STERIS(STE) - 2021 Q2 - Quarterly Report

Part I—Financial Information Financial Statements This section presents the unaudited consolidated financial statements for STERIS plc for the three and six months ended September 30, 2020, including balance sheets, income statements, cash flow statements, and detailed notes Consolidated Financial Statements The consolidated financial statements show total assets increased to $5.49 billion as of September 30, 2020, with six-month revenues of $1.425 billion and net income attributable to shareholders rising to $194.0 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | March 31, 2020 | | :--- | :--- | :--- | | Total current assets | $1,150,310 | $1,208,751 | | Total assets | $5,492,567 | $5,425,582 | | Total current liabilities | $435,418 | $503,607 | | Long-term indebtedness | $1,020,554 | $1,150,521 | | Total liabilities | $1,830,112 | $2,018,858 | | Total shareholders' equity | $3,647,145 | $3,393,876 | Consolidated Statement of Income Highlights (in thousands, except per share) | Metric | Six Months Ended Sep 30, 2020 | Six Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Total revenues | $1,425,064 | $1,433,643 | | Gross profit | $615,605 | $624,510 | | Income from operations | $255,264 | $236,821 | | Net income attributable to shareholders | $194,048 | $179,359 | | Diluted EPS | $2.26 | $2.09 | Consolidated Statement of Cash Flows Highlights (in thousands) | Activity | Six Months Ended Sep 30, 2020 | Six Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $296,073 | $260,000 | | Net cash used in investing activities | $(112,863) | $(185,458) | | Net cash used in financing activities | $(199,319) | $(63,529) | | Increase (decrease) in cash | $(7,553) | $4,903 | Notes to Consolidated Financial Statements The notes detail accounting policies, segment information, debt, taxes, and COVID-19 impact, highlighting the $850 million Key Surgical acquisition agreement and segment reorganization - The company reorganized its reportable segments, combining the former Healthcare Products and Healthcare Specialty Services segments into a single segment named Healthcare, effective April 1, 2020. Prior period data has been recast for comparability[79] - On October 2, 2020, STERIS entered into an agreement to acquire Key Surgical, LLC for a purchase price of $850 million in cash. The acquisition is expected to be completed before December 31, 2020, and will be funded through a combination of debt and cash on hand[133][134] - The COVID-19 pandemic has caused unpredictable fluctuations in demand, with some products seeing increased demand while others, tied to deferrable medical procedures, have seen reduced demand. The company has implemented measures to protect employees and preserve liquidity, including suspending its stock repurchase program[130] - Due to changes in selling philosophy and product architecture, the company changed its revenue recognition policy for certain capital equipment contracts, resulting in the recognition of $14.6 million in previously deferred revenue in the first quarter of fiscal 2021[31][33] Management's Discussion and Analysis (MD&A) The MD&A provides management's perspective on Q2 and first-half fiscal 2021 financial results, detailing COVID-19 impact, revenue and profit trends, segment performance, and liquidity, with Q2 revenues up 2.6% to $756.1 million and first-half free cash flow increasing to $185.6 million Results of Operations For Q2 FY2021, revenues increased 2.6% year-over-year, driven by Applied Sterilization Technologies and Life Sciences, while gross profit margin improved to 43.6% due to favorable pricing and mix Q2 FY2021 vs Q2 FY2020 Revenue Breakdown (in thousands) | Revenue Type | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $756,132 | $736,840 | 2.6% | | Service revenues | $416,628 | $399,174 | 4.4% | | Consumable revenues | $178,590 | $158,573 | 12.6% | | Capital equipment revenues | $160,914 | $179,093 | (10.2)% | YTD FY2021 vs YTD FY2020 Revenue Breakdown (in thousands) | Revenue Type | YTD 2020 | YTD 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,425,064 | $1,433,643 | (0.6)% | | Service revenues | $784,452 | $788,242 | (0.5)% | | Consumable revenues | $321,186 | $318,684 | 0.8% | | Capital equipment revenues | $319,426 | $326,717 | (2.2)% | - The gross profit margin for Q2 FY2021 increased to 43.6% from 43.2% in the prior year, driven by favorable pricing, product mix, and productivity, partially offset by incremental costs associated with COVID-19[181] - Selling, General, and Administrative (SG&A) expenses decreased by 7.6% in