QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission File Number 001-38848
STERIS plc
(Exact name of registrant as specified in its charter)
Ireland
98-1455064
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
70 Sir John Rogerson's Quay,
Dublin 2,
Ireland
D02 R296
(Address of principal executive offices)
(Zip code)
3531 232 2000
(Registrant’s telephone number, including area code)
_______________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
Trading symbol(s)
Name of Exchange on Which Registered
Ordinary Shares, $0.001 par value
STE
New York Stock Exchange
2.700% Senior Notes due 2031
STE/31
New York Stock Exchange
3.750% Senior Notes due 2051
STE/51
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of ordinary shares outstanding as of August 4, 2022: 100,014,639
As used in this Quarterly Report on Form 10-Q, STERIS plc and its consolidated subsidiaries together are called “STERIS,” the “Company,” “we,” “us,” or “our,” unless otherwise noted.
ITEM 1. FINANCIAL STATEMENTS
STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2022
March 31, 2022
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
316,327
$
348,320
Accounts receivable (net of allowances of $23,121 and $24,371, respectively)
763,788
799,041
Inventories, net
620,404
574,999
Prepaid expenses and other current assets
147,428
156,637
Total current assets
1,847,947
1,878,997
Property, plant, and equipment, net
1,573,337
1,552,576
Lease right-of-use assets, net
182,357
188,480
Goodwill
4,321,176
4,404,343
Intangibles, net
3,193,032
3,328,537
Other assets
70,157
70,661
Total assets
$
11,188,006
$
11,423,594
Liabilities and equity
Current liabilities:
Accounts payable
$
228,987
$
225,737
Accrued income taxes
37,553
26,873
Accrued payroll and other related liabilities
137,580
183,721
Short-term lease obligations
35,560
36,472
Short-term indebtedness
151,000
142,875
Accrued expenses and other
317,643
306,544
Total current liabilities
908,323
922,222
Long-term indebtedness
2,846,446
2,945,481
Deferred income taxes, net
790,819
780,619
Long-term lease obligations
150,215
155,056
Other liabilities
73,075
75,579
Total liabilities
$
4,768,878
$
4,878,957
Commitments and contingencies (see Note 8)
Ordinary shares, with $0.001 par value; 500,000 shares authorized; 100,090 and 100,067 ordinary shares issued and outstanding, respectively
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, unless noted and except per share amounts)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
STERIS is a leading global provider of products and services that support patient care with an emphasis on infection prevention. WE HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare, life sciences and dental products and services. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal (“GI”) endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, dental instruments and tools, instrument and scope repair, laboratory testing services, outsourced reprocessing, and capital equipment products, such as sterilizers and surgical tables, automated endoscope reprocessors, and connectivity solutions such as operating room (“OR”) integration.
We operate and report in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. We describe our business segments in Note 9 titled, "Business Segment Information."
Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:
Interim Financial Statements
We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.
These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. The Consolidated Balance Sheet at March 31, 2022 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Principles of Consolidation
We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating polices, are accounted for primarily using the equity method. These investments are immaterial to the Company's Consolidated Financial Statements.
Use of Estimates
We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three month period ended June 30, 2022 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Revenue Recognition and Associated Liabilities
Revenue is recognized when obligations under the terms of the contract are satisfied and control of the promised products or services have 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 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. At June 30, 2022, assets related to costs to fulfill a contract were not material to our Consolidated Financial Statements.
Refer to Note 9, titled "Business Segment Information" for disaggregation of revenue.
Product Revenue
Product revenues consist of revenues generated from sales of consumables and capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer or Group Purchasing Organization ("GPO") agreement.We recognize revenue for sales of product when control passes to the Customer, which generally occurs either when the products are shipped or when they are received by the Customer. Revenue related to capital equipment products is deferred until installation is complete if the capital equipment and installation are highly integrated and form a single performance obligation.
Service Revenue
Within our Healthcare and Life Sciences segments, service revenues include revenue generated from parts and labor associated with the maintenance, repair and installation of capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer, or Group Purchasing Organization ("GPO") agreement. For maintenance, repair and installation of capital equipment, revenue is recognized upon completion of the service. Healthcare service revenues also include outsourced reprocessing services and instrument repairs. Contracts for outsourced reprocessing services are primarily based on an agreement with a Customer, ranging in length from several months to 15 years. Outsourced reprocessing services revenue is recognized ratably over the contract term using a time-based input measure, adjusted for volume and other performance metrics, to the extent that it is probable that a significant reversal of revenue will not occur. Contracts for instrument repairs are primarily based on a Customer’s purchase order, and the associated revenue is recognized upon completion of the repair.
We also offer preventive maintenance and separately priced extended warranty agreements to our Customers, which require us to maintain and repair our products over the duration of the contract. Generally, these contract terms are cancellable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
without penalty and range from one to five years. Amounts received under these Customer contracts are initially recorded as a service liability and are recognized as service revenue ratably over the contract term using a time-based input measure.
Within our Applied Sterilization Technologies segment, service revenues include contract sterilization and laboratory services. Sales contracts for contract sterilization and laboratory services are primarily based on a Customer’s purchase order and associated Customer agreement and revenues are generally recognized upon completion of the service.
Contract Liabilities
Payments received from Customers are based on invoices or billing schedules as established in contracts with Customers. Deferred revenue is recorded when payment is received in advance of performance under the contract. Deferred revenue is recognized as revenue upon completion of the performance obligation, which generally occurs within one year. During the first three months of fiscal 2023, $57,528 of the March 31, 2022 deferred revenue balance was recorded as revenue. During the first three months of fiscal 2022, $35,722 of the March 31, 2021 deferred revenue balance was recorded as revenue.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Deferred revenue balances.
Service Liabilities
Payments received in advance of performance for cancellable preventive maintenance and separately priced extended warranty contracts are recorded as service liabilities. Service liabilities are recognized as revenue as performance is rendered under the contract.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Service liability balances.
Remaining Performance Obligations
Remaining performance obligations reflect only the performance obligations related to agreements for which we have a firm commitment from a Customer to purchase and exclude variable consideration related to unsatisfied performance obligations. With regard to products, these remaining performance obligations include capital equipment and consumable orders which have not shipped. With regard to service, these remaining performance obligations primarily include installation, certification, and outsourced reprocessing services. As of June 30, 2022, the transaction price allocated to remaining performance obligations was approximately $1,574,000. We expect to recognize approximately 62% of the transaction price within one year and approximately 31% beyond one year. The remainder has yet to be scheduled for delivery.
Recently Issued Accounting Standards Impacting the Company
Recently Issued Accounting Standards Impacting the Company are presented in the following table:
Standard
Date of Issuance
Description
Date of Adoption
Effect on the financial statements or other significant matters
Standards that have been adopted in fiscal 2023
ASU 2021-08 "Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
October 2021
The standard provides guidance to improve the accounting for acquired revenue contracts with Customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer.
First Quarter Fiscal 2023
We adopted this standard effective April 1, 2022 with no material impact to our consolidated financial statements.
A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
On June 2, 2021, we acquired all outstanding equity interests in Cantel Medical LLC ("Cantel") through a U.S. subsidiary.The total consideration for Cantel common stock and stock equivalents was $3,599,471. We funded the cash portion of the transaction consideration and repayment of a significant amount of Cantel’s existing debt obligations with a portion of the proceeds from new debt, which is described in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
In addition to the total purchase consideration, STERIS assumed and repaid $721,284 of existing Cantel debt obligations and assumed Cantel's obligations associated with convertible senior notes issued on May 15, 2020, which is described our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
Fair Value of Assets Acquired and Liabilities Assumed
The table below presents the allocation of fair values of assets acquired and liabilities assumed on the acquisition date.
March 31, 2022
(As previously reported)
Adjustments
Final
Cash
$
169,073
$
—
$
169,073
Accounts receivable
172,226
—
172,226
Inventory
249,221
—
249,221
Property, plant and equipment
267,360
(1,282)
266,078
Lease right-of-use assets, net
59,720
—
59,720
Other assets
72,864
—
72,864
Intangible assets
2,942,000
—
2,942,000
Goodwill
1,522,381
22,088
1,544,469
Total assets acquired
5,454,845
20,806
5,475,651
Convertible debt, par value
168,000
—
168,000
Other current liabilities
247,549
5,595
253,144
Long-term lease obligations
47,856
—
47,856
Deferred income taxes, net
670,685
15,211
685,896
Long-term indebtedness
721,284
—
721,284
Total liabilities assumed
1,855,374
20,806
1,876,180
Net assets acquired
$
3,599,471
$
—
$
3,599,471
Fiscal 2023 and 2022 first quarter acquisition and integration expenses totaled $9,832 and $140,996, respectively and were primarily related to the acquisition and integration of Cantel. Acquisition and integration expenses are reported in the selling, general and administrative expenses line of our Consolidated Statements of Income and include but are not limited to investment banker, advisory, legal, other professional fees, and certain employee-related expenses.
