STERIS plc Form 10-K Summary
Business context and reporting period
STERIS provides infection-prevention, procedural, healthcare, life-sciences, and contract sterilization products and services through four segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. The filing covers the fiscal year ended March 31, 2019. The request references 2018 Q4; the filing’s fourth quarter is the quarter ended March 31, 2019, while the principal reported results are for fiscal 2019.
On March 28, 2019, the company completed its redomiciliation from the United Kingdom to Ireland. The transaction inserted a new Irish holding company above the existing group and did not change shareholders’ economic rights.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $2,782.2 million | $2,620.0 million | 6.2% |
| Gross profit | $1,175.4 million | $1,092.7 million | 7.6% |
| Gross margin | 42.2% | 41.7% | +50 basis points |
| Operating income | $411.5 million | $399.9 million | 2.9% |
| Net income attributable to shareholders | $304.1 million | $290.9 million | 4.5% |
| Diluted EPS | $3.56 | $3.39 | 5.0% |
| Cash flow from operations | $539.5 million | $457.6 million | 17.9% |
| Free cash flow | $355.4 million | $294.3 million | 20.8% |
Product revenue increased 6.2% to $1,296.0 million and service revenue increased 6.2% to $1,486.1 million. Capital equipment revenue grew 8.0%, consumables 4.1%, and service revenue 6.2%. The United States generated $1,976.8 million of revenue, or approximately 71% of total revenue.
Estimated operating margin was approximately 14.8% and net margin approximately 10.9%. Segment operating margins were 24.2% for Healthcare Products, 12.6% for Healthcare Specialty Services, 34.9% for Life Sciences, and 40.0% for Applied Sterilization Technologies.
Cash and cash equivalents were $220.6 million at March 31, 2019, compared with $201.5 million a year earlier. Working capital was $588.5 million. Long-term debt was $1,183.2 million, down from $1,316.0 million, and debt-to-total capital declined to 27.1% from 29.1%. The company had $693.4 million of unused availability under its $1.0 billion revolving credit facility, after $4.8 million of letters of credit. The facility matures March 23, 2023, and the company reported compliance with its financial covenants.
Capital expenditures were $189.7 million, compared with $165.5 million in fiscal 2018. The company expects fiscal 2020 capital expenditures of approximately $280.0 million, primarily for facility expansions and maintenance, particularly in Applied Sterilization Technologies. Fiscal 2019 dividends declared were $1.33 per share, and the quarterly dividend was increased to $0.34 per share. The company repurchased 651,093 ordinary shares for $72.1 million, excluding taxes and fees.
Material changes versus the prior comparable period
- All four business segments reported revenue growth: Healthcare Products 4.9%, Healthcare Specialty Services 8.7%, Life Sciences 4.7%, and Applied Sterilization Technologies 8.2%.
- Operating income growth was limited by the Fiscal 2019 Restructuring Plan, which generated $40.7 million of pretax costs, including $31.0 million in restructuring expense and $9.7 million in cost of revenues.
- The restructuring plan includes closing manufacturing facilities in Brazil and England, rationalizing products, eliminating fewer than 200 positions, and relocating production during fiscal 2020. Approximately $3.0 million of additional restructuring costs are expected in fiscal 2020 and beyond.
- SG&A increased 6.0%, partly because of restructuring costs and a $16.2 million impairment charge related to a tradename being phased out under a new branding strategy.
- Interest expense declined to $45.0 million from $50.6 million because of lower debt levels, lower rates on certain notes, and refinancing of higher-cost debt.
- Backlog increased to $215.2 million from $193.9 million, including $154.5 million in Healthcare Products and $60.7 million in Life Sciences. A significant portion was expected to ship in fiscal 2020.
- The company adopted new revenue-recognition guidance in fiscal 2019. The adoption produced a $5.6 million cumulative reduction to opening retained earnings and did not materially affect fiscal 2019 income.
- Fourth-quarter fiscal 2019 revenue was $768.2 million, compared with $716.0 million in the fourth quarter of fiscal 2018. Fourth-quarter net income attributable to shareholders was $108.7 million, compared with $73.6 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expects to continue cost management, internal product and service development, capacity investment, and potential acquisitions. No specific fiscal 2020 revenue or earnings guidance is provided in the filing. Currency movements are expected to continue creating variability in revenue and costs.
- Key operating risks include international currency exposure, Brexit and other geopolitical developments, healthcare reimbursement and government funding, competition and pricing pressure, raw-material availability and costs, and reliance on suppliers for EO and cobalt-60 used in sterilization operations.
- The company is subject to extensive FDA, EPA, NRC, European, and other regulatory requirements. A 2012 FDA warning letter concerning chemical indicators manufactured in the United Kingdom remained disclosed; the company stated that remediation measures had been finalized and that it did not expect a material financial impact.
- In May 2019, the IRS issued proposed adjustments concerning the deductibility of interest on certain intercompany debt for fiscal years 2016 and 2017. The potential tax liability was approximately $25.0 million. STERIS intends to contest the assertions and had not recorded a reserve.
- The company faces ongoing product liability, regulatory, environmental, tax, employment, intellectual-property, and other litigation risks. Management believes probable and estimable matters are adequately reserved and that current proceedings are not expected to have a material adverse effect, but outcomes remain uncertain.
- The U.S. medical-device excise tax remained suspended through calendar 2019. Without further legislative action, STERIS expected the tax to resume in the fourth quarter of fiscal 2020.
- Operating lease commitments totaled $162.4 million, contractual obligations totaled $1.55 billion, and commercial commitments totaled $73.8 million at March 31, 2019.
- Approximately $1.3 billion of undistributed foreign-subsidiary earnings were reported as indefinitely reinvested; related additional taxes were not practicably estimable. The company also continued to face uncertainty regarding the tax treatment of its Irish redomiciliation.
Important facts for investors to verify
- Whether the planned fiscal 2020 facility closures and product relocations deliver the expected savings without disrupting production or customer service.
- Execution of the approximately $280 million fiscal 2020 capital expenditure program and its effect on free cash flow.
- Progress on backlog conversion, particularly the $215.2 million capital-equipment backlog.
- The outcome and potential cash impact of the approximately $25 million IRS proposed tax adjustment.
- Future effects of foreign-currency movements, Brexit, tariffs, raw-material supply constraints, and the possible reinstatement of the medical-device excise tax.
- Debt maturities, covenant compliance, and the company’s ability to fund dividends, share repurchases, acquisitions, and expansion while maintaining liquidity.
- The comparability of fiscal 2019 results after restructuring charges, the tradename impairment, redomiciliation costs, acquisition-related amortization, and other adjustments.