STERIS PLC Introduction
In Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A"), we explain the general financial condition and the results of operations for STERIS including: •what factors affect our business; •what our earnings and costs were in each period presented; •why those earnings and costs were different from prior periods; •where our earnings came from; •how this affects our overall financial condition; •what our expenditures for capital projects were; and •where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchases of shares, pay cash dividends and fund future working capital needs. As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the first quarter of fiscal 2022 and fiscal 2021. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year endedMarch 31, 2021 , datedMay 28, 2021 . In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in STERIS. Financial Measures In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements underU.S. GAAP. We sometimes use the following financial measures in the context of this report: backlog; debt-to-total capital; and days sales outstanding. We define these financial measures as follows: •Backlog - We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements. •Debt-to-total capital - We define debt-to-total capital as total debt divided by the sum of total debt and shareholders' equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth. •Days sales outstanding ("DSO") - We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters' revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect. We, at times, may also refer to financial measures which are considered to be "non-GAAP financial measures" underSEC rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted inthe United States . Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies. Additional information regarding these financial measures, including reconciliations of each non- GAAP financial measure, is available in the subsection of MD&A titled, "Non-GAAP Financial Measures." Revenues - Defined As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues: •Revenues - Our revenues are presented net of sales returns and allowances. •Product Revenues - We define product revenues as revenues generated from sales of consumable and capital equipment products. •Service Revenues - We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment. Service revenues also include hospital sterilization services, instrument and scope repairs, as well as revenues generated from contract sterilization and laboratory services offered through our Applied Sterilization Technologies segment. 32 -------------------------------------------------------------------------------- Table of Contents •Capital Equipment Revenues - We define capital equipment revenues as revenues generated from sales of capital equipment, which includes: steam and gas sterilizers, low temperature liquid chemical sterilant processing systems, pure steam/water systems, surgical lights and tables, and integrated OR. •Consumable Revenues - We define consumable revenues as revenues generated from sales of the consumable family of products, which includes dedicated consumables including V-PRO, SYSTEM 1 and 1E consumables, gastrointestinal endoscopy accessories, sterility assurance products, barrier protection solutions, cleaning consumables, dental and surgical instruments. •Recurring Revenues - We define recurring revenues as revenues generated from sales of consumable products and service revenues. General Company Overview and Executive Summary STERIS is a leading global provider of products and services that meet the needs of healthcare growth areas: procedures, devices, pharmaceuticals and dental. Our MISSION IS TO HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare and life science products and services around the globe. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal ("GI") endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, dental instruments and tools, instrument and scope repair solutions, laboratory testing services, outsourced reprocessing, and capital equipment products, such as sterilizers and surgical tables, automated endoscope reprocessors, and connectivity solutions such as operating room ("OR") integration. We operate and report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income. We describe our business segments in Note 9 to our consolidated financial statements, titled "Business Segment Information." The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventive screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services. Acquisitions. OnJune 2, 2021 , we acquired all outstanding equity interestsCantel Medical Corp. ("Cantel") through aU.S. subsidiary. Cantel, headquartered inLittle Falls, New Jersey , with approximately 3,700 employees, is a global provider of infection prevention products and services primarily to endoscopy and dental Customers. We believe that the acquisition will strengthen STERIS's leadership in infection prevention by bringing together two complementary businesses able to offer a broader set of Customers a more diversified selection of infection prevention, endoscopy and sterilization products and services. Cantel is being integrated into our existing Healthcare and Life Sciences segments. Cantel's Dental business extends our business into a new Customer segment where there is an increasing focus on infection prevention protocols and processes. This business will be reported as the Dental segment. Additionally, the acquisition is expected to result in cost savings from optimizing global back-office infrastructure, leveraging best-demonstrated practices across locations and eliminating redundant public company costs. Fiscal 2022 first quarter acquisition and integration expenses related to the Cantel acquisition totaled$140.3 million and are reported in the selling, general and administrative expenses line of our Consolidated Statements of Income. The results of Cantel are only reflected in the results of operations and cash flows fromJune 2, 2021 forward, which will affect results of comparability to the prior period operations and cash flows. 