STERIS(STE) - 2021 Q3 - Quarterly Report

Form 10-Q Information STERIS plc filed a Quarterly Report on Form 10-Q for the period ended December 31, 2020, with its ordinary shares traded on the New York Stock Exchange under symbol STE[2][3] | Indicator | Value | | :--- | :--- | | Filing Type | Quarterly Report (10-Q) | | Period Ended | December 31, 2020 | | Commission File Number | 001-38848 | | Trading Symbol | STE | | Exchange | New York Stock Exchange | | Ordinary Shares Outstanding (as of Feb 5, 2021) | 85,352,713 | | Filer Status | Large Accelerated Filer | Part I—Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, comprehensive income, cash flows, and shareholders' equity, along with detailed explanatory notes Consolidated Balance Sheets | Metric (in thousands) | Dec 31, 2020 (Unaudited) | Mar 31, 2020 | Change (Dec 2020 vs Mar 2020) | | :--- | :--- | :--- | :--- | | Assets | | | | | Total current assets | $1,176,075 | $1,208,751 | $(32,676) | | Property, plant, and equipment, net | $1,226,895 | $1,111,855 | $115,040 | | Goodwill | $2,926,551 | $2,356,085 | $570,466 | | Intangibles, net | $1,043,904 | $565,473 | $478,431 | | Total assets | $6,580,780 | $5,425,582 | $1,155,198 | | Liabilities & Equity | | | | | Total current liabilities | $505,867 | $503,607 | $2,260 | | Long-term indebtedness | $1,713,199 | $1,150,521 | $562,678 | | Total liabilities | $2,702,588 | $2,018,858 | $683,730 | | Total shareholders' equity | $3,866,990 | $3,393,876 | $473,114 | | Total liabilities and equity | $6,580,780 | $5,425,582 | $1,155,198 | Consolidated Statements of Income | Metric (in thousands, except per share) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $808,924 | $774,261 | +4.5% | $2,233,988 | $2,207,904 | +1.2% | | Gross profit | $345,861 | $331,353 | +4.4% | $961,466 | $955,863 | +0.6% | | Income from operations | $147,030 | $142,387 | +3.3% | $402,294 | $379,208 | +6.1% | | Net income attributable to shareholders | $114,501 | $104,930 | +9.1% | $308,549 | $284,289 | +8.5% | | Diluted EPS | $1.33 | $1.23 | +8.1% | $3.59 | $3.32 | +8.1% | | Cash dividends declared per share | $0.40 | $0.37 | +8.1% | $1.17 | $1.08 | +8.3% | Consolidated Statements of Comprehensive (Loss) Income | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income attributable to shareholders | $114,501 | $104,930 | +9.1% | $308,549 | $284,289 | +8.5% | | Total other comprehensive income | $128,227 | $76,795 | +67.0% | $233,077 | $10,856 | +2047.0% | | Comprehensive income | $242,728 | $181,725 | +33.6% | $541,626 | $295,145 | +83.5% | - The change in cumulative currency translation adjustment was a gain of $128.7 million for the three months and $234.6 million for the nine months ended December 31, 2020, significantly impacting other comprehensive income[15] Consolidated Statements of Cash Flows | Metric (in thousands) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $501,785 | $391,326 | +28.2% | | Net cash used in investing activities | $(1,035,903) | $(259,989) | +298.5% | | Net cash provided by (used in) financing activities | $442,533 | $(153,874) | N/A (swing from use to provide) | | Effect of exchange rate changes on cash | $24,506 | $1,134 | +2069.8% | | Cash and cash equivalents at end of period | $252,502 | $199,230 | +26.7% | Consolidated Statements of Shareholders' Equity - Total equity increased from $3,406.7 million at March 31, 2020, to $3,878.2 million at December 31, 2020, driven by net income and other comprehensive income, partially offset by cash dividends and share repurchases[20][23] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies, acquisitions, debt, segment information, and the impact of COVID-19 and subsequent events Note 1. Nature of Operations and Summary of Significant Accounting Policies - STERIS plc's mission is to create a healthier and safer world by providing innovative healthcare and life science product and service solutions globally[26][164] - In fiscal 2021, the company recognized $14.6 million in previously deferred capital equipment revenues and $7.6 million in related costs due to changes in selling philosophy and manufacturing processes[31][33] - As of December 31, 2020, the transaction price allocated to remaining performance obligations was approximately $1.01 billion, with about 50% expected within one year and 42% beyond one year[47] | Standard | Date of Adoption | Effect on Financial Statements | | :--- | :--- | :--- | | ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" | April 1, 2020 (First Quarter Fiscal 