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 2023 and fiscal 2022. It may also be helpful to refer to information in Item 1, "Business", Part I, Item 1A, "Risk Factors" and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" of our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 , and Part II, Item 1A. of this quarterly report, for a discussion of some of the matters that can adversely affect our business and results of operations. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. This information, discussion, and 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.
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•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.
•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 operating room
("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 support
patient care with an emphasis on infection prevention. WE HELP OUR CUSTOMERS
CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare, life
sciences and dental products and services. 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,
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. On June 2, 2021 , we acquired all outstanding equity interests in
Cantel Medical LLC . ("Cantel"). Cantel's Dental business extended our business
into a new Customer segment where there is an increasing focus on infection
prevention protocols and processes. This business is being reported as the
Dental segment. The rest of Cantel was integrated into our existing Healthcare
and Life Sciences segments. Additionally, the acquisition has and is expected to
continue to result in cost savings from optimizing global back-office
infrastructure, leveraging best-demonstrated practices across locations and
eliminating redundant public company costs.
Fiscal 2023 and 2022 first quarter acquisition and integration expenses totaled
$9.8 million and $141.0 million , respectively and were primarily related to the
acquisition and integration of Cantel. Acquisition and integration expenses 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 from June 2, 2021 forward, which will affect results of comparability to
the prior period operations and cash flows.
COVID-19 Pandemic and Macroeconomic Environment. The COVID-19 global pandemic
and its direct and indirect impacts have led to disruptions in the market and
the global and U.S. economies that may continue for a prolonged period. In
response to the COVID-19 pandemic, various governmental authorities and private
enterprises have implemented numerous containment measures, such as travel bans
and restrictions, quarantines, shelter-in-place orders and shutdowns. A number
of our global suppliers, vendors, and distributors are located in regions that
have been adversely affected by restrictive government and private enterprise
measures implemented in response to the pandemic, or have otherwise been
disrupted by associated prevailing macroeconomic trends. This has led to product
and labor shortages, shipping delays and an increase in raw material and
component pricing as well as other inflationary pressures, particularly on our
manufacturing costs.
Throughout the pandemic, we have experienced and expect to continue to
experience unpredictable fluctuations in demand for certain of our products and
services. To date, we have been able to continue to operate our manufacturing
facilities and meet the demand for essential products and services of our
Customers. Nonetheless, in calendar 2022, supply chain disruptions and
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delays have limited and may continue to limit our ability to ship certain capital equipment, particularly in our Healthcare and Life Sciences business, negatively impacting capital equipment revenue growth. Within the Healthcare and Life Sciences businesses, approximately$35 million in capital equipment shipments were delayed in the first quarter of fiscal 2023. During the quarter we have seen recovery of elective procedures as the impact of the COVID-19 pandemic has subsided in many geographies. However, diminished staffing availability at hospitals appears to be a key variable limiting further recovery of procedure volumes to pre-pandemic levels. We continue to pursue all available avenues to address supply chain disruptions, including purchases from third parties and brokers, qualifying alternative parts and suppliers, and obtaining prioritization from governmental agencies. We do not believe that the COVID-19 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, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 , and within Item 1A. of this 10-Q, Part II. Highlights. Revenues for the first quarter of fiscal 2023 were$1,156.5 million , representing an increase of 19.4% over the first quarter of fiscal 2022 revenues of$968.4 million . The increase reflects organic growth in all segments and added volume from Cantel, which was partially offset by unfavorable fluctuations in currencies, and the absence of revenue from our Renal care business, which was divested inJanuary 2022 . Gross margin percentage for the first quarter of fiscal 2023 was 44.8%, compared to 44.0% for the first quarter of fiscal 2022. Favorable impacts from pricing, the Cantel acquisition, fluctuations in currencies, our recent divestitures, and mix and other adjustments, were partially offset by unfavorable impact from inflation and productivity. Income from operations during the first quarter of fiscal 2023 was$158.4 million , compared to$14.3 million for the first quarter of fiscal 2022. In the fiscal 2022 period, we incurred$141.0 million in acquisition and integration expenses, which were primarily related to our acquisition of Cantel. The fiscal 2023 reduction in such expenses was partially offset by an increase in amortization of purchased intangible assets in the fiscal 2023 period. Cash flows from operations were$231.7 million and free cash flow was$117.1 million in the first three months of fiscal 2023 compared to cash flows from operations of$97.4 million and free cash flow of$41.2 million in the first three months of fiscal 2022 (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 2023 increases in cash flows from operations and free cash flows were primarily due to lower costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, which was partially offset by higher capital expenditures in the fiscal 2023 period.