33 -------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic. We do not believe that the COVID-19 pandemic has had a material impact on our operations, as we have been able to continue to operate our manufacturing facilities and meet the demand for essential products and services of our Customers. In response to the COVID-19 pandemic, we implemented several measures that we believe helped us protect the health and safety of our employees, preserve liquidity and enhance our financial flexibility. We allowed employees to work remotely when possible and implemented additional safety measures in compliance with applicable regulations to allow personnel to continue to work in our facilities. We have successfully managed our liquidity throughout the COVID-19 pandemic and continue to invest in expansion projects as planned. We obtained additional funding in the second half of fiscal 2021 to continue to advance our growth strategy to supplement organic growth with acquisitions. As a result, we do not believe that the COVID-19 pandemic or the actions we took in response to the pandemic will negatively impact our long-term ability to generate revenues or meet existing and future financial obligations. For additional information and our risk factors related to the COVID-19 pandemic, please refer to our Annual Report on Form 10-K for the year endedMarch 31, 2021 datedMay 28, 2021 . Highlights. Revenues for the first quarter of fiscal 2022 were$968.4 million , representing an increase of 44.8% over the first quarter of fiscal 2021 revenues of$668.9 million with growth in all segments. The increase was primarily related to organic growth in the Healthcare and Applied Sterilization Technologies segments, added volume from Cantel and other recent acquisitions, and favorable fluctuations in currencies. Additionally, during the prior year period we experienced reduced demand for our products and services resulting from the reduction of deferrable surgical procedures as a result of the COVID-19 pandemic. Gross margin percentage for the first quarter of fiscal 2022 was 44.0%, compared to 43.0% for the first quarter of fiscal 2021. Favorable impacts from increased productivity, incremental costs associated with COVID-19 in the prior year period and our recent acquisitions were partially offset by unfavorable impact from inflation, fluctuations in currencies, and mix and other adjustments. Operating income during the first quarter of fiscal 2022 was$14.3 million , compared to$115.8 million for the first quarter of fiscal 2021. Contributing to the decline in operating income was$140.3 million in acquisition and integration expenses in the fiscal 2022 period, related to our acquisition of Cantel. Cash flows from operations were$97.4 million and free cash flow was$41.2 million in the first three months of fiscal 2022 compared to cash flows from operations of$134.1 million and free cash flow of$67.4 million in the first three months of fiscal 2021 (see the subsection below titled "Non-GAAP Financial Measures" for additional information and related reconciliation of cash flows from operations to free cash flow). The fiscal 2022 decreases in cash flows from operations and free cash flow were primarily due to anticipated costs associated with the acquisition of Cantel. Our debt-to-total capital ratio was 34.3% atJune 30, 2021 and 29.8% atMarch 31, 2021 . During the first three months of fiscal 2022, we declared and paid quarterly cash dividends of$0.40 per ordinary share. Additional information regarding our financial performance during the first quarter of fiscal 2022 is included in the subsection below titled "Results of Operations." NON-GAAP FINANCIAL MEASURES We, at times, refer to financial measures which are considered to be "non-GAAP financial measures" underSEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented. These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures. These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented. We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies. 34 -------------------------------------------------------------------------------- Table of Contents We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented within investing activities in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to pay cash dividends, fund growth outside of core operations, fund future debt principal repayments, and repurchase shares. The following table summarizes the calculation of our free cash flow for the three months endedJune 30, 2021 and 2020: Three Months Ended June 30, (dollars in thousands) 2021 2020 Net cash provided by operating activities$ 97,426 $ 134,122 Purchases of property, plant, equipment and intangibles, net (56,396) (66,861) Proceeds from the sale of property, plant, equipment and intangibles 217 137 Free cash flow$ 41,247 $ 67,398 Results of Operations In the following subsections, we discuss our earnings and the factors affecting them for the first quarter of fiscal 2022 compared with the same fiscal 2021 period. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments. Revenues. The following tables compare our revenues for the three months endedJune 30, 2021 to the revenues for the three months endedJune 30, 2020 : Three Months Ended June 30, (dollars in thousands) 2021 2020 Change Percent Change Total revenues$ 968,422 $ 668,932 $ 299,490 44.8 % Revenues by type: Service revenues 479,143 367,824 111,319 30.3 % Consumable revenues 298,887 142,596 156,291 109.6 % Capital equipment revenues 190,392 158,512 31,880 20.1 % Revenues by geography: Ireland revenues 21,945 14,373 7,572 52.7 % United States revenues 679,250 491,708 187,542 38.1 % Other foreign revenues 267,227 162,851 104,376 64.1 % Revenues increased 44.8% to$968.4 million for the three months endedJune 30, 2021 , as compared to$668.9 million for the same period in the prior year with growth in all segments. The increase of was primarily related to organic growth in the Healthcare and Applied Sterilization Technologies segments, added volume of$141.3 million from Cantel and other recent acquisitions and favorable fluctuations in currencies. Additionally, during the prior year period we experienced reduced demand for our products and services resulting from the reduction of deferrable surgical procedures as a result of the COVID-19 pandemic. Service revenues increased 30.3% for the first three months of fiscal 2022, as compared to the same period in fiscal 2021, reflecting organic growth in the Healthcare, Applied Sterilization Technologies and Life Sciences segments, as well as added volume from Cantel and our other recent acquisitions. Consumable revenues increased by 109.6% for the first three months of fiscal 2022, as compared to the same period in fiscal 2021, reflecting organic growth in the Healthcare segment, as well as added volume from Cantel and our other recent acquisitions. The growth was partially offset by a decline in the Life Sciences segment as the increased demand from our pharma Customers focused on vaccines and biologics that we experienced during fiscal 2021 shifted back to more normal levels. Capital equipment revenues increased 20.1%, for the first three months of fiscal 2022, as compared to the same period in fiscal 2021, reflecting organic growth in the Healthcare and Life Sciences segments and added volume from Cantel and our other recent acquisitions. 