2021) | No material impact | | ASU 2018-13, "Fair Value Measurement (Topic 820) Disclosure Framework Changes to Disclosure Requirements for Fair Value Measurement" | April 1, 2020 (First Quarter Fiscal 2021) | No material impact (disclosure only) | | ASU 2018-14, "Compensation Retirement Benefits - Defined Benefit Plans General Topic (715-20): Disclosure Framework Changes to the Disclosure Requirements for Defined Benefit Plans" | April 1, 2020 (First Quarter Fiscal 2021) | No material impact (disclosure only) | | ASU 2018-15, "Intangibles Goodwill and Other- Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract" | April 1, 2020 (First Quarter Fiscal 2021) | No material impact | Note 2. Business Acquisitions and Divestitures - On November 18, 2020, STERIS acquired Key Surgical, LLC for $849.7 million (net of cash acquired), integrating it into the Healthcare segment[57] - In Q3 fiscal 2021, STERIS completed two tuck-in acquisitions for approximately $20.9 million, expanding Healthcare segment offerings[59] - During the first nine months of fiscal 2020, STERIS completed several tuck-in acquisitions for approximately $117.3 million, expanding Healthcare and Applied Sterilization Technologies segments[61] - In Q1 fiscal 2020, STERIS sold its China hospital sterilization services business for $0.4 million, recognizing a pre-tax loss of $2.3 million[64] Note 3. Inventories, Net | Inventory Category (in thousands) | Dec 31, 2020 | Mar 31, 2020 | | :--- | :--- | :--- | | Raw materials | $102,212 | $94,321 | | Work in process | $42,109 | $35,643 | | Finished goods | $185,762 | $151,381 | | LIFO reserve | $(18,753) | $(16,937) | | Reserve for excess and obsolete inventory | $(17,198) | $(16,149) | | Inventories, net | $294,132 | $248,259 | Note 4. Property, Plant and Equipment | Asset Category (in thousands) | Dec 31, 2020 | Mar 31, 2020 | | :--- | :--- | :--- | | Land and land improvements | $69,591 | $65,994 | | Buildings and leasehold improvements | $567,113 | $531,267 | | Machinery and equipment | $753,851 | $682,488 | | Information systems | $186,421 | $181,112 | | Radioisotope | $567,353 | $508,593 | | Construction in progress | $211,183 | $159,731 | | Total property, plant, and equipment | $2,355,512 | $2,129,185 | | Less: accumulated depreciation and depletion | $(1,128,617) | $(1,017,330) | | Property, plant, and equipment, net | $1,226,895 | $1,111,855 | Note 5. Debt | Indebtedness (in thousands) | Dec 31, 2020 | Mar 31, 2020 | | :--- | :--- | :--- | | Credit Agreement | $304,618 | $275,449 | | Term Loan | $550,000 | $0 | | Private Placement | $864,425 | $878,409 | | Deferred financing costs | $(5,844) | $(3,337) | | Total long term debt | $1,713,199 | $1,150,521 | - On November 18, 2020, STERIS entered into a $550.0 million Term Loan Agreement to fund a portion of the Key Surgical acquisition, maturing on November 20, 2023[68][69] Note 6. Additional Consolidated Balance Sheet Information | Category (in thousands) | Dec 31, 2020 | Mar 31, 2020 | | :--- | :--- | :--- | | Accrued payroll and other related liabilities: | | | | Compensation and related items | $67,883 | $42,205 | | Accrued bonuses | $51,100 | $53,041 | | Total accrued payroll and other related liabilities | $152,331 | $128,261 | | Accrued expenses and other: | | | | Deferred revenues | $44,308 | $53,299 | | Service liabilities | $38,948 | $47,505 | | Total accrued expenses and other | $184,633 | $192,183 | | Other liabilities: | | | | Asset retirement obligation-long-term portion | $12,379 | $9,843 | | Total other liabilities | $89,264 | $90,346 | Note 7. Income Tax Expense | Metric | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Effective income tax rate | 17.8% | 21.9% | 18.8% | 18.8% | - The decrease in the effective tax rate for the three months ended December 31, 2020, was primarily due to an increase in favorable discrete items[77] - STERIS is contesting IRS proposed tax adjustments of approximately $40.0 million for fiscal years 2016-2018, with no reserves established as a material impact is not expected[82] Note 8. Commitments and Contingencies - STERIS is involved in various legal proceedings and claims, including personal injury, product liability, and commercial disputes, arising in the ordinary course of business[83] - The company believes it has adequately reserved for probable and estimable litigation and claims, expecting no material adverse effect on its financial position or results of operations[84] Note 9. Business Segment Information - STERIS operates