STERIS plc — Form 10-Q Summary
Business context and reporting period
STERIS provides infection-prevention and procedural products and services to healthcare, pharmaceutical, medical-device, and life-sciences customers. Reportable segments are Healthcare, Applied Sterilization Technologies, and Life Sciences. This filing covers the three and nine months ended December 31, 2020, the third quarter and first nine months of fiscal 2021, compared with the corresponding fiscal 2020 periods. The interim financial statements are unaudited but were reviewed by Ernst & Young LLP.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $808.9 million | $774.3 million | $2,234.0 million | $2,207.9 million |
| Gross profit | $345.9 million | $331.4 million | $961.5 million | $955.9 million |
| Gross margin | 42.8% | 42.8% | 43.0% | 43.3% |
| Operating income | $147.0 million | $142.4 million | $402.3 million | $379.2 million |
| Operating margin | 18.2% | 18.4% | 18.0% | 17.2% |
| Net income attributable to shareholders | $114.5 million | $104.9 million | $308.5 million | $284.3 million |
| Diluted EPS | $1.33 | $1.23 | $3.59 | $3.32 |
| Operating cash flow | Not separately provided | Not separately provided | $501.8 million | $391.3 million |
| Free cash flow | Not separately provided | Not separately provided | $337.7 million | $238.1 million |
Q3 revenue increased 4.5%, operating income increased 3.3%, and diluted EPS increased 8.1%. Nine-month revenue increased 1.2%, operating income increased 6.1%, and diluted EPS increased 8.1%. Net margins were approximately 14.2% in Q3 and 13.8% for the nine-month period.
Revenue and segment performance
- Q3 revenue growth was supported by all three segments, favorable currency movements, acquisitions, higher Applied Sterilization Technologies volume, and increased Life Sciences demand from pharmaceutical customers focused on vaccines and biologics.
- Q3 service revenue increased 5.6% to $433.6 million and consumable revenue increased 12.4% to $198.5 million. Capital equipment revenue decreased 5.5% to $176.8 million.
- For nine months, Healthcare revenue declined 3.3% to $1.392 billion, primarily because COVID-19 reduced deferrable procedures and customer capital spending. Applied Sterilization Technologies revenue increased 7.5% to $498.4 million, and Life Sciences revenue increased 12.9% to $343.4 million.
- Q3 segment operating margins were 22.1% for Healthcare, 46.3% for Applied Sterilization Technologies, and 37.5% for Life Sciences. Nine-month margins were 21.7%, 44.6%, and 39.7%, respectively.
- Healthcare backlog was $215.5 million at December 31, 2020, up 2.7% year over year. Life Sciences backlog was $82.0 million, up 14.5%.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $252.5 million at December 31, 2020, compared with $319.6 million at March 31, 2020.
- Operating cash flow increased to $501.8 million from $391.3 million, and free cash flow increased to $337.7 million from $238.1 million. Management attributed the improvement to higher net income, working-capital improvements, and deferred tax payments under COVID-19 relief programs.
- Investing cash outflows were $1.036 billion, including $869.4 million for acquisitions and $164.5 million for capital expenditures and intangible purchases.
- Long-term debt increased to $1.713 billion from $1.151 billion. Debt-to-total capital was 30.7% at December 31, 2020, compared with 25.3% at March 31, 2020.
- The company issued a $550.0 million term loan to help finance the Key Surgical acquisition. The term loan matures November 20, 2023; no principal payments are due through December 31, 2021.
- The company paid $99.7 million in dividends during the first nine months, or $1.17 per share. The share repurchase program was suspended on April 9, 2020; approximately $333.9 million remained available under the authorization at December 31, 2020.
- The company reported $304.6 million of borrowings under its credit agreement and $9.0 million of outstanding letters of credit at December 31, 2020.
Material changes versus the prior comparable period
- STERIS acquired Key Surgical on November 18, 2020, for $849.7 million net of cash acquired, and completed two additional Healthcare tuck-in acquisitions for approximately $20.9 million. Key Surgical contributed significant acquired intangible assets and goodwill; the purchase price allocation remained preliminary.
- Acquisition and integration-related charges increased to $14.0 million for the first nine months from $5.6 million in the prior-year period. COVID-19 incremental costs were $20.5 million for the first nine months and $7.3 million in Q3.
- Q3 gross margin was unchanged at 42.8%; nine-month gross margin decreased from 43.3% to 43.0% because COVID-19 costs and unfavorable mix more than offset pricing and productivity benefits.
- Nine-month SG&A decreased 3.3%, reflecting lower travel, meeting, and performance-related compensation costs, while Q3 SG&A increased 5.5%, largely because of acquisitions.
- During the first quarter, the company recognized $14.6 million of capital equipment revenue and related costs that had previously been deferred after determining that certain contracts contained multiple distinct performance obligations.
- Accumulated other comprehensive loss improved substantially, primarily because of $234.6 million of favorable currency translation adjustments during the first nine months.
Outlook, commentary, risks, and unusual items
- No formal full-year revenue or earnings guidance is provided in the filing. Management stated that COVID-19 continues to create unpredictable demand fluctuations and that its full financial impact cannot reasonably be estimated.
- Management expects some healthcare demand to remain affected by deferred procedures and reduced capital spending, while demand from pharmaceutical customers supporting vaccines and biologics has been favorable.
- On January 12, 2021, STERIS announced an agreement to acquire Cantel Medical in a cash-and-stock transaction valued at approximately $3.6 billion of equity value and $4.6 billion of enterprise value. The transaction remained subject to shareholder and regulatory approvals and was expected to require approximately $2.0 billion of new debt.
- The company disclosed IRS proposed adjustments concerning the deductibility of interest on certain intercompany debt for fiscal years 2016–2018. The asserted cumulative tax liability is approximately $40.0 million; STERIS is contesting the assertions and has not recorded reserves. Management expects no material adverse effect on consolidated financial position, but an unfavorable outcome could materially affect results and cash flow for a period.
- Risks include COVID-19 impacts, acquisition execution and financing, higher leverage, regulatory approvals, litigation and product liability, pricing and margin pressure, foreign currency movements, tax-law changes, raw-material availability, and reduced customer demand.
- Remaining performance obligations were approximately $1.015 billion at December 31, 2020; approximately 50% was expected to be recognized within one year and approximately 42% beyond one year, with the remainder not yet scheduled.
Facts investors should verify
- Progress, financing, closing conditions, regulatory approvals, and expected synergies for the proposed Cantel acquisition.
- Post-acquisition leverage, debt maturities, interest rates, and covenant capacity following the Key Surgical and potential Cantel transactions.
- The durability of healthcare procedure volumes, capital spending, and recurring service and consumable revenue as COVID-19 conditions evolve.
- Whether improved cash flow is sustainable after the effects of working-capital movements, deferred tax payments, and government relief programs.
- Final purchase accounting for Key Surgical, including goodwill, intangible assets, amortization, and integration costs.
- Resolution and potential cash impact of the IRS intercompany-interest tax dispute.
- Conversion of backlog and remaining performance obligations into revenue, including timing and customer cancellation risk.