35 -------------------------------------------------------------------------------- Table of ContentsIreland revenues increased 52.7% to$21.9 million for the three months endedJune 30, 2021 , as compared to$14.4 million for the same period in the prior year, reflecting growth in service, consumable and capital equipment revenues.United States revenues increased 38.1% to$679.3 million for the three months endedJune 30, 2021 , as compared to$491.7 million for the same period in the prior year, reflecting growth in service, consumable and capital equipment revenues, primarily due to the impact of Cantel and our other recent acquisitions. Revenues from other foreign locations increased 64.1% to$267.2 million for the three months endedJune 30, 2021 , as compared to$162.9 million for the same period in the prior year, reflecting growth inCanada and in theEurope ,Middle East &Africa ("EMEA"), Latin American andAsia Pacific regions. Gross Profit. The following table compares our gross profit for the three months endedJune 30, 2021 to the three months endedJune 30, 2020 : Three Months Ended June 30, Percent (dollars in thousands) 2021 2020 Change Change (*as adjusted) Gross profit: Product$ 217,873 $ 146,369 $ 71,504 48.9 % Service 208,409 141,015 67,394 47.8 % Total gross profit$ 426,282 $ 287,384 $ 138,898 48.3 %
Gross profit percentage: Product 44.5 % 48.6 % Service 43.5 % 38.3 % Total gross profit percentage 44.0 % 43.0 % *Certain amounts have been adjusted to reflect the change in inventory accounting method, as described in our Annual report on Form 10-K filed with theSEC onMay 28, 2021 . Our gross profit is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Gross profit percentage for the first three months of fiscal 2022 was 44.0% compared to the gross profit percentage for the first three months of fiscal 2021 of 43.0%. Favorable impacts from increased productivity (330 basis points), incremental costs associated with COVID-19 in the prior year period (120 basis points) and our recent acquisitions (70 basis points) were partially offset by unfavorable impact from inflation (30 basis points), fluctuations in currencies (40 basis points), and mix and other adjustments (350 basis points). Operating Expenses. The following table compares our operating expenses for the three months endedJune 30, 2021 to the three months endedJune 30, 2020 : Three Months Ended June 30, Percent (dollars in thousands) 2021 2020 Change Change Operating expenses: Selling, general, and administrative$ 393,752 $ 155,170 $ 238,582 153.8 % Research and development 18,192 16,231 1,961 12.1 % Restructuring expenses 14 166 (152) NM Total operating expenses$ 411,958 $ 171,567 $ 240,391 140.1 % NM - Not meaningful. Selling, General, and Administrative Expenses. Significant components of total selling, general, and administrative expenses ("SG&A") are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 153.8% in the first three months of fiscal 2022 over the same period in fiscal 2021, primarily due to acquisition and integration costs of$141.0 million and added expenses from Cantel and our other recent acquisitions. 36 -------------------------------------------------------------------------------- Table of Contents Research and Development. For the three month period endedJune 30, 2021 , research and development expenses increased 12.1% over the same prior year period. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. During the first quarter of fiscal 2022, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, procedural products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures. Restructuring Expenses. Amounts related to restructuring expenses were not material for the three month periods endingJune 30, 2021 or 2020, respectively. For information on our restructuring efforts, refer to our Annual Report on Form 10-K filed with theSEC onMay 28, 2021 . Non-Operating Expenses, Net. Non-operating expenses, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. The following table compares our net non-operating expenses for the three months endedJune 30, 2021 and 2020: Three Months Ended June 30, (dollars in thousands) 2021 2020 Change Non-operating expenses, net: Interest expense$ 21,812 $ 9,492 $ 12,320
Fair value adjustment related to convertible debt, premium liability
22,923 - 22,923
Interest (income) and miscellaneous expense (1,434) (2,289) 855
Non-operating expenses, net $ 43,301 $ 7,203 $ 36,098
Interest expense increased $12.3 million during the first quarter of fiscal 2022
as compared to the first quarter of fiscal 2021, primarily due to our Senior
Public Notes which were issued in fiscal 2022. For more information on the
Senior Public Notes refer to note 5 of our Consolidated Financial Statements
totaled, "Debt".
During the first quarter of fiscal 2022, we recorded a fair value adjustment of
$22.9 million related to the convertible debt assumed in the acquisition of
Cantel. For more information on the Cantel convertible debt refer to note 5 of
our Consolidated Financial Statements titled, "Debt".
Interest (income) and miscellaneous expense is not material.
Income Tax Expense. The following table compares our income tax expense and
effective income tax rates for the three months ended June 30, 2021 and June 30,
2020 :
Three Months Ended June 30, Percent
(dollars in thousands) 2021 2020 Change Change
(*as adjusted)
Income tax (credit) expense $ (7,075) $ 19,083 $ (26,158) (137.1)%
Effective income tax rate 24.4 % 17.6 %
*Certain amounts have been adjusted to reflect the change in inventory accounting method, as described in our Annual report on Form 10-K filed with theSEC onMay 28, 2021 . We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual effective income tax rate, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. The effective income tax rates for the three month periods endedJune 30, 2021 and 2020 were 24.4% and 17.6%, respectively.The fiscal 2022 effective tax rate increased when compared to fiscal 2021, primarily due to Cantel and our other recent acquisitions, which historically have had higher effective tax rates than STERIS. The fiscal 2022 effective tax rate also includes one-time, non-deductible acquisition related costs. 