For more information on the acquisition of Cantel, refer to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
3. Inventories, Net
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. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
June 30, 2022
March 31, 2022
Raw materials
$
211,453
$
195,035
Work in process
107,267
76,021
Finished goods
341,109
334,880
Reserve for excess and obsolete inventory
(39,425)
(30,937)
Inventories, net
$
620,404
$
574,999
4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
June 30, 2022
March 31, 2022
Land and land improvements (1)
$
82,795
$
84,015
Buildings and leasehold improvements
651,071
654,851
Machinery and equipment
899,970
903,649
Information systems
223,455
222,620
Radioisotope
603,761
597,641
Construction in progress (1)
402,795
356,013
Total property, plant, and equipment
2,863,847
2,818,789
Less: accumulated depreciation and depletion
(1,290,510)
(1,266,213)
Property, plant, and equipment, net
$
1,573,337
$
1,552,576
(1)Land is not depreciated. Construction in progress is not depreciated until placed in service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
5. Debt
Indebtedness was as follows:
June 30, 2022
March 31, 2022
Short-term debt
Term Loan, current portion
$
27,500
$
27,500
Delayed Draw Term Loan, current portion
32,500
24,375
Private Placement Senior Notes
91,000
91,000
Total short-term debt
$
151,000
$
142,875
Long-term debt
Private Placement Senior Notes
$
745,032
$
758,726
Revolving Credit Facility
92,642
58,908
Deferred financing costs
(24,353)
(25,278)
Term Loan
65,625
177,500
Delayed Draw Term Loan
617,500
625,625
Senior Public Notes
1,350,000
1,350,000
Total long-term debt
$
2,846,446
$
2,945,481
Total debt
$
2,997,446
$
3,088,356
Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
6. Additional Consolidated Balance Sheet Information
Additional information related to our Consolidated Balance Sheets is as follows:
June 30, 2022
March 31, 2022
Accrued payroll and other related liabilities:
Compensation and related items
$
83,416
$
71,878
Accrued vacation/paid time off
14,108
13,669
Accrued bonuses
23,174
64,702
Accrued employee commissions
13,598
30,171
Other postretirement benefit obligations-current portion
1,190
1,190
Other employee benefit plans obligations-current portion
2,094
2,111
Total accrued payroll and other related liabilities
$
137,580
$
183,721
Accrued expenses and other:
Deferred revenues
$
100,617
$
110,791
Service liabilities
47,737
51,365
Self-insured risk reserves-current portion
11,421
8,995
Accrued dealer commissions
34,450
31,700
Accrued warranty
13,443
14,108
Asset retirement obligation-current portion
517
1,181
Accrued interest
18,073
10,014
Other
91,385
78,390
Total accrued expenses and other
$
317,643
$
306,544
Other liabilities:
Self-insured risk reserves-long-term portion
$
19,213
$
19,213
Other postretirement benefit obligations-long-term portion
7,070
7,335
Defined benefit pension plans obligations-long-term portion
3,601
1,772
Other employee benefit plans obligations-long-term portion
1,183
1,360
Accrued long-term income taxes
12,502
12,225
Asset retirement obligation-long-term portion
11,897
12,362
Other
17,609
21,312
Total other liabilities
$
73,075
$
75,579
7. Income Tax Expense
The effective income tax rates for the three-month periods ended June 30, 2022 and 2021 were 17.9% and 24.4%, respectively. The fiscal 2023 effective tax rate decreased when compared to fiscal 2022, primarily due to nonrecurring unfavorable items reported in the prior fiscal year.
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local, as well as foreign jurisdictions. With the exception of formal acceptance of the settlement noted below, we are no longer subject to United States federal examinations for years before fiscal 2016 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2016. We remain subject to tax authority audits in various jurisdictions wherever we do business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
In the fourth quarter of fiscal 2021, we completed an appeals process with the U.S. Internal Revenue Service (the “IRS”) regarding proposed audit adjustments related to deductibility of interest paid on intercompany debt for fiscal years 2016 through 2017. An agreement was reached on final interest rates, which also impacts subsequent years through 2020. We estimate the total federal, state, and local tax impact of the settlement to be approximately $12,000, for the fiscal years 2016 through 2020, of which approximately $7,500 has been paid through June 30, 2022.
In May 2021, we received two notices of proposed tax adjustment from the IRS regarding deemed dividend inclusions and associated withholding tax. The notices relate to the fiscal and calendar year 2018. The IRS adjustments would result in a cumulative tax liability of approximately $50,000. We are contesting the IRS’s assertions, and intend to pursue available remedies such as appeals and litigation, if necessary. We have not established reserves related to these notices. An unfavorable outcome is not expected to have a material adverse impact on our consolidated financial position but could be material to our consolidated results of operations and cash flows for any one period.
8. Commitments and 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 believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
Civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022, Item 1 titled "Business - Information with respect to our Business in General - Government Regulation" and "- Environmental Matters", and the "Risk Factors" in Item 1A titled "Product and service related regulations and claims".
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 7 to our consolidated financial statements titled, “Income Tax Expense” in this Quarterly Report on Form 10-Q.
9. Business Segment Information
We report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental.Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare segment provides a comprehensive offering for healthcare providers worldwide, focused on sterile processing departments and procedural centers, such as operating rooms and endoscopy suites. Our products and services range
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
from infection prevention consumables and capital equipment, as well as services to maintain that equipment; to the repair of re-usable procedural instruments; to outsourced instrument reprocessing services. In addition, our procedural solutions also include single-use devices and capital equipment infrastructure used primarily in operating rooms, ambulatory surgery centers, endoscopy suites, and other procedural areas.
Our Applied Sterilization Technologies ("AST") segment is a third-party service provider for contract sterilization, as well as testing services needed to validate sterility services for medical device and pharmaceutical manufacturers. Our technology-neutral offering supports Customers every step of the way, from testing through sterilization.
Our Life Sciences segment provides a comprehensive offering of products and services that support pharmaceutical manufacturing, primarily for vaccine and other biopharma Customers focused on aseptic manufacturing. These solutions include a full suite of consumable products, equipment maintenance and specialty services, and capital equipment.
Our Dental segment provides a comprehensive offering for dental practitioners and dental schools, offering instruments, infection prevention consumables and instrument management systems.
We disclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated Company. Certain prior period costs were reallocated from the Healthcare segment to corporate to conform with current year presentation. The prior period segment operating income measure has been recast for comparability.
For the three months ended June 30, 2022, revenues from a single Customer did not represent ten percent or more of the Healthcare, Applied Sterilization Technologies or Life Sciences segment revenues.Three Customers collectively and consistently account for approximately 40.0% of our Dental segment revenue. The percentage associated with these three Customers collectively in any one period may vary due to the buying patterns of these three Customers as well as other Dental Customers. These three Customers collectively accounted for approximately 38.6% and 35.8% of our Dental segment revenues for the three months ended June 30, 2022 and 2021, respectively. Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Financial information for each of our segments is presented in the following table:
Three Months Ended June 30,
2022
2021
Revenues:
Healthcare
$
698,526
$
602,817
Applied Sterilization Technologies
220,911
208,902
Life Sciences
132,207
121,471
Dental
104,847
35,232
Total revenues
$
1,156,491
$
968,422
Segment operating income (loss):
Healthcare
$
156,497
$
138,373
Applied Sterilization Technologies
109,315
101,927
Life Sciences
55,305
49,088
Dental
19,596
10,119
Corporate
(75,943)
(77,273)
Total segment operating income
$
264,770
$
222,234
Less: Adjustments
Amortization of acquired intangible assets (1)
$
93,929
$
41,741
Acquisition and integration related charges (2)
9,832
140,996
Tax restructuring costs (3)
173
(49)
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
(3,100)
—
Net loss on divestiture of businesses (1)
3,878
419
Amortization of inventory and property "step up" to fair value (1)
1,637
24,789
Restructuring charges (4)
26
14
Total income from operations
$
158,395
$
14,324
(1)For more information regarding our recent acquisitions and divestitures refer to note 2 titled, "Business Acquisitions and Divestitures" of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
(2)Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in tax restructuring.