in three reportable business segments: Healthcare, Applied Sterilization Technologies (AST), and Life Sciences, with Healthcare combining previous product and service segments[91][92] | Segment (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues: | | | | | | Healthcare | $521,662 | $509,222 | $1,392,247 | $1,440,237 | | Applied Sterilization Technologies | $176,462 | $156,266 | $498,371 | $463,459 | | Life Sciences | $110,800 | $108,773 | $343,370 | $304,208 | | Operating income (loss): | | | | | | Healthcare | $115,412 | $105,227 | $302,565 | $298,777 | | Applied Sterilization Technologies | $81,626 | $65,468 | $222,416 | $198,889 | | Life Sciences | $41,541 | $37,731 | $136,435 | $103,085 | | Revenue Type (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Healthcare: | | | | | | Capital equipment | $147,855 | $155,408 | $407,610 | $428,894 | | Consumables | $148,839 | $130,255 | $355,390 | $362,370 | | Service | $224,968 | $223,559 | $629,247 | $648,973 | | Life Sciences: | | | | | | Capital equipment | $28,993 | $31,762 | $88,664 | $84,993 | | Consumables | $49,627 | $46,370 | $164,262 | $132,939 | | Service | $32,180 | $30,641 | $90,444 | $86,276 | | Geographic Revenue (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Ireland | $20,316 | $16,126 | $51,779 | $46,405 | | United States | $572,397 | $562,502 | $1,613,554 | $1,611,755 | | Other locations | $216,211 | $195,633 | $568,655 | $549,744 | Note 10. Shares and Preferred Shares | Denominator (shares in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Weighted average shares outstanding—basic | 85,330 | 84,788 | 85,153 | 84,740 | | Dilutive effect of share equivalents | 702 | 840 | 698 | 890 | | Weighted average shares outstanding and share equivalents—diluted | 86,032 | 85,628 | 85,851 | 85,630 | - Options to purchase 278 thousand shares (Q3 2020) and 370 thousand shares (9M 2020) were excluded from diluted EPS calculation due to their anti-dilutive nature[106] Note 11. Repurchases of Ordinary Shares - As of December 31, 2020, approximately $333.9 million remained available under the Board-authorized share repurchase program[108] - Share repurchases were suspended on April 9, 2020, due to uncertainty surrounding the COVID-19 pandemic[109] - From the start of fiscal 2021 through April 9, 2020, STERIS repurchased 35,000 ordinary shares for $5.0 million[110] Note 12. Share-Based Compensation - As of December 31, 2020, 3,592,261 ordinary shares remained available for grant under the long-term incentive plan[115] - The weighted average grant date fair value of stock option grants was $27.66 for the first nine months of fiscal 2021, an increase from $23.52 in fiscal 2020[121] - As of December 31, 2020, $51.6 million in unrecognized compensation cost related to non-vested share-based compensation is expected to be recognized over a weighted average period of 2.1 years[123] Note 13. Financial and Other Guarantees | Warranty Liability (in thousands) | Amount | | :--- | :--- | | Balance, March 31, 2020 | $7,381 | | Warranties issued during the period | $7,411 | | Settlements made during the period | $(7,996) | | Balance, December 31, 2020 | $6,796 | Note 14. Derivatives and Hedging - STERIS uses forward and commodity swap contracts to hedge foreign currency and nickel price changes, with fair value changes recognized immediately in income as they are not designated hedging instruments[126][128] - At December 31, 2020, STERIS held foreign currency forward contracts to buy 30.5 million British pounds, 35.0 million Mexican pesos, and 2.2 million Canadian dollars, and to sell 4.0 million euros, alongside commodity swap contracts to buy 946.8 thousand pounds of nickel[129] | Impact on Income (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Foreign currency forward contracts (SG&A) | $661 (gain) | $741 (gain) | $79 (gain) | $784 (gain) | | Commodity swap contracts (Cost of revenues) | $904 (gain) | $153 (gain) | $(398) (loss) | $271 (gain) | Note 15. Fair Value Measurements | Financial Instrument (in thousands) | Carrying Value (Dec 31, 2020) | Fair Value (Dec 31, 2020) | Fair Value (Mar 31, 2020) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $252,502 | $252,502 (Level 1) | $319,581 (Level 1) | | Forward and swap contracts (Asset) | $1,377 | $1,377 (Level 2) | $124 (Level 2) | | Equity investments | $10,484 | $10,484 (Level 1) | $9,624 (Level 1) | | Forward and swap contracts (Liability) | $659 | $659 (Level 2) | $912 (Level 2) | | Long term debt | $1,713,199 | $1,781,304 (Level 