STERIS PLC INTRODUCTION
In Management's Discussion and Analysis ("MD&A"), we explain the general
financial condition and the results of operations for STERIS and its
subsidiaries including:
•what factors affect our business;
•what our earnings and costs were;
•why those earnings and costs were different from the year before;
•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, repurchase ordinary shares, pay cash dividends and
fund future working capital needs.
The MD&A also analyzes and explains the annual changes in the specific line
items in the Consolidated Statements of Income. As you read the MD&A, it may be
helpful to refer to information in Item 1, "Business," Item 6, "Selected
Financial Data," and our consolidated financial statements, which present the
results of our operations for fiscal 2021, 2020 and 2019 as well as Part I,
Item 1A, "Risk Factors" and Note 10 of our consolidated financial statements
titled, "Commitments and Contingencies" for a discussion of some of the matters
that can adversely affect our business and results of operations. This
information, discussion, and disclosure 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 under U.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" under SEC 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
in the 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."
Information on our financial condition and results of our operations for our
2020 fiscal year period can be found in Exhibit 99.1 titled, "Updates to the
Company's Annual Report on Form 10-K for the year ended March 31, 2020 ", of our
Form 8-K, filed with the SEC on February 9, 2021 .
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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, and linen management 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 sterilizers, low
temperature liquid chemical sterilant processing systems, including SYSTEM 1 and
1E, washing systems, VHP® technology, water stills, and pure steam generators;
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 SYSTEM 1 and 1E
consumables, V-PRO consumables, gastrointestinal endoscopy accessories,
sterility assurance products, skin care products, cleaning consumables, barrier
product solutions and surgical instruments.
•Recurring Revenues - We define recurring revenues as revenues generated from
sales of consumable products and service revenues.
GENERAL OVERVIEW AND EXECUTIVE SUMMARY
STERIS plc is a leading provider of infection prevention and other procedural
products and services. WE 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, instrument
and scope repair solutions, laboratory testing services, on-site and off-site
reprocessing, and capital equipment products, such as sterilizers and surgical
tables, and connectivity solutions such as operating room ("OR") integration.
On March 28, 2019 , STERIS plc , a public limited company organized under the laws
of England and Wales ("STERIS UK "), completed a redomiciliation from the United
Kingdom to Ireland (the "Redomiciliation"). The Redomiciliation was achieved
through the insertion of a new Irish public limited holding company ("STERIS
Ireland ") on top of STERIS UK pursuant to a court-approved scheme of arrangement
under English law (the "Scheme"). Following the Scheme effectiveness, STERIS UK
was re-registered as a private limited company with the name STERIS Limited , and
STERIS Emerald IE Limited , a company established in Ireland and a wholly-owned
direct subsidiary of STERIS Ireland, was interposed as the direct parent company
of STERIS UK .
We operate and report in three reportable business segments: Healthcare, Applied
Sterilization Technologies and Life Sciences. We describe our business segments
in Note 11 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 of which are driving increased demand for many
of our products and services. During fiscal 2021, we experienced reduced demand
for certain products and services resulting from the reduction of deferrable
surgical procedures and increased demand for other products and services from
our pharmaceutical Customers focused on vaccines and biologics and increased
demand in the Applied Sterilization Technologies segment for personal protective
equipment product services, as a result of the COVID-19 pandemic. For more
information on the COVID-19 pandemic please refer to the subsection below,
titled "COVID-19 Pandemic".
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Acquisitions. On November 18, 2020 , we acquired all of the outstanding units and
equity of Key Surgical, LLC ("Key Surgical"). Key Surgical is a global provider
of sterile processing, operating room and endoscopy consumable products serving
hospitals and surgical facilities. Key Surgical is being integrated into our
Healthcare segment. The total purchase price of the acquisition was $853.2
million , net of cash acquired, and remains subject to customary working capital
adjustments.
On January 4, 2021 , we purchased the remaining outstanding shares of an equity
investment that we initially made in fiscal 2019. Total consideration was
approximately $78.0 million , net of cash acquired and subject to any working
capital adjustments. Total non-cash consideration for this transaction was $41.8
million , which consisted of the settlement of outstanding principal and interest
on a loan receivable, the initial equity investment, and receivables related to
capital equipment purchases that existed at the acquisition date. The business
is being integrated into our Applied Sterilization Technologies business segment
and we funded the transaction through a combination of cash on hand and credit
facility borrowings.
We also completed two other tuck-in acquisitions during fiscal 2021, which
continued to expand our product and service offerings in the Healthcare segment.
Total aggregate consideration for these transactions was approximately $20.9
million , net of cash acquired and including deferred consideration of $1.2
million .
On January 12, 2021 , we announced the signing of a definitive agreement to
acquire Cantel Medical Corp. (NYSE: CMD "Cantel"), through a U.S. subsidiary.
Cantel is a global provider of infection prevention products and services
primarily to endoscopy and dental Customers. Under the terms of the agreement,
we will acquire Cantel in a cash and stock transaction valued at $84.66 per
Cantel common share, based on STERIS's closing share price of $200.46 on January
11, 2021 . This represents a total equity value of approximately $3.6 billion and
a total enterprise value of approximately $4.6 billion . The agreement has been
unanimously approved by the Boards of Directors of both companies. We expect to
fund the cash portion of the transaction consideration and repay or otherwise
satisfy a significant amount of Cantel's existing debt obligations with
approximately $2.1 billion of new debt, which is described in Note 6 of our
Consolidated Financial Statements, titled "Debt". Cantel shareholder vote and
regulatory approvals have been obtained and the acquisition is expected to occur
on June 2, 2021 .
Divestitures. During fiscal 2021, we sold an Applied Sterilization Technologies
laboratory that was located in the Netherlands . We recorded proceeds of $0.5
million , net of cash divested, and recognized a pre-tax loss on the sale of $2.0
million in the selling, general and administrative expense line of the
Consolidated Statements of Income. The business generated annual revenues of
approximately $6.0 million .
COVID-19 Pandemic. The COVID-19 pandemic began to impact our business late in
fiscal 2020. The pandemic and related public health recommendations and mandated
precautions to mitigate the spread of COVID-19, including deferral of surgical
procedures and treatments and shelter-in-place orders or similar measures, have
negatively affected and are expected to continue to negatively affect some of
our operations, which may impact our financial position and cash flows. We have
experienced and expect to continue to experience unpredictable fluctuations in
demand for certain of our products and services, including some products and
services that are experiencing increased demand. To date, 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. During fiscal 2021,
in response to the to the 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 suspended all non-essential travel and enacted a temporary hiring
freeze on certain positions. To manage liquidity, we suspended our stock
repurchase program and deferred certain planned capital expenditures; however,
we continued to invest in expansion projects as planned. We do not believe that
these actions will negatively impact our long-term ability to generate revenues
or meet existing and future financial obligations.
Highlights. Revenues increased $76.6 million , or 2.5%, to $3,107.5 million for
the year ended March 31, 2021 , as compared to $3,030.9 million for the year
ended March 31, 2020 . The increase reflects organic growth in the Applied
Sterilization Technologies and Life Sciences segments and favorable fluctuations
in currencies, which were partially offset by a decline in the Healthcare
segment. Growth in the Applied Sterilization Technologies segment was primarily
due to volume. Growth in the Life Sciences segment was due to increased demand
for our products and services from our pharmaceutical Customers focused on
vaccines and biologics. The decline in the Healthcare segment was primarily due
to reduced demand for our products and services resulting from the reduction of
deferrable surgical procedures as a result of the COVID-19 pandemic and reduced
capital spending by Customers in response to the uncertainty surrounding the
COVID-19 pandemic. The Healthcare decline was partially offset by the impact of
our recent acquisitions and the recognition of $14.6 million of capital
equipment revenues that were previously deferred, recorded in the first quarter
of fiscal 2021 (for more information regarding this change refer to Note 1 of
the consolidated statements, titled "Nature of Operations and Summary of
Significant Accounting Policies").
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Our gross profit percentage decreased slightly to 43.2% for fiscal 2021 as
compared to 43.6% for fiscal 2020. The unfavorable impact of incremental costs
associated with COVID-19 (60 basis points), unfavorable fluctuations in
currencies (10 basis points) and mix and other adjustments (20 basis points),
more than offset favorable pricing (50 basis points).