(4)For more information regarding our restructuring efforts refer to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Additional information regarding our fiscal 2023 and fiscal 2022 first quarter revenue is disclosed in the following tables:
Three Months Ended June 30,
2022
2021
Healthcare:
Consumables
$
252,032
$
206,692
Capital equipment
179,134
150,890
Service
267,360
245,235
Total Healthcare Revenues
$
698,526
$
602,817
Total Applied Sterilization Technologies Revenues
$
220,911
$
208,902
Life Sciences:
Consumables
$
59,557
$
56,536
Capital equipment
40,499
32,745
Service
32,151
32,190
Total Life Sciences Revenues
$
132,207
$
121,471
Dental Revenues
$
104,847
$
35,232
Total Revenues
$
1,156,491
$
968,422
Additional geographic information regarding our revenues and property, plant and equipment, net is presented in the following tables:
Three Months Ended June 30,
2022
2021
Revenues:
Ireland
$
18,176
$
21,945
United States
834,101
679,250
Other locations
304,214
267,227
Total Revenues
$
1,156,491
$
968,422
10. Shares and Preferred Shares
Ordinary shares
We calculate basic earnings per share based upon the weighted average number of shares outstanding. We calculate diluted earnings per share based upon the weighted average number of shares outstanding plus the dilutive effect of share equivalents calculated using the treasury stock method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
Three Months Ended June 30,
Denominator (shares in thousands):
2022
2021
Weighted average shares outstanding—basic
100,082
90,152
Dilutive effect of share equivalents
640
840
Weighted average shares outstanding and share equivalents—diluted
100,722
90,992
Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:
Three Months Ended June 30,
(shares in thousands)
2022
2021
Number of share options
291
273
Additional Authorized Shares
The Company has an additional authorized share capital of 50,000,000 preferred shares of $0.001 par value each, plus 25,000 deferred ordinary shares of €1.00 par value each, in order to satisfy minimum statutory capital requirements for all Irish public limited companies.
11. Repurchases of Ordinary Shares
On May 7, 2019, our Board of Directors authorized a share repurchase program resulting in a share repurchase authorization of approximately $78,979 (net of taxes, fees and commissions). On July 30, 2019, our Board of Directors approved an increase in the May 7, 2019 authorization of an additional amount of $300,000 (net of taxes, fees and commissions). As of June 30, 2022, there was approximately $294,649 (net of taxes, fees and commissions) of remaining availability under a Board authorized share repurchase program. The share repurchase program has no specified expiration date.
Under the authorization, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any share repurchases may be activated, suspended or discontinued at any time. Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended on April 9, 2020. The suspension was lifted effective February 10, 2022, enabling the Company to resume stock repurchases pursuant to the prior authorizations.
During the first three months of fiscal 2023, we repurchased 68,177 of our ordinary shares for the aggregate amount of $14,283 (net of fees and commissions) pursuant to the authorizations.
During the first three months of fiscal 2023, we obtained 57,704 of our ordinary shares in the aggregate amount of $11,737 in connection with share based compensation award programs. During the first three months of fiscal 2022, we obtained 59,648 of our ordinary shares in the aggregate amount of $10,670 in connection with share based compensation award programs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
12. Share-Based Compensation
We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Compensation and Organizational Development Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and share grants. We satisfy share award incentives through the issuance of new ordinary shares.
Stock options provide the right to purchase our shares at the market price on the date of grant, or for options granted to employees in fiscal 2019 and thereafter, 110% of the market price on the date of grant, subject to the terms of the option plan and agreements. Generally, one-fourth of the stock options granted to employees become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each year of employment after the grant date. As of June 30, 2022, 2,812,252 ordinary shares remained available for grant under the long-term incentive plan.
The fair value of stock option awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during the first three months of fiscal 2023 and 2022:
Fiscal 2023
Fiscal 2022
Risk-free interest rate
2.41
%
1.16
%
Expected life of options
5.8 years
5.8 years
Expected dividend yield of stock
0.80
%
0.97
%
Expected volatility of stock
24.45
%
24.41
%
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.54% and 2.85% was applied in fiscal 2023 and 2022, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
Number of Options
Weighted Average Exercise Price
Average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at March 31, 2022
1,560,954
$
138.37
Granted
222,384
250.06
Exercised
(20,640)
53.20
Forfeited
(6,326)
200.62
Outstanding at June 30, 2022
1,756,372
$
153.29
6.9 years
$
105,081
Exercisable at June 30, 2022
1,109,471
$
118.70
5.8 years
$
97,397
We estimate that 624,686 of the non-vested stock options outstanding at June 30, 2022 will ultimately vest.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $206.15 closing price of our ordinary shares on June 30, 2022 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.
The total intrinsic value of stock options exercised during the first three months of fiscal 2023 and fiscal 2022 was $3,897 and $5,469, respectively. Net cash proceeds from the exercise of stock options were $1,221 and $1,710 for the first three months of fiscal 2023 and fiscal 2022, respectively.
The weighted average grant date fair value of stock option grants was $50.04 and $36.24 for the first three months of fiscal 2023 and fiscal 2022, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. As of May 24, 2021, we no longer have
outstanding SARS.
A summary of the non-vested restricted share and share unit activity is presented below:
Number of Restricted Shares
Number of Restricted Share Units
Weighted-Average Grant Date Fair Value
Non-vested at March 31, 2022
485,510
33,677
$
157.37
Granted
119,588
5,824
227.46
Vested
(137,898)
(6,218)
121.81
Forfeited
(6,167)
(766)
164.04
Non-vested at June 30, 2022
461,033
32,517
$
155.01
Restricted shares and restricted share unit grants are valued based on the closing stock price at the grant date. The value of restricted shares and units that vested during the first three months of fiscal 2023 was $17,570.
As of June 30, 2022, there was a total of $88,105 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plan. We expect to recognize the cost over a weighted average period of 2.4 years.
Cantel Share Based Compensation Plan
In connection with the acquisition of Cantel, outstanding, non-vested Cantel restricted share units were replaced with STERIS restricted share units.
A total of 280,402 STERIS restricted share units replaced Cantel awards based on a ratio of one Cantel restricted share unit to 0.4262 STERIS restricted share units. Cantel time based restricted share units were replaced with STERIS restricted share units with the same three-year pro-rata vesting terms based on the original award date. Performance based Cantel restricted share units were replaced with time based STERIS restricted share units that vest pro rata over the remaining one, two or three anniversaries from the original Cantel award date. The number of Cantel performance restricted share units was replaced based on the original target achievement level. All replacement restricted share units retained dividend accumulation rights.
The fair value of each STERIS restricted share unit awarded on June 2, 2021 to replace outstanding non-vested Cantel restricted share units was $191.18 based on the closing price of STERIS ordinary shares on June 2, 2021. Approximately $18,173 of the total $53,607 grant date fair value was attributable to pre-acquisition services provided and was recorded as a component of purchase consideration in connection with the acquisition of Cantel.
Recognition of unamortized share-based compensation expense totaling $197 and $18,545, for the first quarter of fiscal 2023 and 2022, respectively was accelerated in connection with the planned termination of certain Cantel executive level employees in fiscal 2023. As a result of the formal notices provided and the terms of the Cantel share based compensation plans and Cantel Executive Severance and Change of Control Plan, the remaining service required under the awards became non-substantive requiring acceleration of the remaining related compensation cost.
As of June 30, 2022, there was a total of $4,438 in unrecognized compensation cost related to non-vested STERIS restricted share units awarded to replace Cantel restricted share units. We expect to recognize the cost over a weighted average of 1.0 year.
A summary of the non-vested restricted share units activity associated with the Cantel share-based compensation plans is presented below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Number of Restricted Share Units
Weighted-Average Grant Date Fair Value
Non-vested at March 31, 2022
45,722
$
191.18
Vested
(2,578)
191.18
Forfeited
(1,318)
191.18
Non-vested at June 30, 2022
41,826
$
191.18
13. Financial and Other Guarantees
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our warranty liability during the first three months of fiscal 2023 were as follows:
Warranties
Balance, March 31, 2022
$
14,108
Warranties issued during the period
3,285
Settlements made during the period
(3,950)
Balance, June 30, 2022
$
13,443
14. Derivatives and Hedging
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. During the first quarter of fiscal 2023, we also entered into forward foreign currency contracts in order to hedge a portion of our expected non-U.S. dollar denominated earnings against our reporting currency, the U.S. dollar. These foreign currency exchange contracts will mature during fiscal 2023. We did not elect hedge accounting for these forward foreign currency contracts; however, we may seek to apply hedge accounting in future scenarios. We do not use derivative financial instruments for speculative purposes.
None of these contracts are designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At June 30, 2022, we held foreign currency forward contracts to sell 34.9 million euros. At June 30, 2022 we held commodity swap contracts to buy 601.2 thousand pounds of nickel.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
Location of gain (loss) recognized in income
Amount of gain (loss) recognized in income
Three Months Ended June 30,
2022
2021
Foreign currency forward contracts
Selling, general and administrative
$
2,349
$
1,428
Commodity swap contracts
Cost of revenues
$
(2,824)
$
664
15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions.
The following table shows the fair value of our financial assets and liabilities at June 30, 2022 and March 31, 2022:
Fair Value Measurements
Carrying Value
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
Level 1
Level 2
Level 3
June 30,
March 31,
June 30,
March 31,
June 30,
March 31,
June 30,
March 31,
Assets:
Cash and cash equivalents
$
316,327
$
348,320
$
316,327
$
348,320
$
—
$
—
$
—
$
—
Forward and swap contracts (1)
1,330
2,780
—
—
1,330
2,780
—
—
Equity investments(2)
7,178
8,520
7,178
8,520
—
—
—
—
Other investments
2,140
2,272
2,140
2,272
—
—
—
—
Liabilities:
Forward and swap contracts (1)
$
783
$
198
$
—
$
—
$
783
$
198
$
—
$
—
Deferred compensation plans (2)
1,036
1,240
1,036
1,240
—
—
—
—
Total debt (3)
2,997,446
3,088,356
—
—
2,725,916
2,991,680
—
—
Contingent consideration obligations (4)
7,518
10,550
—
—
—
7,518
10,550
(1) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(2) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Changes in the fair value of these investments are recorded in the "Interest income and miscellaneous expense line" of the Consolidated Statement of Income. During the first quarter of fiscal 2023 and 2022, we recorded a (losses) of $(936) and $(16), respectively, related to these investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
(3) We estimate the fair value of our debt using discounted cash flow analyses, based on estimated current incremental borrowing rates for similar types of borrowing arrangements.
