STERIS plc Form 10-Q Summary
Business context and reporting period
STERIS plc is a global provider of infection-prevention products and services serving healthcare, life sciences, medical-device, pharmaceutical, and dental customers. The filing covers the three and six months ended September 30, 2021, representing the second quarter and first half of fiscal 2022. Fiscal years end March 31.
On June 2, 2021, STERIS acquired Cantel Medical for total consideration of approximately $3.6 billion, including cash, STERIS shares, and assumed equity compensation. Cantel added the Dental segment and expanded STERIS’s endoscopy and infection-prevention offerings. Purchase accounting remained preliminary at September 30, 2021.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Six months ended September 30, 2021 | Six months ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $1,197.0 million | $756.1 million | $2,165.4 million | $1,425.1 million |
| Gross profit | $480.3 million | $330.0 million | $906.6 million | $617.4 million |
| Gross margin | 40.1% | 43.6% | 41.9% | 43.3% |
| Operating income | $116.5 million | $141.3 million | $130.8 million | $257.1 million |
| Net income attributable to shareholders | $69.8 million | $105.9 million | $48.0 million | $195.5 million |
| Diluted EPS | $0.69 | $1.23 | $0.50 | $2.28 |
Revenue increased 58.3% in the quarter and 52.0% year to date. Growth reflected organic expansion, Cantel and other acquisitions, and favorable currency movements. Product revenue increased to $685.2 million in the quarter, while service revenue increased to $511.7 million.
Operating income and earnings declined despite higher revenue because of acquisition and integration costs, acquired-intangible amortization, inventory and property fair-value step-up amortization, higher interest expense, and the fair-value adjustment on Cantel convertible debt. The effective tax rate increased to 22.3% for the quarter and 21.3% year to date, compared with 20.8% and 19.3%, respectively, in the prior-year periods.
Cash flow, liquidity, debt, and capital structure
- Net cash provided by operating activities was $268.8 million for the first six months, compared with $296.1 million in the prior-year period.
- Free cash flow was $135.8 million, compared with $185.6 million in the prior-year period.
- Capital expenditures were $133.4 million, compared with $110.7 million in the prior-year period.
- Cash used for the Cantel acquisition, net of cash acquired, was $547.4 million.
- Cash and cash equivalents were $383.5 million at September 30, 2021, compared with $220.5 million at March 31, 2021.
- Total debt was $3.44 billion at September 30, 2021, compared with $1.65 billion at March 31, 2021. Long-term debt was $3.42 billion.
- STERIS issued $1.35 billion of senior public notes, consisting of $675 million of 2.70% notes due 2031 and $675 million of 3.75% notes due 2051, and borrowed $650 million under a delayed-draw term loan.
- The debt-to-total-capital ratio was 34.5% at September 30, 2021, compared with 29.8% at March 31, 2021 and 21.8% at September 30, 2020.
- Cash dividends declared were $0.43 per share for the quarter and $0.83 per share year to date. The company paid $77.1 million of dividends during the first six months.
- Approximately $333.9 million remained available under the authorized share-repurchase program, although program repurchases were suspended during the quarter.
Material changes versus the prior comparable period
- The Cantel acquisition added approximately $312.9 million of revenue and generated an operating loss of approximately $57.9 million in the quarter; for the acquisition-to-date period, Cantel contributed $414.7 million of revenue and an operating loss of $191.1 million.
- Acquisition and integration expenses were $17.4 million in the quarter and $158.4 million year to date, compared with $1.1 million and $2.4 million, respectively, in the prior-year periods.
- Amortization of acquired intangible assets increased to $74.8 million in the quarter and $116.5 million year to date, compared with $22.0 million and $39.5 million, respectively.
- Amortization of inventory and property fair-value step-ups was $69.5 million in the quarter and $94.3 million year to date.
- Gross margin declined because acquisition-related effects, inflation, and currency movements outweighed pricing, mix, and other favorable factors. Product margin fell to 37.6% from 48.2% in the quarter, while service margin increased to 43.5% from 39.9%.
- Interest expense increased to $23.0 million in the quarter and $44.8 million year to date, primarily because of acquisition-related borrowings.
- The company recorded $4.9 million in the quarter and $27.8 million year to date of fair-value expense related to the Cantel convertible-debt premium liability. The liability was settled for approximately $371.4 million during the first half.
- Other comprehensive loss was $68.9 million in the quarter and $44.5 million year to date, primarily from currency translation.
Segments and operating trends
| Segment | Q2 2021 revenue | Q2 2021 operating income |
|---|---|---|
| Healthcare | $744.1 million | $160.4 million |
| Applied Sterilization Technologies | $204.9 million | $99.8 million |
| Life Sciences | $132.3 million | $57.5 million |
| Dental | $115.6 million | $32.4 million |
Healthcare revenue increased 58.0% in the quarter, Applied Sterilization Technologies increased 20.8%, and Life Sciences increased 14.4%. Healthcare backlog excluding Cantel was $311.2 million at September 30, 2021, and Life Sciences backlog excluding Cantel was $98.3 million. The Dental segment’s top three customers represented approximately 40.6% of quarterly Dental revenue and 39.5% year to date.
Guidance, outlook, commentary, and risks
The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Management stated that order momentum continued to improve and that demand for certain capital equipment products strengthened from the fourth quarter of fiscal 2021. Management also expects to pursue organic growth supplemented by acquisitions and believes it has maintained liquidity and financial flexibility during the pandemic.
- COVID-19 continues to create uncertainty in demand, medical-procedure volumes, supply chains, labor availability, material costs, and inflation. Management reported that operations continued without a material overall impact during the period, but future effects remain difficult to forecast.
- Supply-chain disruptions contributed to shipment delays and higher backlog, while labor scarcity and inflation pressured costs.
- Successful integration of Cantel, realization of expected synergies, and completion of preliminary purchase accounting remain significant execution matters.
- Higher indebtedness may reduce financial flexibility, increase borrowing costs, and expose the company to rating-agency or credit-market risk.
- Dental revenue is concentrated among a limited number of distributors; loss of a major customer could materially affect the segment.
- The company is contesting IRS proposed adjustments relating to deemed dividend inclusions and withholding tax. The proposed cumulative tax liability is approximately $50 million; no reserve has been established. A separate tax settlement is estimated at approximately $12 million across fiscal years 2016 through 2020.
- Legal proceedings, product-liability claims, regulatory matters, tax audits, currency movements, pricing pressure, changing regulations, and potential changes in tax law could affect future results.
Most important facts for investors to verify
- Whether Cantel integration costs, operating losses, and fair-value step-up charges decline as expected and whether anticipated synergies are realized.
- The final Cantel purchase-price allocation, including goodwill, intangible assets, deferred taxes, and any resulting changes to amortization or earnings.
- Revenue growth excluding Cantel and other acquisitions, including organic growth by segment and the sustainability of backlog conversion.
- Gross-margin recovery in light of inflation, supply-chain constraints, pricing, product mix, and acquisition-related effects.
- Debt repayment capacity, covenant compliance, interest-rate exposure, and the effect of the higher debt-to-total-capital ratio on future capital allocation.
- The outcome of the IRS proposed tax adjustments and any changes in global tax laws or interpretations.
- COVID-19 developments, procedure volumes, labor availability, supply-chain performance, and demand from dental distributors.