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. Its reportable segments for fiscal 2020 were Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. The filing covers the fiscal year ended March 31, 2020, not a standalone calendar 2019 fourth quarter. The filing separately reports fourth-quarter fiscal 2020 results for the quarter ended March 31, 2020.
STERIS completed its redomiciliation from the United Kingdom to Ireland on March 28, 2019. The company had approximately 13,000 employees and served customers in more than 100 countries.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $3,030.9 million | $2,782.2 million | 8.9% increase |
| Gross profit | $1,319.9 million | $1,175.4 million | 12.3% increase |
| Gross margin | 43.5% | 42.2% | 130 basis-point increase |
| Operating income | $537.0 million | $411.5 million | 30.5% increase |
| Operating margin | 17.7% | 14.8% | Improved |
| Net income attributable to shareholders | $407.6 million | $304.1 million | 34.1% increase |
| Diluted EPS | $4.76 | $3.56 | 33.7% increase |
| Net cash from operations | $590.6 million | $539.5 million | 9.5% increase |
| Free cash flow | $380.2 million | $355.4 million | Increase |
| Cash and cash equivalents | $319.6 million | $220.6 million | Increase |
| Long-term debt | $1,150.5 million | $1,183.2 million | Decrease |
| Debt-to-total capital | 25.3% | 27.1% | Improved |
Fiscal 2020 income tax expense was $90.9 million, with an effective tax rate of 18.2%, compared with 17.4% in fiscal 2019. The company declared dividends of $1.45 per share, up from $1.33 per share.
Segment performance and material changes
- Healthcare Products: Revenue increased 6.3% to $1,423.2 million; operating income increased 10.1% to $356.4 million; operating margin rose to 25.0% from 24.2%.
- Healthcare Specialty Services: Revenue increased 10.5% to $563.6 million, while operating income was essentially flat at $64.2 million. Margin declined to 11.4% from 12.6% due to capacity investments.
- Life Sciences: Revenue increased 10.1% to $416.9 million; operating income increased 9.1% to $144.1 million. Margin declined modestly to 34.6% from 34.9% due primarily to product mix.
- Applied Sterilization Technologies: Revenue increased 13.0% to $627.1 million; operating income increased 22.1% to $270.9 million; margin rose to 43.2% from 40.0% on higher volumes.
- Backlog increased to $242.5 million at March 31, 2020, from $215.2 million, including $170.1 million in Healthcare Products and $72.4 million in Life Sciences.
- STERIS completed several tuck-in acquisitions during fiscal 2020, using approximately $109.8 million of cash for acquisitions. It also sold its Healthcare Specialty Services operations in China, which had annual revenue of approximately $5.0 million.
- The company’s fiscal 2019 restructuring plan generated total restructuring-related costs of approximately $43.9 million since inception, including $3.1 million in fiscal 2020 versus $40.7 million in fiscal 2019.
- Effective April 1, 2020, Healthcare Products and Healthcare Specialty Services were combined into a single Healthcare segment, resulting in three operating segments going forward.
Quarter ended March 31, 2020
| Metric | Q4 Fiscal 2020 | Q4 Fiscal 2019 |
|---|---|---|
| Revenue | $823.0 million | $768.2 million |
| Gross profit | $364.1 million | $334.7 million |
| Gross margin | 44.2% | 43.6% |
| Net income attributable to shareholders | $123.3 million | $108.7 million |
| Diluted EPS | $1.44 | $1.27 |
Liquidity, debt, and cash deployment
- Capital expenditures were $214.5 million, up from $189.7 million, primarily for Applied Sterilization Technologies and Healthcare Specialty Services expansion projects.
- Cash used for acquisitions was $109.8 million, compared with $13.3 million in fiscal 2019.
- The company had $275.4 million outstanding under its revolving Credit Agreement and $717.8 million of unused availability, after $6.8 million of letters of credit.
- Senior notes totaled $878.4 million. Total debt maturities were $35.0 million in fiscal 2021 and $366.4 million in fiscal 2023; the fiscal 2021 maturity was classified as long term because management intended to refinance it.
- STERIS was in compliance with all financial covenants at March 31, 2020.
- The company repurchased $40.0 million of ordinary shares and paid $123.0 million of cash dividends during fiscal 2020. Approximately $339.0 million remained available under the repurchase authorization.
Outlook, commentary, risks, and unusual items
Management expected to continue cost management, internal product and service development, capacity investment, and selective acquisitions. However, the COVID-19 pandemic began affecting the business late in fiscal 2020. Deferred elective procedures, facility closures, supply-chain disruptions, altered customer spending, and workforce restrictions were expected to produce unpredictable demand fluctuations in fiscal 2021 and beyond. Management stated that the ultimate financial impact could not be reliably estimated.
- COVID-19 had no material effect on fiscal 2020 full-year operating results, but the filing recorded $0.7 million of incremental COVID-19 costs.
- Key operational risks include regulatory requirements, product recalls or liability claims, EO sterilization restrictions, supply availability for EO and cobalt-60, commodity costs, foreign exchange, cybersecurity, and international operations.
- The IRS proposed adjustments concerning the deductibility of interest on certain intercompany debt for fiscal 2016 through 2018. The company estimated a cumulative potential tax liability of approximately $40 million, contested the adjustments, and recorded no reserve. An unfavorable outcome could be material to results or cash flow for an individual period.
- The company adopted the lease accounting standard in fiscal 2020 and recorded approximately $120.6 million of operating lease right-of-use assets and liabilities at adoption, without a material income-statement or cash-flow effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The audit did not include controls of fiscal 2020 acquisitions, which represented approximately 4% of total assets and 1% of revenue.
Investor verification points
- Verify the filing period: the primary report is fiscal year 2020 ended March 31, 2020, with a separately disclosed fourth quarter.
- Assess the sustainability of the 43.5% gross margin and 17.7% operating margin after restructuring benefits and before the full effects of COVID-19.
- Review the effect of deferred elective procedures and customer demand changes on fiscal 2021 Healthcare results.
- Evaluate refinancing requirements for the $35.0 million August 2020 note maturity and the $366.4 million of fiscal 2023 maturities.
- Monitor the approximately $40 million IRS proposed tax adjustment and any related reserve or cash-tax consequences.
- Reconcile acquisition spending, contingent consideration, backlog, and the transition to the new three-segment reporting structure.