STERIS plc 10-Q Summary
Business context and reporting period
STERIS provides infection-prevention, procedural, sterilization, testing, equipment, maintenance, repair, and related services to healthcare, pharmaceutical, and life-sciences customers. This filing covers the three months ended June 30, 2020, the first quarter of fiscal 2021, compared with the first quarter of fiscal 2020. The company reports Healthcare, Applied Sterilization Technologies, and Life Sciences segments; prior-period segment data was recast following the combination of the former Healthcare Products and Healthcare Specialty Services segments.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $668.9 million | $696.8 million | Down 4.0% |
| Gross profit | $285.6 million | $305.8 million | Down 6.6% |
| Gross margin | 42.7% | 43.9% | Down 120 basis points |
| Operating income | $114.0 million | $110.1 million | Up 3.6% |
| Net income attributable to shareholders | $88.2 million | $84.6 million | Up 4.3% |
| Diluted EPS | $1.03 | $0.99 | Up 4.0% |
| Operating cash flow | $134.1 million | $109.3 million | Up $24.8 million |
| Free cash flow | $67.4 million | $59.6 million | Up $7.8 million |
Service revenue declined 5.5% to $367.8 million and consumable revenue declined 10.9% to $142.6 million. Capital equipment revenue increased 7.4% to $158.5 million, including $14.6 million of previously deferred revenue recognized after a change in the assessment of performance obligations.
Operating income benefited from a 13.2% reduction in selling, general, and administrative expense, partly reflecting lower travel, meeting, and compensation costs during the pandemic. Research and development expense increased 4.1%. The effective tax rate rose to 17.5% from 14.7%, primarily because a greater proportion of profits was earned in higher-tax jurisdictions.
At June 30, 2020, cash and cash equivalents were $255.6 million, compared with $319.6 million at March 31, 2020. Total debt was $1.057 billion, including $35.0 million of short-term debt and $1.022 billion of long-term debt, versus $1.151 billion at March 31, 2020. The debt-to-total-capital ratio was 23.3%, compared with 25.3% at March 31, 2020 and 27.2% at June 30, 2019. The company had $180.6 million outstanding under its credit agreement and $8.4 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Healthcare revenue decreased 10.3% to $399.7 million, primarily because COVID-19 reduced elective and deferrable surgical procedures. Healthcare operating income declined to $82.4 million from $90.5 million, while segment margin increased to 20.6% from 20.3% because of reduced expenditures.
- Applied Sterilization Technologies revenue decreased 1.2% to $152.4 million. Operating income declined to $64.0 million from $68.0 million, and margin decreased to 42.0% from 44.1%, primarily because of customer product mix.
- Life Sciences revenue increased 20.8% to $116.9 million, driven by demand from pharmaceutical customers focused on vaccines and biologics. Operating income increased to $48.5 million from $33.0 million, and margin increased to 41.5% from 34.1%.
- COVID-19 incremental costs were $8.7 million, including enhanced cleaning, personal protective equipment, event cancellation fees, and related payroll costs. Management attributed 120 basis points of gross-margin pressure to these costs and 100 basis points to lower productivity.
- Operating cash flow and free cash flow improved primarily because of working-capital improvements and deferred tax payments under government COVID-19 relief programs. Capital expenditures increased to $66.9 million from $49.8 million, mainly for Applied Sterilization Technologies expansion projects.
- The company paid a quarterly dividend of $0.37 per share, up from $0.34, and paid $31.5 million in dividends. Share repurchases were suspended on April 9, 2020; $333.9 million remained authorized at quarter-end.
Outlook, commentary, risks, and unusual items
Management did not provide specific quarterly or full-year financial guidance in the filing. Management stated that demand remained unpredictable: healthcare demand was reduced by deferred procedures, while some Life Sciences and pharmaceutical demand increased. Manufacturing facilities continued operating and meeting demand for essential products and services.
The full financial impact of COVID-19 could not be reasonably estimated. Management implemented remote work where possible, additional facility safety measures, a temporary hiring freeze, suspended nonessential travel, suspended share repurchases, and deferred certain planned capital expenditures while continuing planned expansion projects. Management stated that these actions were not expected to impair long-term revenue generation or the ability to meet financial obligations.
Management decided not to refinance a senior note due in August 2020 and planned to use cash on hand to repay it. Remaining performance obligations were approximately $930.0 million at June 30, 2020, with approximately 48% expected to be recognized within one year and 46% beyond one year; the balance had not been scheduled for delivery.
STERIS is contesting IRS proposed adjustments concerning the deductibility of interest on certain intercompany debt for fiscal years 2016 through 2018. The proposed adjustments would result in cumulative tax liability of approximately $40.0 million. No reserve had been established; management did not expect an unfavorable outcome to materially affect consolidated financial position, although it could materially affect results and cash flow for a period.
Other risks include further COVID-19 effects, reduced healthcare procedure volumes, supply and production disruptions, currency and commodity volatility, regulatory and product-liability matters, tax-law changes, litigation, customer order delays or cancellations, pricing pressure, and the ability to realize expected benefits from acquisitions, divestitures, and restructuring. The company stated that existing litigation and claims were adequately reserved where probable and estimable, but ultimate outcomes remain uncertain.
Important facts for investors to verify
- Whether elective procedure volumes recover and Healthcare revenue and backlog improve; Healthcare backlog was $164.2 million, down 12.3% year over year.
- Whether elevated Life Sciences demand related to vaccines and biologics is sustained; Life Sciences backlog was $67.7 million, up 15.1% year over year.
- The timing and cash impact of the August 2020 senior-note repayment and the company’s post-repayment liquidity.
- Whether COVID-19 costs, productivity effects, and gross-margin pressure persist as operations normalize.
- The resolution and potential cash-tax impact of the approximately $40.0 million IRS proposed adjustments.
- The effect of the $14.6 million revenue-recognition change on future comparisons and capital-equipment revenue trends.
- Future capital spending, free cash flow conversion, dividend capacity, and any resumption of share repurchases.