STERIS plc Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021. The request references 2020 Q4, but the filing is the fiscal 2021 annual report and includes fourth-quarter fiscal 2021 results. STERIS provides infection prevention, procedural products and services, contract sterilization and testing, and life sciences products through Healthcare, Applied Sterilization Technologies, and Life Sciences segments.
Fourth-Quarter Fiscal 2021
| Metric | Q4 FY2021 | Q4 FY2020 |
|---|---|---|
| Revenue | $873.5 million | $823.0 million |
| Gross profit | $379.8 million | $363.1 million |
| Gross margin | 43.5% | 44.1% |
| Net income attributable to shareholders | $87.4 million | $122.6 million |
| Diluted EPS | $1.02 | $1.43 |
Fourth-quarter results were affected by acquisition-related costs, COVID-19-related costs, amortization and other adjustments. Quarterly figures reflect the retrospective change from LIFO to FIFO inventory accounting where applicable.
Annual Financial Performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $3.108 billion | $3.031 billion | 2.5% increase |
| Gross profit | $1.343 billion | $1.320 billion | 1.8% increase |
| Gross margin | 43.2% | 43.6% | Down 40 basis points |
| Operating income | $548.4 million | $537.0 million | 2.1% increase |
| Net income attributable to shareholders | $397.4 million | $407.7 million | 2.5% decrease |
| Diluted EPS | $4.63 | $4.76 | Decrease |
| Effective tax rate | 23.3% | 18.2% | Up 510 basis points |
- Service revenue increased 2.2% to $1.664 billion; consumable revenue increased 8.0% to $726.0 million; capital equipment revenue declined 1.8% to $717.6 million.
- Operating cash flow increased to $689.6 million from $590.6 million. Free cash flow, a non-GAAP measure, increased to $450.9 million from $380.2 million.
- Capital expenditures were $239.3 million, primarily reflecting Applied Sterilization Technologies expansion projects.
- Cash and cash equivalents were $220.5 million at March 31, 2021, compared with $319.6 million a year earlier.
- Working capital was $633.8 million, down from $720.4 million.
- Long-term indebtedness increased to $1.651 billion from $1.151 billion, and debt-to-total capital increased to 29.8% from 25.3%.
- The company had $992.8 million of unused revolving-credit capacity, excluding $9.8 million of outstanding letters of credit, and reported compliance with its financial covenants.
- Annual dividends increased to $1.57 per share from $1.45. Share repurchases were suspended in April 2020; $333.9 million remained authorized at year-end.
Segment Results and Material Changes
| Segment | FY2021 Revenue | Year-over-year change | FY2021 Operating Margin |
|---|---|---|---|
| Healthcare | $1.954 billion | Down 1.6% | 21.9% |
| Applied Sterilization Technologies | $685.9 million | Up 9.4% | 45.3% |
| Life Sciences | $467.6 million | Up 12.1% | 38.7% |
- Healthcare was pressured by deferred surgical procedures and reduced customer capital spending during the COVID-19 pandemic. Consumable revenue increased 5.0%, partly offsetting declines in capital equipment and service revenue.
- AST benefited primarily from higher volume and increased demand for personal protective equipment-related services.
- Life Sciences benefited from pharmaceutical customers focused on vaccines and biologics, as well as favorable pricing, mix and currency effects.
- Backlog increased to $286.2 million from $242.5 million, including Healthcare backlog of $206.3 million and Life Sciences backlog of $79.9 million.
- STERIS acquired Key Surgical for $853.2 million, acquired the remaining interest in another investment for approximately $78.0 million, and completed two additional tuck-in acquisitions. Acquisition and integration costs were $35.6 million, including $18.1 million related to Cantel.
- The company voluntarily changed certain inventory costing from LIFO to FIFO, retrospectively increasing fiscal 2021 net income attributable to shareholders by approximately $1.5 million and increasing March 31, 2021 inventory by approximately $18.0 million.
Outlook, Risks and Unusual Items
Management expects to continue cost management, internal product and service development, capacity investment and acquisitions. The company expected to close its Cantel Medical acquisition on June 2, 2021.
- The Cantel transaction was valued at approximately $3.6 billion of equity value and $4.6 billion of enterprise value. STERIS expected approximately $2.1 billion of new debt financing, including a $750 million delayed-draw term loan and $1.35 billion of senior notes issued April 1, 2021.
- Management expects approximately $110 million of annualized pre-tax cost synergies within four fiscal years after closing, but cautions that the transaction could be dilutive, delayed, more expensive than expected or not completed.
- COVID-19 caused deferrals of surgical procedures, demand volatility, supply-chain disruption and incremental costs of $25.8 million in fiscal 2021. The ultimate financial impact remained uncertain.
- Key risks include regulatory requirements and product approvals, recalls and product liability, competition and pricing pressure, raw-material availability, dependence on ethylene oxide and cobalt-60, cybersecurity, foreign currency exposure, tax disputes and acquisition integration.
- The IRS proposed adjustments related to 2018 deemed dividend inclusions and withholding tax that could produce approximately $50 million of cumulative tax liability. STERIS intends to contest the proposed adjustments and had not recorded a reserve.
- The company recognized a $2.0 million pre-tax loss on the sale of an Applied Sterilization Technologies laboratory and reported a fiscal 2021 restructuring credit of $3.0 million.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Controls for entities acquired during fiscal 2021 were excluded from management's assessment; those businesses represented approximately 4% of total assets and 1% of revenue.
Important Facts for Investors to Verify
- Completion, financing, integration costs and realized synergies from the Cantel acquisition.
- Post-acquisition leverage, debt maturities, interest costs and covenant headroom.
- Recovery of Healthcare procedure volumes and capital equipment demand after COVID-19-related deferrals.
- Sustainability of AST and Life Sciences growth and the effect of pandemic-related demand normalization.
- Resolution and cash-tax impact of the IRS proposed $50 million tax adjustment.
- Impact of the LIFO-to-FIFO accounting change when comparing historical margins, earnings and inventory balances.
- Exposure to regulatory action involving ethylene oxide sterilization, product approvals, recalls and environmental compliance.
- Whether improving operating cash flow and free cash flow remain sufficient to fund dividends, capital expenditures, acquisitions and debt repayment.