(4)Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at June 30, 2022 are summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three months ended June 30, 2022 and 2021 were as follows:
Defined Benefit Plans (1)
Currency Translation (2)
Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2022
$
1,276
$
(211,084)
$
(209,808)
Other Comprehensive (Loss) Income before reclassifications
154
(178,594)
(178,440)
Amounts reclassified from Accumulated Other Comprehensive (Loss) Income
(125)
—
(125)
Net current-period Other Comprehensive (Loss) Income
29
(178,594)
(178,565)
Balance at June 30, 2022
$
1,305
$
(389,678)
$
(388,373)
(1)The amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(2)The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.
Defined Benefit Plans (1)
Currency Translation (2)
Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2021
$
(5,519)
$
(55,724)
$
(61,243)
Other Comprehensive Income (Loss) before reclassifications
591
24,933
25,524
Amounts reclassified from Accumulated Other Comprehensive (Loss)
(1,098)
—
(1,098)
Net current-period Other Comprehensive (Loss)
(507)
24,933
24,426
Balance at June 30, 2021
$
(6,026)
$
(30,791)
$
(36,817)
(1)Amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(2)The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of STERIS plc
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of STERIS plc and subsidiaries (the Company) as of June 30, 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the three-month periods ended June 30, 2022 and 2021, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of March 31, 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended, and the related notes and schedule (not presented herein); and in our report dated May 31, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), we explain the general financial condition and the results of operations for STERIS including:
•what factors affect our business;
•what our earnings and costs were in each period presented;
•why those earnings and costs were different from prior periods;
•where our earnings came from;
•how this affects our overall financial condition;
•what our expenditures for capital projects were; and
•where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchases of shares, pay cash dividends and fund future working capital needs.
As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the first quarter of fiscal 2023 and fiscal 2022. It may also be helpful to refer to information in Item 1, "Business", Part I, Item 1A, "Risk Factors" and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022, and Part II, Item 1A. of this quarterly report, for a discussion of some of the matters that can adversely affect our business and results of operations.
In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. This information, discussion, and analysis may be important to you in making decisions about your investments in STERIS.
Financial Measures
In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements 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."
Revenues – Defined
As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
•Revenues – Our revenues are presented net of sales returns and allowances.
•Product Revenues – We define product revenues as revenues generated from sales of consumable and capital equipment products.
•Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment. Service revenues also include hospital sterilization services, instrument and scope repairs, as well as revenues generated from contract sterilization and laboratory services offered through our Applied Sterilization Technologies segment.
•Capital Equipment Revenues – We define capital equipment revenues as revenues generated from sales of capital equipment, which includes: steam and gas sterilizers, low temperature liquid chemical sterilant processing systems, pure steam/water systems, surgical lights and tables, and integrated operating room ("OR").
•Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products, which includes dedicated consumables including V-PRO, SYSTEM 1 and 1E consumables, gastrointestinal endoscopy accessories, sterility assurance products, barrier protection solutions, cleaning consumables, dental and surgical instruments.
•Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues.
General Company Overview and Executive Summary
STERIS is a leading global provider of products and services that support patient care with an emphasis on infection prevention. WE HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare, life sciences and dental products and services. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal (“GI”) endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, dental instruments and tools, instrument and scope repair, laboratory testing services, outsourced reprocessing, and capital equipment products, such as sterilizers and surgical tables, automated endoscope reprocessors, and connectivity solutions such as operating room (“OR”) integration.
We operate and report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental.Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income. We describe our business segments in Note 9 to our consolidated financial statements, titled "Business Segment Information."
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is increased concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventive screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all which are driving increased demand for many of our products and services.
Acquisitions. On June 2, 2021, we acquired all outstanding equity interests in Cantel Medical LLC. ("Cantel"). Cantel’s Dental business extended our business into a new Customer segment where there is an increasing focus on infection prevention protocols and processes. This business is being reported as the Dental segment. The rest of Cantel was integrated into our existing Healthcare and Life Sciences segments. Additionally, the acquisition has and is expected to continue to result in cost savings from optimizing global back-office infrastructure, leveraging best-demonstrated practices across locations and eliminating redundant public company costs.
Fiscal 2023 and 2022 first quarter acquisition and integration expenses totaled $9.8 million and $141.0 million, respectively and were primarily related to the acquisition and integration of Cantel. Acquisition and integration expenses are reported in the selling, general and administrative expenses line of our Consolidated Statements of Income.
The results of Cantel are only reflected in the results of operations and cash flows from June 2, 2021 forward, which will affect results of comparability to the prior period operations and cash flows.
COVID-19 Pandemic and Macroeconomic Environment. The COVID-19 global pandemic and its direct and indirect impacts have led to disruptions in the market and the global and U.S. economies that may continue for a prolonged period. In response to the COVID-19 pandemic, various governmental authorities and private enterprises have implemented numerous containment measures, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. A number of our global suppliers, vendors, and distributors are located in regions that have been adversely affected by restrictive government and private enterprise measures implemented in response to the pandemic, or have otherwise been disrupted by associated prevailing macroeconomic trends. This has led to product and labor shortages, shipping delays and an increase in raw material and component pricing as well as other inflationary pressures, particularly on our manufacturing costs.
Throughout the pandemic, we have experienced and expect to continue to experience unpredictable fluctuations in demand for certain of our products and services. To date, we have been able to continue to operate our manufacturing facilities and meet the demand for essential products and services of our Customers. Nonetheless, in calendar 2022, supply chain disruptions and
delays have limited and may continue to limit our ability to ship certain capital equipment, particularly in our Healthcare and Life Sciences business, negatively impacting capital equipment revenue growth. Within the Healthcare and Life Sciences businesses, approximately $35 million in capital equipment shipments were delayed in the first quarter of fiscal 2023. During the quarter we have seen recovery of elective procedures as the impact of the COVID-19 pandemic has subsided in many geographies. However, diminished staffing availability at hospitals appears to be a key variable limiting further recovery of procedure volumes to pre-pandemic levels.
We continue to pursue all available avenues to address supply chain disruptions, including purchases from third parties and brokers, qualifying alternative parts and suppliers, and obtaining prioritization from governmental agencies. We do not believe that the COVID-19 pandemic will negatively impact our long-term ability to generate revenues or meet existing and future financial obligations.
For additional information and our risk factors related to the COVID-19 pandemic, please refer to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022, and within Item 1A. of this 10-Q, Part II.
Highlights. Revenues for the first quarter of fiscal 2023 were $1,156.5 million, representing an increase of 19.4% over the first quarter of fiscal 2022 revenues of $968.4 million. The increase reflects organic growth in all segments and added volume from Cantel, which was partially offset by unfavorable fluctuations in currencies, and the absence of revenue from our Renal care business, which was divested in January 2022.
Gross margin percentage for the first quarter of fiscal 2023 was 44.8%, compared to 44.0% for the first quarter of fiscal 2022. Favorable impacts from pricing, the Cantel acquisition, fluctuations in currencies, our recent divestitures, and mix and other adjustments, were partially offset by unfavorable impact from inflation and productivity.
Income from operations during the first quarter of fiscal 2023 was $158.4 million, compared to $14.3 million for the first quarter of fiscal 2022. In the fiscal 2022 period, we incurred $141.0 million in acquisition and integration expenses, which were primarily related to our acquisition of Cantel. The fiscal 2023 reduction in such expenses was partially offset by an increase in amortization of purchased intangible assets in the fiscal 2023 period.
Cash flows from operations were $231.7 million and free cash flow was $117.1 million in the first three months of fiscal 2023 compared to cash flows from operations of $97.4 million and free cash flow of $41.2 million in the first three months of fiscal 2022 (see the subsection below titled "Non-GAAP Financial Measures" for additional information and related reconciliation of cash flows from operations to free cash flow). The fiscal 2023 increases in cash flows from operations and free cash flows were primarily due to lower costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, which was partially offset by higher capital expenditures in the fiscal 2023 period.
Our debt-to-total capital ratio was 31.9% at June 30, 2022 and 32.1% at March 31, 2022. During the first three months of fiscal 2023, we declared and paid a quarterly cash dividend of $0.43 per ordinary share.
Additional information regarding our financial performance during the first quarter of fiscal 2023 is included in the subsection below titled “Results of Operations.”
NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” 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 (capital expenditures) plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented within investing activities in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to pay cash dividends, fund growth outside of core operations, fund future debt principal repayments, and repurchase shares.
The following table summarizes the calculation of our free cash flow for the three months ended June 30, 2022 and 2021:
Three Months Ended June 30,
(dollars in thousands)
2022
2021
Net cash provided by operating activities
$
231,746
$
97,426
Purchases of property, plant, equipment and intangibles, net
(115,933)
(56,396)
Proceeds from the sale of property, plant, equipment and intangibles
1,288
217
Free cash flow
$
117,101
$
41,247
Results of Operations
In the following subsections, we discuss our earnings and the factors affecting them for the first quarter of fiscal 2023 compared with the same fiscal 2022 period. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.
Revenues. The following tables compare our revenues for the three months ended June 30, 2022 to the revenues for the three months ended June 30, 2021:
Three Months Ended June 30,
(dollars in thousands)
2022
2021
Change
Percent Change
Total revenues
$
1,156,491
$
968,422
$
188,069
19.4
%
Revenues by type:
Service revenues
519,415
479,143
40,272
8.4
%
Consumable revenues
416,825
298,887
117,938
39.5
%
Capital equipment revenues
220,251
190,392
29,859
15.7
%
Revenues by geography:
Ireland revenues
18,176
21,945
(3,769)
(17.2)
%
United States revenues
834,101
679,250
154,851
22.8
%
Other foreign revenues
304,214
267,227
36,987
13.8
%
Revenues increased 19.4% to $1,156.5 million for the three months ended June 30, 2022, as compared to $968.4 million for the same period in the fiscal 2022, with growth in all segments. The increase reflects organic growth in all segments and added volume of $166.2 million from Cantel, which was partially offset by unfavorable fluctuations in currencies and the absence of revenue from our Renal care business, which was divested in January 2022.
Service revenues increased 8.4% for the first three months of fiscal 2023, as compared to the same period in fiscal 2022, reflecting organic growth in the Healthcare and the Applied Sterilization Technologies segments, as well as added volume from Cantel, which was partially offset by a slight decline in Life Sciences. Consumable revenues increased by 39.5% for the first three months of fiscal 2023, as compared to the same period in fiscal 2022, reflecting the added volume from Cantel and organic growth in the Life Sciences segment. Capital equipment revenues increased 15.7%, for the first three months of fiscal 2023, as compared to the same period in fiscal 2022, reflecting organic growth in the Healthcare and Life Sciences segments and added volume from Cantel.
Ireland revenues decreased 17.2% to $18.2 million for the three months ended June 30, 2022, as compared to $21.9 million for the same period in the prior year, reflecting declines in service, consumable and capital equipment revenues.
United States revenues increased 22.8% to $834.1 million for the three months ended June 30, 2022, as compared to $679.3 million for the same period in the prior year, reflecting growth in service, consumable and capital equipment revenues, primarily due to strong organic growth and the addition of Cantel.
Revenues from other foreign locations increased 13.8% to $304.2 million for the three months ended June 30, 2022, as compared to $267.2 million for the same period in the prior year, reflecting growth in Canada and in the Europe, Middle East & Africa ("EMEA"), Latin America and Asia Pacific regions.
Gross Profit. The following table compares our gross profit for the three months ended June 30, 2022 to the three months ended June 30, 2021:
Three Months Ended June 30,
Change
Percent Change
(dollars in thousands)
2022
2021
Gross profit:
Product
$
304,221
$
217,873
$
86,348
39.6
%
Service
213,577
208,409
5,168
2.5
%
Total gross profit
$
517,798
$
426,282
$
91,516
21.5
%
Gross profit percentage:
Product
47.8
%
44.5
%
Service
41.1
%
43.5
%
Total gross profit percentage
44.8
%
44.0
%
Our gross profit is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs associated with the products and services that are sold.
Gross profit percentage for the first three months of fiscal 2023 was 44.8% compared to the gross profit percentage for the first three months of fiscal 2022 of 44.0%. Favorable impacts from pricing (130 basis points), the Cantel acquisition (50 basis points), fluctuations in currencies (30 basis points), our recent divestitures (20 basis points), and mix and other adjustments (320 basis points), were partially offset by unfavorable impact from inflation (420 basis points), and productivity (50 basis points).
Operating Expenses. The following table compares our operating expenses for the three months ended June 30, 2022 to the three months ended June 30, 2021:
Three Months Ended June 30,
Change
Percent Change
(dollars in thousands)
2022
2021
Operating expenses:
Selling, general, and administrative
$
334,626
$
393,752
$
(59,126)
(15.0)
%
Research and development
24,751
18,192
6,559
36.1
%
Restructuring expenses
26
14
12
NM
Total operating expenses
$
359,403
$
411,958
$
(52,555)
(12.8)
%
NM - Not meaningful.
Selling, General, and Administrative Expenses. Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A decreased $59.1 million in the first three months of fiscal 2023, over the same period in fiscal 2022. In the fiscal 2022 period, we incurred $141.0 million in acquisition and integration expenses, which were primarily related to our acquisition of Cantel. The fiscal 2023 reduction in such expenses was partially offset by an increase in amortization of purchased intangible assets in the fiscal 2023 period.
Research and Development. For the three month period ended June 30, 2022, research and development expenses increased $6.6 million over the same period in fiscal 2022, largely due to the addition of Cantel. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. During the first quarter of fiscal 2023, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, procedural products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.
Non-Operating Expenses, Net. Non-operating expenses, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. The following table compares our net non-operating expenses for the three months ended June 30, 2022 and 2021:
Three Months Ended June 30,
(dollars in thousands)
2022
2021
Change
Non-operating expenses, net:
Interest expense
$
22,674
$
21,812
$
862
Fair value adjustment related to convertible debt, premium liability
—
22,923
(22,923)
Interest (income) and miscellaneous expense
770
(1,434)
2,204
Non-operating expenses, net
$
23,444
$
43,301
$
(19,857)
Interest expense increased by $0.9 million during the first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022, primarily due to higher interest rates on floating rate debt partially offset by lower principal amount of debt outstanding.
During the first quarter of fiscal 2022, we recorded a fair value adjustment of $22.9 million related to the convertible debt assumed in the acquisition of Cantel. For more information on the Cantel convertible debt refer to our Annual Report filed on Form 10-K, which was filed with the Securities and Exchange Commission on May 31, 2022.
Interest (income) and miscellaneous expense changed by $2.2 million during the first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022, primarily due to losses on our equity investments. For more information refer to note 15 of our consolidated financial statements, titled "Fair Value Measurements".
Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the three months ended June 30, 2022 and June 30, 2021:
Three Months Ended June 30,
Change
Percent Change
(dollars in thousands)
2022
2021
Income tax (credit) expense
$
24,196
$
(7,075)
$
31,271
NM
Effective income tax rate
17.9
%
24.4
%
NM - Not meaningful.
We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual effective income tax rate, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.
The effective income tax rates for the three month periods ended June 30, 2022 and 2021 were 17.9% and 24.4%, respectively. The fiscal 2023 effective tax rate decreased when compared to fiscal 2022, primarily due to nonrecurring unfavorable items reported in the prior fiscal year.
Business Segment Results of Operations. We report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental.Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare segment provides a comprehensive offering for healthcare providers worldwide, focused on sterile processing departments and procedural centers, such as operating rooms and endoscopy suites. Our products and services range from infection prevention consumables and capital equipment, as well as services to maintain that equipment; to the repair of re-usable procedural instruments; to outsourced instrument reprocessing services. In addition, our procedural solutions also include single-use devices and capital equipment infrastructure used primarily in operating rooms, ambulatory surgery centers, endoscopy suites, and other procedural areas.
Our Applied Sterilization Technologies ("AST") segment is a third-party service provider for contract sterilization, as well as testing services needed to validate sterility services for medical device and pharmaceutical manufacturers. Our technology-neutral offering supports Customers every step of the way, from testing through sterilization.
Our Life Sciences segment provides a comprehensive offering of products and services that support pharmaceutical manufacturing, primarily for vaccine and other biopharma Customers focused on aseptic manufacturing. These solutions include a full suite of consumable products, equipment maintenance and specialty services, and capital equipment.
Our Dental segment provides a comprehensive offering for dental practitioners and dental schools, offering instruments, infection prevention consumables and instrument management systems.
We disclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated Company. Certain prior period costs were reallocated from the Healthcare segment to corporate to conform with current year presentation. The prior period segment operating income measure has been recast for comparability.
For the three months ended June 30, 2022, revenues from a single Customer did not represent ten percent or more of the Healthcare, Applied Sterilization Technologies or Life Sciences segment revenues.Three Customers collectively and consistently account for approximately 40.0% of our Dental segment revenue. The percentage associated with these three Customers collectively in any one period may vary due to the buying patterns of these three Customers as well as other Dental Customers. These three Customers collectively accounted for approximately 38.6% and 35.8% of our Dental segment revenues for the three months ended June 30, 2022 and 2021, respectively.