Fiscal 2021 operating income increased 2.1% to $548.4 million over fiscal 2020
operating income of $537.0 million . This increase was primarily attributable to
higher gross margin attainment. Additional expenses from our recent acquisitions
were partially offset by reduced selling, general, and administrative ("SG&A")
expenses during fiscal 2021, as certain expenses were suspended or decreased as
a result of the COVID-19 pandemic.
Net cash flows from operations were $689.6 million and free cash flow was $450.9
million in fiscal 2021 compared to net cash flows from operations of $590.6
million and free cash flow of $380.2 million in fiscal 2020 (see subsection of
MD&A titled, "Non-GAAP Financial Measures" for additional information and
related reconciliation of non-GAAP financial measures to the most comparable
GAAP measures). The fiscal 2021 increases in cash flows from operations and free
cash flow were primarily due to working capital improvements, somewhat offset by
higher capital expenditures.
Our debt-to-total capital ratio was 29.8% at March 31, 2021 . During the year, we
increased our quarterly dividend for the fifteenth consecutive year to $0.40 per
share per quarter.
Outlook. In fiscal 2022 and beyond, we expect to continue to manage our costs,
grow our business with internal product and service development, invest in
greater capacity, and augment these value creating methods with potential
acquisitions of additional products and services. In this regard, we are working
diligently on the closing of our acquisition of Cantel Medical, which we
continue to expect to occur on June 2, 2021 .
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NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be "non-GAAP
financial measures" under SEC 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.
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
years ended March 31, 2021 and 2020:
Years Ended March 31,
(dollars in thousands) 2021 2020
Net cash flows provided by operating activities $ 689,640 $ 590,559
Purchases of property, plant, equipment and intangibles, net (239,262) (214,516)
Proceeds from the sale of property, plant, equipment and
intangibles 569 4,156
Free cash flow $ 450,947 $ 380,199
RESULTS OF OPERATIONS
In the following subsections, we discuss our earnings and the factors affecting
them. We begin with a general overview of our operating results and then
separately discuss earnings for our operating segments.
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FISCAL 2021 AS COMPARED TO FISCAL 2020
Revenues. The following table compares our revenues, in total and by type and
geography, for the year ended March 31, 2021 to the year ended March 31, 2020 :
Years Ended March 31, Percent
(dollars in thousands) 2021 2020 Change Change
Total revenues $ 3,107,519 $ 3,030,895 $ 76,624 2.5 %
Revenues by type:
Service revenues 1,663,979 1,628,107 35,872 2.2 %
Consumable revenues 725,951 672,329 53,622 8.0 %
Capital equipment revenues 717,589 730,459 (12,870) (1.8) %
Revenues by geography:
Ireland revenues 71,905 63,821 8,084 12.7 %
United States revenues 2,227,038 2,211,722 15,316 0.7 %
Other foreign revenues 808,576 755,352 53,224 7.0 %
Revenues increased $76.6 million , or 2.5%, to $3,107.5 million for the year
ended March 31, 2021 , as compared to $3,030.9 million for the year ended
March 31, 2020 . The increase reflects organic growth in the Applied
Sterilization Technologies and Life Sciences segments and favorable fluctuations
in currencies, which were partially offset by a decline in the Healthcare
segment. Growth in the Applied Sterilization Technologies segment was primarily
due to increased volume. Growth in the Life Sciences segment was due to
increased demand for our products and services from our pharmaceutical Customers
focused on vaccines and biologics. The decline in the Healthcare segment was
primarily due to reduced demand for our products and services resulting from the
reduction of deferrable surgical procedures as a result of the COVID-19 pandemic
and reduced capital spending by Customers in response to the uncertainty
surrounding the COVID-19 pandemic. The Healthcare decline was partially offset
by the impact of our recent acquisitions and the recognition of $14.6 million of
capital equipment revenues that were previously deferred, recorded in the first
quarter of fiscal 2021 (for more information regarding this change refer to Note
1 of the consolidated statements, titled "Nature of Operations and Summary of
Significant Accounting Policies").
Service revenues for fiscal 2021 increased $35.9 million , or 2.2% over fiscal
2020, reflecting growth in the Applied Sterilization Technologies and Life
Sciences business segments, which was partially offset by decline in the
Healthcare business segment. Consumable revenues for fiscal 2021 increased $53.6
million , or 8.0%, over fiscal 2020, reflecting growth in the Healthcare and the
Life Sciences segments. Capital equipment revenues for fiscal 2021 decreased by
$12.9 million , or 1.8%, over fiscal 2020, reflecting decline in the Healthcare
segment which was partially offset by growth in the Life Sciences business
segment. In the first quarter of fiscal 2021, we recognized $14.6 million of
capital equipment revenues that were previously deferred (for more information
regarding this change refer to Note 1 of the consolidated statements, titled
"Nature of Operations and Summary of Significant Accounting Policies").
Ireland revenues for fiscal 2021 were $71.9 million , representing an increase of
$8.1 million , or 12.7%, over fiscal 2020 revenues of $63.8 million , reflecting
growth in service, consumable and capital equipment revenues.
United States revenues for fiscal 2021 were $2,227.0 million , representing an
increase of $15.3 million , or 0.7%, over fiscal 2020 revenues of $2,211.7
million , reflecting growth in consumable and service revenues, which were
partially offset by a decline in capital equipment revenues.
Revenues from other foreign locations for fiscal 2021 were $808.6 million ,
representing an increase of $53.2 million , or 7.0% over the fiscal 2020 revenues
of $755.4 million , reflecting strength in Canada and the Europe , Middle East and
Africa ("EMEA") and Asia Pacific regions, which were partially offset by decline
in the Latin American region.
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Gross Profit. The following table compares our gross profit for the year ended
March 31, 2021 to the year ended March 31, 2020 :
Years Ended March 31, Percent
(dollars in thousands) 2021 2020 Change Change
Gross profit: (as adjusted)*
Product $ 678,464 $ 652,659 $ 25,805 4.0 %
Service 664,636 667,337 (2,701) (0.4) %
Total gross profit $ 1,343,100 $ 1,319,996 $ 23,104 1.8 %
Gross profit percentage:
Product 47.0 % 46.5 %
Service 39.9 % 41.0 %
Total gross profit percentage 43.2 % 43.6 %
*Certain amounts have been adjusted to reflect the change in inventory
accounting method, as described in Note 1 to our Consolidated Financial
Statements.
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. Our gross profit percentage decreased slightly to 43.2%
for fiscal 2021 as compared to 43.6% for fiscal 2020. The unfavorable impact of
incremental costs associated with COVID-19 (60 basis points), unfavorable
fluctuations in currencies (10 basis points), and mix and other adjustments (20
basis points), more than offset favorable pricing (50 basis points).
Operating Expenses. The following table compares our operating expenses for the
year ended March 31, 2021 to the year ended March 31, 2020 :
Years Ended March 31, Percent
(dollars in thousands) 2021 2020 Change Change
Operating expenses:
Selling, general, and administrative $ 731,320 $ 716,731 $ 14,589 2.0 %
Research and development 66,326 65,546 780 1.2 %
Restructuring expenses (2,914) 673 (3,587) NM
Total operating expenses $ 794,732 $ 782,950 $ 11,782 1.5 %
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, gains or losses from divestitures, and other general and
administrative expenses. SG&A increased 2.0% in fiscal 2021 over fiscal 2020,
largely due to our recent acquisitions. Volume and performance driven employee
compensation costs and travel and meeting costs have declined in the fiscal 2021
as compared to fiscal 2020, as a result of the COVID-19 pandemic and measures we
have taken in response to it.
Research and Development. Research and development expenses increased $0.8
million during fiscal 2021, as compared to fiscal 2020, due primarily to
increased spending within the Healthcare Products segment. 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 fiscal 2021, 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. During the third quarter of fiscal 2019, we adopted and
announced a targeted restructuring plan (the "Fiscal 2019 Restructuring Plan"),
which included the closure of two manufacturing facilities, one in Brazil and
one in England , as well as other actions including the rationalization of
certain products. Fewer than 200 positions were eliminated. The Company
relocated the production of certain impacted products to other existing
manufacturing operations during fiscal 2020. These restructuring actions were
designed to enhance profitability and improve efficiency.
Since inception of the Fiscal 2019 Restructuring Plan we have incurred pre-tax
expenses totaling $40.8 million related to these restructuring actions, of which
$28.7 million was recorded as restructuring expenses and $12.1 million was
recorded in cost of revenues, with a total of $33.9 million , $4.5 million and
$0.7 million related to the Healthcare, Applied Sterilization Technologies and
Life Sciences segments, respectively. Corporate related restructuring charges
were $1.8 million . Additional restructuring expenses related to this plan are
not expected to be material to our results of operations.
