STERIS(STE) - 2022 Q2 - Quarterly Report

Part I—Financial Information Financial Statements The company's financial statements show significant balance sheet growth and higher revenue driven by the Cantel acquisition, though net income declined due to related costs Consolidated Balance Sheets Total assets grew to $11.75 billion and liabilities to $5.21 billion, primarily due to goodwill, intangibles, and debt from the Cantel acquisition Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 (Unaudited) | Mar 31, 2021 | | :--- | :--- | :--- | | Total current assets | $1,904,627 | $1,211,754 | | Goodwill | $5,132,697 | $3,026,049 | | Intangibles, net | $2,954,417 | $898,406 | | Total assets | $11,752,448 | $6,574,471 | | Total current liabilities | $785,701 | $577,920 | | Long-term indebtedness | $3,421,506 | $1,650,540 | | Total liabilities | $5,207,517 | $2,683,003 | | Total equity | $6,544,931 | $3,891,468 | Consolidated Statements of Income Q2 revenues rose 58.3% to $1.20 billion due to the Cantel acquisition, while net income fell to $69.8 million on higher acquisition-related costs Income Statement Summary (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | Change | Six Months 2021 | Six Months 2020 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,196,985 | $756,132 | +58.3% | $2,165,407 | $1,425,064 | +52.0% | | Gross Profit | $480,344 | $330,037 | +45.5% | $906,626 | $617,421 | +46.8% | | Income from Operations | $116,503 | $141,263 | -17.5% | $130,827 | $257,079 | -49.1% | | Net Income Attributable to Shareholders | $69,811 | $105,858 | -34.1% | $48,004 | $195,455 | -75.4% | | Diluted EPS | $0.69 | $1.23 | -43.9% | $0.50 | $2.28 | -78.1% | Consolidated Statements of Cash Flows H1 operating cash flow was $268.8 million, with significant cash used for the Cantel acquisition and raised through new debt issuance Cash Flow Summary for Six Months Ended Sep 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $268,766 | $296,073 | | Net cash used in investing activities | ($680,335) | ($112,863) | | Net cash provided by (used in) financing activities | $579,703 | ($199,319) | | Increase (decrease) in cash | $162,963 | ($7,553) | - Key investing activities included $547.4 million used for the acquisition of businesses, net of cash acquired[21] - Key financing activities included proceeds from senior public notes ($1.35B) and a term loan ($650M), offset by payments on long-term obligations ($721.3M) and convertible debt ($371.4M)[21] Notes to Consolidated Financial Statements Notes detail the accounting for the $3.6 billion Cantel acquisition, which created a new Dental segment and increased goodwill, assets, and debt - On June 2, 2021, STERIS acquired Cantel Medical for total consideration of $3.6 billion, creating a new Dental segment and integrating operations into Healthcare and Life Sciences[54][55][58] - To fund the Cantel acquisition, the company issued $1.35 billion in Senior Public Notes and borrowed $650 million under a delayed draw term loan[75][77] - As a result of the Cantel acquisition, the company now reports in four segments: Healthcare, Applied Sterilization Technologies, Life Sciences, and the new Dental segment[103] Management's Discussion and Analysis of Financial Condition and Results of Operations The Cantel acquisition drove a 58.3% revenue increase in Q2 FY22, but gross margin and operating income declined due to related costs and inflation - Revenues increased 58.3% in Q2 2022, reflecting organic growth and added volume from the Cantel acquisition[181] - Gross profit percentage for Q2 2022 decreased to 40.1% from 43.6% in the prior year, primarily due to unfavorable impacts from recent acquisitions (460 basis points) and inflation (40 basis points)[182][204] - Operating income declined in Q2 2022 compared to the prior year, mainly due to acquisition and integration expenses and incremental amortization related to the Cantel acquisition[183] - Free cash flow for the first half of fiscal 2022 was $135.8 million, down from $185.6 million in the prior year, due to Cantel acquisition costs and higher capital expenditures[184][190] Results of Operations Q2 FY22 revenue grew 58.3% to $1.2 billion, while gross margin and operating income fell due to acquisition costs, inflation, and higher taxes Q2 2022 vs Q2 2021 Revenue by Type (in thousands) | Revenue Type | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Service revenues | $511,747 | $416,628 | 22.8% | | Consumable revenues | $447,799 | $178,590 | 150.7% | | Capital