STERIS(STE) - 2022 Q4 - Annual Report

Part I Business STERIS plc is a global provider of infection prevention products and services across four segments: Healthcare, Applied Sterilization Technologies (AST), Life Sciences, and Dental, driven by an aging population and increased medical procedures - STERIS is a leading global provider of products and services focused on infection prevention, helping customers create a healthier and safer world through innovative healthcare, life sciences, and dental solutions[10] - On June 2, 2021, STERIS acquired Cantel Medical LLC, a global provider of infection prevention products for endoscopy and dental customers. This acquisition added a new Dental segment and is expected to strengthen STERIS's market leadership and result in cost savings[13][14] - The company operates and reports financial information in four business segments: Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental[11] - The company does not believe the COVID-19 pandemic has had a material impact on its operations and has successfully managed liquidity while continuing to invest in expansion projects[15] Information Related to Business Segments This section details STERIS's four business segments: Healthcare, AST, Life Sciences, and Dental, highlighting the Dental segment's customer concentration - The Healthcare segment provides a comprehensive offering for healthcare providers, focusing on sterile processing departments and procedural centers like operating rooms and endoscopy suites[17] - The Applied Sterilization Technologies (AST) segment is a third-party service provider for contract sterilization and sterility validation testing for medical device and pharmaceutical manufacturers[22] - The Life Sciences segment offers products and services supporting pharmaceutical manufacturing, particularly for biopharma customers in aseptic manufacturing[25] - The Dental segment, added after the Cantel acquisition, provides instruments and infection prevention products for dental practitioners. Three major customers account for approximately 45.1% of this segment's revenue in fiscal 2022[30][32] Information with Respect to Our Business in General The company sources raw materials globally, holds significant intellectual property, operates under extensive government regulations, and faces competitive markets - The company experienced delays and significant cost increases for raw materials in fiscal 2022, which are expected to continue into fiscal 2023. It has stopped purchasing cobalt-60 from its Russian supplier due to the conflict in Ukraine, though this is not expected to be material to the AST segment[34][35] - As of March 31, 2022, STERIS held approximately 566 U.S. patents and 2,346 in other jurisdictions, along with approximately 2,463 trademark registrations worldwide[38][39] Capital Equipment Backlog Comparison | Date | Healthcare Segment | Life Sciences Segment | Total Backlog (excluding Cantel) | | :--- | :--- | :--- | :--- | | March 31, 2022 | $423.6 million | $104.7 million | $528.3 million | | March 31, 2021 | $206.3 million | $79.9 million | $286.2 million | Environmental, Social, and Governance (ESG) STERIS has a formal ESG function, emphasizes ethical practices, focuses on human capital management, and maintains stringent quality control - The company has an established ESG function led by a Vice President of ESG, with oversight from a cross-functional Global Sustainability Steering Committee and regular updates to the Board of Directors[58] - In fiscal 2022, STERIS incurred no monetary losses from legal proceedings related to bribery, corruption, or false marketing claims[62][72] Employee Headcount by Segment (Average) | Segment | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | | Healthcare | 10,546 | 8,529 | | Applied Sterilization Technologies | 2,961 | 2,686 | | Life Sciences | 1,111 | 868 | | Dental | 1,020 | — | | Corporate | 784 | 687 | | Total employees | 16,422 | 12,770 | Key Safety Metrics | Metric | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | | Total Recordable Cases Rate | 0.85 | 0.91 | | Days Away From Work Rate | 0.24 | 0.37 | - Employee turnover rate increased to 17% in fiscal 2022 from 11% in fiscal 2021. The company aims for a rate of 10% or under[86] - In fiscal 2022, STERIS did not receive any FDA warning letters, seizures, or consent decrees, and had no Class I recalls for the third consecutive year[91][92] Information About Our Executive Officers This section lists the executive officers of STERIS as of March 31, 2022, including their positions and recent business experience Executive Officers as of March 31, 2022 | Name | Age | Position | | :--- | :--- | :--- | | Karen L. Burton | 54 | Vice President, Controller and Chief Accounting Officer | | Daniel A. Carestio | 49 | President and Chief Executive Officer | | Mary Clare Fraser | 51 | Vice President and Chief Human Resources Officer | | Julia K. Madsen | 57 | Senior Vice President, Life Sciences | | Cary L. Majors | 47 | Senior Vice