STERIS plc — Fiscal 2022 Third-Quarter Form 10-Q Summary
Business context and reporting period
STERIS is a global provider of infection-prevention products and services serving healthcare, life sciences, dental, and medical-device customers. The filing covers the three and nine months ended December 31, 2021, representing the third quarter and first nine months of fiscal 2022. Fiscal 2021 comparative amounts were adjusted for a change in inventory accounting.
STERIS reported four segments: Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. Dental was added following the June 2, 2021 acquisition of Cantel Medical.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Prior period | Nine months ended Dec. 31, 2021 | Prior period |
|---|---|---|---|---|
| Revenue | $1,209.0 million | $808.9 million | $3,374.4 million | $2,234.0 million |
| Gross profit | $538.1 million | $345.9 million | $1,444.7 million | $963.3 million |
| Gross margin | 44.5% | 42.8% | 42.8% | 43.1% |
| Operating income | $202.9 million | $147.0 million | $333.8 million | $404.1 million |
| Net income attributable to shareholders | $143.6 million | $114.5 million | $191.6 million | $310.0 million |
| Diluted EPS | $1.42 | $1.33 | $1.97 | $3.61 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $513.1 million | $501.8 million |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $300.3 million | $337.7 million |
Third-quarter revenue increased 49.5%, while nine-month revenue increased 51.0%. Product revenue was $697.3 million in the quarter and $1,871.8 million year to date; service revenue was $511.7 million and $1,502.6 million, respectively. Nine-month revenue growth included $820.2 million from Cantel and other recent acquisitions, as well as organic growth and favorable currency movements.
Third-quarter operating income benefited from higher volume and gross-margin improvement. Nine-month operating income declined because of acquisition and integration expenses, higher acquired-intangible amortization, inventory and property fair-value step-up amortization, and other acquisition-related items. Nine-month operating income included $191.6 million of acquired-intangible amortization, $167.7 million of acquisition and integration charges, and $96.5 million of inventory and property fair-value step-up amortization.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $359.1 million at December 31, 2021, compared with $220.5 million at March 31, 2021.
- Total debt was $3.303 billion, including $127.9 million of short-term debt and $3.175 billion of long-term debt, compared with $1.651 billion at March 31, 2021.
- Debt-to-total capital was 33.3% at December 31, 2021, compared with 29.8% at March 31, 2021.
- STERIS issued $1.350 billion of senior notes in April 2021, consisting of $675 million of 2.70% notes due 2031 and $675 million of 3.75% notes due 2051. It also borrowed $650 million under a delayed-draw term loan.
- Borrowings under the revolving credit facility were $46.5 million, and letters of credit outstanding were $15.4 million at December 31, 2021.
- The company paid $120.1 million of cash dividends during the first nine months, or $1.26 per ordinary share. Approximately $333.9 million remained available under the share-repurchase authorization; repurchases were suspended during the pandemic and were authorized to resume February 10, 2022.
Material changes versus the prior comparable period
- Cantel acquisition: Cantel contributed $306.5 million of third-quarter revenue and $721.2 million of nine-month revenue from the June 2 acquisition date. Total consideration was approximately $3.599 billion, including cash and STERIS shares.
- New Dental segment: Dental generated $105.1 million of third-quarter revenue and $256.0 million from the acquisition date through December 31, 2021. Its operating margin was 22.0% in the quarter and 25.6% year to date.
- Segment growth: Nine-month revenue increased 51.3% in Healthcare, 26.4% in Applied Sterilization Technologies, and 11.2% in Life Sciences. Excluding Cantel, Healthcare backlog rose 77.0% to $381.6 million and Life Sciences backlog rose 43.0% to $117.2 million.
- Cash generation: Operating cash flow increased modestly, but free cash flow declined 11.1% because of higher capital expenditures and Cantel-related acquisition and integration costs.
- Taxes and interest: The nine-month effective tax rate increased to 21.5% from 18.8%. Interest expense increased to $67.8 million from $27.1 million, and the company recorded a $27.8 million fair-value adjustment related to Cantel convertible debt.
Guidance, outlook, risks, and unusual items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management stated that order momentum continued to improve and that demand for certain capital equipment products strengthened. Remaining performance obligations were approximately $1.570 billion at December 31, 2021; approximately 54% was expected to be recognized within one year and approximately 36% beyond one year.
Management said it had maintained liquidity, continued planned expansion investments, and did not believe COVID-19 had materially impaired long-term revenue generation or the ability to meet financial obligations. However, COVID-19 continued to create uncertainty, including supply-chain disruption, labor scarcity, material and labor inflation, procedure delays, and unpredictable demand.
- The Cantel purchase-price allocation remained preliminary; revisions to acquired intangible assets, goodwill, deferred taxes, and other fair values could materially affect future results and financial position.
- STERIS agreed to sell the Renal Care business for approximately $196 million, subject to adjustments and $12.3 million of contingent consideration. The sale closed January 3, 2022, and proceeds were used to repay debt. The business had generated approximately $180 million of annual revenue.
- Three customers accounted for approximately 55.8% of Dental revenue in the quarter and 46.1% for the nine-month period, creating customer-concentration risk.
- Reported risks include Cantel integration challenges, higher leverage and borrowing costs, pricing and margin pressure, regulatory and product-liability exposure, tax-law changes, foreign-currency volatility, supply constraints, inflation, litigation, and reduced customer demand.
- The IRS proposed adjustments relating to deemed dividend inclusions and withholding tax that could result in approximately $50 million of cumulative tax liability. STERIS is contesting the assertions and recorded no reserve for these notices.
- Management stated that no material off-balance-sheet arrangements existed and that current litigation and claims were adequately reserved where probable and estimable.
Most important facts for investors to verify
- Whether Cantel integration delivers expected revenue growth, cost savings, and synergies without further material charges.
- The final Cantel purchase-price allocation and its effect on amortization, goodwill, deferred taxes, and earnings.
- Debt repayment progress, leverage trends, interest costs, and liquidity after the acquisition and the Renal Care divestiture.
- Whether supply-chain constraints, labor shortages, inflation, and currency movements pressure gross margins and backlog conversion.
- The durability of Dental revenue given its concentration among three major distributors or customers.
- The outcome and timing of the IRS tax matters and other regulatory, legal, product-liability, and government proceedings.
- Actual fiscal 2022 results versus any subsequent guidance or outlook issued after this filing.