STERIS plc Form 10-Q Summary
Business context and reporting period
STERIS provides infection-prevention products and services across Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2022, representing the second quarter and first half of fiscal 2023. The prior comparable periods ended September 30, 2021.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $1,200.5 million | $1,197.0 million | $2,357.0 million | $2,165.4 million |
| Gross profit | $532.3 million | $480.3 million | $1,050.1 million | $906.6 million |
| Gross margin | 44.3% | 40.1% | 44.6% | 41.9% |
| Operating income (loss) | $(306.4) million | $116.5 million | $(148.0) million | $130.8 million |
| Net income (loss) attributable to shareholders | $(315.3) million | $69.8 million | $(204.0) million | $48.0 million |
| Diluted EPS | $(3.15) | $0.69 | $(2.04) | $0.50 |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $335.6 million | $268.8 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $138.2 million | $135.8 million |
At September 30, 2022, cash and cash equivalents were $258.3 million, compared with $348.3 million at March 31, 2022. Total debt was $3.025 billion, including $151.0 million of short-term debt and $2.874 billion of long-term debt. Debt-to-total capital was 34.3%, compared with 32.1% at March 31, 2022. The company reported $13.5 million of letters of credit and approximately $107.9 million of commercial commitments.
Capital expenditures were $198.7 million for the first six months, compared with $133.4 million in the prior-year period. The company paid $90.0 million in dividends, or $0.90 per share, and repurchased approximately $69.9 million of ordinary shares during the first six months. Approximately $249.4 million remained available under the repurchase authorization at September 30, 2022.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.3%, while six-month revenue increased 8.8%. Six-month growth reflected organic growth, $166.2 million of added Cantel volume, and pricing, partly offset by foreign-exchange effects and divestitures.
- Quarterly service revenue increased 4.4% and capital equipment revenue increased 6.5%, while consumable revenue declined 7.7%. For the six-month period, service, consumable, and capital equipment revenue increased 6.3%, 11.2%, and 10.6%, respectively.
- Gross margin improved by 420 basis points in the quarter and 270 basis points for the first half. Favorable mix, pricing, and prior-year Cantel inventory fair-value step-up comparisons outweighed inflation, productivity, and supply-chain pressures.
- Operating results were substantially affected by a non-cash $490.6 million goodwill impairment charge related to the Dental segment. Excluding this item, reported operating performance was materially stronger than the GAAP operating loss suggests, although the filing does not present a single adjusted operating-income figure in the supplied text.
- SG&A declined 6.3% in the quarter and 10.9% for the first half, primarily because prior-year Cantel acquisition and integration costs were much higher. Research and development expense increased 32.4% and 34.2%, respectively.
- Operating cash flow increased $66.8 million for the first half, while free cash flow increased $2.4 million because higher operating cash flow was largely offset by increased capital spending.
- Applied Sterilization Technologies produced the strongest quarterly revenue growth, up 13.4%. Healthcare revenue declined 1.5% in the quarter but increased 6.3% for the first half. Life Sciences and Dental revenue declined in the quarter.
Outlook, management commentary, risks, and unusual items
- The filing does not provide clear quantitative full-year revenue or earnings guidance.
- Management reported that approximately $70 million of Healthcare and Life Sciences capital equipment shipments were delayed during the quarter because of supply-chain disruptions. Healthcare backlog was $533.1 million and Life Sciences backlog was $99.5 million at September 30, 2022.
- Inflation in material, labor, energy, and other costs, supply shortages, shipping delays, foreign-currency volatility, and COVID-19-related disruptions remain significant operating risks. Management stated that it did not believe COVID-19 would impair the company’s long-term ability to generate revenue or meet financial obligations.
- Goodwill impairment testing was triggered by rising interest rates, inflation, and uncertainty regarding customer and patient behavior. The entire Dental segment goodwill balance was impaired, reducing total goodwill to $3.705 billion.
- The IRS has proposed adjustments related to deemed dividend inclusions and withholding tax that could result in approximately $50 million of cumulative tax liability. STERIS is contesting the assertions and has not recorded a reserve; an unfavorable outcome is not expected to materially affect financial position but could materially affect results or cash flow in a single period.
- STERIS reports ordinary-course litigation, product liability, regulatory, tax, employment, and commercial claims. Management believes reserves are adequate and that pending matters are not expected to have a material adverse effect, but outcomes remain uncertain.
- The company completed a Healthcare tuck-in acquisition for approximately $21.9 million, including $6.7 million of contingent deferred consideration.
- The independent registered public accounting firm performed a review, not an audit, of the interim financial statements and reported no material modifications were necessary. Management concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether supply-chain delays convert into future Healthcare and Life Sciences revenue and whether the reported backlog is ultimately shipped without significant margin pressure.
- The sustainability of gross-margin improvement after separating favorable acquisition-accounting comparisons from recurring pricing, mix, and productivity gains.
- The Dental segment’s post-impairment operating trajectory and whether further goodwill impairment indicators emerge.
- Interest-rate exposure, floating-rate debt costs, debt repayment capacity, and available liquidity following the decline in cash balances.
- The outcome and potential cash impact of the IRS tax dispute and other legal or regulatory matters.
- The pace and return on elevated capital expenditures, particularly in Applied Sterilization Technologies.
- The extent to which reported six-month growth depends on Cantel acquisition contribution versus organic growth and currency movements.