2) | $1,143,978 (Level 2) | | Contingent consideration obligations | $17,931 | $17,931 (Level 3) | $15,988 (Level 3) | | Contingent Consideration (Level 3, in thousands) | Amount | | :--- | :--- | | Balance at March 31, 2020 | $15,988 | | Additions | $334 | | Assumed in acquisition of Key Surgical | $2,940 | | Payments | $(917) | | Reversal | $(500) | | Currency translation adjustments | $86 | | Balance at December 31, 2020 | $17,931 | Note 16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Beginning Balance (Total AOCI) | $(130,613) | $(235,463) | | Net current-period Other Comprehensive Income | $128,227 | $233,077 | | Balance at December 31, 2020 (Total AOCI) | $(2,386) | $(2,386) | - The change in cumulative currency translation adjustment was a gain of $128.7 million for the three months and $234.6 million for the nine months ended December 31, 2020, significantly impacting other comprehensive income[15] Note 17. Restructuring - Since the inception of the Fiscal 2019 Restructuring Plan, STERIS has incurred $44.0 million in pre-tax expenses, with $31.7 million as restructuring expenses and $12.3 million in cost of revenues[140] - The restructuring plan included the closure of two manufacturing facilities and product rationalization, resulting in fewer than 200 positions eliminated[139] Note 18. Loans Receivable - STERIS provided a credit facility of up to $11.6 million for an equity investment, with $10.3 million outstanding at December 31, 2020, which was capitalized in January 2021[142][150] - A loan agreement related to a fiscal 2017 divestiture had an outstanding principal of $9.0 million (or €7.3 million) at December 31, 2020, with repayments scheduled to begin in October 2022[143] Note 19. COVID-19 Pandemic - The COVID-19 pandemic caused unpredictable demand fluctuations, with reduced deferrable surgical procedures impacting some products/services, while increasing demand from pharma customers[145][165][171] - STERIS implemented measures including remote work, enhanced safety protocols, travel suspension, a hiring freeze, and deferred capital expenditures to protect employees and preserve liquidity[145][169] - Despite the impact, STERIS believes the pandemic has not significantly affected its operations, as manufacturing facilities continue to operate and meet demand for essential products and services[145][169] Note 20. Subsequent Events - On January 12, 2021, STERIS agreed to acquire Cantel Medical Corp. for approximately $3.6 billion in equity value ($4.6 billion enterprise value) via a cash and stock transaction[148][167] - The Cantel acquisition is expected to be funded with approximately $2.0 billion of new debt to cover the cash portion and repay existing Cantel debt[149][167] - On January 4, 2021, STERIS purchased the remaining outstanding shares of an equity investment for approximately $44.3 million, capitalizing an outstanding credit facility of $10.5 million[150] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes STERIS's financial condition and operating results, covering revenue, gross profit, expenses, segment performance, liquidity, and the impact of acquisitions and the COVID-19 pandemic Introduction - The MD&A explains STERIS's financial condition and results of operations, including factors affecting the business, earnings, costs, capital expenditures, and future cash funding[157][160] Financial Measures - STERIS uses non-GAAP financial measures such as backlog, debt-to-total capital, and days sales outstanding (DSO) to enhance financial performance analysis and provide transparency[158][161] - Backlog is defined as unfilled capital equipment purchase orders, debt-to-total capital as total debt divided by total debt plus shareholders' equity, and DSO as net accounts receivable divided by trailing four quarters' revenues multiplied by 365 days[161] Revenues – Defined - STERIS categorizes revenues into Product Revenues (consumable and capital equipment sales) and Service Revenues (various maintenance, repair, and sterilization services), with recurring revenues combining consumables and services[162][168] General Company Overview and Executive Summary - STERIS plc is a leading global provider of infection prevention and procedural products and services for healthcare and pharmaceutical industries, driven by an aging population and increased concern over hospital-acquired infections[164][165] - The company operates in three segments: Healthcare, Applied Sterilization Technologies, and Life Sciences[165] - STERIS