the first half of fiscal 2021 compared to the prior year, primarily due to reduced employee compensation, travel, and meeting costs resulting from the COVID-19 pandemic[182][183] Business Segment Results of Operations In Q2 FY2021, Healthcare revenue declined 3.0%, while Applied Sterilization Technologies (AST) saw 10.9% growth and Life Sciences achieved exceptional 17.2% revenue increase with a 40.1% operating margin Segment Revenue Performance (Q2 FY2021 vs Q2 FY2020, in thousands) | Segment | Q2 2020 Revenue | Q2 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Healthcare | $470,927 | $485,283 | (3.0)% | | Applied Sterilization Technologies | $169,547 | $152,907 | 10.9% | | Life Sciences | $115,658 | $98,650 | 17.2% | Segment Operating Income & Margin (Q2 FY2021 vs Q2 FY2020, in thousands) | Segment | Q2 2020 Op. Income | Q2 2020 Margin | Q2 2019 Op. Income | Q2 2019 Margin | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $104,796 | 22.3% | $103,035 | 21.2% | | Applied Sterilization Technologies | $76,835 | 45.3% | $65,386 | 42.8% | | Life Sciences | $46,433 | 40.1% | $32,315 | 32.8% | Liquidity and Capital Resources The company maintained strong liquidity, with net cash from operations increasing to $296.1 million and free cash flow to $185.6 million for the first six months of fiscal 2021, improving the debt-to-total capital ratio to 21.9% Key Liquidity Metrics (Six Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $296,073 | $260,000 | | Free cash flow | $185,602 | $162,038 | | Debt-to-total capital ratio | 21.9% | 26.9% | - The increase in operating cash flow was primarily due to working capital improvements and deferred tax payments under government COVID-19 relief programs[202] - To fund the acquisition of Key Surgical, the company has obtained a $550.0 million term loan commitment[209] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures, including interest rate, currency, and commodity risks, have not materially changed since March 31, 2020, though new forward currency contracts for hedging non-U.S. dollar earnings may introduce volatility - The company's market risk exposures have not changed materially since the fiscal year-end 2020[218] - In Q2 FY2021, the company began using forward currency contracts to hedge earnings denominated in euros, Mexican pesos, and Canadian dollars. Hedge accounting was not elected, which could cause earnings volatility due to the timing of recognizing gains/losses[219] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[221] - No material changes were made to the internal control over financial reporting during the quarter ended September 30, 2020[222] Part II—Other Information Legal Proceedings The company is involved in various legal proceedings and claims arising in the ordinary course of business, for which management believes adequate reserves have been established, expecting no material adverse effect on financial position or results - The company is involved in a number of legal proceedings, government investigations, and claims arising in the normal course of business[70] - Management believes that adequate reserves have been established and that the ultimate outcome of pending litigation will not have a material adverse effect on the company's financial position or results[71] Risk Factors This section refers to the comprehensive discussion of risk factors included in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020, indicating no material changes to those risks - The report directs readers to the risk factors detailed in the Annual Report on Form 10-K for the fiscal year ended March 31, 2020[226] Share Repurchases and Use of Proceeds As of September 30, 2020, approximately $333.9 million remained available under the share repurchase program, though repurchases were suspended on April 9, 2020, due to COVID-19 uncertainty, with no shares repurchased in Q2 FY2021 - As of September 30, 2020, approximately $333.9 million remained available under the Board-authorized share repurchase program[228] - Share repurchases were suspended on April 9, 2020, due to uncertainty related to the COVID-19 pandemic[229] - No shares were repurchased under the publicly announced plan during the three months ended September 30, 2020[231] Exhibits This section lists the exhibits filed with the Form 10-Q, including the purchase agreement for Key Surgical, officer certifications, and interactive data files (Inline XBRL) - Key exhibits filed include the Purchase Agreement for Key Surgical, LLC, and certifications from the Principal Executive Officer and Principal Financial Officer[233]