STERIS plc Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2022. The filing also provides unaudited fourth-quarter results for the quarter ended March 31, 2022. The requested “2021 Q4” period is not the filing’s reporting period; the comparable fourth quarter is fiscal 2022 Q4 versus fiscal 2021 Q4.
Business context
STERIS provides infection-prevention products and services across Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. The Dental segment was added following the June 2, 2021 acquisition of Cantel Medical. Cantel was integrated into Healthcare, Life Sciences, and Dental, and contributed results from the acquisition date onward.
Financial performance and metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Revenue | $4,585.1 million | $3,107.5 million | 47.5% |
| Gross profit | $2,016.4 million | $1,343.1 million | 50.1% |
| Gross margin | 44.0% | 43.2% | Up 80 basis points |
| Operating income | $425.6 million | $548.4 million | Down 22.4% |
| Net income attributable to shareholders | $243.9 million | $397.4 million | Down 38.6% |
| Diluted EPS | $2.48 | $4.63 | Down 46.4% |
| Cash flow from operations | $684.8 million | $689.6 million | Down 0.7% |
| Free cash flow | $399.0 million | $450.9 million | Down 11.5% |
Fiscal 2022 revenue growth included $1,073.1 million of volume from Cantel and other recent acquisitions, organic growth, and favorable currency effects. Product revenue increased 67.5% to $2,556.3 million, while service revenue increased 21.9% to $2,028.8 million.
Operating results were pressured by $205.8 million of acquisition and integration charges, $366.4 million of amortization of acquired intangible assets, $81.8 million of inventory and property fair-value step-up amortization, and approximately $45.0 million of unplanned supply-chain and inflation costs. Interest expense increased to $89.6 million from $37.2 million, and the company recorded a $27.8 million fair-value adjustment related to Cantel convertible debt.
Fourth-quarter results
| Metric | Fiscal 2022 Q4 | Fiscal 2021 Q4 |
|---|---|---|
| Revenue | $1,210.7 million | $873.5 million |
| Gross profit | $571.6 million | $379.8 million |
| Gross margin | 47.2% | 43.5% |
| Net income attributable to shareholders | $52.3 million | $87.4 million |
| Diluted EPS | $0.52 | $1.02 |
Segments
| Segment | Fiscal 2022 revenue | Fiscal 2022 operating income | Operating margin |
|---|---|---|---|
| Healthcare | $2,845.5 million | $626.1 million | 22.0% |
| Applied Sterilization Technologies | $853.0 million | $410.1 million | 48.1% |
| Life Sciences | $525.0 million | $216.2 million | 41.2% |
| Dental | $361.7 million | $84.4 million | 23.3% |
Healthcare backlog excluding Cantel increased to $423.6 million from $206.3 million, and Life Sciences backlog increased to $104.7 million from $79.9 million. The company attributed part of the backlog increase to customer demand and part to supply-chain shipment delays.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $348.3 million at March 31, 2022, versus $220.5 million a year earlier.
- Total debt was $3.088 billion, compared with $1.651 billion at March 31, 2021. Long-term indebtedness was $2.945 billion.
- Debt-to-total capital increased to 32.1% from 29.8%.
- The company had $1.176 billion of unused revolving-credit capacity, net of letters of credit, at year-end.
- Fiscal 2022 debt financing included $1.350 billion of senior notes, consisting of $675 million of 2.70% notes due 2031 and $675 million of 3.75% notes due 2051, plus $650 million drawn under a delayed-draw term loan.
- Debt maturities totaled $142.9 million in fiscal 2023, $60.0 million in fiscal 2024, $165.9 million in fiscal 2025, and $341.4 million in fiscal 2026.
- Capital expenditures were $287.6 million, up from $239.3 million, primarily reflecting Cantel and Applied Sterilization Technologies investments.
- Cash dividends paid were $163.2 million, or $1.69 per share. The quarterly dividend was increased to $0.43 per share, the sixteenth consecutive annual increase.
- Share repurchases resumed in February 2022; 108,368 shares were repurchased for $25.0 million through March 31, 2022. Remaining authorization was approximately $308.9 million.
Material changes versus the prior comparable period
- Cantel materially expanded revenue, employees, goodwill, intangible assets, debt, and the reported operating structure. Cantel contributed $974.4 million of revenue and $41.8 million of operating income after acquisition.
- Assets increased to $11.424 billion from $6.574 billion, primarily because of the Cantel acquisition.
- Goodwill increased to $4.404 billion from $3.026 billion, and net intangible assets increased to $3.329 billion from $898.4 million.
- Operating income and EPS declined despite substantial revenue growth because of acquisition-related amortization, integration costs, fair-value adjustments, higher interest expense, and inflationary supply-chain costs.
- The company sold its Renal Care business in January 2022 for approximately $196.0 million and used the proceeds to repay debt.
Guidance, outlook, risks, and unusual items
Management expects to realize additional Cantel cost synergies, manage costs, develop products and services, expand capacity, and pursue additional acquisitions. It expects continued supply-chain and inflation pressure in fiscal 2023. Management disclosed an anticipated approximately $110 million of annualized pre-tax Cantel synergies within the first four fiscal years after the acquisition.
- Key risks include integration execution, realization of synergies, elevated leverage and interest costs, refinancing requirements, and potential impairment of goodwill or acquired intangible assets.
- Supply-chain disruption, labor costs, inflation, raw-material availability, and limited sources for ethylene oxide and cobalt-60 may affect margins and capacity.
- COVID-19 disruptions could recur and affect procedures, staffing, customer spending, facilities, and supply chains.
- The Russia-Ukraine conflict led STERIS to stop operations in Russia and Belarus and stop purchasing cobalt-60 from its Russian supplier. Management does not expect a material segment impact but noted potential capacity and cost risks.
- Regulatory exposure includes FDA, EPA, OSHA, NRC, environmental, product approval, recall, and ethylene-oxide requirements.
- The IRS proposed adjustments related to deemed dividend inclusions and withholding tax for fiscal 2018 that could result in approximately $50 million of cumulative tax liability. STERIS contests the assertions and has not recorded a reserve.
- The Cantel purchase-price allocation remained preliminary at March 31, 2022, including approximately $2.3 billion allocated to Dental and Healthcare customer-relationship intangibles.
- Management and the auditor reported effective internal control over financial reporting; however, acquired entities representing approximately 48% of total assets and 21% of revenue were excluded from the fiscal 2022 internal-control assessment.
Investor verification points
- Verify the recurring earnings impact after excluding Cantel acquisition, integration, amortization, and fair-value charges.
- Monitor debt reduction, covenant compliance, refinancing needs, and the effect of higher interest rates on cash flow.
- Assess whether the projected $110 million of Cantel annualized synergies are achieved and whether integration costs remain elevated.
- Evaluate backlog conversion and the extent to which supply-chain delays, rather than underlying demand, drove backlog growth.
- Review the final Cantel purchase-price allocation and any resulting changes to goodwill, intangible assets, amortization, or deferred taxes.
- Track inflation, labor and material costs, cobalt-60 availability, ethylene-oxide regulation, and geopolitical supply-chain exposure.
- Follow the IRS tax dispute, potential exposure of approximately $50 million, and other regulatory or product-liability contingencies.