acquired Key Surgical for $849.7 million in November 2020 and announced the acquisition of Cantel Medical Corp. for approximately $3.6 billion in January 2021, significantly expanding its offerings[166][167] COVID-19 Pandemic - The COVID-19 pandemic caused unpredictable demand fluctuations, with reduced deferrable surgical procedures impacting some products/services, while increasing demand from pharma customers[169][171] - STERIS implemented measures including remote work, enhanced safety, travel suspension, a hiring freeze, and deferred capital expenditures to protect employees and preserve liquidity[169] Highlights | Metric (in millions) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $808.9 | $774.3 | +4.5% | $2,234.0 | $2,207.9 | +1.2% | | Gross Profit Percentage | 42.8% | 42.8% | 0 bps | 43.0% | 43.3% | -30 bps | | Operating Income | $147.0 | $142.4 | +3.2% | $402.3 | $379.2 | +6.1% | - Cash flows from operations increased to $501.8 million (9M FY21) from $391.3 million (9M FY20), and free cash flow rose to $337.7 million from $238.1 million, driven by higher net income, working capital improvements, and deferred tax payments[174] - The debt-to-total capital ratio increased to 30.7% at December 31, 2020, from 25.3% at March 31, 2020[175] NON-GAAP FINANCIAL MEASURES - STERIS uses non-GAAP financial measures, such as free cash flow, to provide greater transparency and assist investors in understanding underlying operational performance, not as replacements for GAAP measures[177][178] - Free cash flow is defined as net cash provided by operating activities less net purchases of property, plant, equipment, and intangibles, plus proceeds from sales of property, plant, equipment, and intangibles[179] | Metric (in thousands) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $501,785 | $391,326 | | Purchases of property, plant, equipment and intangibles, net | $(164,497) | $(153,649) | | Proceeds from the sale of property, plant, equipment and intangibles | $417 | $387 | | Free cash flow | $337,705 | $238,064 | Results of Operations Revenues | Revenue (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $808,924 | $774,261 | +4.5% | $2,233,988 | $2,207,904 | +1.2% | | Service revenues | $433,610 | $410,466 | +5.6% | $1,218,062 | $1,198,708 | +1.6% | | Consumable revenues | $198,466 | $176,625 | +12.4% | $519,652 | $495,309 | +4.9% | | Capital equipment revenues | $176,848 | $187,170 | -5.5% | $496,274 | $513,887 | -3.4% | - For the three months ended December 31, 2020, revenue growth was driven by recent acquisitions in Healthcare, volume in Applied Sterilization Technologies, and increased demand from pharma customers in Life Sciences[183] - For the nine months ended December 31, 2020, revenue growth was primarily organic in Applied Sterilization Technologies and Life Sciences, partially offset by a decline in Healthcare due to reduced deferrable surgical procedures and capital spending from COVID-19[188] - Capital equipment revenues declined 5.5% (Q3) and 3.4% (9M) due to reduced capital spending in Healthcare from COVID-19 uncertainty and timing of shipments in Life Sciences[184][189] Gross Profit | Gross Profit (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total gross profit | $345,861 | $331,353 | +4.4% | $961,466 | $955,863 | +0.6% | | Total gross profit percentage | 42.8% | 42.8% | 0 bps | 43.0% | 43.3% | -30 bps | - Q3 fiscal 2021 gross profit percentage remained flat at 42.8%, with improved productivity and favorable pricing/acquisitions offset by COVID-19 incremental costs and other factors[194] - 9M fiscal 2021 gross profit percentage decreased to 43.0% from 43.3%, as COVID-19 incremental costs and other factors outweighed favorable pricing and improved productivity[195] Operating Expenses | Operating Expense (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling, general, and administrative | $182,373 | $172,927 | +5.5% | $510,250 | $527,667 | -3.3% | | Research and development | $16,438 | $16,487 | -0.3% | $48,812 | $48,321 | +1.0% | | Restructuring expenses | $20 | $(448) | N/A | $110 | $667 | -83.5% | | Total operating expenses | $198,831 | $188,966 | +5.2% | $559,172 | $576,655 | -3.0% | - SG&A expenses increased 5.5% in Q3 fiscal 2021 due to recent acquisitions but decreased 3.3% in 9M fiscal 2021 due to reduced employee compensation, travel, and meeting costs from the COVID-19 pandemic[198] - Research and development expenses remained relatively stable, with a slight decrease of 0.3% in Q3 and an increase of 1.0% in 