President, Americas Commercial Operations | | Renato G. Tamaro | 53 | Vice President and Corporate Treasurer | | Michael J. Tokich | 53 | Senior Vice President and Chief Financial Officer | | Andrew Xilas | 57 | Senior Vice President and General Manager, Dental | | J. Adam Zangerle | 55 | Senior Vice President, General Counsel, and Corporate Secretary | Risk Factors The company identifies various risks, including legal, regulatory, economic, geopolitical, operational, supply chain, and integration challenges from the Cantel acquisition - The company faces risks from international laws, economic conditions, and geopolitical instability, such as the Russia-Ukraine conflict, which has led to the cessation of cobalt-60 purchases from a Russian supplier[102][106][107] - Operations are subject to extensive regulation (e.g., by the FDA and EPA), and failure to maintain approvals or comply with regulations could result in penalties, recalls, or suspension of production[113][114][115] - The business is highly competitive and faces risks from supply chain volatility for key raw materials like cobalt-60 and ethylene oxide (EO), which have a limited number of suppliers[135][137] - The integration of Cantel Medical presents risks, including failure to achieve anticipated synergies, complexities in managing a larger business, potential loss of key employees, and managing the substantial debt incurred for the acquisition[152][159][164] - The Dental segment is highly dependent on a few large distributors, with the top three customers historically accounting for over 40% of its revenues[151] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None Properties STERIS's principal executive office is in Dublin, Ireland, with primary administrative offices in Mentor, Ohio, and operates numerous owned and leased facilities globally - The company's principal executive office is in Dublin, Ireland, and its primary administrative offices are in Mentor, OH[168] - The Applied Sterilization Technologies Segment utilizes 52 owned and 12 leased contact sterilization locations globally[169] - STERIS operates over 150 sales, administrative, and operational locations in the U.S. and more than 25 other countries, with the majority being leased[170] Legal Proceedings Information regarding the company's legal proceedings is incorporated by reference from Item 7 of Part II (MD&A) and Note 10 of the consolidated financial statements - Details on legal proceedings are incorporated by reference from other sections of the report, specifically MD&A and Note 10 to the financial statements[172] Mine Safety Disclosures The company reports that there are no mine safety disclosures - None Part II Market for Registrant's Ordinary Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities STERIS's ordinary shares trade on the NYSE under "STE," and the company expects to continue paying cash dividends, with a share repurchase program having approximately $308.9 million remaining available as of March 31, 2022 - The company's ordinary shares are traded on the NYSE under the symbol "STE"[175] - As of March 31, 2022, approximately $308.9 million remained available under the authorized share repurchase program, which has no specified expiration date[177] Share Repurchases in Q4 Fiscal 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January 1-31 | — | $ — | | February 1-28 | 50,000 | $229.59 | | March 1-31 | 58,368 | $231.64 | | Total | 108,368 | $230.69 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, revenues grew 47.5% to $4.59 billion, driven by the Cantel acquisition and organic growth, while operating income declined 22.4% to $425.6 million due to acquisition and integration expenses Fiscal 2022 Financial Highlights | Metric | Fiscal 2022 | Fiscal 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $4,585.1 million | $3,107.5 million | 47.5% | | Gross Profit % | 44.0% | 43.2% | +80 bps | | Operating Income | $425.6 million | $548.4 million | -22.4% | | Net Cash from Operations | $684.8 million | $689.6 million | -0.7% | | Free Cash Flow | $399.0 million | $450.9 million | -11.5% | - The significant increase in revenue was primarily due to the acquisition of Cantel, which contributed $1,073.1 million in volume[214] - The decline in operating income was mainly caused by additional acquisition and integration expenses, incremental amortization from the Cantel acquisition, and approximately $45.0 million in unplanned supply chain and inflation costs[200] Results of Operations For fiscal 2022, total revenues increased 47.5% to $4.59 billion, with gross profit margin improving to 44.0%, while operating expenses more than doubled due to Cantel acquisition costs Revenues by Type and Geography (FY2022 vs FY2021) | Revenue Category | FY 2022 ($M) | FY 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | By Type | | | | | Service | $2,028.8 | $1,664.0 | 21.9% | | Consumable | $1,607.1 | $726.0 | 121.4% | | Capital Equipment | $949.2 | $717.6 | 32.3% | | By Geography | | | | | United States | $3,228.9 | $2,227.0 | 45.0% | | Other Foreign | $1,274.2 | $808.6 | 57.6% | | Total Revenues | $4,585.1 | $3,107.5 | 47.5% | - Gross profit percentage increased to 44.0% in fiscal 2022 from 43.2% in fiscal 2021. Positive impacts from productivity (+170 bps) and pricing (+70 bps) were partially offset by unfavorable impacts from recent acquisitions (-80 bps), material costs (-70 bps), and inflation (-50 bps)[219] - Selling, General, and Administrative (SG&A) expenses increased 105.5% in fiscal 2022, primarily due to acquisition-related costs from the Cantel transaction, including amortization of intangibles, fair value step-up, and integration expenses[221] - Interest expense increased by $52.4 million in fiscal 2022 due to debt incurred for acquisition financing[225] Business Segment Results of Operations In fiscal 2022, all legacy segments showed strong revenue growth, with Healthcare revenues up 45.6% to $2.85 billion, and the new Dental segment generating $361.7 million Segment Revenues and Operating Income (FY2022) | Segment | Revenues ($M) | % Change (YoY) | Operating Income ($M) | Operating Margin | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $2,845.5 | 45.6% | $626.1 | 22.0% | | Applied Sterilization Technologies | $853.0 | 24.4% | $410.1 | 48.1% | | Life Sciences | $525.0 | 12.3% | $216.2 | 41.2% | | Dental | $361.7 | N/A | $84.4 | 23.3% | - The Healthcare segment's backlog (excluding Cantel) more doubled to $423.6 million at March 31, 2022, from $206.3 million a year prior, reflecting strong customer demand and some supply chain-related shipment delays[235] - The Life Sciences segment's backlog (excluding Cantel) increased 31.1% to $104.7 million at March 31, 2022, from $79.9 million a year prior[237] Liquidity and Capital Resources Net cash from operating activities remained stable at $684.8 million in fiscal 2022, while net cash used in investing activities was $666.6 million, primarily for the Cantel acquisition Cash Flow Summary (FY2022 vs FY2021) | Cash Flow Activity | FY 2022 ($M) | FY 2021 ($M) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $684.8 | $689.6 | | Net Cash Used in Investing Activities | ($666.6) | ($1,154.2) | | Net Cash Provided by Financing Activities | $115.8 | $345.6 | - Key investing activities in FY2022 included $550.4 million for acquisitions (net of cash) and $287.6 million in capital expenditures[244] - Major financing activities in FY2022 included proceeds from senior notes ($1.35 billion) and a term loan ($650 million), offset by repayments of Cantel's debt ($721.3 million) and convertible debt ($371.4 million), and dividend payments ($163.2 million)[245] - The debt-to-total capital ratio increased to 32.1% at March 31, 2022, from 29.8% at March 31, 2021, reflecting the debt taken on for the Cantel acquisition[246] Critical Accounting Estimates and Assumptions The company's financial statements rely on critical accounting estimates for revenue recognition, asset impairment, purchase accounting for acquisitions, and income taxes - Revenue recognition involves allocating transaction prices to multiple performance obligations based on standalone selling prices[269][271] - Purchase accounting for acquisitions requires significant estimates for the fair value of assets and liabilities, particularly intangible assets like customer relationships, which impacts future amortization and goodwill balances[279] - Goodwill and indefinite-lived intangible assets are tested for impairment annually, using discounted cash flow analysis and other valuation techniques that rely on management's judgment regarding future profitability and market conditions. No impairment was identified in fiscal 2022[280][281] - The company uses significant judgment in determining its effective tax rate and evaluating uncertain tax positions, which are subject to interpretation and potential challenges by tax authorities[282][283] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from variable-rate borrowings, foreign currency risk from international operations, and commodity risk from raw material price volatility - The company has interest rate risk exposure on $58.9 million of outstanding variable-rate borrowings under its Credit Agreement as of March 31, 2022[304] - Approximately 30% of revenues and cost of revenues are generated outside the United States, creating exposure to foreign currency fluctuations. The company uses forward contracts to hedge some of this risk[305][306] - The company faces commodity risk from price changes and availability of raw materials. It uses commodity swap contracts to hedge against price changes in nickel[307] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended March 31, 2022, and the report of the independent registered public accounting firm, Ernst & Young LLP - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[312][313] - The auditor's report identified two critical audit matters: the valuation of Dental and Healthcare customer relationship intangible assets from the Cantel acquisition, and the