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Non-Operating Expenses, Net. Non-operating expense (income), net consists of
interest expense on debt, offset by interest earned on cash, cash equivalents,
short-term investment balances, and other miscellaneous expense. The following
table compares our non-operating expense (income), net for the year ended
March 31, 2021 to the year ended March 31, 2020 :
Years Ended March 31,
(dollars in thousands) 2021 2020 Change
Non-operating expenses, net:
Interest expense $ 37,180 $ 40,279 $ (3,099)
Interest income and miscellaneous expense (6,345) (1,987) (4,358)
Non-operating expenses, net $ 30,835 $ 38,292 $ (7,457)
Interest expense decreased $3.1 million during fiscal 2021, as compared to
fiscal 2020, primarily due to lower interest rates on floating rate debt and an
increased amount of capitalized interest expensed (refer to our Note 6 to our
consolidated financial statements, titled "Debt", for more information).
Interest (income) and miscellaneous expense changed by $4.4 million primarily
due to movement on our equity investments (refer to our Note 15 to our
consolidated financial statements, titled "Fair Value Measurements" for more
information).
Additional information regarding our outstanding debt is included in Note 6 to
our consolidated financial statements titled, "Debt," and in the subsection of
this MD&A titled, "Liquidity and Capital Resources."
Income Tax Expense. The following table compares our income tax expense and
effective income tax rates for the years ended March 31, 2021 and March 31,
2020 :
Years Ended March 31, Percent
(dollars in thousands) 2021 2020 Change Change
(as adjusted)*
Income tax expense $ 120,663 $ 90,895 $ 29,768 32.7%
Effective income tax rate 23.3 % 18.2 %
*Certain amounts have been adjusted to reflect the change in inventory
accounting method, as described in Note 1 to our Consolidated Financial
Statements.
The effective income tax rate for fiscal 2021 was 23.3% as compared to 18.2% for
fiscal 2020. The fiscal 2021 effective tax rate increased when compared to
fiscal 2020 primarily due to an increased percentage of profits earned and taxed
in jurisdictions with a higher tax rate.
Business Segment Results of Operations. We operate and report our financial
information in three reportable business segments: Healthcare, Applied
Sterilization Technologies and Life Sciences. 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 offers infection prevention and procedural products and
services for healthcare providers worldwide, including consumable products,
equipment maintenance and installation services, and capital equipment. The
segment also provides a range of specialty services for healthcare providers
including hospital sterilization services and instrument and scope repairs.
Our Applied Sterilization Technologies ("AST") segment provides contract
sterilization and testing services for medical device and pharmaceutical
manufacturers.
Our Life Sciences segment designs, manufactures and sells consumable products,
equipment maintenance, specialty services and capital equipment primarily to
pharmaceutical manufacturers around the world.
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 more information regarding our segments please refer to Note 11 to our
consolidated financial statements titled "Business Segment Information," and
Item 1, "Business".
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The following table compares business segment and Corporate and other revenues
and operating income for the year ended March 31, 2021 to the year ended
March 31, 2020 . The March 31, 2020 amounts have been adjusted to reflect the
change in inventory accounting method, as described in Note 1 titled, "Nature of
Operations and Summary of Significant Accounting Policies".
Years ended March 31, Percent
(dollars in thousands) 2021 2020 Change Change
Revenues: (as adjusted)*
Healthcare $ 1,954,055 $ 1,986,809 $ (32,754) (1.6) %
Applied Sterilization Technologies 685,912 627,147 58,765 9.4 %
Life Sciences 467,552 416,939 50,613 12.1 %
Total revenues $ 3,107,519 $ 3,030,895 $ 76,624 2.5 %
Operating income (loss):
Healthcare 427,089 420,709 6,380 1.5 %
Applied Sterilization Technologies 310,648 270,917 39,731 14.7 %
Life Sciences 180,796 144,088 36,708 25.5 %
Corporate (219,153) (207,015) (12,138) 5.9 %
Total operating income before adjustments $ 699,380 $ 628,699 $ 70,681 11.2 %
Less: Adjustments
Amortization of acquired intangible assets (1) 83,892 71,675
Acquisition and integration related charges (2) 35,634 8,225 Redomiciliation and tax restructuring costs (3) 1,592 3,699 (Gain) on fair value adjustment of acquisition related contingent consideration (1) (500) - Net loss (gain) on divestiture of businesses (1) 2,030 1,770 Amortization of inventory and property "step up" to fair value (1) 5,600 2,392 Restructuring charges (4) (3,029) 3,143 COVID-19 incremental costs (5) 25,793 749 Total operating income$ 548,368 $ 537,046
*Certain amounts have been adjusted to reflect the change in inventory accounting method, as described in Note 1 to our Consolidated Financial Statements.
(1) For more information regarding our recent acquisitions and divestitures see Note 18 titled, "Business Acquisitions and Divestitures". Amortization of purchased intangible assets fiscal 2019 total includes an impairment charge of$16,249 , see Note 3 titled, "Goodwill and Intangible Assets", for more information. (2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions. (3) Costs incurred in connection with the Redomiciliation and subsequent tax restructuring. (4) For more information regarding our restructuring activities see Note 2 titled, "Restructuring". (5) Represents a one-time special employee bonus paid to mostU.S. employees and associated professional fees. (6) 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. Healthcare revenues decreased 1.6% in fiscal 2021, as compared to fiscal 2020, reflecting declines in capital equipment and service revenues of 4.7% and 3.2%, respectively, which were partially offset by an increase in consumable revenues of 5.0%. The declines in capital equipment and services revenues were primarily due to reduced demand for our products and services resulting from the reduction of deferrable surgical procedures as a result of the COVID-19 pandemic and reduced capital spending by Customers in response to the uncertainty surrounding the COVID-19 pandemic. Fluctuations in currencies and the impact from our recent acquisitions were favorable during fiscal 2021. Consumable revenues increased during fiscal 2021, as procedure volumes continued to rebound during the second half of fiscal 2021. AtMarch 31, 2021 , the Healthcare segment's backlog amounted to$206.3 million , increasing 21.3%, as compared to the backlog of$170.1 million atMarch 31, 2020 . Fiscal 2021 backlog was impacted by the recognition of capital equipment revenues that were previously deferred, recorded in the first quarter of fiscal 2021 (for more information regarding this change refer to Note 1 of the consolidated statements, titled "Nature of Operations and Summary of Significant Accounting Policies"). Applied Sterilization Technologies revenues increased 9.4% in fiscal 2021, as compared to fiscal 2020. The increase reflects organic growth and favorable fluctuations in currencies. 33 -------------------------------------------------------------------------------- Table of Contents Life Sciences revenues increased 12.1% in fiscal 2021, as compared to fiscal 2020, reflecting growth in consumable, capital equipment and service revenues of 15.6%, 13.8% and 5.0%, respectively. The increase reflects organic growth, favorable pricing, and favorable fluctuations in currencies. Life Sciences backlog atMarch 31, 2021 amounted to$79.9 million , increasing 10.3%, as compared to backlog of$72.4 million atMarch 31, 2020 . The Healthcare segment's operating income increased$6.4 million to$427.1 million in fiscal year 2021, as compared to$420.7 million in fiscal year 2020. The segment's operating margins were 21.9% for fiscal year 2021 and 21.2% for fiscal year 2020. The increases in the fiscal 2021 period were primarily due to favorable impact from our recent acquisitions and reduced expenditures, including reductions in travel and meeting spend due to the COVID-19 pandemic. Employee compensation associated with the Healthcare segment was also reduced due to lower volumes and measures taken in response to the COVID-19 pandemic. The Applied Sterilization Technologies segment's operating income increased$39.7 million to$310.6 million in fiscal year 2021, as compared to$270.9 million in fiscal year 2020. The Applied Sterilization Technologies segment's operating margins were 45.3% for fiscal year 2021 and 43.2% for fiscal year 2020. The increases in the fiscal 2021 period were primarily due to higher volumes and reduced expenditures, including reductions in travel and meeting spend due to the COVID-19 pandemic. The Life Sciences business segment's operating income increased$36.7 million to$180.8 million in fiscal year 2021, as compared to$144.1 million in fiscal year 2020. The segment's operating margins were 38.7% for fiscal year 2021 and 34.6% for fiscal year 2020. These increases in the fiscal 2021 period were primarily due to higher volumes and favorable mix. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes significant components of our cash flows for the years endedMarch 31, 2021 and 2020: Years EndedMarch 31 , (dollars in thousands) 2021
2020
Net cash provided by operating activities$ 689,640 $ 590,559 Net cash used in investing activities (1,154,159)
(319,735)