Our debt-to-total capital ratio was 31.9% at
Additional information regarding our financial performance during the first quarter of fiscal 2023 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. 29
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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 (capital expenditures) 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 ended
Three Months Ended June 30,
(dollars in thousands) 2022 2021
Net cash provided by operating activities $ 231,746 $ 97,426
Purchases of property, plant, equipment and intangibles, net (115,933) (56,396)
Proceeds from the sale of property, plant, equipment and
intangibles 1,288 217
Free cash flow $ 117,101 $ 41,247 Results of Operations
In the following subsections, we discuss our earnings and the factors affecting them for the first quarter of fiscal 2023 compared with the same fiscal 2022 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 ended
Three Months Ended June 30,
(dollars in thousands) 2022 2021 Change Percent Change
Total revenues $ 1,156,491 $ 968,422 $ 188,069 19.4 %
Revenues by type:
Service revenues 519,415 479,143 40,272 8.4 %
Consumable revenues 416,825 298,887 117,938 39.5 %
Capital equipment revenues 220,251 190,392 29,859 15.7 %
Revenues by geography:
Ireland revenues 18,176 21,945 (3,769) (17.2) %
United States revenues 834,101 679,250 154,851 22.8 %
Other foreign revenues 304,214 267,227 36,987 13.8 %
Revenues increased 19.4% to $1,156.5 million for the three months ended June 30,
2022 , as compared to $968.4 million for the same period in the fiscal 2022, with
growth in all segments. The increase reflects organic growth in all segments and
added volume of $166.2 million from Cantel, which was partially offset by
unfavorable fluctuations in currencies and the absence of revenue from our Renal
care business, which was divested in January 2022 .
Service revenues increased 8.4% for the first three months of fiscal 2023, as
compared to the same period in fiscal 2022, reflecting organic growth in the
Healthcare and the Applied Sterilization Technologies segments, as well as added
volume from Cantel, which was partially offset by a slight decline in Life
Sciences. Consumable revenues increased by 39.5% for the first three months of
fiscal 2023, as compared to the same period in fiscal 2022, reflecting the added
volume from Cantel and organic growth in the Life Sciences segment. Capital
equipment revenues increased 15.7%, for the first three months of fiscal 2023,
as compared to the same period in fiscal 2022, reflecting organic growth in the
Healthcare and Life Sciences segments and added volume from Cantel.
Ireland revenues decreased 17.2% to $18.2 million for the three months ended
June 30, 2022 , as compared to $21.9 million for the same period in the prior
year, reflecting declines in service, consumable and capital equipment revenues.
United States revenues increased 22.8% to $834.1 million for the three months
ended June 30, 2022 , as compared to $679.3 million for the same period in the
prior year, reflecting growth in service, consumable and capital equipment
revenues, primarily due to strong organic growth and the addition of Cantel.
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Revenues from other foreign locations increased 13.8% to$304.2 million for the three months endedJune 30, 2022 , as compared to$267.2 million for the same period in the prior year, reflecting growth inCanada and in theEurope ,Middle East &Africa ("EMEA"),Latin America andAsia Pacific regions.