9M fiscal 2021, focusing on new product development and technological innovations[199] Non-Operating Expenses, Net | Non-Operating Expense (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest expense | $8,899 | $9,813 | -9.4% | $27,056 | $30,702 | -11.9% | | Interest income and miscellaneous expense | $(1,299) | $(1,378) | +5.7% | $(4,776) | $(2,163) | +120.8% | | Non-operating expenses, net | $7,600 | $8,435 | -9.9% | $22,280 | $28,539 | -21.9% | - Interest expense decreased due to lower interest rates on floating rate debt and increased capitalized interest expense[201] - Interest income and miscellaneous expense increased significantly for the nine-month period, primarily due to movements in equity investments[201] Income Tax Expense | Income Tax Metric | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Income tax expense (in thousands) | $24,842 | $29,285 | -15.2% | $71,294 | $66,083 | +7.9% | | Effective income tax rate | 17.8% | 21.9% | -4.1 ppts | 18.8% | 18.8% | 0 ppts | - The effective income tax rate for Q3 fiscal 2021 decreased to 17.8% from 21.9% in Q3 fiscal 2020, primarily due to an increase in favorable discrete items[203] Business Segment Results of Operations | Segment (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (YoY) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues: | | | | | | | | Healthcare | $521,662 | $509,222 | +2.4% | $1,392,247 | $1,440,237 | -3.3% | | Applied Sterilization Technologies | $176,462 | $156,266 | +12.9% | $498,371 | $463,459 | +7.5% | | Life Sciences | $110,800 | $108,773 | +1.9% | $343,370 | $304,208 | +12.9% | | Operating income (loss): | | | | | | | | Healthcare | $115,412 | $105,227 | +9.7% | $302,565 | $298,777 | +1.3% | | Applied Sterilization Technologies | $81,626 | $65,468 | +24.7% | $222,416 | $198,889 | +11.8% | | Life Sciences | $41,541 | $37,731 | +10.1% | $136,435 | $103,085 | +32.4% | - Healthcare segment revenues increased 2.4% in Q3 fiscal 2021 due to consumables growth and recent acquisitions, but decreased 3.3% in 9M fiscal 2021 due to reduced deferrable surgical procedures and capital spending from COVID-19[210] - Applied Sterilization Technologies segment revenues increased 12.9% (Q3) and 7.5% (9M) due to organic growth and favorable currency fluctuations, with operating income increasing significantly due to higher volumes and reduced expenditures[211][214] - Life Sciences segment revenues increased 1.9% (Q3) and 12.9% (9M) due to increased demand from pharma customers focused on vaccines and biologics, with operating income seeing substantial growth due to higher volumes and favorable mix[212][215] Liquidity and Capital Resources | Metric (in thousands) | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $501,785 | $391,326 | | Net cash (used in) investing activities | $(1,035,903) | $(259,989) | | Net cash provided by (used in) financing activities | $442,533 | $(153,874) | | Debt-to-total capital ratio | 30.7% | 25.2% | | Free cash flow | $337,705 | $238,064 | - Net cash provided by operating activities increased to $501.8 million (9M FY21) from $391.3 million (9M FY20), driven by higher net income, working capital improvements, and deferred tax payments[217] - Net cash used in investing activities significantly increased to $1,035.9 million (9M FY21) from $260.0 million (9M FY20), primarily due to $869.4 million for business acquisitions and $164.5 million in capital expenditures[218] - Net cash provided by financing activities was $442.5 million (9M FY21), a swing from $153.9 million used in 9M FY20, largely due to $550.0 million in proceeds from a new Term Loan, partially offset by $99.7 million in cash dividends and $14.6 million in share repurchases[218][219] - STERIS expects to fund the cash portion of the Cantel acquisition (approx. $2.0 billion) and repay Cantel's existing debt with new debt, having fully committed bridge financing[225] Critical Accounting Policies, Estimates, and Assumptions - STERIS's critical accounting policies, estimates, and assumptions have not materially changed from March 31, 2020, as detailed in its Annual Report on Form 10-K[226] Contingencies - STERIS is involved in various legal proceedings, government investigations, and claims, with liabilities recorded when probable and estimable, and no material adverse effect on financial position or results of operations is anticipated[227][228] Off-Balance Sheet Arrangements - STERIS does not have any off-balance sheet arrangements likely to have a material current or future impact