Net provided by (cash used) in financing activities 345,620 (163,146) Debt-to-total capital ratio 29.8 % 25.3 % Free cash flow$ 450,947 $ 380,199 Net Cash Provided By Operating Activities - The net cash provided by our operating activities was$689.6 million for the year endedMarch 31, 2021 , compared to$590.6 million for the year endedMarch 31, 2020 . The following discussion summarizes the significant changes in our operating cash flows for the years endedMarch 31, 2021 and 2020: •Net cash provided by operating activities increased in fiscal 2021 by 16.8%, as compared to fiscal 2020, primarily due to working capital improvements and deferred tax payments under government COVID-19 relief programs.Net Cash Used In Investing Activities - The net cash used in our investing activities was$1,154.2 million for the year endedMarch 31, 2021 , compared to$319.7 million for the year endedMarch 31, 2020 . The following discussion summarizes the significant changes in our investing cash flows for the years endedMarch 31, 2021 and 2020: •Purchases of property, plant, equipment, and intangibles, net - Capital expenditures totaled$239.3 million and$214.5 million for fiscal 2021 and 2020, respectively. The fiscal 2021 increase was primarily due to expansion projects in the Applied Sterilization Technologies segment. •Proceeds from the sale of property, plant, equipment and intangibles - During fiscal 2021 and 2020 we received$0.6 million and$4.2 million , respectively, for proceeds from the sale of property, plant, equipment and intangibles. The majority of the fiscal 2021 proceeds were related the sale of a manufacturing facility located inBrazil . The majority of the fiscal 2020 proceeds were related to the sale of Healthcare Products facilities that were located in theU.K. •Proceeds from the sale of business - During fiscal 2021 and 2020 we received$0.5 million and$0.4 million , respectively, for proceeds from the sale of certain non-core businesses. For more information, refer to our Note 18 to our consolidated financial statements, titled "Business Acquisitions and Divestitures". •Purchases of investments - During fiscal 2021, we purchased an equity investment for$4.4 million . •Investments in business, net of cash acquired - During fiscal 2021 and 2020, we used$909.2 million and$109.8 million , respectively, for acquisitions. For more information on these acquisitions refer to Note 18 to our consolidated financial statements titled, "Business Acquisitions and Divestitures". 34 -------------------------------------------------------------------------------- Table of Contents •Other - During fiscal 2021, we provided approximately$2.4 million under borrowing agreements. For more information on these agreements refer to our Note 18 to our consolidated financial statements, titled "Business Acquisitions and Divestitures". Net Cash Provided By (Used In) Financing Activities - Net cash provided by financing activities was$345.6 million for the year endedMarch 31, 2021 , compared to net cash used in financing activities of$163.1 million for the year endedMarch 31, 2020 . The following discussion summarizes the significant changes in our financing cash flows for the years endedMarch 31, 2021 and 2020: •Payments on long-term obligations - During the second quarter of fiscal 2021, we repaid$35.0 million of principal for private placement notes that matured inAugust 2020 . For more information on our debt refer to Note 6 to our consolidated financial statements titled, "Debt". •(Payments) proceeds under credit facilities, net - At the end of fiscal 2021,$247.4 million of debt was outstanding under our bank credit facility, compared to$275.4 million of debt outstanding under this facility at the end of fiscal 2020. We provide additional information about our bank credit facility in Note 6 to our consolidated financial statements titled, "Debt". •Proceeds from the issuance of long-term obligations - During the third quarter of fiscal 2021, we received proceeds of$550.0 million under our Term Loan. OnMarch 19, 2021 , we entered into a new term loan agreement which provided for a$550.0 million term loan facility (the "New Term Loan"), which replaced theNovember 2020 Term Loan agreement. For more information refer to Note 6 of our consolidated financial statements, titled "Debt". •Deferred financing fees and debt issuance costs - During fiscal 2021 and fiscal 2020, we paid$12.8 million and$1.3 million , respectively for financing fees and debt issuance costs. For more information on our debt refer to Note 6 to our consolidated financial statements titled, "Debt". •Repurchases of shares - From the start of fiscal 2021 throughApril 9, 2020 , we purchased 35,000 of our ordinary shares in the aggregate amount of$5.0 million . Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended onApril 9, 2020 . During fiscal 2021 we obtained 91,567 of our ordinary shares in connection with our stock-based compensation award programs in the amount of$9.6 million . During fiscal 2020, we purchased 273,259 of our ordinary shares in the aggregate amount of$40.0 million . We also obtained 122,884 of our ordinary shares in connection with our stock-based compensation award programs in the amount$11.2 million . We provide additional information about our share repurchases in Note 13 to our consolidated financial statements titled, "Repurchases of Ordinary Shares." •Acquisition related deferred or contingent consideration - During fiscal 2021 and 2020 we paid$2.4 million and$0.6 million , respectively, in acquisition related deferred or contingent consideration. For more information, refer to our Note 18 to our consolidated financial statements, titled "Business Acquisitions and Divestitures". •Cash dividends paid to ordinary shareholders - During fiscal 2021, we paid cash dividends totaling$133.8 million or$1.57 per outstanding share. During fiscal 2020, we paid cash dividends totaling$123.0 million or$1.45 per outstanding share. •Transactions with noncontrolling interest holders - During fiscal 2021, we received$2.3 million of contributions from noncontrolling interest holders and paid$4.1 million in distributions to noncontrolling interest holders. During fiscal 2020, we received$6.1 million of contributions from noncontrolling interest holders and paid$1.2 million in distributions to noncontrolling interest holders. •Stock option and other equity transactions, net - We generally receive cash for issuing shares upon the exercise of options under our employee stock option program. During fiscal 2021 and fiscal 2020, we received cash proceeds totaling$26.7 million and$34.7 million , respectively, under these programs. Cash Flow Measures. Free cash flow was$450.9 million in fiscal 2021, compared to$380.2 million in fiscal 2020. The fiscal 2021 increase in free cash flow was primarily due to working capital improvements, somewhat offset by higher capital expenditures. Our debt-to-total capital ratio was 29.8% atMarch 31, 2021 and 25.3% atMarch 31, 2020 . Cash Requirements. We intend to use our existing cash and cash equivalent balances and cash generated from operations to fund capital expenditures and meet our other liquidity needs. Our capital requirements depend on many uncertain factors, including our rate of sales growth, our Customers' acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, changes in our operating expenses and other factors. To the extent that existing and anticipated sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or the sale of equity securities. There can be no assurance that our financing arrangements will provide us with sufficient funds or that we will be able to obtain any additional funds on terms favorable to us or at all. 35 -------------------------------------------------------------------------------- Table of Contents Sources of Credit. Our sources of credit as ofMarch 31, 2021 are summarized in the following table: Reductions in Maximum Available Credit March 31, 2021 March 31, 2021 Amounts Facility for Other Amounts Amounts (dollars in thousands) Available Financial
Instruments Outstanding Available Sources of Credit Private placement$ 860,308 $ -$ 860,308 $ - New Term loan 550,000 - 550,000 - Revolving Credit Agreement (1) 1,250,000 9,824 247,423 992,753 Total Sources of Credit$ 2,660,308 $ 9,824$ 1,657,731 $ 992,753 (1) AtMarch 31, 2021 , there was$9.8 million of letters of credit outstanding under the Credit Agreement. Our sources of funding from credit as ofMarch 31, 2021 are summarized below: •OnMarch 19, 2021 ,STERIS plc ("the Company"),STERIS Corporation ,STERIS Limited ("Limited"), andSTERIS Irish FinCo Unlimited Company ("FinCo", "STERIS Irish FinCo"), each as a borrower and guarantor, entered into a credit agreement with various financial institutions as lenders, andJPMorgan Chase Bank, N.A ., as administrative agent (the "Revolving Credit Agreement") providing for a$1,250 million revolving credit facility (the "Revolver"), which replaced a prior revolving credit agreement. •The Revolver provides for revolving credit borrowings, swing line borrowings and letters of credit, with sublimits for swing line borrowings and letters of credit. The Revolver may be increased in specified circumstances by up to$625 million in the discretion of the lenders. The Revolver matures on the date that is five years afterMarch 19, 2021 , and all unpaid borrowings, together with accrued and unpaid interest thereon, are repayable on that date. The Revolver bears interest from time to time, at either the Base Rate or the Eurocurrency Rate, as defined in and calculated under and as in effect from time to time under the Revolving Credit Agreement, plus the Applicable Margin, as defined in the Revolving Credit Agreement. The Applicable Margin is determined based on the Debt Rating of the Company, as defined in the Credit Agreement. Base Rate Advances are payable quarterly in arrears and Eurocurrency Rate Advances are payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. Swingline borrowings bear interest at a rate to be agreed by the applicable swingline lender and the applicable borrower, subject to a cap in the case of swingline borrowings denominated inU.S. Dollars equal to the Base Rate plus the Applicable Margin for Base Rate Advances plus the Facility Fee. Advances may be extended inU.S. Dollars or in specified alternative currencies. •OnMarch 19, 2021 , the Company,STERIS Corporation, Limited , and FinCo, each as a borrower and guarantor, entered into a term loan agreement with various financial institutions as lenders, andJPMorgan Chase Bank, N.A ., as Administrative agent (the "Term Loan Agreement") providing for a$550 million term loan facility (the "Term Loan"), which replaced an existing term loan agreement, dated as ofNovember 18, 2020 (the "Existing Term Loan Agreement"). The proceeds of the Term Loan were used to refinance the Existing Term Loan Agreement. •The Term Loan matures on the date that is five years afterMarch 19, 2021 (the "Term Loan Closing Date"). No principal payments are due on the Term Loan for the period beginning from the first full fiscal quarter ended after the Term Loan Closing Date to and including the fourth full fiscal quarter ended after the Term Loan Closing Date. For the period beginning from the fifth full fiscal quarter ended after the Term Loan Closing Date to and including the twelfth full fiscal quarter ended after the Term Loan Closing Date, quarterly principal payments, each in the amount of 1.25% of the original principal amount of the Term Loan, are due on the last business day of each fiscal quarter. For