37 -------------------------------------------------------------------------------- Table of Contents Business Segment Results of Operations. As a result of the acquisition of Cantel, we have reassessed the organization of our business and have added a new segment called Dental. We now operate and report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income. Our Healthcare segment provides a comprehensive offering for healthcare providers worldwide, focused on sterile processing departments and procedural centers, such as operating rooms, endoscopy suites, and renal dialysis centers. Our products and services range from infection prevention consumables and capital equipment, as well as services to maintain that equipment; to the repair of re-usable procedural instruments; to outsourced instrument reprocessing services. In addition, our procedural solutions also include single-use devices and capital equipment infrastructure used primarily in operating rooms, ambulatory surgery centers, endoscopy suites, and other procedural areas. Our Applied Sterilization Technologies ("AST") segment is a third-party service provider for contract sterilization, as well as the testing services needed to validate sterility services for medical device and pharmaceutical manufacturers. Our technology-neutral offering supports Customers every step of the way, from testing through sterilization. Our Life Sciences segment provides a comprehensive offering of products and services that support pharmaceutical manufacturing, primarily for vaccine and other biopharma Customers focused on aseptic manufacturing. These solutions include a full suite of consumable products, equipment maintenance and specialty services, and capital equipment. Our Dental segment provides a comprehensive offering for dental practitioners and dental schools, offering instruments, infection prevention consumables and instrument management systems. We disclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated Company. For the three months endedJune 30, 2021 , revenues from a single Customer did not represent ten percent or more of the Healthcare, Applied Sterilization Technologies or Life Sciences segment's revenues. Three customers collectively accounted for approximately 35.8% of our Dental segment revenues for the three months endedJune 30, 2021 . Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year endedMarch 31, 2021 , datedMay 28, 2021 . We disclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated Company. Additional information regarding our segments is included in our consolidated financial statements included in its Annual Report on Form 10-K for the year endedMarch 31, 2021 , datedMay 28, 2021 . 38 -------------------------------------------------------------------------------- Table of Contents Financial information for each of our segments is presented in the following table: Three Months Ended June 30, (dollars in thousands) 2021 2020 Revenues: (*as adjusted) Healthcare$ 602,817 $ 399,658 Applied Sterilization Technologies 208,902 152,362 Life Sciences 121,471 116,912 Dental 35,232 - Total revenues$ 968,422 $ 668,932 Operating income (loss): Healthcare$ 136,160 $ 84,173 Applied Sterilization Technologies 101,927 63,955 Life Sciences 49,088 48,461 Dental 10,119 - Corporate (75,060) (52,367) Total operating income before adjustments$ 222,234 $ 144,222 Less: Adjustments Amortization of acquired intangible assets (1)$ 41,741 $ 17,500 Acquisition and integration related charges (2) 140,996 1,286 Tax restructuring costs (3) (49) 170 Net loss on divestiture of businesses (1) 419 10
Amortization of inventory and property "step up" to fair value (1)
24,789 603
COVID-19 incremental costs (4) - 8,670
Restructuring charges (5) 14 166
Total operating income $ 14,324 $ 115,817
*Certain amounts have been adjusted to reflect the change in inventory
accounting method, as described in our Annual report on Form 10-K filed with the
SEC on May 28, 2021 .
(1) For more information regarding our recent acquisitions and divestitures
refer to Note 2 titled, "Business Acquisitions" and to our Annual Report on Form
10-K for the year ended March 31, 2021 , dated May 28, 2021 .
(2) Acquisition and integration related charges include transaction costs and
integration expenses associated with acquisitions.
(3) Costs incurred in tax restructuring.
(4) COVID-19 incremental costs includes the additional costs attributable to
COVID-19 such as enhanced cleaning protocols, personal protective equipment for
our employees, event cancellation fees, and payroll costs associated with our
response to COVID-19, net of any government subsidies available.
(5) For more information regarding our restructuring efforts refer to our Annual
Report on Form 10-K for the year ended March 31, 2021 , dated May 28, 2021 .
Healthcare revenues increased 50.8% to $602.8 million for the three months ended
June 30, 2021 , as compared to $399.7 million for the same prior year period.
This increase reflects growth in consumable, service and capital equipment
revenues of 146.8%, 30.6% and 17.8%, respectively and reflects organic growth,
favorable fluctuations in foreign currencies and the impact of Cantel in June
and our other recent acquisitions. Additionally, during the fiscal 2021 period
we experienced reduced demand for our products and services resulting from the
reduction of deferrable surgical procedures as a result of the COVID-19
pandemic.
Excluding Cantel's backlog, the Healthcare segment's backlog was $254.3 million
at June 30, 2021 , representing an increase of 54.9% compared to the backlog of
$164.2 million at June 30, 2020 . The increase is primarily due to built up
demand as a result of the COVID-19 pandemic.
Applied Sterilization Technologies segment revenues increased 37.1% to $208.9
million for the quarter ended June 30, 2021 , as compared to $152.4 million for
the same prior year period. The fiscal 2022 increase reflects organic growth,
favorable fluctuations in currencies and the impact of a fiscal 2021
acquisition.
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Life Sciences segment revenues increased 3.9% to $121.5 million for the first
three months ended June 30, 2021 , as compared to $116.9 million for the same
prior year period. This increase reflects growth in service and capital
equipment revenues of 16.5% and 7.6% respectively primarily due to the
acquisition of Cantel in June and favorable fluctuations in foreign currencies.
Consumable revenues declined by 3.9%, as the increased demand from our pharma
Customers focused on vaccines and biologics that we experienced in fiscal 2021
shifted back to more normal levels.
Excluding Cantel's backlog, the Life Sciences segment's backlog amounted to
$92.1 million at June 30, 2021 , representing an increase of 36.0% compared to
the backlog of $67.7 million at June 30, 2020 . The increase is primarily due to
built up demand as a result of the COVID-19 pandemic.
Dental segment revenues in June 2021 were $35.2 million .