on its financial condition, results of operations, liquidity, or capital[230] Forward-Looking Statements - This Form 10-Q contains forward-looking statements subject to uncertainty and changes in circumstances, which STERIS does not undertake to update or revise unless legally required[231] - Key risks include failure to complete the Cantel acquisition, integration challenges, increased debt, impact of COVID-19, changes in tax laws, market demand fluctuations, and regulatory actions[232][236] Availability of Securities and Exchange Commission Filings - STERIS makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments available free of charge on its investor relations website after filing with the SEC[234] Item 3. Quantitative and Qualitative Disclosures About Market Risk STERIS is exposed to interest rate, currency, and commodity risks, which have not materially changed, and uses forward currency contracts that may cause volatility in reported gains/losses - STERIS is subject to interest rate, currency, and commodity risks, which have not materially changed since March 31, 2020[235] - During Q3 fiscal 2021, STERIS entered into forward currency contracts to hedge non-U.S. dollar denominated earnings, but did not elect hedge accounting, potentially leading to volatility in reported gains/losses[236][237] Item 4. Controls and Procedures STERIS's management evaluated the effectiveness of its disclosure controls and procedures as of December 31, 2020, concluding they were effective with no material changes in internal control over financial reporting - As of December 31, 2020, STERIS's disclosure controls and procedures were evaluated and deemed effective by management, including the Principal Executive Officer and Principal Financial Officer[238] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2020[239] Part II—Other Information Item 1. Legal Proceedings Information regarding STERIS's legal proceedings is cross-referenced to Note 8 of the consolidated financial statements and Item 7 of the Annual Report on Form 10-K - Legal proceedings information is cross-referenced to Note 8 of the consolidated financial statements and Item 7 of the Annual Report on Form 10-K[242] Item 1A. Risk Factors While general risk factors remained unchanged, new risks related to the proposed Cantel Medical Corp. acquisition include completion failure, business uncertainties, significant transaction costs, and increased debt - No material changes to general risk factors were noted since March 31, 2020, except for new risks related to the proposed acquisition of Cantel Medical Corp.[243] - Risks associated with the Cantel acquisition include potential failure or delays in completion, adverse impacts on share price and business, business uncertainties, significant transaction and integration costs, and increased debt limiting financial flexibility[244][246] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds STERIS had approximately $333.9 million remaining under its share repurchase program as of December 31, 2020, but suspended repurchases on April 9, 2020, due to COVID-19 uncertainty - As of December 31, 2020, approximately $333.9 million remained available under the Board-authorized share repurchase program, which has no specified expiration date[248] - Share repurchases were suspended on April 9, 2020, due to the uncertainty surrounding the COVID-19 pandemic[249] - From the start of fiscal 2021 through April 9, 2020, STERIS repurchased 35,000 ordinary shares for $5.0 million[110] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans at Period End (in thousands) | | :--- | :--- | :--- | :--- | :--- | | October 1-31 | — | $— | — | $333,932 | | November 1-30 | — | $— | — | $333,932 | | December 1-31 | — | $— | — | $333,932 | | Total | — | $— | — | $333,932 | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including purchase agreements for Key Surgical and Cantel Medical Corp., loan agreements, and certifications - Exhibits include the Purchase Agreement for Key Surgical (Oct 2, 2020) and the Agreement and Plan of Merger for Cantel Medical Corp. (Jan 12, 2021)[253] - Other exhibits detail the Term Loan Agreement (Nov 18, 2020) and various Guarantor Joinder Agreements related to debt[253] Signature The report was signed on behalf of STERIS plc by Karen L. Burton, Vice President, Controller, and Chief Accounting Officer, on February 9, 2021 - The report was signed by Karen L. Burton, Vice President, Controller and Chief Accounting Officer, on February 9, 2021[256]