the period beginning from the thirteenth full fiscal quarter ended after the Term Loan Closing Date through the maturity of the loan, quarterly principal payments, each in the amount of 1.875% of the original principal amount of the Term Loan, are due on the last business day of each fiscal quarter. The remaining unpaid principal is due and payable on the maturity date. •The Term Loan bears interest from time to time, at either the Base Rate or the Eurocurrency Rate, as defined in and calculated under and as in effect from time to time under the Term Loan Agreement, plus the Applicable Margin, as defined in the Term Loan Agreement. The Applicable Margin is determined based on the Debt Rating of STERIS, as defined in the Term Loan Agreement. Base Rate Advances are payable quarterly in arrears and Eurocurrency Rate Advances are payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. •Also onMarch 19, 2021 , the Company,STERIS Corporation, Limited , and FinCo, each as a borrower and guarantor, entered into a delayed draw term loan agreement with various financial institutions as lenders, andJPMorgan Chase Bank, N.A ., as administrative agent (the "Delayed Draw Term Loan Agreement") providing for a delayed draw term loan facility of up to$750 million (the "Delayed Draw Term Loan") in connection with STERIS's proposed acquisition of Cantel Medical Corp. ("Cantel"). The Delayed Draw Term Loan will be funded by the lenders upon the satisfaction of certain 36 -------------------------------------------------------------------------------- Table of Contents conditions, including the concurrent consummation of the acquisition (the "Acquisition Closing Date"). The proceeds of the Delayed Draw Term Loan are expected to be used, together with the proceeds from other new indebtedness, to fund the cash consideration for the acquisition, as well as for various other items. •The Delayed Draw Term Loan matures on the date that is five years after the Acquisition Closing Date. No principal payments are due on the Delayed Draw Term Loan for the period beginning from the first full fiscal quarter ended after the Acquisition Closing Date to and including the fourth full fiscal quarter ended after the Acquisition Closing Date. For the period beginning from the fifth full fiscal quarter ended after the Acquisition Closing Date to and including the twelfth full fiscal quarter ended after the Acquisition Closing Date, quarterly principal payments, each in the amount of 1.25% of the original principal amount of the Delayed Draw Term Loan, are due on the last business day of each fiscal quarter. For the period beginning from the thirteenth full fiscal quarter ended after the Acquisition Closing Date through the maturity of the loan, quarterly principal payments, each in the amount of 1.875% of the original principal amount of the Delayed Draw Term Loan, are due on the last business day of each fiscal quarter. The remaining unpaid principal is due and payable on the maturity date. •The Delayed Draw Term Loan bears interest from time to time, at either the Base Rate or the Eurocurrency Rate, as defined in and calculated under and as in effect from time to time under the Delayed Draw Term Loan Agreement, plus the Applicable Margin, as defined in the Delayed Draw Term Loan Agreement. The Applicable Margin is determined based on the Debt Rating of the Company, as defined in the Delayed Draw Term Loan Agreement. Interest on borrowings made at the Base Rate ("Base Rate Advances") is payable quarterly in arrears and interest on borrowings made at the Eurocurrency Rate ("Eurocurrency Rate Advances") is payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. There is no premium or penalty for prepayment of Base Rate Advances, but prepayments of Eurocurrency Rate Advances are subject to a breakage fee. Our outstanding Private Placement Senior Notes atMarch 31, 2021 were as follows: U.S. Dollar Applicable Note Purchase Value at March (dollars in thousands) Agreement Maturity Date 31, 2021$91,000 Senior notes at 3.20% 2012 Private Placement December 2022 91,000$80,000 Senior notes at 3.35% 2012 Private Placement December 2024 80,000$25,000 Senior notes at 3.55% 2012 Private Placement December 2027 25,000$125,000 Senior notes at 3.45% 2015 Private Placement May 2025 125,000$125,000 Senior notes at 3.55% 2015 Private Placement May 2027 125,000$100,000 Senior notes at 3.70% 2015 Private Placement May 2030 100,000$50,000 Senior notes at 3.93% 2017 Private Placement February 2027 50,000 €60,000 Senior notes at 1.86% 2017 Private Placement February 2027 70,426$45,000 Senior notes at 4.03% 2017 Private Placement February 2029 45,000 €20,000 Senior notes at 2.04% 2017 Private Placement February 2029 23,475 £45,000 Senior notes at 3.04% 2017 Private Placement February 2029 61,863 €19,000 Senior notes at 2.30% 2017 Private Placement February 2032 22,302 £30,000 Senior notes at 3.17% 2017 Private Placement February 2032 41,242 Total Senior Notes$ 860,308 The Private Placement Senior Notes were issued as follows: •OnFebruary 27, 2017 , Limited issued and sold an aggregate principal amount of$95.0 million , €99.0 million, and £75.0 million, of senior notes in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. These notes have maturities of between 10 and 15 years from the issue date. The agreement governing these notes contains leverage and interest coverage covenants. •OnMay 15, 2015 ,STERIS Corporation issued and sold$350.0 million of senior notes, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. These notes have maturities of 10 years to 15 years from the issue date. The agreement governing these notes contains leverage and interest coverage covenants. •InDecember 2012 , and inFebruary 2013 STERIS Corporation issued and sold$200.0 million of senior notes, in a private placements to certain institutional investors in offerings that were exempt from the registration requirements of the Securities Act of 1933. The agreement governing the notes contains leverage and interest coverage covenants. 37 -------------------------------------------------------------------------------- Table of Contents •All of the note agreements for the senior notes were amended inMarch 2019 , in connection with the Redomiciliation. The amendments waived certain repurchase rights for of the note holders and increased the size of certain baskets to more closely align with other than current credit agreement baskets. •In addition,STERIS's STERIS Irish FinCo Unlimited Company ("FinCo", "STERIS Irish FinCo") subsidiary issued$1.35 billion of 10 year and 30 year registered senior notes onApril 1, 2021 (the "Senior Public Notes"). •OnMarch 19, 2021 ,STERIS Corporation as issuer, and theCompany, Limited and FinCo, as guarantors, entered into (1) a First Amendment to Amended and Restated Note Purchase Agreement datedMarch 5, 2019 (which had amended and restated certain note purchase agreements originally datedDecember 4, 2012 ) per the 2012 and 2013 senior notes (the "2012 Amendment"), and (2) a First Amendment to Amended and Restated Note Purchase Agreement datedMarch 5, 2019 (which had amended and restated certain note purchase agreements originally datedMarch 31, 2015 ) for the 2015 senior notes (the "2015 Amendment"). Also onMarch 19, 2021 , Limited, as Issuer, and the Company,STERIS Corporation and FinCo, as guarantors, entered into a First Amendment to Amended and Restated Note Purchase Agreement datedMarch 5, 2019 (which had amended and restated a certain note purchase agreement originally datedJanuary 23, 2017 ) for the 2017 senior notes (together with the 2012 Amendment and the 2015 Amendment, the "NPA Amendments"). The NPA Amendments provide for, among other things, the netting of cash proceeds received from qualifying capital markets events under certain circumstances for purposes of calculating the leverage ratio financial covenant. As ofMarch 31, 2021 , a total of$247.4 million was outstanding under the Revolving Credit Agreement, based on currency exchange rates as ofMarch 31, 2021 . AtMarch 31, 2021 , we had$992.8 million of unused funding available under the Revolving Credit Agreement. The Revolving Credit Agreement includes a sub-limit that reduces the maximum amount available to us by letters of credit outstanding. AtMarch 31, 2021 , there was$9.8 million in letters of credit outstanding under the Credit Agreement. As ofMarch 31, 2021 ,$550.0 million was outstanding under the Term Loan. AtMarch 31, 2021 , we were in compliance with all financial covenants associated with our indebtedness. We provide additional information regarding our debt structure and payment obligations in the section of the MD&A titled, "Liquidity and Capital Resources" in the subsection titled, "Contractual and Commercial Commitments" and in Note 6 to our consolidated financial statements titled, "Debt." CAPITAL EXPENDITURES Our capital expenditure program is a component of our long-term strategy. This program includes, among other things, investments in new and existing facilities, business expansion projects, radioisotope (cobalt-60), and information technology enhancements and research and development advances. During fiscal 2021, our capital expenditures amounted to$239.3 million . We use cash provided by operating activities and our cash and cash equivalent balances to fund capital expenditures. In fiscal 2022, we plan to continue to invest in facility expansions, particularly within the Applied Sterilization Technologies segment and in ongoing maintenance for existing facilities. CONTRACTUAL AND COMMERCIAL COMMITMENTS AtMarch 31, 2021 , we had commitments under non-cancelable operating leases totaling$195.1 million . 38 -------------------------------------------------------------------------------- Table of Contents Our contractual obligations and commercial commitments as ofMarch 31, 2021 are presented in the following tables. Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies, and other potential cash outflows resulting from events that require us to fulfill commitments. Payments due by March 31, 2026 and (dollars in thousands) 2022 2023 2024 2025 thereafter Total Contractual Obligations: Debt $ -$ 118,500 $ 27,500 $ 121,250 $ 1,390,481 $ 1,657,731 Operating leases 28,675 24,593 19,160 16,052 106,593 195,073 Purchase obligations 119,824 90,932 - - - 210,756 Benefit payments under defined benefit plans 5,137 5,731 5,388 5,543 36,672
58,471
Trust assets available for benefit payments under defined benefit plans (5,137) (5,731) (5,388) (5,543) (36,672)
(58,471)
Benefit payments under other post-retirement benefits plans 1,327 1,198 1,072 969 4,089