company's position on uncertain tax positions related to deemed dividend inclusions[316][318][319] Note 2. Business Acquisitions and Divestitures On June 2, 2021, STERIS acquired Cantel Medical for $3.6 billion, adding the Dental segment, with a preliminary purchase price allocation including $2.94 billion in intangible assets and $1.52 billion in goodwill Cantel Medical Acquisition Details (June 2, 2021) | Component | Value ($M) | | :--- | :--- | | Cash Consideration | $716.4 | | STERIS Ordinary Shares | $2,689.3 | | Other Equity-related Consideration | $193.7 | | Total Purchase Consideration | $3,599.5 | Preliminary Purchase Price Allocation for Cantel | Asset/Liability | Fair Value ($M) | | :--- | :--- | | Intangible Assets | $2,942.0 | | Goodwill | $1,522.4 | | Net Tangible Assets | ($864.9) | | Net Assets Acquired | $3,599.5 | - In December 2021, STERIS sold the Renal Care business, which was part of the Cantel acquisition, for approximately $196.0 million in cash[420] Note 6. Debt As of March 31, 2022, total debt increased to $3.09 billion from $1.65 billion the prior year, primarily due to new credit facilities and senior public notes issued to finance the Cantel acquisition Total Debt Comparison | Date | Total Debt ($M) | | :--- | :--- | | March 31, 2022 | $3,088.4 | | March 31, 2021 | $1,650.5 | - To finance the Cantel acquisition, the company issued $1.35 billion in Senior Public Notes in April 2021 and borrowed $650 million under a new Delayed Draw Term Loan[449][452] - All of Cantel's convertible senior notes were converted by holders following the acquisition, resulting in a total cash settlement of approximately $371.4 million[460][462] Note 8. Income Taxes The effective tax rate for fiscal 2022 was 22.8%, a slight decrease from 23.3% in fiscal 2021, primarily due to profit distribution, while net deferred tax liabilities significantly increased to $772.2 million due to the Cantel acquisition Effective Tax Rate | Fiscal Year | Effective Tax Rate | | :--- | :--- | | 2022 | 22.8% | | 2021 | 23.3% | | 2020 | 18.2% | - In May 2021, the company received IRS notices of proposed tax adjustments for fiscal year 2018 regarding deemed dividend inclusions, which could result in a cumulative tax liability of approximately $50 million. The company is contesting these assertions and has not recorded a liability[486] - Net deferred tax liabilities increased from $227.3 million in FY2021 to $772.2 million in FY2022, primarily driven by a large increase in deferred tax liabilities related to intangible assets acquired in the Cantel transaction[491] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of March 31, 2022, excluding recently acquired entities - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[601] - Management concluded that internal control over financial reporting was effective as of March 31, 2022. This evaluation excluded the internal controls of businesses acquired during fiscal 2022[603] Other Information The company reports no other information - None Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not Applicable Part III Directors, Executive Officers and Corporate Governance This section incorporates information regarding directors, executive officers, and corporate governance by reference from the company's 2022 Proxy Statement - Information regarding directors, corporate governance, and delinquent Section 16(a) reports is incorporated by reference from the 2022 Proxy Statement[617] Executive Compensation This section incorporates information regarding executive and director compensation by reference from the company's 2022 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2022 Proxy Statement[619] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates information regarding security ownership by reference from the company's 2022 Proxy Statement and summarizes equity compensation plan details - Information regarding security ownership is incorporated by reference from the 2022 Proxy Statement[620] Equity Compensation Plan Information as of March 31, 2022 | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,560,954 | $138.37 | 3,146,465 | Certain Relationships and Related Transactions, and Director Independence This section incorporates information regarding related transactions and director independence by reference from the company's 2022 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[622] Principal Accountant Fees and Services This section incorporates information regarding principal accountant fees and services by reference from the company's 2022 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[623] Part IV Exhibits and Financial Statement Schedule This section lists the consolidated financial statements and financial statement schedule included in Item 8, along with a detailed list of all exhibits filed with the Form 10-K - This section provides a comprehensive index of all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K[624][626] Form 10-K Summary This item is not applicable - Not Applicable