Gross Profit. The following table compares our gross profit for the three months
ended
Three Months Ended June 30, Percent
(dollars in thousands) 2022 2021 Change Change
Gross profit:
Product $ 304,221 $ 217,873 $ 86,348 39.6 %
Service 213,577 208,409 5,168 2.5 %
Total gross profit $ 517,798 $ 426,282 $ 91,516 21.5 %
Gross profit percentage:
Product 47.8 % 44.5 %
Service 41.1 % 43.5 %
Total gross profit percentage 44.8 % 44.0 %
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 2023 was 44.8%
compared to the gross profit percentage for the first three months of fiscal
2022 of 44.0%. Favorable impacts from pricing (130 basis points), the Cantel
acquisition (50 basis points), fluctuations in currencies (30 basis points), our
recent divestitures (20 basis points), and mix and other adjustments (320 basis
points), were partially offset by unfavorable impact from inflation (420 basis
points), and productivity (50 basis points).
Operating Expenses. The following table compares our operating expenses for the
three months ended
Three Months Ended June 30, Percent
(dollars in thousands) 2022 2021 Change Change
Operating expenses:
Selling, general, and administrative $ 334,626 $ 393,752 $ (59,126) (15.0) %
Research and development 24,751 18,192 6,559 36.1 %
Restructuring expenses 26 14 12 NM
Total operating expenses $ 359,403 $ 411,958 $ (52,555) (12.8) %
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 decreased
$59.1 million in the first three months of fiscal 2023, over the same period in
fiscal 2022. In the fiscal 2022 period, we incurred $141.0 million in
acquisition and integration expenses, which were primarily related to our
acquisition of Cantel. The fiscal 2023 reduction in such expenses was partially
offset by an increase in amortization of purchased intangible assets in the
fiscal 2023 period.
Research and Development. For the three month period ended June 30, 2022 ,
research and development expenses increased $6.6 million over the same period in
fiscal 2022, largely due to the addition of Cantel. 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 2023, 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.
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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, 2022 and 2021: Three Months Ended June 30, (dollars in thousands) 2022 2021 Change Non-operating expenses, net: Interest expense $
22,674
- 22,923 (22,923)
Interest (income) and miscellaneous expense 770 (1,434) 2,204
Non-operating expenses, net $ 23,444 $ 43,301 $ (19,857)
Interest expense increased by $0.9 million during the first quarter of fiscal
2023, as compared to the first quarter of fiscal 2022, primarily due to higher
interest rates on floating rate debt partially offset by lower principal amount
of debt outstanding.
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 our Annual
Report filed on Form 10-K, which was filed with the Securities and Exchange
Commission on May 31, 2022 .
Interest (income) and miscellaneous expense changed by $2.2 million during the
first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022,
primarily due to losses on our equity investments. For more information refer to
note 15 of our consolidated financial statements, titled "Fair Value
Measurements".
Income Tax Expense. The following table compares our income tax expense and
effective income tax rates for the three months ended
Three Months Ended June 30, Percent
(dollars in thousands) 2022 2021 Change Change
Income tax (credit) expense$ 24,196 $ (7,075) $ 31,271 NM Effective income tax rate 17.9 % 24.4 % NM - Not meaningful. 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, 2022 and 2021 were 17.9% and 24.4%, respectively. The fiscal 2023 effective tax rate decreased when compared to fiscal 2022, primarily due to nonrecurring unfavorable items reported in the prior fiscal year.
Business Segment Results of Operations. We 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 and endoscopy suites. 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 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.