The Healthcare segment's operating income increased $52.0 million to $136.2
million for the first three months of fiscal 2022, as compared to $84.2 million
for the same prior year period. The segment's operating margins were 22.6% and
21.1% for the first three months of fiscal 2022 and 2021, respectively. The
segment's operating income and margin improvements were primarily due to to
increased volume.
The Applied Sterilization Technologies segment's operating income increased
$38.0 million to $101.9 million for the first three months of fiscal 2022, as
compared to $64.0 million for the same prior year period. The segment's
operating margins were 48.8% and 42.0% for the first three months of fiscal 2022
and fiscal 2021, respectively. The segment's operating income and margin
improvements were primarily due to to increased volume.
The Life Sciences segment's operating income increased $0.6 million to $49.1
million for the first three months of fiscal 2022, as compared to $48.5 million
for the same prior year period. The segment's operating margins were 40.4% and
41.5% for the first three months of fiscal 2022 and fiscal 2021, respectively.
The Dental segment's operating income and operating margin were $10.1 million
and 28.7%, for the month of June 2021 .
Liquidity and Capital Resources
The following table summarizes significant components of our cash flows for the
three months ended June 30, 2021 and 2020:
Three Months Ended June 30,
(dollars in thousands) 2021 2020
Net cash provided by operating activities$ 97,426 $ 134,122 Net cash (used in) investing activities$ (603,532) $ (66,724) Net cash provided by (used in) financing activities$ 818,810 $ (134,000) Debt-to-total capital ratio 34.3 % 23.3 % Free cash flow$ 41,247 $ 67,398 Net Cash Provided by Operating Activities - The net cash provided by our operating activities was$97.4 million for the first three months of fiscal 2022 and$134.1 million for the first three months of fiscal 2021. The fiscal 2022 decrease in cash flows from operations was primarily due to anticipated costs associated with the acquisition of Cantel.Net Cash (Used In) Investing Activities - The net cash used in investing activities totaled$603.5 million for the first three months of fiscal 2022 and$66.7 million for the first three months of fiscal 2021. The following discussion summarizes the significant changes in our investing cash flows for the first three months of fiscal 2022 and fiscal 2021: •Purchases of property, plant, equipment, and intangibles, net - Capital expenditures were$56.4 million for the first three months of fiscal 2022 and$66.9 million during the same prior year period. The decrease was primarily due to higher spending related to expansion projects in the Applied Sterilization Technologies segment which occurred in the fiscal 2021 period. •Acquisitions of businesses, net of cash acquired - During the first three months of fiscal 2022, we used$547.4 million for the acquisition of Cantel. For more information refer to our note 2 of our Consolidated Financial Statements titled, "Business Acquisitions". Net Cash Provided by (Used In) Financing Activities - The net cash provided by financing activities amounted to$818.8 million for the first three months of fiscal 2022 compared with net cash used in financing activities of$134.0 million for the first three months of fiscal 2021. The following discussion summarizes the significant changes in our financing cash flows for the first three months of fiscal 2022 and fiscal 2021: 40 -------------------------------------------------------------------------------- Table of Contents •Proceeds from Issuance of Senior Notes - During the first three months of fiscal 2022, we received$1,350.0 million in proceeds from the issuance of our Senior Public Notes. For more information on our Senior Public Notes, refer to note 5 of our Consolidated Financial Statements titled, "Debt". •Proceeds from Term Loan - During the first three months of fiscal 2022, we borrowed$650.0 million under our Delayed Draw Term Loan. For more information on our Delayed Draw Term Loan, refer to our annual report on Form 10-K filed with theSEC onMay 28, 2021 . •Payments on Term Loan - During the first three months of fiscal 2022, we repaid$125.0 million of our Term Loan. For more information on our Term Loan, refer to our annual report on Form 10-K filed with theSEC onMay 28, 2021 . •Payments on Long-term Obligations, net - During the first three months of fiscal 2022, we repaid$721.3 million of Cantel's outstanding debt in connection with the acquisition. For more information on Cantel's debt refer to note 2 of our Consolidated Financial Statements titled, "Business Acquisitions". •Payments under credit facilities, net - Net payments under credit facilities totaled$249.4 million in the first three months of fiscal 2022, compared to net payments under credit facilities of$95.8 million in the first three months of fiscal 2021. For more information on our debt, refer to note 5 of our Consolidated Financial Statements titled, "Debt". •Deferred financing fees and debt issuance costs - During the first three months of fiscal 2022, we paid$17.2 million for financing fees and debt issuance costs primarily related to our Senior Public Notes and Delayed Draw Term Loan. For more information on our debt refer to note 5 of our Consolidated Financial Statements titled, "Debt". •Repurchases of ordinary shares -During the first three months of fiscal 2022, we obtained 59,648 of our ordinary shares in connection with share-based compensation award programs in the aggregate amount of$10.7 million . During the first three months of fiscal 2021 throughApril 9, 2020 , we purchased 35,000 of our ordinary shares in the aggregate amount of$5.0 million . During the first three months of fiscal 2021, we obtained 63,150 of our ordinary shares in connection with share-based compensation award programs in the aggregate amount of$9.2 million . Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended onApril 9, 2020 . •Acquisition related deferred or contingent consideration - During the first three months of fiscal 2022, we paid$25.2 million in deferred and contingent consideration, the majority of which was associated with a pre-acquisition arrangement related to an acquisition made by Cantel prior to our purchase of the company. •Cash dividends paid to ordinary shareholders - During the first three months of fiscal 2022, we paid total cash dividends of$34.1 million , or$0.40 per outstanding share. During the first three months of fiscal 2021, we paid total cash dividends of$31.5 million , or$0.37 per outstanding share. •Contributions from noncontrolling interest - During the first three months of fiscal 2021, we received contributions from noncontrolling interest holders of$2.3 million . •Stock option and other equity transactions, net - We generally receive cash for issuing shares under our stock option programs. During the first three months of fiscal 2022 and fiscal 2021, we received cash proceeds totaling$1.7 million and$5.4 million , respectively, under these programs. Cash Flow Measures. Free cash flow was$41.2 million in the first three months of fiscal 2022 compared to$67.4 million in the first three months of fiscal 2021 (see the subsection above titled "Non-GAAP Financial Measures" for additional information and related reconciliation of cash flows from operations to free cash flow). The fiscal 2022 decrease in cash flows was primarily due to anticipated costs associated with the acquisition of Cantel. Our debt-to-total capital ratio was 34.3% atJune 30, 2021 and 23.3% atJune 30, 2020 . Sources of Credit and Contractual and Commercial Commitments. Information related to our sources of credit and contractual and commercial commitments is included in our Annual Report on Form 10-K for the year endedMarch 31, 2021 datedMay 28, 2021 . Our commercial commitments were approximately$81.7 million atJune 30, 2021 , reflecting a net increase of$2.6 million in surety bonds and other commercial commitments fromMarch 31, 2021 . We had no outstanding borrowings under the Credit Agreement as ofJune 30, 2021 . We had$13.0 million of letters of credit outstanding under the Credit Agreement atJune 30, 2021 . Cash Requirements. We intend to use our existing cash and cash equivalent balances and cash generated from operations for short-term and long-term capital expenditures and our other liquidity needs. Our capital requirements depend on many uncertain factors, including our rate of sales growth, our Customers' acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, changes in our operating expenses and other factors. To the extent that existing and anticipated sources of cash are not sufficient to fund our 41 -------------------------------------------------------------------------------- Table of Contents future activities, we may need to raise additional funds through additional borrowings or the sale of equity securities. There can be no assurance that our existing financing arrangements will provide us with sufficient funds or that we will be able to obtain any additional funds on terms favorable to us or at all. 42 -------------------------------------------------------------------------------- Table of Contents Supplemental Guarantor Financial InformationSTERIS plc (STERIS) and its wholly-owned subsidiaries,STERIS Limited andSTERIS Corporation (collectively Guarantors), each have provided guarantees of the obligations ofSTERIS Irish FinCo Unlimited Company ("FinCo", "STERIS Irish FinCo"), a wholly-owned subsidiary issuer, under Senior Public Notes issued by STERIS Irish FinCo onApril 1, 2021 and of certain other obligations relating to the Senior Public Notes. The Senior Public Notes are guaranteed, jointly and severally, on a senior unsecured basis. The Senior Public Notes and the related guarantees are senior unsecured obligations of STERIS Irish FinCo and the Guarantors, respectively, and are equal in priority with all other unsecured and unsubordinated indebtedness of the Issuer and the Guarantors, respectively, from time to time outstanding, including, as applicable, under the Private Placement Senior Notes and borrowings under the credit facilities. All of the liabilities of non-guarantor direct and indirect subsidiaries of STERIS, other than STERIS Irish FinCo,STERIS Limited andSTERIS Corporation , including any claims of trade creditors, are effectively senior to the Senior Public Notes. STERIS Irish FinCo's main objective and source of revenues and cash flows is the provision of short- and long-term financing for the activities ofSTERIS plc and its subsidiaries. The ability of our subsidiaries to pay dividends, interest and other fees to the Issuer and ability of the Issuer and Guarantors to service the Senior Notes may be restricted by, among other things, applicable corporate and other laws and regulations as well as agreements to which our subsidiaries are or may become a party. The following is a summary of the Senior Public Notes guarantees: Guarantees of Senior Notes •Parent Company Guarantor -STERIS plc •Subsidiary Issuer -STERIS Irish FinCo Unlimited Company •Subsidiary Guarantor -STERIS Limited •Subsidiary Guarantor -STERIS Corporation The guarantee of a Guarantor will be automatically and unconditionally released and discharged: •in the case of a Subsidiary Guarantor, upon the sale, transfer or other disposition (including by way of consolidation or merger) of such Subsidiary Guarantor, other than to the Parent or a subsidiary of the Parent and as permitted by the indenture; •in the case of a Subsidiary Guarantor, upon the sale, transfer or other disposition of all or substantially all the assets of such Subsidiary Guarantor, other than to the Parent or a subsidiary of the Parent and as permitted by the indenture; •in the case of a Subsidiary Guarantor, at such time as such Subsidiary Guarantor is no longer a borrower under or no longer guarantees any Material Credit Facility (subject to restatement in specified circumstances); •upon the legal defeasance or covenant defeasance of the Senior Public Notes or the discharge of the Issuer's obligations under the indenture in accordance with the terms of the indenture; •as described in accordance with the terms of the indenture; or •in the case of the Parent, if the Issuer ceases for any reason to be a subsidiary of the Parent; provided that all guarantees and other obligations of the Parent in respect