STERIS plc — Fiscal 2024 Second-Quarter Form 10-Q Summary
Business context and reporting period
STERIS is a global provider of healthcare, infection-prevention, sterilization, life sciences, and dental products and services. It reports four segments: Healthcare, Applied Sterilization Technologies (AST), Life Sciences, and Dental. This unaudited Form 10-Q covers the three and six months ended September 30, 2023, the second quarter and first half of fiscal 2024, compared with the corresponding fiscal 2023 periods. STERIS’s fiscal year ends March 31.
Financial performance and key metrics
| Metric | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Six months ended September 30, 2023 | Six months ended September 30, 2022 |
|---|---|---|---|---|
| Total revenue | $1,342.4 million | $1,200.5 million | $2,626.9 million | $2,357.0 million |
| Revenue growth | 11.8% | — | 11.5% | — |
| Gross profit | $593.5 million | $532.3 million | $1,167.0 million | $1,050.1 million |
| Gross margin | 44.2% | 44.3% | 44.4% | 44.6% |
| Operating income (loss) | $185.9 million | $(306.4) million | $374.7 million | $(148.0) million |
| Approximate operating margin | 13.8% | (25.5)% | 14.3% | (6.3)% |
| Net income attributable to shareholders | $115.3 million | $(315.3) million | $238.9 million | $(204.0) million |
| Approximate net margin | 8.6% | (26.3)% | 9.1% | (8.7)% |
| Diluted EPS | $1.16 | $(3.15) | $2.41 | $(2.04) |
| Operating cash flow | Not separately provided | Not separately provided | $427.2 million | $335.6 million |
| Free cash flow | Not separately provided | Not separately provided | $284.7 million | $138.2 million |
Product revenue increased 14.4% in the quarter and 13.3% year to date; service revenue increased 8.6% and 9.2%, respectively. Capital equipment revenue grew 15.5% in the quarter and 18.8% year to date, while consumable revenue grew 13.7% and 10.1%.
Healthcare was the primary growth driver, with revenue of $870.1 million in the quarter, up 18.7%, and $1,688.9 million year to date, up 18.0%. AST revenue grew 1.2% in the quarter and 3.3% year to date. Life Sciences revenue grew 5.8% and 2.5%, respectively. Dental revenue declined 4.9% in the quarter and 4.2% year to date.
Segment operating income was $302.0 million in the quarter and $589.4 million year to date, compared with $285.3 million and $550.1 million in the prior-year periods before corporate costs and specified adjustments. Healthcare operating margin improved to 23.5% in the quarter and 23.8% year to date. AST margin declined to 47.1% in both periods reported, while Life Sciences margin declined year to date to 37.9% and Dental remained under pressure.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $213.8 million at September 30, 2023, compared with $208.4 million at March 31, 2023.
- Total debt was $3.437 billion, including $70.9 million of short-term debt and $3.366 billion of long-term debt, versus $3.079 billion at March 31, 2023.
- Debt-to-total capital was 35.7% at September 30, 2023, compared with 33.6% at March 31, 2023 and 34.3% at September 30, 2022.
- Borrowings under the revolving credit facility were $692.0 million; letters of credit outstanding under the credit agreement were $11.6 million.
- Operating cash flow increased to $427.2 million from $335.6 million. Free cash flow increased to $284.7 million from $138.2 million, reflecting lower capital spending and lower compensation-related cash payments, partly offset by inventory investment.
- Capital expenditures were $149.9 million, compared with $198.7 million in the prior-year period.
- Cash used in investing activities was $672.8 million, primarily due to the $539.8 million BD asset acquisition. Financing activities provided $256.6 million, mainly from net credit-facility borrowings of $391.0 million.
- Dividends paid were $97.8 million, or $0.99 per share, compared with $90.0 million, or $0.90 per share. No purchases occurred under the new $500 million share-repurchase authorization during the first six months.
Material changes versus the prior comparable period
- Results benefited materially from the absence of the $490.6 million Dental goodwill impairment charge recorded in the second quarter of fiscal 2023.
- On August 2, 2023, STERIS acquired surgical instrumentation, laparoscopic instrumentation, and sterilization-container assets from BD for $539.8 million. The transaction was financed with the existing credit facility and generated approximately $202.4 million of preliminary goodwill and $303.6 million of intangible assets. The purchase-price allocation remains preliminary.
- Acquisition and integration charges increased to $16.0 million in the quarter and $18.7 million year to date, primarily because of the BD transaction and a fair-value adjustment related to a building held for sale.
- Gross margin declined modestly because productivity shortfalls and material and labor inflation exceeded pricing and mix benefits. SG&A increased 17.8% in the quarter and 12.4% year to date, driven primarily by compensation, professional fees, and bad-debt expense.
- Interest expense increased $10.8 million in the quarter and $20.5 million year to date because of higher interest rates and higher floating-rate debt balances.
- Dental demand was affected by customer inventory destocking. AST was affected by customer inventory management and lower bioprocessing demand. Healthcare benefited from higher volume, pricing, and BD-related volume.
- Healthcare backlog was $457.1 million at September 30, 2023, down from $533.1 million a year earlier, reflecting strong shipments, shorter lead times, and easing supply-chain constraints. Life Sciences backlog was $91.1 million, down from $99.5 million.
Outlook, risks, contingencies, and unusual items
The filing does not provide a specific full-year revenue, earnings, or cash-flow guidance figure. Management indicated that demand is supported by aging populations, healthcare procedure volumes, infection-prevention needs, pharmaceutical regulatory requirements, and customer efficiency initiatives. Management also noted continuing exposure to inflation, productivity, labor and energy costs, supply availability, customer demand, and foreign-currency movements.
- Approximately $1.580 billion of remaining performance obligations existed at September 30, 2023; management expects approximately 53% to be recognized within one year and 38% beyond one year, with the remainder unscheduled.
- STERIS is involved in ordinary-course product liability, regulatory, commercial, employment, tax, and other legal proceedings. Management believes probable and estimable matters are adequately reserved and that pending matters are not expected to materially affect consolidated results, but outcomes remain uncertain.
- The IRS has asserted 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 established reserves; an unfavorable outcome is not expected to materially affect financial position but could materially affect a single period’s results and cash flows.
- Key risks include acquisition integration, elevated indebtedness, interest rates, pricing and margin pressure, inflation, supply-chain disruption, regulatory requirements, litigation, tax-law changes, foreign currency, geopolitical events, customer destocking, and the potential failure to realize expected acquisition or cost benefits.
- The company held foreign-currency forwards and nickel commodity swaps. These instruments are used for risk management rather than speculation, but changes in their fair value may create earnings volatility because hedge accounting was not elected for certain contracts.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2023, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the BD asset acquisition delivers the expected revenue, margin, tax, and integration benefits, and whether the preliminary purchase-price allocation changes materially.
- The sustainability of Healthcare growth and backlog conversion, particularly as backlog declined year over year.
- Whether pricing offsets inflation, labor, energy, productivity, and supply-chain costs without further gross-margin erosion.
- The trajectory of Dental demand, customer destocking, AST bioprocessing exposure, and Life Sciences volume and margin performance.
- Debt reduction plans, floating-rate exposure, covenant capacity, refinancing needs, and the effect of higher interest expense on future earnings and cash flow.
- The status and potential financial impact of the IRS tax dispute and other regulatory, legal, product-liability, and insurance matters.
- Actual full-year guidance, which is not specified in the provided filing text, and the comparability of reported results after acquisition, currency, and unusual-item adjustments.