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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. Certain prior period costs were reallocated from the Healthcare segment to corporate to conform with current year presentation. The prior period segment operating income measure has been recast for comparability. For the three months endedJune 30, 2022 , revenues from a single Customer did not represent ten percent or more of the Healthcare, Applied Sterilization Technologies or Life Sciences segment revenues. Three Customers collectively and consistently account for approximately 40.0% of our Dental segment revenue. The percentage associated with these three Customers collectively in any one period may vary due to the buying patterns of these three Customers as well as other Dental Customers. These three Customers collectively accounted for approximately 38.6% and 35.8% of our Dental segment revenues for the three months endedJune 30, 2022 and 2021, respectively. Additional information regarding our segments is included in our consolidated financial statements included our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . Financial information for each of our segments is presented in the following table: Three Months Ended June 30, (dollars in thousands) 2022 2021 Revenues: Healthcare$ 698,526 $ 602,817 Applied Sterilization Technologies 220,911 208,902 Life Sciences 132,207 121,471 Dental 104,847 35,232 Total revenues$ 1,156,491 $ 968,422 Segment operating income (loss): Healthcare$ 156,497 $ 138,373 Applied Sterilization Technologies 109,315 101,927 Life Sciences 55,305 49,088 Dental 19,596 10,119 Corporate (75,943) (77,273) Total segment operating income$ 264,770 $ 222,234 Less: Adjustments Amortization of acquired intangible assets (1)$ 93,929 $ 41,741 Acquisition and integration related charges (2) 9,832 140,996 Tax restructuring costs (3) 173 (49)
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
(3,100) -
Net loss on divestiture of businesses (1) 3,878 419
Amortization of inventory and property "step up" to fair value (1)
1,637 24,789
Restructuring charges (4) 26 14
Total income from operations (1) For more information regarding our recent acquisitions and divestitures refer to note 2 titled, "Business Acquisitions and Divestitures" of our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . (2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions. (3) Costs incurred in tax restructuring. (4) For more information regarding our restructuring efforts refer to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . 33
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Healthcare revenues increased 15.9% to$698.5 million for the three months endedJune 30, 2022 , as compared to$602.8 million for the same prior year period. This increase reflects growth in consumable, capital equipment and service revenues of 21.9%, 18.7% and 9.0%, respectively. The increase is attributable to organic growth and the addition of Cantel, which were partially offset by unfavorable fluctuations in foreign currencies and the fiscal 2022 divestiture of our Renal care business. The Healthcare segment's backlog was$521.7 million atJune 30, 2022 . Excluding Cantel, the Healthcare segment's backlog was$254.3 million atJune 30, 2021 . In addition to the added volume from Cantel, the increase is primarily due to built up demand and supply chain disruptions as a result of the COVID-19 pandemic. Applied Sterilization Technologies segment revenues increased 5.7% to$220.9 million for the quarter endedJune 30, 2022 , as compared to$208.9 million for the same prior year period. The increase reflects organic growth, which was partially offset by unfavorable fluctuations in currencies. Life Sciences segment revenues increased 8.8% to$132.2 million for the first three months endedJune 30, 2022 , as compared to$121.5 million for the same prior year period. This increase reflects growth in capital equipment and consumable revenues of 23.7% and 5.3% respectively. Service revenues remained essentially flat between the fiscal 2023 and 2022 periods. The increase also reflects organic growth and the impact of Cantel, which were partially offset by unfavorable fluctuations in foreign currencies. The Life Sciences segment's backlog amounted to$92.7 million atJune 30, 2022 and$92.1 million atJune 30, 2021 . The increase is primarily due to built up demand and supply chain disruptions as a result of the COVID-19 pandemic. Dental segment revenues for first three months of fiscal 2023 were$104.8 million . Dental segment revenues for the month ofJune 2021 were$35.2 million . Revenue was somewhat limited by supply chain challenges in the fiscal 2023 first quarter. The Healthcare segment operating income increased$18.1 million to$156.5 million for the first three months of fiscal 2023, as compared to$138.4 million for the same prior year period. The increase was primarily due to increased volume. The segment's operating margins were 22.4% and 23.0% for the first three months of fiscal 2023 and 2022, respectively. The decline is primarily due to increased supply chain and inflationary costs, and higher research and development, meeting and travel expenses in fiscal 2023. The Applied Sterilization Technologies segment operating income increased$7.4 million to$109.3 million for the first three months of fiscal 2023, as compared to$101.9 million for the same prior year period. The segment's operating margins were 49.5% and 48.8% for the first three months of fiscal 2023 and fiscal 2022, respectively. The increase in segment operating income and operating margin were primarily due to increased volume, which was partially offset by higher energy costs in fiscal 2023. The Life Sciences segment operating income increased$6.2 million to$55.3 million for the first three months of fiscal 2023, as compared to$49.1 million for the same prior year period. The segment's operating margins were 41.8% and 40.4% for the first three months of fiscal 2023 and fiscal 2022, respectively. The increase in segment operating income and operating margin were primarily due to increased volume and favorable mix within capital equipment shipments. The Dental segment operating income and operating margin was$19.6 million and 18.7%, respectively for the first three months of fiscal 2023. The Dental segment operating income and operating margin was$10.1 million and 28.7%, for the month ofJune 2021 . Segment operating income and operating margin were somewhat limited by supply chain challenges in the fiscal 2023 first quarter.