of all other indebtedness under any Material Credit Facility of the Issuer terminate upon the Issuer ceasing to be a subsidiary of the Parent; and •upon such Guarantor delivering to the trustee an officer's certificate and an opinion of counsel, each stating that all conditions precedent provided for in the indenture relating to such transaction or release have been complied with. The obligations of each Guarantor under its guarantee are expressly limited to the maximum amount that such Guarantor could guarantee without such guarantee constituting a fraudulent conveyance. Each Guarantor that makes a payment under its guarantee will be entitled upon payment in full of all guaranteed obligations under the indenture to a contribution from each Guarantor in an amount equal to such other Guarantor's pro rata portion of such payment based on the respective net assets of all the Guarantors at the time of such payment determined in accordance with GAAP. The following tables present summarized results of operations for the three months endedJune 30, 2021 and summarized balance sheet information atMarch 31, 2021 for the obligor group of the Senior Notes. The obligor group consists of the Parent Company Guarantor, Subsidiary Issuer, and Subsidiary Guarantors for the Senior Notes. The summarized financial information is presented after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or non-issuer. Transactions with non-issuer and non-guarantor subsidiaries have been presented separately. 43 -------------------------------------------------------------------------------- Table of Contents Summarized Results of Operations (in thousands) Three Months Ended June 30, 2021 Revenues $ 401,332 Gross profit 237,037
Operating costs arising from transactions with non-issuers and non-guarantors - net
79,951
Income from operations 78,440
Non-operating income (expense) arising from transactions with subsidiaries that are non-issuers and non-guarantors - net
89,177
Net income $ 63,781
Summarized Balance Sheet Information
( in thousands)
June 30, March 31,
2021 2021
Receivables due from non-issuers and non-guarantor subsidiaries $ 15,178,327 $ 14,102,215
Other current assets 442,474 348,937
Total current assets $ 15,620,801 $ 14,451,152
Non-current receivables due from non-issuers and non-guarantor
subsidiaries $ 1,876,959 $ 1,091,809
Goodwill 94,979 94,979
Other non-current assets 200,583 207,240
Total non-current assets $ 2,172,521 $ 1,394,028
Payables due to non-issuers and non-guarantor subsidiaries $ 15,874,013 $ 15,549,831
Other current liabilities 213,697 128,665
Total current liabilities $ 16,087,710 $ 15,678,496
Non-current payables due to non-issuers and non-guarantor
subsidiaries $ 1,203,174 $ 1,203,274
Other non-current liabilities 3,307,125 1,695,772
Total non-current liabilities $ 4,510,299 $ 2,899,046 Intercompany balances and transactions between the obligor group have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately. Intercompany transactions arise from internal financing and trade activities.
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Critical Accounting Policies, Estimates, and Assumptions
Information related to our critical accounting policies, estimates, and
assumptions is included in our Annual Report on Form 10-K for the year ended
March 31, 2021 , dated May 28, 2021 . Our critical accounting policies, estimates,
and assumptions have not changed materially from March 31, 2021 .
Contingencies
We are, and will likely continue to be, involved in a number of legal
proceedings, government investigations, and claims, which we believe generally
arise in the course of our business, given our size, history, complexity, and
the nature of our business, products, Customers, regulatory environment, and
industries in which we participate. These legal proceedings, investigations and
claims generally involve a variety of legal theories and allegations, including,
without limitation, personal injury (e.g., slip and falls, burns, vehicle
accidents), product liability or regulation (e.g., based on product operation or
claimed malfunction, failure to warn, failure to meet specification, or failure
to comply with regulatory requirements), product exposure (e.g., claimed
exposure to chemicals, asbestos, contaminants, radiation), property damage
(e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals),
commercial claims (e.g., breach of contract, economic loss, warranty,
misrepresentation), financial (e.g., taxes, reporting), employment (e.g.,
wrongful termination, discrimination, benefits matters), and other claims for
damage and relief.
We record a liability for such contingencies to the extent we conclude that
their occurrence is both probable and estimable. We consider many factors in
making these assessments, including the professional judgment of experienced
members of management and our legal counsel. We have made estimates as to the
likelihood of unfavorable outcomes and the amounts of such potential losses. In
our opinion, the ultimate outcome of these proceedings and claims is not
anticipated to have a material adverse affect on our consolidated financial
position, results of operations, or cash flows. However, the ultimate outcome of
proceedings, government investigations, and claims is unpredictable and actual
results could be materially different from our estimates. We record expected
recoveries under applicable insurance contracts when we are assured of recovery.
Refer to Note 8 of our consolidated financial statements titled, "Commitments
and Contingencies" for additional information.
We are subject to taxation from United States federal, state and local, and
non-U.S. jurisdictions. Tax positions are settled primarily through the
completion of audits within each individual tax jurisdiction or the closing of a
statute of limitation. Changes in applicable tax law or other events may also
require us to revise past estimates. The IRS routinely conducts audits of our
federal income tax returns.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, that have or are reasonably
likely to have, a material current or future impact on our financial condition,
changes in financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures or capital.
