

Naturally, we will address these issues as warranted along with other results of healthcare reform and corporate tax rates as we learn more what the courts, Congress and the administration decide.

mid- to high single digit revenue growth through a combination of market growth, successful new product introductions and acquisitions. We expect leverage on that top line growth to deliver double digit earnings per share growth.

Given our reported results the last couple of years, our long-term objectives may seem aggressive, so let me explain one of the reasons we believe they are reasonable.

If we look back at what we’ve accomplished over the last 4 years, the results are significantly greater than the long-term profit goals I mentioned a moment ago. If we set aside the negative impact of U.S.

SYSTEM 1 and 1E, we have managed through a global recession, healthcare reform and a significant reduction of one of our most profitable profits and with all these issues included we have still grown EPS over 15% per year compounded the past 4 years. Obviously we would have done even better were it not for the SYSTEM 1/1E reductions.

We believe we can produce double digit performance the next several years and do not expect to face that combination of obstacles again.

Moving forward, we will continue to manage our costs, grow our business with internal product development, invest in greater capacity and augment these value-creating methods with the acquisitions of tangential products and services. We have a strong balance sheet and cash flow and will use both to grow the business.

One of the ways we plan to create value going forward is to in-source much of the production that we have traditionally outsourced. We have come far enough with our lean approach that we can utilize the capacity we have created to produce many of our purchased components.

We expect to invest over $20 million of capital the next 18 months to do this and create better quality, better delivery and lower costs. We have also increased our efforts toward acquisition of tangential products and market opportunities, both by internal development and acquisition.

We continue to believe the future for STERIS is bright and look forward to the attainment of our goals. With that, I will turn the call back over to Julie to begin Q&A.

Thank you, Mike and Walt for your comments. We’re now ready to begin the Q&A session.

So Kaylin, would you please give the instructions and we’ll get started?

It looks like Infection Prevention had a good quarter, up double digits. I was wondering if you could talk about what the drivers there have been.

You know, Jason, Infection Prevention and Surgical both had a pretty good year. And capital bounces a little bit so it just so happens they had a bit stronger quarter.

That quarter versus the Surgical side. But in general, there’s a general growth rate but also our newer products.

V-PRO specifically had a very nice quarter and we expect it to grow significantly over the course of the year. And we have a number of new products on the plate that we’ve introduced and we are introducing that we think will improve that.

And do you have the amount of the 1E backlog on a dollar basis?

It’s about $12 million, Jason.

Thank you.

Good morning.

Excuse me, Bob. I should add that, that backlog would have been at the end of the year, not current.

Sorry, Bob.

Morning, Bob.

Good morning. A few details, I think they were mentioned.

I know they were mentioned in your commentary but I didn’t write them down quick enough. So first, the SYSTEM 1E units that were shipped in the fourth quarter, how many were those?

There were 700 SYSTEM 1Es shipped in the fourth quarter.

Okay. And then when you speak about the total company sales growth would have been 4%, excluding the SYSTEM 1, 1E sales, are you excluding 1, 1E sales in both the fourth quarter of the '11 and '12?

And then arriving at the 4%?

Yes, that is correct, Bob. We’re excluding the U.S.

SYSTEM 1 and 1E portion of revenue in both fiscal year 2012 and fiscal year 2011, and that would have been 4% growth.

Okay. And the foreign exchange impact in the quarter, Mike?

The FX exchange impact in the quarter was actually a negative 0.4%.

Okay. And I’ll be refining my models a bit.

But I get the sense, and tell me if I’m wrong on this, that the SYSTEM 1/1E consumable sales in the fourth quarter had a bit of a bump up from what we’ve seen in the prior quarters. Am I just modeling it wrong, or is that correct?

No, that’s fair, Bob. Given that we’ve continued to install over the last several quarters, we would anticipate to see that ramping.

Well, but at the same time, I suspect folks are using less of the SYSTEM 1. But given all that, you’re saying there was a bump up in the consumable sales in the fourth quarter, relative to the third?

Bob, Julie misunderstood the question. She was speaking specifically of S40.

S40 and S20 have been on a ramping decline, and I don’t happen to know off the top of my head if that rate changed significantly. But the endpoints that we have been describing, kind of all along, that being in that 30% to 40% percent range of sterilant is still in play.

Okay. And then I believe you mentioned that doing better in your 2013 projection are SYSTEM 1/1E consumable sales of $10 million.

Is that correct?

That is actually what is going to be lost year-over-year in fiscal 2013, as compared to 2012. So remember, in 2012, especially at the beginning of the year, we still had a large percentage of retention on the 1E, specifically the S20 business.