equipment revenues | $237,439 | $160,914 | 47.6% | | Total revenues | $1,196,985 | $756,132 | 58.3% | - SG&A expenses increased 99.6% in Q2 FY22, primarily due to acquisition and integration costs, amortization of acquired intangibles, and fair value step-up related to the Cantel acquisition[208] - The effective tax rate for Q2 FY22 was 22.3%, up from 20.8% in Q2 FY21, mainly because Cantel and other recent acquisitions have higher effective tax rates than STERIS historically[213] Business Segment Results All segments saw Q2 FY22 revenue growth, led by Healthcare's 58% increase and the new Dental segment's $115.6 million contribution Segment Revenue and Operating Income - Q2 2022 (in thousands) | Segment | Revenue | % Change YoY | Operating Income | Operating Margin | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $744,134 | +58.0% | $160,390 | 21.6% | | Applied Sterilization Technologies | $204,892 | +20.8% | $99,789 | 48.7% | | Life Sciences | $132,327 | +14.4% | $57,519 | 43.5% | | Dental | $115,632 | N/A | $32,392 | 28.0% | - Excluding Cantel, the Healthcare segment's backlog increased 74.8% YoY to $311.2 million, and the Life Sciences backlog increased 31.3% to $98.3 million, driven by customer demand and supply chain delays[222][224] Liquidity and Capital Resources The Cantel acquisition was funded by $2.0 billion in new debt, increasing the debt-to-total capital ratio to 34.5% - Net cash from operating activities for the first six months of FY22 was $268.8 million, down from $296.1 million YoY, due to costs associated with the Cantel acquisition and integration[231] - Financing activities in H1 FY22 were dominated by debt issuance to fund the Cantel acquisition, including $1.35 billion from Senior Public Notes and $650 million from a term loan[233] - The debt-to-total capital ratio increased to 34.5% as of September 30, 2021, compared to 21.8% a year prior, reflecting the new debt taken on for the acquisition[231][236] Quantitative and Qualitative Disclosures About Market Risk Market risk exposures are unchanged, but new unhedged currency forward contracts for EUR, MXN, and CAD may introduce earnings volatility - The company's exposures to market risks (interest rate, currency, commodity) have not changed materially since March 31, 2021[255] - In Q2 FY22, the company began using forward currency contracts to hedge earnings denominated in euros, Mexican pesos, and Canadian dollars; hedge accounting was not applied, which could cause earnings volatility[256] Controls and Procedures Disclosure controls were deemed effective as of September 30, 2021, with ongoing integration of Cantel's internal controls - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of September 30, 2021[257] - The company is in the process of integrating the internal controls of the acquired Cantel business into its existing operations[258] Part II—Other Information Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse financial effect - Information on legal proceedings is detailed in Note 8, 'Commitments and Contingencies'[261] Risk Factors Key risks include Dental segment distributor dependency, COVID-19 supply chain disruptions, and potential changes to tax laws - A new risk factor highlights that the Dental segment's sales are highly dependent on a small number of large distributors, with the top three historically accounting for over 40% of its revenue[264] - The COVID-19 pandemic continues to pose a risk, causing disruptions in the supply chain and labor scarcity, which has resulted in material and labor cost inflation[265] - The company notes significant uncertainty regarding potential changes to tax laws, such as the proposed U.S. 'Build Back Better' legislation and the OECD's BEPS project, which could increase tax liabilities[268][269] Unregistered Sales of Equity Securities and Use of Proceeds The company's share repurchase program remains suspended, with no shares repurchased under the plan in Q2 FY22 - The company's share repurchase program was suspended on April 9, 2020, and no shares were repurchased under the publicly announced plan in Q2 FY22[273][274] - As of September 30, 2021, approximately $333.9 million remained available for repurchase under the board-authorized program, which has no expiration date[272] Exhibits This section lists all exhibits filed with the Form 10-Q, including required Sarbanes-Oxley certifications - Lists required exhibits, including certifications from the PEO and PFO pursuant to Sarbanes-Oxley Act rules[275]