Additional information regarding our segments is included in our consolidated financial statements included our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
Financial information for each of our segments is presented in the following table:
Three Months Ended June 30,
(dollars in thousands)
2022
2021
Revenues:
Healthcare
$
698,526
$
602,817
Applied Sterilization Technologies
220,911
208,902
Life Sciences
132,207
121,471
Dental
104,847
35,232
Total revenues
$
1,156,491
$
968,422
Segment operating income (loss):
Healthcare
$
156,497
$
138,373
Applied Sterilization Technologies
109,315
101,927
Life Sciences
55,305
49,088
Dental
19,596
10,119
Corporate
(75,943)
(77,273)
Total segment operating income
$
264,770
$
222,234
Less: Adjustments
Amortization of acquired intangible assets (1)
$
93,929
$
41,741
Acquisition and integration related charges (2)
9,832
140,996
Tax restructuring costs (3)
173
(49)
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
(3,100)
—
Net loss on divestiture of businesses (1)
3,878
419
Amortization of inventory and property "step up" to fair value (1)
1,637
24,789
Restructuring charges (4)
26
14
Total income from operations
$
158,395
$
14,324
(1) For more information regarding our recent acquisitions and divestitures refer to note 2 titled, "Business Acquisitions and Divestitures" of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
(2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in tax restructuring.
(4) For more information regarding our restructuring efforts refer to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
Healthcare revenues increased 15.9% to $698.5 million for the three months ended June 30, 2022, as compared to $602.8 million for the same prior year period. This increase reflects growth in consumable, capital equipment and service revenues of 21.9%, 18.7% and 9.0%, respectively. The increase is attributable to organic growth and the addition of Cantel, which were partially offset by unfavorable fluctuations in foreign currencies and the fiscal 2022 divestiture of our Renal care business. The Healthcare segment’s backlog was $521.7 million at June 30, 2022. Excluding Cantel, the Healthcare segment's backlog was $254.3 million at June 30, 2021. In addition to the added volume from Cantel, the increase is primarily due to built up demand and supply chain disruptions as a result of the COVID-19 pandemic.
Applied Sterilization Technologies segment revenues increased 5.7% to $220.9 million for the quarter ended June 30, 2022, as compared to $208.9 million for the same prior year period. The increase reflects organic growth, which was partially offset by unfavorable fluctuations in currencies.
Life Sciences segment revenues increased 8.8% to $132.2 million for the first three months ended June 30, 2022, as compared to $121.5 million for the same prior year period. This increase reflects growth in capital equipment and consumable revenues of 23.7% and 5.3% respectively. Service revenues remained essentially flat between the fiscal 2023 and 2022 periods. The increase also reflects organic growth and the impact of Cantel, which were partially offset by unfavorable fluctuations in foreign currencies. The Life Sciences segment’s backlog amounted to $92.7 million at June 30, 2022 and $92.1 million at June 30, 2021. The increase is primarily due to built up demand and supply chain disruptions as a result of the COVID-19 pandemic.
Dental segment revenues for first three months of fiscal 2023 were $104.8 million. Dental segment revenues for the month of June 2021 were $35.2 million. Revenue was somewhat limited by supply chain challenges in the fiscal 2023 first quarter.
The Healthcare segment operating income increased $18.1 million to $156.5 million for the first three months of fiscal 2023, as compared to $138.4 million for the same prior year period. The increase was primarily due to increased volume. The segment's operating margins were 22.4% and 23.0% for the first three months of fiscal 2023 and 2022, respectively. The decline is primarily due to increased supply chain and inflationary costs, and higher research and development, meeting and travel expenses in fiscal 2023.
The Applied Sterilization Technologies segment operating income increased $7.4 million to $109.3 million for the first three months of fiscal 2023, as compared to $101.9 million for the same prior year period. The segment’s operating margins were 49.5% and 48.8% for the first three months of fiscal 2023 and fiscal 2022, respectively. The increase in segment operating income and operating margin were primarily due to increased volume, which was partially offset by higher energy costs in fiscal 2023.
The Life Sciences segment operating income increased $6.2 million to $55.3 million for the first three months of fiscal 2023, as compared to $49.1 million for the same prior year period. The segment’s operating margins were 41.8% and 40.4% for the first three months of fiscal 2023 and fiscal 2022, respectively. The increase in segment operating income and operating margin were primarily due to increased volume and favorable mix within capital equipment shipments.
The Dental segment operating income and operating margin was $19.6 million and 18.7%, respectively for the first three months of fiscal 2023. The Dental segment operating income and operating margin was $10.1 million and 28.7%, for the month of June 2021. Segment operating income and operating margin were somewhat limited by supply chain challenges in the fiscal 2023 first quarter.
Liquidity and Capital Resources
The following table summarizes significant components of our cash flows for the three months ended June 30, 2022 and 2021:
Three Months Ended June 30,
(dollars in thousands)
2022
2021
Net cash provided by operating activities
$
231,746
$
97,426
Net cash (used in) investing activities
$
(109,417)
$
(603,532)
Net cash provided by (used in) financing activities
$
(141,414)
$
818,810
Debt-to-total capital ratio
31.9
%
34.3
%
Free cash flow
$
117,101
$
41,247
Net Cash Provided by Operating Activities – The net cash provided by our operating activities was $231.7 million for the first three months of fiscal 2023 and $97.4 million for the first three months of fiscal 2022. The increase in fiscal 2023 period was primarily due to higher net income attainment, largely due to a decline in costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, as compared to the fiscal 2022 period.
Net Cash (Used In) Investing Activities – The net cash used in investing activities totaled $109.4 million for the first three months of fiscal 2023 and $603.5 million for the first three months of fiscal 2022. The following discussion summarizes the significant changes in our investing cash flows for the first three months of fiscal 2023 and fiscal 2022:
•Purchases of property, plant, equipment, and intangibles, net – Capital expenditures were $115.9 million for the first three months of fiscal 2023 and $56.4 million during the same prior year period. The fiscal 2023 increase was primarily due to additional expenditures in our Applied Sterilization Technologies segment.
•Proceeds from the sale of business – During the first three months of fiscal 2023, we sold the remaining component of the animal healthcare business for $5.2 million.
•Acquisitions of businesses, net of cash acquired – During the first three months of fiscal 2022, we used $547.4 million for the acquisition of Cantel. For more information refer to our note 2 of our Consolidated Financial Statements titled, "Business Acquisitions and Divestitures".
Net Cash Provided by (Used In) Financing Activities – The net cash provided by financing activities amounted to $141.4 million for the first three months of fiscal 2023 compared with net cash used in financing activities of $818.8 million for the first three months of fiscal 2022. The following discussion summarizes the significant changes in our financing cash flows for the first three months of fiscal 2023 and fiscal 2022:
•Proceeds from Issuance of Senior Notes – During the first three months of fiscal 2022, we received $1,350.0 million in proceeds from the issuance of our Senior Public Notes. For more information on our Senior Public Notes, refer to note 5 titled "Debt" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Proceeds from Term Loan – During the first three months of fiscal 2022, we borrowed $650.0 million under our Delayed Draw Term Loan. For more information on our Delayed Draw Term Loan, refer to note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Payments on Term Loan – During the first three months of fiscal 2023, we repaid $111.9 million of our Term Loan. During the first three months of fiscal 2022, we repaid $125.0 million of our Term Loan. For more information on our Term Loan, refer to note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Payments on Long-term Obligations, net – During the first three months of fiscal 2022, we repaid $721.3 million of Cantel's outstanding debt in connection with the acquisition. For more information on Cantel's debt refer to note 2 of our Consolidated Financial Statements titled, "Business Acquisitions and Divestitures" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Proceeds (payments) under credit facilities, net – Net proceeds under credit facilities totaled $37.0 million in the first three months of fiscal 2023, compared to net payments under credit facilities of $249.4 million in the first threemonths of fiscal 2022. For more information on our credit facilities, refer to note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Deferred financing fees and debt issuance costs – During the first three months of fiscal 2022, we paid $17.2 million for financing fees and debt issuance costs primarily related to our Senior Public Notes and Delayed Draw Term Loan. For more information on our debt, refer to note 5 titled, "Debt" and to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
•Repurchases of ordinary shares – During the first three months of fiscal 2023, we purchased 61,677 of our ordinary shares in the aggregate amount of $12.9 million. During the first three months of fiscal 2023, we obtained 57,704 of our ordinary shares in connection with share-based compensation award programs in the aggregate amount of $11.7 million. During the first three months of fiscal 2022, we obtained 59,648 of our ordinary shares in connection with share-based compensation award programs in the aggregate amount of $10.7 million.
•Acquisition related deferred or contingent consideration – During the first three months of fiscal 2023 and fiscal 2022, we paid approximately $0.1 million and $25.2 million, respectively, in deferred and contingent consideration. The majority of the fiscal 2022 amount was associated with a pre-acquisition arrangement related to an acquisition made by Cantel prior to our purchase of the company.