That obviously is going away, as the first half of this year, as August 2nd deadline comes due. So we believe that’s going to be about a $10 million negative impact on revenue.

And then finally, I know you mentioned, but again I didn’t write it down quick enough, the consumable sales on the 1/1E franchise for 2012?

The total consumables? Well, no, the only thing I talked about was the quarter declined 44%.

Is that what you’re asking, Bob?

No, I thought Walt had mentioned what the total consumable sales for the year were on that franchise in 2012.

I mentioned that they’re down to $10 million, 2013 over 2012, Bob.

I got you. Okay, but will you give the SYSTEM 1/1E consumable sales in 2012 or would you just as soon not?

No. The only indication we’ve given, Bob, every quarter we’ve you the decline of the combined S20/S40 consumable volume.

We will not give a specific number, though. Although we tried to give you an indication in '13 about how big that decline is going to be so you can understand the hurdle that we’re going to overcome.

Right. Okay.

Thank you very much.

Actually my question was answered. Thanks.

Yes, hi. Good morning.

Just a few questions; Walt, I believe you had mentioned in terms of the growth you’re looking forward to beyond fiscal 2013 related to new product introductions and continued success with V-Pro, et cetera, I was wondering if you could just give us a sense of what you’re seeing again in terms of hospital cap spending and what leads you to believe we are going to see a pick up there?

Yes. We have seen - I’ll bifurcate two components.

The first is what I’ll call ongoing or routine capital spending. That has continued, I will call it routinely, you know roughly flat, maybe slightly up.

And from what we are hearing from hospital CEOs and the people who determine capital spending, that’s kind of the path they’re on right now. In terms of large projects, as you know we look out at large projects several years in advance.

We’re working on projects several years in advance because they are building projects and we’re seeing a similar trend. It’s actually the number of projects are down slightly but the size of the projects have grown such that in total it’s grown slightly.

So in terms of market we’re kind of looking at that low single digit to mid-single digit growth of market and then we add on top of it some of the new product entries we expect and that’s what gets us to that number.

Okay. Any concerns in terms of what’s going on in Europe as it affects your international business?

Well, Europe has been as you know under pressure for a good long time. The good news for us, and I’ll take first about balance sheet issues.

The good news is we don’t have a lot of receivables or business in Greece, Portugal, et cetera, what I’ll call the most severely affected countries. We do have a good business in Spain, Italy, France, so those countries are under pressure and we’re watching them closely.

We clearly have seen reductions in the spending levels of what I’ll call the traditional Western European countries, but conversely we’ve seen pickups in some of the again traditional Eastern European countries in the Middle East. So when you pull it all together, we are seeing pressure, but not as bad as the newspaper headlines might suggest.

Hey, Mitra, if I could just add, for the full year, our total company growth in Europe was 5%, so it - that rings true to what Walt just said.

Thanks. That’s very helpful.

And quickly on CapEx - I know it’s ticking up a little this year. And one of the things you mentioned was reducing costs.

Is any of that assumed cost reduction in the guidance for fiscal 2013? Or is that a more longer term issue?

Yes, Mitra, almost all of the - it takes a while to put these things in place. We’ve announced one of them and have started doing work on a fabrication center here in Ohio, that will really not be coming up to speed until late this calendar year, so we’ll see a little bit from that one.

The other things we’re working on will be put in place the back half of this year and the first half of next year, so we won’t see much of any of those savings in fiscal '13, but we do anticipate it then, but we don’t see any significant numbers in '13. We would expect to see that result in '14 and beyond.

Hi, guys. I apologize, I’m in an airport.

I just want to make sure I heard one of the stats you quoted there in your prepared comments. You mentioned that the year-over-year decline in SYSTEM 1E consumables, or I should say sterilant, in fiscal '13, is expected to be approximately $10 million.

I guess if I’ve heard that correctly, should I then assume there’s a further step down in fiscal '14? Just trying to do the math here on the install base and the implied reduction in sterilant usage.

Or are you able to continue maybe on some of that lost share base with a lower price point chemistry there? I’m just trying to get my hands around that number and then I have one follow-up.

Thanks.

Chris, there will be some, I would call it very modest continued decline next year, but it will not be significant and we think it will be overshadowed or more than overshadowed by improvements that we’re making that is costing us money in terms of the up-time reliability. So the answer is, yes, there’ll be some modest reduction, but not something we don’t think we can overcome.

Okay. And then secondly, just looking at your free cash flow number - targets for the year, and I understand the company’s gone through some difficult period the last three years, but I guess the nit that I have is just looking at your free cash flow, it’s actually looking down again or flattish versus what you just reported.