Forward-Looking Statements
This quarterly report may contain statements concerning certain trends,
expectations, forecasts, estimates, or other forward-looking information
affecting or relating to STERIS or its industry, products or activities that are
intended to qualify for the protections afforded "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995 and other laws and
regulations. Forward-looking statements speak only as to the date the statement
is made and may be identified by the use of forward-looking terms such as "may,"
"will," "expects," "believes," "anticipates," "plans," "estimates," "projects,"
"targets," "forecasts," "outlook," "impact," "potential," "confidence,"
"improve," "optimistic," "deliver," "orders," "backlog," "comfortable," "trend",
and "seeks," or the negative of such terms or other variations on such terms or
comparable terminology. Many important factors could cause actual results to
differ materially from those in the forward-looking statements including,
without limitation, disruption of production or supplies, changes in market
conditions, political events, pending or future claims or litigation,
competitive factors, technology advances, actions of regulatory agencies, and
changes in laws, government regulations, labeling or product approvals or the
application or interpretation thereof. Other risk factors are described in
STERIS's other securities filings, including Item 1A of our Annual Report on
Form 10-K for the year ended March 31, 2021 . Many of these important factors are
outside of STERIS's control. No assurances can be provided as to any result or
the timing of any outcome regarding matters described in STERIS's securities
filings or otherwise with respect to any regulatory action, administrative
proceedings, government investigations, litigation, warning letters, cost
reductions, business strategies, earnings or revenue trends or future financial
results. References to products are summaries only and should not be considered
the specific terms of the product clearance or literature. Unless legally
required, STERIS does not undertake to update or revise any forward-looking
statements even if events make clear that any projected results, express or
implied, will not be realized. Other potential risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements include, without limitation, (a) the impact of the
COVID-19 pandemic on STERIS's operations, performance, results, prospects, or
value, (b) STERIS's ability to achieve the expected benefits regarding the
accounting and tax treatments of the redomiciliation to Ireland
("Redomiciliation"), (c) operating costs, Customer loss and business disruption
(including, without
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limitation, difficulties in maintaining relationships with employees, Customers,
clients or suppliers) being greater than expected following the Redomiciliation,
(d) STERIS's ability to successfully integrate the businesses of Cantel Medical
into our existing businesses, including unknown or inestimable liabilities, or
increases in expected integration costs or difficulties in connection with the
integration of Cantel Medical (e) STERIS's ability to meet expectations
regarding the accounting and tax treatment of the Tax Cuts and Jobs Act ("TCJA")
or the possibility that anticipated benefits resulting from the TCJA will be
less than estimated, (f) changes in tax laws or interpretations that could
increase our consolidated tax liabilities, including changes in tax laws that
would result in STERIS being treated as a domestic corporation for United States
federal tax purposes, (g) the potential for increased pressure on pricing or
costs that leads to erosion of profit margins, (h) the possibility that market
demand will not develop for new technologies, products or applications or
services, or business initiatives will take longer, cost more or produce lower
benefits than anticipated, (i) the possibility that application of or compliance
with laws, court rulings, certifications, regulations, regulatory actions,
including without limitation any of the same relating to FDA, EPA or other
regulatory authorities, government investigations, the outcome of any pending or
threatened FDA, EPA or other regulatory warning notices, actions, requests,
inspections or submissions, or other requirements or standards may delay, limit
or prevent new product or service introductions, affect the production, supply
and/or marketing of existing products or services or otherwise affect STERIS's
performance, results, prospects or value, (j) the potential of international
unrest, economic downturn or effects of currencies, tax assessments, tariffs
and/or other trade barriers, adjustments or anticipated rates, raw material
costs or availability, benefit or retirement plan costs, or other regulatory
compliance costs, (k) the possibility of reduced demand, or reductions in the
rate of growth in demand, for STERIS's products and services, (l) the
possibility of delays in receipt of orders, order cancellations, or delays in
the manufacture or shipment of ordered products or in the provision of services,
(m) the possibility that anticipated growth, cost savings, new product
acceptance, performance or approvals, or other results may not be achieved, or
that transition, labor, competition, timing, execution, regulatory,
governmental, or other issues or risks associated with STERIS's businesses,
industry or initiatives including, without limitation, those matters described
in our Annual Report on Form 10-K for the year ended March 31, 2021 , and other
securities filings, may adversely impact STERIS's performance, results,
prospects or value, (n) the impact on STERIS and its operations, or tax
liabilities, of Brexit or the exit of other member countries from the EU, and
the Company's ability to respond to such impacts, (o) the impact on STERIS and
its operations of any legislation, regulations or orders, including but not
limited to any new trade or tax legislation, regulations or orders, that may be
implemented by the U.S. administration or Congress , or of any responses thereto,
(p) the possibility that anticipated financial results or benefits of recent
acquisitions, including the acquisition of Cantel Medical and Key Surgical, or
of STERIS's restructuring efforts, or of recent divestitures, including
anticipated revenue, productivity improvement, cost savings, growth synergies
and other anticipated benefits, will not be realized or will be other than
anticipated, (q) the increased level of STERIS's indebtedness incurred in
connection with the acquisition of Cantel Medical limiting financial flexibility
or increasing future borrowing costs, (r) rating agency actions that could
affect STERIS's existing debt or future ability to borrow funds at rates
favorable to STERIS or at all, (s) the potential impact of the acquisition of
Cantel Medical on relationships, including with suppliers, Customers, employees
and regulators, and (t) the effects of contractions in credit availability, as
well as the ability of STERIS's Customers and suppliers to adequately access the
credit markets when needed.
Availability of Securities and Exchange Commission Filings
We make available free of charge on or through our website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to these reports as soon as reasonably practicable after we file such
material with, or furnish such material to, the Securities Exchange Commission
("SEC .") You may access these documents on the Investor Relations page of our
website at http://www.steris-ir.com. The information on our website and the
SEC's website is not incorporated by reference into this report.
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