Liquidity and Capital Resources
The following table summarizes significant components of our cash flows for the
three months ended
Three Months Ended June 30 ,
(dollars in thousands) 2022 2021
Net cash provided by operating activities$ 231,746 $ 97,426 Net cash (used in) investing activities$ (109,417) $ (603,532) Net cash provided by (used in) financing activities$ (141,414) $ 818,810 Debt-to-total capital ratio 31.9 % 34.3 % Free cash flow$ 117,101 $ 41,247 Net Cash Provided by Operating Activities - The net cash provided by our operating activities was$231.7 million for the first three months of fiscal 2023 and$97.4 million for the first three months of fiscal 2022. The increase in fiscal 2023 period was primarily due to higher net income attainment, largely due to a decline in costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, as compared to the fiscal 2022 period. 34
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Net Cash (Used In) Investing Activities - The net cash used in investing activities totaled$109.4 million for the first three months of fiscal 2023 and$603.5 million for the first three months of fiscal 2022. The following discussion summarizes the significant changes in our investing cash flows for the first three months of fiscal 2023 and fiscal 2022: •Purchases of property, plant, equipment, and intangibles, net - Capital expenditures were$115.9 million for the first three months of fiscal 2023 and$56.4 million during the same prior year period. The fiscal 2023 increase was primarily due to additional expenditures in our Applied Sterilization Technologies segment. •Proceeds from the sale of business - During the first three months of fiscal 2023, we sold the remaining component of the animal healthcare business for$5.2 million . •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 and Divestitures". Net Cash Provided by (Used In) Financing Activities - The net cash provided by financing activities amounted to$141.4 million for the first three months of fiscal 2023 compared with net cash used in financing activities of$818.8 million for the first three months of fiscal 2022. The following discussion summarizes the significant changes in our financing cash flows for the first three months of fiscal 2023 and fiscal 2022: •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 titled "Debt" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •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 note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •Payments on Term Loan - During the first three months of fiscal 2023, we repaid$111.9 million of our 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 note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •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 and Divestitures" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •Proceeds (payments) under credit facilities, net - Net proceeds under credit facilities totaled$37.0 million in the first three months of fiscal 2023, compared to net payments under credit facilities of$249.4 million in the first three months of fiscal 2022. For more information on our credit facilities, refer to note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •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 titled, "Debt" and to our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . •Repurchases of ordinary shares - During the first three months of fiscal 2023, we purchased 61,677 of our ordinary shares in the aggregate amount of$12.9 million . During the first three months of fiscal 2023, we obtained 57,704 of our ordinary shares in connection with share-based compensation award programs in the aggregate amount of$11.7 million . 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 . •Acquisition related deferred or contingent consideration - During the first three months of fiscal 2023 and fiscal 2022, we paid approximately$0.1 million and$25.2 million , respectively, in deferred and contingent consideration. The majority of the fiscal 2022 amount was associated with a pre-acquisition arrangement related to an acquisition made by Cantel prior to our purchase of the company. 35
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•Cash dividends paid to ordinary shareholders - During the first three months of fiscal 2023, we paid total cash dividends of$43.0 million , or$0.43 per outstanding share. During the first three months of fiscal 2022, we paid total cash dividends of$34.1 million , or$0.40 per outstanding share. •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 2023 and fiscal 2022, we received cash proceeds totaling$1.2 million and$1.7 million , respectively, under these programs. Cash Flow Measures. Free cash flow was$117.1 million in the first three months of fiscal 2023 compared to$41.2 million in the first three months of fiscal 2022 (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 2023 increase in free cash flow was primarily due to lower costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, which was partially offset by higher capital expenditures in the fiscal 2023 period.