So for fiscal 2012 I guess when you start to think about it structurally, has the business’s profitability come down? I’m thinking that as you work through some of these initiatives that you’ve had obviously throughout fiscal 2012, the weight on your profitability and your growth.

I realize this is a transition year. This isn’t the bounce back year; that’s next year, fiscal 2014.

But why does that free cash flow come back up in fiscal 2013 versus fiscal 2012? Or is this going to be normal from a loan rate perspective?

Yes, Chris, let me - I’m going to talk about capital. I’ll let Mike talk about the working capital.

But this year we are really stepping up the capital spending in the business twofold. Actually it’s about $30 million.

We’re adding capacity in Isomedix again, so that’s a significant step up. And part of that just happens to be we do cobalt loading on a sequence of events.

And it just happened our - what we expected our fourth quarter cobalt loading last year to - that fell into our first quarter this year. So we’re seeing a little bit more - a few million dollars more in the cobalt side.

And we’re investing in those expansion facilities that I’ve already mentioned.

In the rest of the business we’re clearly taking a step up, looking at insourcing, which we think will pay for itself handsomely over the next few years. And so we’re putting about $20 million of additional capital above and beyond what we would kind of historically spend in that arena.

And that’s a specific, strategic approach. So it does not affect our earnings significantly this year because the depreciation doesn’t hit until we put it in place.

But it clearly affects our cash flow.

And Mike, if you want to talk about the working capital side?

Yes. In contrast to that we’re actually able to offset basically a little bit more than those investments that we’re making from a capital expenditure standpoint through some improvements in working capital, specifically in our accounts receivables and accounts payable balances is what we’re looking at from a planning standpoint.

So even though it looks a little flattish, there are positives and negatives going on. Again, we are spending a little bit more, but we’re actually able to offset that spending even a little bit more than that and still say flattish.

Now, if you exclude the rebate program and class action lawsuit, we actually are showing a bit of an uptick, Chris, in there which is probably more relevant. And gain, we’re assuming that the remainder of the $69 million of liability is all processed and the use of cash will occur all in 2013, fiscal year 2013 as those two programs come to an end.

Let me, so just if I could replay that back just to make sure I’m on point here. So it sounds like on a normalized basis, the free cash flow level is around, approximately $100 million on a normalized kind of go-forward basis, is what you’re talking about, if I adjust for that incremental spend on the capital side and some of the in-sourcing there.

Yes. $100 million, $110 million, you’re in that ballpark.

$100 million or higher.

Yes.

Yes. Okay.

Okay. Thanks so much.

Thanks, Chris.

Just one quick question. It looked like you guys didn’t do any buy-back in the quarter.

What’s kind of your thinking there? You’ve got $118 million authorized, stock's pretty cheap.

What’s kind of the company’s view there?

Well in general, I’ll step back in the way we look at it. First of all, we are in, our use of cash is first to invest in the business, and we clearly knew we were going to pick up our capital spending this year, as we just spoke about.

Our next component is dividends, and we’ve discussed kind of what our thinking is on dividends.

The next two components, in rank order of business development that adds to our business, we mentioned an acquisition, actually we’ve made a couple of them this past 12 months to 15 months, and we’ve been picking that up. We do have a number of things on our radar.

One never knows if those are or are not going to close, but that’s certainly something we’re taking into account. And the fourth is stock buyback, and that’s clearly something that we continue to watch.

We did buy back a little over $50 million last year, and it would not be surprising if we bought some back this year.

What’s the criteria again on acquisitions? I mean is that something that you like to see immediately accretive?

Or how do you view that?

Well, we take a longer term view than that. In fact my criteria is more, I would call it strategic based than financially based in terms of, I like things that are right next door to me.

They’re a product that I can put into my current markets. Or if I go to expand into a different market, a classic example, the Biotest that we just talked about, that unit has shares - they do something different than our Isomedix folks, but they share the same customer and the work precedes the work that Isomedix does.

So we believe our channel can improve their revenue generation. That’s a classic example.

The converse is when we bought Sercon in Brazil we have a series of products that are very much like their series of products. Theirs are more specific to the Latin America market and they have a channel that expands on the channel we had in Brazil.

So one way or the other I’m looking for something that people use different terms for it - tangential, tuck-in. Words like that and that’s my very first criteria.

Secondly, we would probably take some dilution in a very short period. We don’t expect to take dilution for long periods as a general statement.

And certainly our #1 criteria is really the internal rate of return that we generate on the products or on the acquisition. So we manage it for cash.

So that would be the criteria.

Okay. Thanks, guys.

You bet.

Thank you, Kaylin. This concludes our conference call.

Thanks, everybody, for joining us and we’ll talk to you next quarter.