STERIS plc — Fiscal 2023 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
STERIS provides infection-prevention products and services to healthcare, life sciences, medical device, pharmaceutical, and dental customers. Its reportable segments are Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. The filing covers the three months ended June 30, 2022, the first quarter of fiscal 2023, compared with the three months ended June 30, 2021. The interim financial statements are unaudited and were reviewed by Ernst & Young LLP.
The comparison is affected by the June 2, 2021 acquisition of Cantel Medical. Cantel contributed to the prior-year period only from the acquisition date, while its results were included for the full current-quarter period.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $1,156.5 million | $968.4 million | Up 19.4% |
| Gross profit | $517.8 million | $426.3 million | Up 21.5% |
| Gross margin | 44.8% | 44.0% | Up 80 basis points |
| Income from operations | $158.4 million | $14.3 million | Significant increase |
| Net income attributable to shareholders | $111.3 million | $(21.8) million | Returned to profitability |
| Diluted earnings per share | $1.10 | $(0.24) | Improved |
| Cash flow from operations | $231.7 million | $97.4 million | Up $134.3 million |
| Free cash flow | $117.1 million | $41.2 million | Up $75.9 million |
Product revenue was $637.1 million, up 30.2%, while service revenue was $519.4 million, up 8.4%. Consumable revenue increased 39.5% to $416.8 million, and capital equipment revenue increased 15.7% to $220.3 million.
Operating expenses declined 12.8% to $359.4 million, primarily because acquisition and integration expenses fell to $9.8 million from $141.0 million in the prior-year quarter. Research and development expense increased 36.1% to $24.8 million. Interest expense increased modestly to $22.7 million, while the prior-year period included a $22.9 million fair-value adjustment related to assumed convertible debt.
The effective income tax rate was 17.9%, compared with 24.4% in the prior-year period, primarily reflecting nonrecurring unfavorable items in the prior year.
Segment Performance
| Segment | Revenue Q1 FY2023 | Revenue Change | Operating Income | Operating Margin |
|---|---|---|---|---|
| Healthcare | $698.5 million | Up 15.9% | $156.5 million | 22.4% |
| Applied Sterilization Technologies | $220.9 million | Up 5.7% | $109.3 million | 49.5% |
| Life Sciences | $132.2 million | Up 8.8% | $55.3 million | 41.8% |
| Dental | $104.8 million | Not comparable; prior-year period reflected one month | $19.6 million | 18.7% |
Healthcare backlog was $521.7 million at June 30, 2022, compared with $254.3 million at June 30, 2021 excluding Cantel. Life Sciences backlog was $92.7 million, compared with $92.1 million in the prior year.
Liquidity, Cash Flow, and Debt
- Cash and cash equivalents were $316.3 million at June 30, 2022, down from $348.3 million at March 31, 2022.
- Total debt was $3.0 billion, consisting of $151.0 million of short-term debt and $2.85 billion of long-term debt.
- The debt-to-total-capital ratio was 31.9% at June 30, 2022, compared with 32.1% at March 31, 2022 and 34.3% at June 30, 2021.
- Capital expenditures were $115.9 million, compared with $56.4 million in the prior-year quarter, primarily because of additional Applied Sterilization Technologies investment.
- STERIS repaid $111.9 million of term-loan principal and received $37.0 million of net proceeds under credit facilities.
- The company paid $43.0 million in dividends, or $0.43 per ordinary share, and repurchased approximately $14.3 million of ordinary shares under its authorization.
- Approximately $294.6 million remained available under the share-repurchase authorization at June 30, 2022.
- Outstanding borrowings under the credit agreement were $92.6 million, with $15.0 million of letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected organic growth across all segments and $166.2 million of incremental Cantel volume, partly offset by unfavorable currency movements and the January 2022 divestiture of the Renal care business.
- Operating income increased sharply because prior-year results included substantial Cantel acquisition and integration costs and a fair-value adjustment on convertible debt.
- Gross margin improved despite inflation and productivity headwinds. Management cited pricing, Cantel, currency, divestitures, and mix as favorable factors, partly offset by 420 basis points of inflation pressure and 50 basis points of unfavorable productivity impact.
- Healthcare operating margin declined from 23.0% to 22.4%, primarily because of supply-chain, inflationary, research and development, meeting, and travel costs.
- Applied Sterilization Technologies and Life Sciences operating margins improved, while Dental margin was constrained by supply-chain challenges and the limited comparability of the prior-year one-month period.
- Operating cash flow and free cash flow increased substantially, primarily because of lower Cantel-related acquisition and integration costs, partly offset by higher capital expenditures.
Guidance, Outlook, Commentary, and Risks
The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management stated that elective procedures were recovering as COVID-19 impacts subsided in many regions, but hospital staffing shortages continued to limit procedure-volume recovery. Approximately $35 million of Healthcare and Life Sciences capital equipment shipments were delayed during the quarter because of supply-chain constraints.
Management expects continued exposure to product and labor shortages, shipping delays, raw-material and component inflation, energy costs, weakening currencies, and higher interest rates. The company is pursuing alternative suppliers, third-party purchases, alternative-part qualifications, and governmental prioritization to address supply constraints.
Management stated that it does not believe COVID-19 will negatively affect STERIS’s long-term ability to generate revenue or meet financial obligations. However, the filing identifies risks involving supply-chain availability, inflation, customer demand, regulatory approvals, product liability, foreign exchange, commodity prices, integration of Cantel, increased indebtedness, tax-law changes, litigation, and geopolitical or macroeconomic disruptions.
STERIS is contesting IRS proposed adjustments relating to deemed dividend inclusions and withholding tax. The asserted cumulative tax liability is approximately $50.0 million; no reserve has been recorded. Management does not expect an unfavorable outcome to materially affect consolidated financial position, but it could be material to results of operations and cash flows in a particular period.
Legal proceedings and claims are described as arising in the ordinary course of business. Management believes current reserves are adequate and that pending matters will not materially affect consolidated financial position or results of operations as a whole, although outcomes remain uncertain.
Important Facts for Investors to Verify
- Whether supply-chain disruptions, delayed capital equipment shipments, inflation, and labor shortages continue to pressure revenue conversion and margins.
- Whether Cantel integration delivers expected cost savings and whether acquisition-related expenses continue to decline.
- The sustainability of the quarter’s operating-income improvement after excluding acquisition-related charges, fair-value items, and other adjustments.
- Debt repayment progress, floating-rate exposure, refinancing needs, and the effect of higher interest rates on future interest expense.
- Whether Healthcare backlog converts to revenue as expected and whether Dental customer concentration and supply constraints create volatility.
- The resolution and potential cash-flow impact of the approximately $50.0 million IRS proposed tax adjustment.
- Future capital-expenditure requirements, free-cash-flow conversion, dividend capacity, and the pace of share repurchases.
- Currency and commodity exposures, including euro forward contracts and nickel swaps, and their effect on reported earnings.