8,655
Expected contributions to defined benefit plans 3,954 1,991 - - -
5,945
Total Contractual Obligations$ 153,780 $ 237,214
The table above includes only the principal amounts of our contractual
obligations. We provide information about the interest component of our
long-term debt in the subsection of MD&A titled, "Liquidity and Capital
Resources," and in Note 6 to our consolidated financial statements titled,
"Debt."
Purchase obligations shown in the table above relate to minimum purchase
commitments with suppliers for materials purchases and long term construction
contracts.
The table above excludes contributions we make to our defined contribution
plans. Our future contributions to the defined contribution plans depend on
uncertain factors, such as the amount and timing of employee contributions and
discretionary employer contributions. We provide additional information about
our defined benefit pension plans, defined contribution plan, and other
post-retirement benefits plan in Note 9 to our consolidated financial statements
titled, "Benefit Plans."
Amount of Commitment Expiring
2026 and
(dollars in thousands) 2022 2023 2024 2025 thereafter Totals
Commercial Commitments:
Letters of credit and surety bonds $ 61,060 $ 3,569 $ 440 $ 1,466 $ 780 $ 67,315
Letters of credit as security for
self-insured risk retention policies 11,807 - - - - 11,807
Total Commercial Commitments $ 72,867 $ 3,569 $ 440 $ 1,466 $ 780 $ 79,122
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
STERIS plc (STERIS) and its wholly-owned subsidiaries, STERIS Limited and STERIS
Corporation (collectively Guarantors), each have provided guarantees of the
obligations of STERIS Irish FinCo Unlimited Company ("FinCo", "STERIS Irish
FinCo"), a wholly-owned subsidiary issuer, under Senior Public Notes issued by
STERIS Irish FinCo on April 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 will be senior unsecured obligations of STERIS Irish FinCo and the
Guarantors, respectively, and will be 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 and STERIS Corporation ,
including any claims of trade creditors, will be 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 of STERIS plc and
its subsidiaries.
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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 these 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 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 twelve
months ended March 31, 2021 and summarized balance sheet information at March
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 issuer. Transactions with non-issuer and
non-guarantor subsidiaries have been presented separately.
Summarized Results of Operations
(in thousands) Twelve Months Ended
March 31,
2021
Revenues $ 1,542,738
Gross profit 941,179Operating costs arising from transactions with non-issuers and non-guarantors - net
380,042
Income from operations 443,046
Non-operating income (expense) arising from transactions with subsidiaries that are non-issuers and non-guarantors - net
(134,138)
Net income $ 727,636
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Summarized Balance Sheet Information
( in thousands)
March 31,
2021
Receivables due from non-issuers and non-guarantor subsidiaries $ 14,102,215
Other current assets 348,937
Total current assets $ 14,451,152 Non-current receivables due from non-issuers and non-guarantor subsidiaries
$ 1,091,809 Goodwill 94,979 Other non-current assets 207,240 Total non-current assets$ 1,394,028 Payables due to non-issuers and non-guarantor subsidiaries$ 15,549,831 Other current liabilities 128,665 Total current liabilities$ 15,678,496
Non-current payables due to non-issuers and non-guarantor subsidiaries
$ 1,203,274 Other non-current liabilities 1,695,772 Total non-current liabilities$ 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. CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS The following subsections describe our most critical accounting policies, estimates, and assumptions. Our accounting policies are more fully described in Note 1 to our consolidated financial statements titled, "Nature of Operations and Summary of Significant Accounting Policies." Estimates and Assumptions. Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements that were prepared in accordance withUnited States generally accepted accounting principles. We make certain estimates and assumptions that we believe to be reasonable when preparing these financial statements. These estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could be materially different from these estimates. We periodically review these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit Committee of the Company's Board of Directors. Revenue Recognition. Revenue is recognized when obligations under the terms of the contract are satisfied and control of the promised products or services has transferred to the Customer. Revenues are measured at the amount of consideration that we expect to be paid in exchange for the products or services. Product revenue is recognized when control passes to the Customer, which is generally based on contract or shipping terms. Service revenue is recognized when the Customer benefits from the service, which occurs either upon completion of the service or as it is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Our standard return and restocking fee policies are applied to sales of products. Shipping and handling costs charged to Customers are included in Product revenues. The associated expenses are treated as fulfillment costs and are included in Cost of revenues. Revenues are reported net of sales and value-added taxes collected from Customers. We have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances in the same period the related revenues are recorded. The reduction in revenue for these items is estimated based on historical experience and trend analysis to the extent that it is probable that a significant reversal of revenue will not occur. Estimated returns are recorded gross on the Consolidated Balance Sheets. In transactions that contain multiple performance obligations, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate 41 -------------------------------------------------------------------------------- Table of Contents the total arrangement consideration to each performance obligation based on its relative standalone selling price, which is the price for the product or service when it is sold separately. Payment terms vary by the type and location of the Customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. We do not evaluate whether the selling price contains a financing component for contracts that have a duration of less than one year. We do not capitalize sales commissions as substantially all of our sales commission programs have an amortization period of one year or less. Certain costs to fulfill a contract are capitalized and amortized over the term of the contract if they are recoverable, directly related to a contract and generate resources that we will use to fulfill the contract in the future. AtMarch 31, 2021 assets related to costs to fulfill a contract were not material to our Consolidated Financial Statements. Allowance for Doubtful Accounts Receivable. We maintain an allowance for uncollectible accounts receivable for estimated losses in the collection of amounts owed by Customers. We estimate the allowance based on analyzing a number of factors, including amounts written off historically, Customer payment practices, and general economic conditions. We also analyze significant Customer accounts on a regular basis and record a specific allowance when we become aware of a specific Customer's inability to pay. As a result, the related accounts receivable are reduced to an amount that we reasonably believe is collectible. These analyses require judgment. If the financial condition of our Customers worsens, or economic conditions change, we may be required to make changes to our allowance for doubtful accounts receivable. Allowance for Sales Returns. We maintain an allowance for sales returns based upon known returns and estimated returns for both capital equipment and consumables. We estimate returns of capital equipment and consumables based upon historical experience. Inventories and Reserves. Inventories are stated at the lower of their cost and net realizable value determined by the first-in, first-out ("FIFO") cost method. Inventory costs include material, labor, and overhead. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be usable. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write-down inventory values and record an adjustment to cost of revenues. Asset Impairment Losses. Property, plant, equipment, and identifiable intangible assets are reviewed for impairment when events and circumstances indicate that the carrying value of such assets may not be recoverable. Impaired assets are recorded at the lower of carrying value or estimated fair value. We conduct this review on an ongoing basis and, if impairment exists, we record the loss in the Consolidated Statements of Income during that period. When we evaluate assets for impairment, we make certain judgments and estimates, including interpreting current economic indicators and market valuations, evaluating our strategic plans with regards to operations, historical and anticipated performance of operations, and other factors. If we incorrectly anticipate these factors, or unexpected events occur, our operating results could be materially affected. Asset Retirement Obligations. We incur retirement obligations for certain assets. We record an initial liability for the asset retirement obligations (ARO) at fair value. Accounting for the ARO at inception and in subsequent periods includes the determination of the present value of a liability and offsetting asset, the subsequent accretion of that liability and depletion of the asset, and a periodic review of the ARO liability estimates and discount rates used in the analysis. We provide additional information about our asset retirement obligations in Note 5 to our consolidated financial statements titled, "Property, Plant and Equipment." Restructuring. We record specific accruals in connection with plans for restructuring elements of our business. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, and contractual obligations. Actual amounts could differ from the original estimates. We review our restructuring-related accruals on a quarterly basis and changes to plans are appropriately recognized in the Consolidated Statements of Income in the period the change is identified. Purchase Accounting andGoodwill . Assets and liabilities of the business acquired are accounted for at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. We supplement management expertise with valuation specialists in performing appraisals to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We generally amortize our intangible assets over their useful lives with the exception of indefinite lived intangible assets. We do not amortize goodwill, but we evaluate it annually for impairment. Therefore, the allocation of the purchase price to intangible assets and goodwill has a significant impact on future operating results. 42 -------------------------------------------------------------------------------- Table of Contents We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. We may consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. We may also utilize a discounted cash flow analysis that requires certain assumptions and estimates be made regarding market conditions and our future profitability. In those circumstances, we test goodwill for impairment by reviewing the book value compared to the fair value at the reporting unit level. We calculate the fair value of our reporting units based on the present value of estimated future cash flows. Management's judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants. As a result of our annual impairment review for goodwill and other indefinite lived intangible assets for fiscal year 2020 no indicators of impairment were identified. We evaluate indefinite lived intangible assets annually, or when evidence of potential impairment exists. We evaluate several qualitative indicators and assumptions, and trends that influence the valuation of the assets to determine if any evidence of potential impairment exists. During the third quarter of fiscal 2019, management adopted a branding strategy that included phasing out the usage of a tradename associated with certain products in the Healthcare Products business segment. As a result, management recorded an impairment charge of$16.2 million , which is included within the Selling, general, and administrative line of the Consolidated Statements of Income. The remaining fair value of the asset was calculated using an income approach (the relief from royalty method). The remaining fair value was not material and was amortized over the asset's remaining useful life. Fair value calculated using this approach is classified within Level 3 of the fair value hierarchy and requires several assumptions. Income Taxes. Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, income tax rates, changes in uncertain tax benefits, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and the respective governmental taxing authorities. We use judgment in determining our annual effective income tax rate and evaluating our tax positions. We prepare and file tax returns based on our interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. We cannot be sure that the tax authorities will agree with all of the tax positions taken by us. The actual income tax liability for each jurisdiction in any year can, in some instances, ultimately be determined be several years after the tax return is filed and the financial statements are published. We evaluate our tax positions using the recognition threshold and measurement attribute in accordance with current accounting guidance. We determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority and that the taxing authority will have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The appropriate unit of account for determining what constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. We review and adjust our tax estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance, which would increase our effective income tax rate and could result in an adverse impact on our consolidated financial position, results of operations, or cash flows. We believe that adequate accruals have been made for income taxes. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations or cash flows for any one period. Additional information regarding income taxes is included in Note 8 to our consolidated financial statements titled, "Income Taxes." 43 -------------------------------------------------------------------------------- Table of Contents Self-Insurance Liabilities. We record a liability for self-insured risks that we retain for general and product liabilities, workers' compensation, and automobile liabilities based on actuarial calculations. We use our historical loss experience and actuarial methods to calculate the estimated liability. This liability includes estimated amounts for both losses and incurred but not reported claims. We review the assumptions used to calculate the estimated liability at least annually to evaluate the adequacy of the amount recorded. We maintain insurance policies to cover losses greater than our estimated liability, which are subject to the terms and conditions of those policies. The obligation covered by insurance contracts will remain on the balance sheet as we remain liable to the extent insurance carriers do not meet their obligation. Estimated amounts receivable under the contracts are included in the "Prepaid expenses and other current assets" line, and the "Other assets" line of our consolidated balance sheets. Our accrual for self-insured risk retention as ofMarch 31, 2021 and 2020 was$23.3 million and$23.2 million , respectively. We are also self-insured for employee medical claims. We estimate a liability for incurred but not reported claims based upon recent claims experience. Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual results are not consistent with these assumptions and judgments, we could be exposed to additional costs in subsequent periods. 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 10 of our consolidated financial statements titled, "Commitments and Contingencies" for additional information. We are subject to taxation from federal, state and local, and foreign 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 ofthe United States routinely conducts audits of our federal income tax returns. Additional information regarding our commitments and contingencies is included in Note 10 to our consolidated financial statements titled, "Commitments and Contingencies." Benefit Plans. We provide defined benefit pension plans for certain employees and retirees. In addition, we sponsor an unfunded post-retirement benefits plan for two groups ofUnited States retirees. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage. 44 -------------------------------------------------------------------------------- Table of Contents Employee pension and post-retirement benefits plans are a cost of conducting business and represent obligations that will be settled in the future and therefore, require us to use estimates and make certain assumptions to calculate the expense and liabilities related to the plans. Changes to these estimates and assumptions can result in different expense and liability amounts. Future actual experience may be significantly different from our current expectations. We believe that the most critical assumptions used to determine net periodic benefit costs and projected benefit obligations are the expected long-term rate of return on plan assets and the discount rate. A summary of significant assumptions used to determine theMarch 31, 2021 projected benefit obligations and the fiscal 2021 net periodic benefit costs is as follows: U.S. Post- Synergy Health Synergy Health Synergy Health Synergy Health Harwell Dosimeters Retirement plc Isotron BV Daniken AG Radeberg Allershausen Ltd Benefits Plan Funding Status Funded Funded Funded Unfunded Unfunded Funded Unfunded Assumptions used to determine March 31, 2021 Benefit obligations: Discount rate 2.10 % 0.90 % 0.35 % 1.60 % 0.80 % 2.15 % 2.50 % Assumptions used to determine fiscal 2021 Net periodic benefit costs: Discount rate 2.40 % 1.60 % 0.70 % 1.50 % 1.75 % 2.15 % 3.00 % Expected return on plan assets 3.50 % 1.60 % 0.70 % n/a n/a n/a n/a NA - Not applicable. We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios, and the long-term asset class return expectations. Generally, net periodic benefit costs increase as the expected long-term rate of return on plan assets assumption decreases. Holding all other assumptions constant, lowering the expected long-term rate of return on plan assets assumption for our funded defined benefit pension plans by 50 basis points would have increased the fiscal 2021 benefit costs by less than$0.1 million . We develop our discount rate assumptions by evaluating input from third-party professional advisers, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as our projected benefit obligations. Generally, the projected benefit obligations and the net periodic benefit costs both increase as the discount rate assumption decreases. Holding all other assumptions constant, lowering the discount rate assumption for our defined benefit pension plans and for the other post-retirement benefits plan by 50 basis points would have decreased the fiscal 2021 net periodic benefit costs by less than$0.1 million and would have increased the projected benefit obligations by approximately$12.6 million atMarch 31, 2021 . We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five year-period from the assumed current year healthcare cost trend rate of 7.0% to the assumed long-term healthcare cost trend rate. A 100 basis point change in the assumed healthcare cost trend rate (including medical, prescription drug, and long-term rates) would have had the following effect atMarch 31, 2021 : 100 Basis Point (dollars in thousands) Increase Decrease Effect on total service and interest cost components $ - $ - Effect on postretirement benefit obligation 3
(3)
We recognize an asset for the overfunded status or a liability for the
underfunded status of defined benefit pension and post-retirement benefit plans
in our balance sheets. This amount is measured as the difference between the
fair value of plan assets and the benefit obligation (the projected benefit
obligation for pension plans and the accumulated post-retirement benefit
obligation for other post-retirement benefit plans). Changes in the funded
status of the plans are recorded in other comprehensive income in the year they
occur. We measure plan assets and obligations as of the balance sheet date. Note
9 to our consolidated financial statements titled, "Benefit Plans," contains
additional information about our pension and other post-retirement welfare
benefits plans.
