STERIS(US:STE)2023-11-06 16:00Part I—Financial Information Item 1. Financial Statements The company presents its unaudited consolidated financial statements for the three and six months ended September 30, 2023 Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2023 ($ in thousands) | March 31, 2023 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | $11,280,638 | $10,821,839 | | Total Current Assets | $2,173,977 | $2,011,442 | | Goodwill | $4,040,245 | $3,879,219 | | Total Liabilities | $5,091,470 | $4,734,667 | | Total Current Liabilities | $873,115 | $861,844 | | Long-term Indebtedness | $3,366,241 | $3,018,655 | | Total Equity | $6,189,168 | $6,087,172 | Consolidated Statements of Income Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2023 ($ in thousands) | Three Months Ended Sep 30, 2022 ($ in thousands) | Six Months Ended Sep 30, 2023 ($ in thousands) | Six Months Ended Sep 30, 2022 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,342,360 | $1,200,517 | $2,626,902 | $2,357,008 | | Gross Profit | $593,529 | $532,335 | $1,166,990 | $1,050,133 | | Income (Loss) from Operations | $185,857 | $(306,415) | $374,739 | $(148,020) | | Net Income (Loss) Attributable to Shareholders | $115,319 | $(315,285) | $238,873 | $(204,023) | | Diluted EPS | $1.16 | $(3.15) | $2.41 | $(2.04) | Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Six Months Ended Sep 30, 2023 ($ in thousands) | Six Months Ended Sep 30, 2022 ($ in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $427,224 | $335,570 | | Net cash used in investing activities | $(672,833) | $(207,342) | | Net cash provided by (used in) financing activities | $256,577 | $(186,362) | | Increase (decrease) in cash and cash equivalents | $5,400 | $(90,061) | Note 2. Business Acquisitions STERIS acquired surgical and sterilization assets from Becton, Dickinson and Company (BD) for $539.8 million - The company purchased assets from BD for $539.8 million, which was financed through its existing credit facility5152 - Acquisition and integration expenses totaled $16.0 million for the three months and $18.7 million for the six months ended September 30, 2023, primarily due to the BD acquisition54 Note 9. Business Segment Information The Healthcare segment was the largest contributor to revenue and operating income, while the Dental segment saw a revenue decline Revenues by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $870,056 | $732,813 | $1,688,930 | $1,431,339 | | AST | $235,053 | $232,358 | $468,152 | $453,269 | | Life Sciences | $133,095 | $125,768 | $264,508 | $257,975 | | Dental | $104,156 | $109,578 | $205,312 | $214,425 | | Total | $1,342,360 | $1,200,517 | $2,626,902 | $2,357,008 | Operating Income by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $204,054 | $165,337 | $402,236 | $321,834 | | AST | $110,783 | $110,384 | $220,373 | $219,699 | | Life Sciences | $50,284 | $48,619 | $100,125 | $103,924 | | Dental | $24,516 | $28,059 | $46,555 | $47,655 | - The Dental segment relies on three key customers who collectively accounted for approximately 43.8% of its revenue in the three months ended September 30, 202383 Note 17. Goodwill Goodwill increased to $4.04 billion due to the BD acquisition, with no impairment recorded in the current period - Goodwill increased from $3.88 billion at March 31, 2023, to $4.04 billion at September 30, 2023, mainly from $202.4 million in goodwill acquired in the BD transaction125 - No goodwill impairment was indicated for any segment during the period ended September 30, 2023126 - In the prior year period, the company recorded a goodwill impairment charge of $490.6 million related to the Dental segment127 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 11.8% in Q2 FY24, driven by organic growth and the BD acquisition, while operating income rose significantly absent the prior year's goodwill impairment Results of Operations Q2 FY24 revenues grew 11.8% to $1.34 billion, while operating expenses decreased significantly due to the absence of a prior-year goodwill impairment charge Q2 Revenue Growth by Type | Revenue Type | Q2 FY24 ($ in thousands) | Q2 FY23 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Service | $580,024 | $534,123 | 8.6% | | Consumable | $470,239 | $413,411 | 13.7% | | Capital Equipment | $292,097 | $252,983 | 15.5% | | Total | $1,342,360 | $1,200,517 | 11.8% | - The gross profit percentage for Q2 FY24 was 44.2%, a slight decrease from 44.3% in Q2 FY23, as inflation and productivity costs offset pricing benefits165 - SG&A expenses increased 17.8% in Q2 FY24, primarily due to increased compensation, professional fees, and bad debt expense167 Business Segment Results of Operations The Healthcare segment's revenue grew 18.7% driven by the BD acquisition, while the Dental segment's revenue declined 4.9% due to customer destocking - Healthcare Q2 revenue increased 18.7% (13.9% constant currency organic growth) due to higher volume, pricing, and the BD acquisition, with operating margin increasing to 23.5%179181189 - AST Q2 revenue grew 1.2% (-1.0% constant currency organic growth), impacted by customer inventory management, with operating margin slightly decreasing to 47.1%179183190 - Dental Q2 revenue decreased 4.9% (-5.7% constant currency organic growth) due to lower volume from customer inventory destocking, with operating margin declining to 23.5%179186192 Liquidity and Capital Resources Net cash from operations and free cash flow increased significantly, while the debt-to-total capital ratio rose to 35.7% following the BD acquisition Key Liquidity Metrics (Six Months Ended Sep 30) | Metric ($ in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $427,224 | $335,570 | | Net cash used in investing activities | $(672,833) | $(207,342) | | Free cash flow | $284,691 | $138,192 | - The increase in cash from operations was primarily due to a decline in cash used for compensation-related payments, offset by continued investment in inventory193 - The debt-to-total capital ratio increased to 35.7% at September 30, 2023, compared to 34.3% at September 30, 2022193198 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to interest rate, currency, and commodity risks has not materially changed, and it continues to use derivatives for hedging - The company's exposures to interest rate, currency, and commodity risks have not changed materially since March 31, 2023219 - To manage currency risk, the company held forward contracts to buy British pounds and Mexican pesos, and to sell Australian dollars, Canadian dollars, and euros as of September 30, 2023221 - To hedge against commodity price changes, the company held swap contracts to buy 376.5 thousand pounds of nickel as of September 30, 2023223 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The PEO and PFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report224 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls225 Part II—Other Information Item 1. Legal Proceedings This section refers to other filings for information regarding the company's legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 8 of the consolidated financial statements and the company's most recent Form 10-K228 Item 1A. Risk Factors This section refers readers to the company's Annual Report on Form 10-K for a complete discussion of risk factors - A complete discussion of the Company's risk factors is included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2023229 Item 2. Unregistered Sales of Equity Securities, Use or Proceeds, and Issuer Purchases of Equity Securities A new $500 million share repurchase program was authorized, but no repurchases have been made under it as of September 30, 2023 - A new share repurchase program for up to $500 million was authorized on May 3, 2023231 - As of September 30, 2023, no shares have been repurchased under the new $500 million program231 - During the first six months of fiscal 2024, the company obtained 57,161 ordinary shares for an aggregate amount of $9.2 million related to share-based compensation awards234 Item 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the period - No directors or officers adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" during the six months ended September 30, 2023235 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and interactive data files - The report includes required exhibits such as officer certifications (31.1, 31.2, 32.1) and Inline XBRL documents (101 series)238