•Cash dividends paid to ordinary shareholders – During the first three months of fiscal 2023, we paid total cash dividends of $43.0 million, or $0.43 per outstanding share. During the first three months of fiscal 2022, we paid total cash dividends of $34.1 million, or $0.40 per outstanding share.
•Stock option and other equity transactions, net – We generally receive cash for issuing shares under our stock option programs. During the first three months of fiscal 2023 and fiscal 2022, we received cash proceeds totaling $1.2 million and $1.7 million, respectively, under these programs.
Cash Flow Measures. Free cash flow was $117.1 million in the first three months of fiscal 2023 compared to $41.2 million in the first three months of fiscal 2022 (see the subsection above titled "Non-GAAP Financial Measures" for additional information and related reconciliation of cash flows from operations to free cash flow). The fiscal 2023 increase in free cash flow was primarily due to lower costs associated with the acquisition and integration of Cantel in the fiscal 2023 period, which was partially offset by higher capital expenditures in the fiscal 2023 period.
Our debt-to-total capital ratio was 31.9% at June 30, 2022 and 34.3% at June 30, 2021.
Material Future Cash Obligations and Commercial Commitments. Information related to our material future cash obligations and commercial commitments is included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. Our commercial commitments were approximately $100.9 million at June 30, 2022, reflecting a net increase of $2.2 million in surety bonds and other commercial commitments from March 31, 2022. Outstanding borrowings under our Credit Agreement as of June 30, 2022 were $92.6 million. We had $15.0 million of letters of credit outstanding under the Credit Agreement at June 30, 2022.
Cash Requirements. We intend to use our existing cash and cash equivalent balances and cash generated from operations for short-term and long-term capital expenditures and our other liquidity needs. Our capital requirements depend on many uncertain factors, including our rate of sales growth, our Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, changes in our operating expenses and other factors. To the extent that existing and anticipated sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or the sale of equity securities. There can be no assurance that our existing financing arrangements will provide us with sufficient funds or that we will be able to obtain any additional funds on terms favorable to us or at all.
STERIS plc ("Parent") and its wholly-owned subsidiaries, STERIS Limited and STERIS Corporation (collectively "Guarantors" and each a "Guarantor"), 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 are senior unsecured obligations of STERIS Irish FinCo and the Guarantors, respectively, and are equal in priority with all other unsecured and unsubordinated indebtedness of the Issuer and the Guarantors, respectively, from time to time outstanding, including, as applicable, under the Private Placement Senior Notes, borrowings under the Revolving Credit Facility, the Term Loan and the Delayed Draw Term Loan.
All of the liabilities of non-guarantor direct and indirect subsidiaries of STERIS, other than STERIS Irish FinCo, STERIS Limited and STERIS Corporation, including any claims of trade creditors, are effectively senior to the Senior Public Notes.
STERIS Irish FinCo’s main objective and source of revenues and cash flows is the provision of short- and long-term financing for the activities of STERIS plc and its subsidiaries.
The ability of our subsidiaries to pay dividends, interest and other fees to the Issuer and ability of the Issuer and Guarantors to service the Senior Public Notes may be restricted by, among other things, applicable corporate and other laws and regulations as well as agreements to which our subsidiaries are or may become a party.
The following is a summary of the Senior Public Notes guarantees:
Guarantees of Senior Notes
•Parent Company Guarantor – STERIS plc
•Subsidiary Issuer – STERIS Irish FinCo Unlimited Company
•Subsidiary Guarantor – STERIS Limited
•Subsidiary Guarantor – STERIS Corporation
The guarantee of a Guarantor will be automatically and unconditionally released and discharged:
•in the case of a Subsidiary Guarantor, upon the sale, transfer or other disposition (including by way of consolidation or merger) of such Subsidiary Guarantor, other than to the Parent or a subsidiary of the Parent and as permitted by the indenture;
•in the case of a Subsidiary Guarantor, upon the sale, transfer or other disposition of all or substantially all the assets of such Subsidiary Guarantor, other than to the Parent or a subsidiary of the Parent and as permitted by the indenture;
•in the case of a Subsidiary Guarantor, at such time as such Subsidiary Guarantor is no longer a borrower under or no longer guarantees any material credit facility (subject to restatement in specified circumstances);
•upon the legal defeasance or covenant defeasance of the Senior Public Notes or the discharge of the Issuer’s obligations under the indenture in accordance with the terms of the indenture;
•as described in accordance with the terms of the indenture; or
•in the case of the Parent, if the Issuer ceases for any reason to be a subsidiary of the Parent; provided that all guarantees and other obligations of the Parent in respect of all other indebtedness under any Material Credit Facility of the Issuer terminate upon the Issuer ceasing to be a subsidiary of the Parent; and
•upon such Guarantor delivering to the trustee an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the indenture relating to such transaction or release have been complied with.
The obligations of each Guarantor under its guarantee are expressly limited to the maximum amount that such Guarantor could guarantee without such guarantee constituting a fraudulent conveyance. Each Guarantor that makes a payment under its guarantee will be entitled upon payment in full of all guaranteed obligations under the indenture to a contribution from each Guarantor in an amount equal to such other Guarantor’s pro rata portion of such payment based on the respective net assets of all the Guarantors at the time of such payment determined in accordance with GAAP.
The following tables present summarized results of operations for the three months ended June 30, 2022 and summarized balance sheet information at March 31, 2022 for the obligor group of the Senior Public Notes. The obligor group consists of the Parent Company Guarantor, Subsidiary Issuer, and Subsidiary Guarantors for the Senior Public Notes. The summarized financial information is presented after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or non-issuer. Transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
Operating costs arising from transactions with non-issuers and non-guarantors - net
92,345
Income from operations
156,764
Non-operating income (expense) arising from transactions with subsidiaries that are non-issuers and non-guarantors - net
93,140
Net income
$
123,902
Summarized Balance Sheet Information
( in thousands)
June 30,
March 31,
2022
2022
Receivables due from non-issuers and non-guarantor subsidiaries
$
16,360,447
$
16,033,719
Other current assets
472,828
400,776
Total current assets
$
16,833,275
$
16,434,495
Non-current receivables due from non-issuers and non-guarantor subsidiaries
$
1,998,340
$
2,001,742
Goodwill
95,688
95,688
Other non-current assets
242,809
142,711
Total non-current assets
$
2,336,837
$
2,240,141
Payables due to non-issuers and non-guarantor subsidiaries
$
17,534,254
$
17,053,749
Other current liabilities
218,749
231,043
Total current liabilities
$
17,753,003
$
17,284,792
Non-current payables due to non-issuers and non-guarantor subsidiaries
$
1,056,874
$
1,102,873
Other non-current liabilities
3,041,636
3,134,777
Total non-current liabilities
$
4,098,510
$
4,237,650
Intercompany balances and transactions between the obligor group have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately. Intercompany transactions arise from internal financing and trade activities.
Information related to our critical accounting estimates and assumptions is included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. Our critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2022.
Contingencies
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Note 8 of our consolidated financial statements titled, "Commitments and Contingencies" for additional information.
We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of our federal income tax returns.
Refer to note 7 of our Consolidated Financial Statements titled, "Income Tax Expense" for more information.