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Share-Based Compensation. We measure the estimated fair value for share-based
compensation awards, including grants of employee stock options, at the grant
date and recognize the related compensation expense over the period in which the
share-based compensation vests. We selected the Black-Scholes-Merton option
pricing model as the most appropriate method for determining the estimated fair
value of our share-based stock option compensation awards. This model involves
assumptions that are judgmental and affect share-based compensation expense.
Share-based compensation expense was $26.0 million in fiscal 2021, $23.8 million
in fiscal 2020 and $24.0 million in fiscal 2019. Note 14 to our consolidated
financial statements titled, "Share-Based Compensation," contains additional
information about our share-based compensation plans.
RECENTLY ISSUED ACCOUNTING STANDARDS IMPACTING THE COMPANY
Recently issued accounting standards that are relevant to us are presented in
Note 1 to our consolidated financial statements titled, "Nature of Operations
and Summary of Significant Accounting Policies."
INFLATION
Our business has not been significantly impacted by the overall effects of
inflation. We monitor the prices we charge for our products and services on an
ongoing basis and plan to adjust those prices to take into account future
changes in the rate of inflation. However, we may not be able to completely
offset the impact of inflation.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of the
federal securities laws about STERIS, and the acquisition of Cantel.
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. These forward-looking statements are based on current
expectations, estimates or forecasts about our businesses, the industries in
which we operate and current beliefs and assumptions of management and are
subject to uncertainty and changes in circumstances. These statements are not
guarantees of performance or results. Many important factors could affect actual
financial results and cause them to vary materially from the expectations
contained in the forward-looking statements. 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. 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. These risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements include, without limitation:
•the failure to obtain Cantel stockholder approval of acquisition of Cantel;
•the possibility that the closing conditions to the acquisition of Cantel may
not be satisfied or waived, including that a governmental entity may prohibit,
delay or refuse to grant a necessary regulatory approval and any conditions
imposed on the combined entity in connection with consummation of the
acquisition of Cantel;
•delay in closing the acquisition of Cantel or the possibility of
non-consummation of the acquisition of Cantel;
•the risk that the cost savings and any other synergies from the acquisition of
Cantel may not be fully realized or may take longer to realize than expected,
including that the acquisition of Cantel may not be accretive within the
expected timeframe or to the extent anticipated;
•the occurrence of any event that could give rise to termination of the merger
agreement;
•the risk that shareholder/stockholder litigation in connection with the
acquisition of Cantel may affect the timing or occurrence of the acquisition of
Cantel or result in significant costs of defense, indemnification and liability;
•risks related to the disruption of the acquisition of Cantel to STERIS, Cantel
and our respective managements;
•risks relating to the value of the STERIS shares to be issued in the
transaction;
•the effect of announcement of the acquisition of Cantel on our ability to
retain and hire key personnel and maintain relationships with customers,
suppliers and other third parties;
•the impact of the COVID-19 pandemic on STERIS's or Cantel's operations,
performance, results, prospects, or value;
•STERIS's ability to achieve the expected benefits regarding the accounting and
tax treatments of the redomiciliation to Ireland ("Redomiciliation");
•operating costs, Customer loss and business disruption (including, without
limitation, difficulties in maintaining relationships with employees, Customers,
clients or suppliers) being greater than expected following the Redomiciliation;
•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;
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•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;
•the potential for increased pressure on pricing or costs that leads to erosion
of profit margins;
•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;
•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 or Cantel's
performance, results, prospects or value;
•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;
•the possibility of reduced demand, or reductions in the rate of growth in
demand, for STERIS's or Cantel's products and services;
•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;
•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 and Cantel's businesses, industry
or initiatives including, without limitation, those matters described in this
Form 10-K, and other securities filings, may adversely impact STERIS's and/or
Cantel's performance, results, prospects or value;
•the impact on STERIS and its operations, or tax liabilities, of Brexit or the
exit of other member countries from the EU, and STERIS's ability to respond to
such impacts;
•the impact on STERIS, Cantel and their respective 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;
•the possibility that anticipated financial results or benefits of recent
acquisitions, including the acquisition of Key Surgical, or of STERIS's
restructuring efforts, or of recent divestitures, or of restructuring plans will
not be realized or will be other than anticipated;
•the effects of contractions in credit availability, as well as the ability of
STERIS's and Cantel's Customers and suppliers to adequately access the credit
markets when needed;
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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, we are exposed to various risks, including, but not limited to, interest rate, foreign currency, and commodity risks. These risks are described in the sections that follow. INTEREST RATE RISK As ofMarch 31, 2021 , we had$860.3 million in fixed rate senior notes outstanding. As ofMarch 31, 2021 , we had$247.4 million in outstanding borrowings under our Credit Agreement which are exposed to changes in interest rates. We monitor our interest rate risk, but do not engage in any hedging activities using derivative financial instruments. For additional information regarding our debt structure, refer to Note 6 to our Consolidated Financial Statements titled, "Debt." FOREIGN CURRENCY RISK We are exposed to the impact of foreign currency exchange fluctuations. This foreign currency exchange risk arises when we conduct business in a currency other than theU.S. dollar. For most operations, local currencies have been determined to be the functional currencies. The financial statements of subsidiaries are translated to theirU.S. dollar equivalents at end-of-period exchange rates for assets and liabilities and at average currency exchange rates for revenues and expenses. Translation adjustments for subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within equity. Note 19 to our consolidated financial statements titled, " Reclassifications out of Accumulated Other Comprehensive Income (Loss)," contains additional information about the impact of translation on accumulated other comprehensive income (loss) and equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the Consolidated Statements of Income. Since we operate internationally and approximately 30% of our revenues and 40% of our cost of revenues are generated outsidethe United States , foreign currency exchange rate fluctuations can significantly impact our financial position, results of operations, and competitive position. We enter into foreign currency forward contracts to hedge monetary assets and liabilities denominated in foreign currencies, including inter-company transactions. We do not use derivative financial instruments for speculative purposes. AtMarch 31, 2021 , we held a foreign currency forward contract to buy41.5 million British pounds . COMMODITY RISK We are dependent on basic raw materials, sub-assemblies, components, and other supplies used in our operations. Our financial results could be affected by the availability and changes in prices of these materials. Some of these materials are sourced from a limited number of suppliers or only a single supplier. These materials are also key source materials for our competitors. Therefore, if demand for these materials rises, we may experience increased costs and/or limited or unavailable supplies. As a result, we may not be able to acquire key production materials on a timely basis, which could impact our ability to produce products and satisfy incoming sales orders on a timely basis. In addition, the costs of these materials can rise suddenly and result in significantly higher costs of production. We believe that we have adequate sources of supply for many of our key materials and energy sources. Where appropriate, we enter into long-term supply contracts as a basis to guarantee a reliable supply. We may also enter into commodity swap contracts to hedge price changes in a certain commodity that impacts raw materials included in our cost of revenues. AtMarch 31, 2021 , we held commodity swap contracts to buy 768.0 thousand pounds of nickel. 48
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