STERIS plc — Fiscal 2022 First-Quarter Form 10-Q Summary
Business context and reporting period
STERIS provides healthcare, life sciences, sterilization, infection-prevention, dental, equipment, consumable, and related services globally. The filing covers the unaudited three months ended June 30, 2021, representing the first quarter of fiscal 2022, compared with the first quarter of fiscal 2021. Prior-year amounts were adjusted for a change in inventory accounting.
On June 2, 2021, STERIS completed its acquisition of Cantel Medical Corp. Cantel contributed approximately $101.8 million of revenue and an operating loss of approximately $133.2 million from acquisition through June 30, 2021. The acquisition added a Dental reportable segment and materially affects period comparability.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $968.4 million | $668.9 million | +44.8% |
| Gross profit | $426.3 million | $287.4 million | +48.3% |
| Gross margin | 44.0% | 43.0% | +100 bps |
| Operating income | $14.3 million | $115.8 million | -$101.5 million |
| Operating margin | 1.5% | 17.3% | Down materially |
| Net income attributable to shareholders | $(21.8) million | $89.6 million | Decline |
| Diluted EPS | $(0.24) | $1.05 | Decline |
| Cash flow from operations | $97.4 million | $134.1 million | Down $36.7 million |
| Free cash flow | $41.2 million | $67.4 million | Down $26.2 million |
Revenue growth reflected organic growth in Healthcare and Applied Sterilization Technologies, Cantel and other acquisition contributions, favorable currency movements, and easier comparisons against COVID-19-related procedure deferrals in the prior-year quarter. Service revenue increased 30.3%, consumable revenue increased 109.6%, and capital equipment revenue increased 20.1%.
Operating results were reduced by approximately $140.3 million of Cantel acquisition and integration expenses, $41.7 million of acquired-intangible amortization, $24.8 million of amortization of inventory and property fair-value step-ups, and other acquisition-related adjustments. Interest expense increased to $21.8 million from $9.5 million, and STERIS recorded a $22.9 million fair-value adjustment on Cantel convertible debt.
Segments and margins
| Segment | Q1 FY2022 revenue | Q1 FY2021 revenue | Q1 FY2022 operating margin |
|---|---|---|---|
| Healthcare | $602.8 million | $399.7 million | 22.6% |
| Applied Sterilization Technologies | $208.9 million | $152.4 million | 48.8% |
| Life Sciences | $121.5 million | $116.9 million | 40.4% |
| Dental | $35.2 million | Not applicable | 28.7% |
Healthcare backlog, excluding Cantel, was $254.3 million at June 30, 2021, up 54.9% from the prior-year comparable amount. Life Sciences backlog, excluding Cantel, was $92.1 million, up 36.0%.
Cash flow, liquidity, debt, and capital resources
- Cash and cash equivalents were $534.8 million at June 30, 2021, compared with $220.5 million at March 31, 2021.
- Operating cash flow was $97.4 million; capital expenditures and purchases of intangibles were $56.4 million, producing free cash flow of $41.2 million.
- Investing cash outflows were $603.5 million, including $547.4 million for the Cantel acquisition.
- Financing cash inflows were $818.8 million, including $1.35 billion of senior public notes and $650.0 million borrowed under a delayed-draw term loan.
- Total debt was $3.43 billion at June 30, 2021, compared with $1.65 billion at March 31, 2021. Debt-to-total capital was 34.3%, compared with 29.8% at March 31, 2021 and 23.3% at June 30, 2020.
- The senior public notes comprise $675.0 million of 2.70% notes due 2031 and $675.0 million of 3.75% notes due 2051.
- The $168.0 million Cantel convertible notes were subject to cash settlement. Their estimated total settlement value was approximately $366.5 million at June 30, 2021, including a $198.5 million premium liability. The liability remained subject to further fair-value changes.
- STERIS reported no outstanding borrowings under its credit agreement at June 30, 2021 and had $13.0 million of letters of credit outstanding.
- Cash dividends declared and paid were $0.40 per ordinary share, compared with $0.37 in the prior-year quarter. Approximately $333.9 million remained available under the share repurchase authorization.
Material changes versus the prior comparable period
- Cantel materially increased revenue, assets, goodwill, intangible assets, employee-related costs, acquisition expenses, and indebtedness.
- Total assets increased to $12.10 billion from $6.57 billion at March 31, 2021, primarily due to the acquisition.
- Goodwill increased to $5.29 billion from $3.03 billion, and intangible assets increased to $3.05 billion from $898.4 million. Cantel purchase accounting remained preliminary.
- Gross margin improved by 100 basis points due primarily to productivity, lower COVID-19 incremental costs, and acquisitions, partly offset by inflation, currency, product mix, and other adjustments.
- Despite higher revenue and gross profit, operating income and net income declined sharply because of acquisition-related costs, amortization, fair-value adjustments, higher interest expense, and other purchase accounting effects.
- Operating cash flow and free cash flow declined because of anticipated Cantel acquisition-related costs.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical full-year earnings or revenue guidance figure. Management stated that order momentum continued to improve and that demand for certain capital equipment strengthened from the fourth quarter of fiscal 2021. Management also expects Cantel integration to create cost savings through back-office optimization, best-practice sharing, and elimination of redundant public-company costs.
Management stated that COVID-19 had not materially impaired current operations and that manufacturing facilities continued operating. However, demand remains subject to unpredictable fluctuations arising from procedure volumes, public-health restrictions, vaccine distribution, new variants, and supplier capacity.
- Successful integration of Cantel, realization of expected synergies, and control of integration costs are significant uncertainties.
- Higher indebtedness may reduce financial flexibility and increase borrowing costs.
- The Cantel purchase price allocation remains preliminary; changes in valuations, useful lives, goodwill, deferred taxes, or assumed liabilities could materially affect future results.
- The fair value of the Cantel convertible-debt premium liability could materially affect second-quarter earnings. A 5% change in the assumed remaining-period Daily VWAP was estimated to change non-operating expense by approximately $11.3 million.
- STERIS is contesting IRS proposed tax adjustments related to deemed dividend inclusions and withholding tax. The proposed adjustments would result in approximately $50.0 million of cumulative tax liability; no reserve was recorded.
- Dental revenue is concentrated among distributors: three customers represented approximately 35.8% of Dental revenue in the quarter, and the filing identifies distributor concentration as a material risk.
- Legal, regulatory, product liability, tax, supply-chain, pricing, foreign currency, raw-material, and healthcare-demand risks remain relevant. Management believes existing legal reserves are adequate and that pending matters are not expected to materially affect the company as a whole, although outcomes are uncertain.
Important facts for investors to verify
- Whether Cantel integration costs and purchase-accounting adjustments decline as expected and whether anticipated synergies are realized.
- Subsequent fair-value changes and final cash settlement of the Cantel convertible notes.
- Finalization of the Cantel purchase price allocation, including goodwill, intangible assets, deferred taxes, and assumed liabilities.
- Debt repayment capacity, covenant compliance, refinancing needs, and the effect of the increased debt-to-total capital ratio.
- Healthcare and Life Sciences backlog conversion, procedure volumes, and the durability of post-COVID demand recovery.
- Dental customer and distributor concentration, including the potential effect of losing a major distributor.
- Resolution or progression of the IRS tax matters and any related cash-tax exposure.
- Effects of inflation, currency movements, supply constraints, regulatory requirements, and new COVID-19 variants on margins and demand.