This quarterly report may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to STERIS or its industry, products or activities that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date the statement is made and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “outlook,” “impact,” “potential,” “confidence,” “improve,” “optimistic,” “deliver,” “orders,” “backlog,” “comfortable,” “trend”, and “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws, government regulations, labeling or product approvals or the application or interpretation thereof. Many of these important factors are outside of STERIS’s control. No assurances can be provided as to any result or the timing of any outcome regarding matters described in STERIS’s securities filings or otherwise with respect to any regulatory action, administrative proceedings, government investigations, litigation, warning letters, cost reductions, business strategies, earnings or revenue trends or future financial results. References to products are summaries only and should not be considered the specific terms of the product clearance or literature. Unless legally required, STERIS does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the impact of the COVID-19 pandemic or similar public health crises on STERIS’s operations, supply chain, material and labor costs, performance, results, prospects, or value, (b) STERIS's ability to achieve the expected benefits regarding the accounting and tax treatments of the redomiciliation to Ireland (“Redomiciliation”), (c) operating costs, Customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, Customers, clients or suppliers) being greater than expected, (d) STERIS’s ability to successfully integrate the businesses of Cantel Medical into our existing businesses, including unknown or inestimable liabilities, or increases in expected integration costs or difficulties in connection with the integration of Cantel Medical (e) STERIS’s ability to meet expectations regarding the accounting and tax treatment of the Tax Cuts and Jobs Act (“TCJA”) or the possibility that anticipated benefits resulting from the TCJA will be less than estimated, (f) changes in tax laws or interpretations that could increase our consolidated tax liabilities, including changes in tax laws that would result in STERIS being treated as a domestic corporation for United States federal tax purposes, (g) the potential for increased pressure on pricing or costs that leads to erosion of profit margins, (h) the possibility that market demand will not develop for new technologies, products or applications or services, or business initiatives will take longer, cost more or produce lower benefits than anticipated, (i) the possibility that application of or compliance with laws, court rulings, certifications, regulations, regulatory actions, including without limitation any of the same relating to FDA, EPA or other regulatory authorities, government investigations, the outcome of any pending or threatened FDA, EPA or other regulatory warning notices, actions, requests, inspections or submissions, or other requirements or standards may delay, limit or prevent new product or service introductions, affect the production, supply and/or marketing of existing products or services or otherwise affect STERIS’s performance, results, prospects or value, (j) the potential of international unrest, including the Russia-Ukraine military conflict, economic downturn or effects of currencies, tax assessments, tariffs and/or other trade barriers, adjustments or anticipated rates, material and labor costs or availability, benefit or retirement plan costs, or other regulatory compliance costs, (k) the possibility of reduced demand, or reductions in the rate of growth in demand, for STERIS’s products and services, (l) the possibility of delays in receipt of orders, order cancellations, or delays in the manufacture or shipment of ordered products, due to supply chain issues or otherwise,or in the provision of services, (m) the possibility that anticipated growth, cost savings, new product acceptance, performance or approvals, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with STERIS’s businesses, industry or initiatives may adversely impact STERIS’s performance, results, prospects or value, (n) the impact on STERIS and its operations, or tax liabilities, of Brexit or the exit of other member countries from the EU, and the Company’s ability to respond to such impacts, (o) the impact on STERIS and its operations of any legislation, regulations or orders, including but not limited to any new trade or tax legislation, regulations or orders, that may be implemented by the U.S. administration or Congress, or of any responses thereto, (p) the possibility that anticipated financial results or benefits of recent acquisitions, including the acquisition of Cantel Medical and Key Surgical, or of STERIS’s restructuring efforts, or of recent divestitures, including anticipated revenue, productivity improvement, cost savings, growth synergies and other anticipated benefits, will not be realized or will be other than anticipated, (q) the increased level of STERIS’s indebtedness incurred in connection with the acquisition of Cantel Medical limiting financial flexibility or increasing future borrowing costs, (r) rating agency actions or other occurrences that could affect STERIS’s existing debt or future ability to borrow funds at rates favorable to STERIS or at all, (s) the potential impact of the acquisition of Cantel Medical on relationships, including with suppliers, Customers, employees and regulators, and (t) the effects of contractions in credit availability, as well as the ability of STERIS’s Customers and suppliers to adequately access the credit markets when needed.
Availability of Securities and Exchange Commission Filings
We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish such material to, the Securities Exchange Commission ("SEC.") You may access these documents on the Investor Relations page of our website at http://www.steris-ir.com. The information on our website and the SEC's website is not incorporated by reference into this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are subject to interest rate, currency, and commodity risks. Information related to these risks and our management of these exposures is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. Our exposures to market risks have not changed materially since March 31, 2022.
Fluctuations in currency rates could affect our revenues, cost of revenues and income from operations and could result in currency exchange gains and losses. During the first quarter of fiscal 2023, we entered into forward currency contracts in order to hedge a portion of our expected euro denominated earnings against our reporting currency, the U.S. dollar. These currency exchange contracts will mature during fiscal 2023. We did not elect hedge accounting for these forward currency contracts; however, we may seek to apply hedge accounting in future scenarios. As a result, we may experience volatility due to (i) the timing mismatch of unrealized hedge gains or losses versus recognition of the underlying hedged earnings, and (ii) the impact of unrealized and realized hedge gains or losses being reported in selling, general and administrative expenses, whereas the offsetting economic gains and losses of the underlying hedged earnings are reported in the various line items of our Consolidated Statements of Income.
We also 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. At June 30, 2022, we held foreign currency forward contracts to sell 34.9 million euros.
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. The costs of these materials can rise suddenly and result in significantly higher costs of production. 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. At June 30, 2022, we held commodity swap contracts to buy 601.2 thousand pounds of nickel.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of and with the participation of our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on that evaluation, including the assessment and input of our management, the PEO and PFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information regarding our legal proceedings is included in this Form 10-Q in Note 8 to our consolidated financial statements titled, "Commitments and Contingencies" and in Item 7 of Part II, titled “Management's Discussion and Analysis of Financial Conditions and Results of Operations," of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
ITEM 1A. RISK FACTORS
For a complete discussion of the Company's risk factors, you should carefully review the risk factors included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
We use a variety of raw materials, components, and devices in our global supply chains, production and distribution processes; significant labor and materials shortages, price increases, inflation or unavailability as a result of the COVID-19 pandemic or related macroeconomic factors could increase our operating costs, require significant capital expenditures, or adversely impact the competitive position of our products.
Our reliance on certain suppliers and vendors to secure raw materials, components and finished devices for use in our global supply chains, production and distribution processes, exposes us to risks of product shortages and unanticipated increases in prices, whether due to inflationary pressure, regulatory changes or otherwise. In addition, several raw materials, components and finished devices are procured from a limited number of suppliers or are single-sourced due to the quality considerations or constraints associated with regulatory requirements. Many of these suppliers and vendors are located in regions that have been adversely affected by restrictive government and private enterprise measures implemented in response to the pandemic, or have otherwise been disrupted by associated prevailing macroeconomic trends. This has led to product shortages and an increase in raw material and component pricing. If these suppliers or vendors are unable or unwilling to deliver these materials, we may not be able to manufacture certain products at reasonable cost, without significant capital expenditures or at all, and our business and results of operations could suffer. In such cases, we may not be able to establish additional or replacement suppliers for such materials in a timely or cost-effective manner, including as a result of FDA and other regulations that require, among other things, validation of materials and components prior to their use in our products, which could further negatively impact our business and results of operations. In addition, during calendar 2022, the U.S. and other markets have experienced significant and increasing inflationary pressures in part due to global supply chain disruptions, labor shortages and other impacts of the COVID-19 pandemic, which we anticipate will continue. The existence of inflation in the United States and in many of the countries where we conduct business has resulted in, and may continue to result in, higher interest rates and capital costs, higher shipping costs, increased costs of labor, weakening exchange rates and other similar effects. We have experienced and may continue to experience inflationary increases in manufacturing costs and operating expenses as well as negative impacts from weakening exchange rates, caused by the COVID-19 pandemic or as a result of associated prevailing macroeconomic factors, and may not be able to pass these cost increases on to our Customers in a timely manner or at all, which could have a material adverse impact on our profitability and results of operations. Inflation may also cause our Customers to reduce or delay orders for our products and services, which could have a material adverse impact on our revenues and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 7, 2019, our Board of Directors authorized a share repurchase program resulting in a share repurchase authorization of approximately $79.0 million (net of taxes, fees and commissions). On July 30, 2019, our Board of Directors approved an increase in the May 7, 2019 authorization of an additional amount of $300.0 million (net of taxes, fees and commissions). As of June 30, 2022, there was approximately $294.6 million (net of taxes, fees and commissions) of remaining availability under a Board authorized share repurchase program. The share repurchase program has no specified expiration date.
Under the authorization, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any share repurchases may be activated, suspended or discontinued at any time. Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended on April 9, 2020. The suspension was lifted effective February 10, 2022, enabling the Company to resume stock repurchases pursuant to the prior authorizations.
During the first three months of fiscal 2023, we repurchased 68,177 of our ordinary shares for the aggregate amount of $14.3 million (net of fees and commissions) pursuant to the authorizations.
During the first three months of fiscal 2023, we obtained 57,704 of our ordinary shares in the aggregate amount of $11.7 million in connection with share based compensation award programs.
The following table summarizes the ordinary shares repurchase activity during the first quarter of fiscal 2023 under our ordinary share repurchase program:
(a) Total Number of Shares Purchased
(b) Average Price Paid Per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans
(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans at Period End (in thousands)
April 1-30
—
$
—
—
(1)
$
308,932
(1)
May 1-31
—
—
—
308,932
June 1-30
68,177
209.50
68,177
294,649
Total
68,177
(2)
$
209.50
(2)
68,177
$
294,649
(1) See narrative above for details regarding the share repurchase program.
(2) Does not include 9 shares purchased during the quarter at an average price of $223.77 per share by the STERIS Corporation 401(k) Plan on behalf of an executive officer of the Company who may be deemed to be an affiliated purchaser.
ITEM 5. OTHER INFORMATION
On August 8, 2022, STERIS plc and STERIS Corporation entered into new or revised deeds of indemnity and indemnification agreements with each of the directors and executive officers of STERIS plc. These arrangements supersede all previous agreements and provide for the indemnification of, and advancement of expenses to, these persons, in connection with claims arising out of or to which they become subject to because of their service in such capacities. The description of these agreements set forth herein is not complete and is qualified in its entirety by reference to the full text of the forms of deed and agreement, which are filed as Exhibits 10.1, 10.2 and 10.3 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STERIS plc
/s/ KAREN L. BURTON
Karen L. Burton Vice President, Controller and Chief Accounting Officer