Our debt-to-total capital ratio was 31.9% at
Material Future Cash Obligations and Commercial Commitments. Information related to our material future cash obligations and commercial commitments is included in our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . Our commercial commitments were approximately$100.9 million atJune 30, 2022 , reflecting a net increase of$2.2 million in surety bonds and other commercial commitments fromMarch 31, 2022 . Outstanding borrowings under our Credit Agreement as ofJune 30, 2022 were$92.6 million . We had$15.0 million of letters of credit outstanding under the Credit Agreement atJune 30, 2022 . 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 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. 36
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Supplemental Guarantor Financial Information
STERIS plc ("Parent") and its wholly-owned subsidiaries,STERIS Limited andSTERIS Corporation (collectively "Guarantors" and each a "Guarantor"), 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, borrowings under the Revolving Credit Facility, the Term Loan and the Delayed Draw Term Loan. 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 Public 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 -
•Subsidiary Issuer -
•Subsidiary Guarantor -
•Subsidiary Guarantor -
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, 2022 and summarized balance sheet information atMarch 31, 2022 for the obligor group of the Senior Public Notes. The obligor group consists of the Parent Company Guarantor, Subsidiary Issuer, and Subsidiary Guarantors for the Senior Public 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. 37
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Summarized Results of Operations
(in thousands) Three Months Ended
June 30,
2022
Revenues $ 511,512
Gross profit 280,378Operating costs arising from transactions with non-issuers and non-guarantors - net
92,345
Income from operations 156,764
Non-operating income (expense) arising from transactions with subsidiaries that are non-issuers and non-guarantors - net
93,140
Net income $ 123,902
Summarized Balance Sheet Information
( in thousands)
June 30, March 31,
2022 2022
Receivables due from non-issuers and non-guarantor subsidiaries $ 16,360,447 $ 16,033,719
Other current assets 472,828 400,776
Total current assets $ 16,833,275 $ 16,434,495
Non-current receivables due from non-issuers and non-guarantor
subsidiaries $ 1,998,340 $ 2,001,742
Goodwill 95,688 95,688
Other non-current assets 242,809 142,711
Total non-current assets $ 2,336,837 $ 2,240,141
Payables due to non-issuers and non-guarantor subsidiaries $ 17,534,254 $ 17,053,749
Other current liabilities 218,749 231,043
Total current liabilities $ 17,753,003 $ 17,284,792
Non-current payables due to non-issuers and non-guarantor
subsidiaries $ 1,056,874 $ 1,102,873
Other non-current liabilities 3,041,636 3,134,777
Total non-current liabilities $ 4,098,510 $ 4,237,650 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 Estimates and Assumptions
Information related to our critical accounting estimates and assumptions is included in our Annual Report on Form 10-K for the year endedMarch 31, 2022 , which was filed with theSecurities and Exchange Commission onMay 31, 2022 . Our critical accounting policies, estimates, and assumptions have not changed materially fromMarch 31, 2022 .
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 fromUnited 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. TheIRS routinely conducts audits of our federal income tax returns.
Refer to note 7 of our Consolidated Financial Statements titled, "Income Tax Expense" for more information.
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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. 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 or similar public health crises on STERIS's operations, supply chain, material and labor costs, performance, results, prospects, or value, (b) STERIS's ability to achieve the expected benefits regarding the accounting and tax treatments of the redomiciliation toIreland ("Redomiciliation"), (c) operating costs, Customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, Customers, clients or suppliers) being greater than expected, (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 forUnited 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, including theRussia -Ukraine military conflict, economic downturn or effects of currencies, tax assessments, tariffs and/or other trade barriers, adjustments or anticipated rates, material and labor 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, due to supply chain issues or otherwise,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 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 theU.S. administration orCongress , 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 or other occurrences 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. 40
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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, theSecurities 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 theSEC's website is not incorporated by reference into this report.
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