Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30,
2022 March 31,
2022
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 316,327 $ 348,320
Accounts receivable (net of allowances of $ 23,121 and $ 24,371 , respectively)
763,788 799,041
Inventories, net 620,404 574,999
Prepaid expenses and other current assets 147,428 156,637
Total current assets 1,847,947 1,878,997
Property, plant, and equipment, net 1,573,337 1,552,576
Lease right-of-use assets, net 182,357 188,480
Goodwill 4,321,176 4,404,343
Intangibles, net 3,193,032 3,328,537
Other assets 70,157 70,661
Total assets $ 11,188,006 $ 11,423,594
Liabilities and equity
Current liabilities:
Accounts payable $ 228,987 $ 225,737
Accrued income taxes 37,553 26,873
Accrued payroll and other related liabilities 137,580 183,721
Short-term lease obligations 35,560 36,472
Short-term indebtedness 151,000 142,875
Accrued expenses and other 317,643 306,544
Total current liabilities 908,323 922,222
Long-term indebtedness 2,846,446 2,945,481
Deferred income taxes, net 790,819 780,619
Long-term lease obligations 150,215 155,056
Other liabilities 73,075 75,579
Total liabilities $ 4,768,878 $ 4,878,957
Commitments and contingencies (see Note 8)
Ordinary shares, with $ 0.001 par value; 500,000 shares authorized; 100,090 and 100,067 ordinary shares issued and outstanding, respectively
4,738,746 4,742,920
Retained earnings 2,057,175 1,999,244
Accumulated other comprehensive (loss) ( 388,373 ) ( 209,808 )
Total shareholders’ equity 6,407,548 6,532,356
Noncontrolling interests 11,580 12,281
Total equity 6,419,128 6,544,637
Total liabilities and equity $ 11,188,006 $ 11,423,594
See notes to consolidated financial statements.
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STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30,
2022 2021
Revenues:
Product $ 637,076 $ 489,279
Service 519,415 479,143
Total revenues 1,156,491 968,422
Cost of revenues:
Product 332,855 271,406
Service 305,838 270,734
Total cost of revenues 638,693 542,140
Gross profit 517,798 426,282
Operating expenses:
Selling, general, and administrative 334,626 393,752
Research and development 24,751 18,192
Restructuring expenses 26 14
Total operating expenses 359,403 411,958
Income from operations 158,395 14,324
Non-operating expenses, net:
Interest expense 22,674 21,812
Fair value adjustment related to convertible debt, premium liability — 22,923
Interest (income) and miscellaneous expense 770 ( 1,434 )
Total non-operating expenses, net 23,444 43,301
Income (loss) before income tax expense 134,951 ( 28,977 )
Income tax expense (credit) 24,196 ( 7,075 )
Net income (loss) 110,755 ( 21,902 )
Less: Net (loss) attributable to noncontrolling interests ( 507 ) ( 95 )
Net income (loss) attributable to shareholders $ 111,262 $ ( 21,807 )
Net income (loss) per share attributed to shareholders
Basic $ 1.11 $ ( 0.24 )
Diluted $ 1.10 $ ( 0.24 )
Cash dividends declared per share ordinary outstanding $ 0.43 $ 0.40
See notes to consolidated financial statements.
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STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(Unaudited)
Three Months Ended June 30,
2022 2021
Net income (loss) $ 110,755 $ ( 21,902 )
Less: Net income (loss) attributable to noncontrolling
interests ( 507 ) ( 95 )
Net income (loss) attributable to shareholders 111,262 ( 21,807 )
Other comprehensive income (loss)
Amortization of pension and postretirement benefit plans cost, (net of taxes of $( 6 ) and $ 174 , respectively)
29 ( 507 )
Change in cumulative currency translation adjustment ( 178,594 ) 24,933
Total other comprehensive income (loss) ( 178,565 ) 24,426
Comprehensive income (loss) $ ( 67,303 ) $ 2,619
See notes to consolidated financial statements.
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STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended June 30,
2022 2021
Operating activities:
Net income (loss) $ 110,755 $ ( 21,902 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization 138,863 83,621
Deferred income taxes 5,304 456
Share-based compensation expense 8,963 26,600
Loss on the disposal of property, plant, equipment, and intangibles, net ( 972 ) 824
Loss on sale of businesses, net 3,878 419
Fair value adjustment related to convertible debt, premium liability — 22,923
Other items 10,412 ( 2,334 )
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net 26,335 41,732
Inventories, net ( 58,076 ) ( 1,660 )
Other current assets 6,755 ( 6,747 )
Accounts payable 6,492 ( 4,614 )
Accruals and other, net ( 26,963 ) ( 41,892 )
Net cash provided by operating activities 231,746 97,426
Investing activities:
Purchases of property, plant, equipment, and intangibles, net ( 115,933 ) ( 56,396 )
Proceeds from the sale of property, plant, and equipment 1,288 217
Proceeds from the sale of businesses 5,228 —
Acquisition of businesses, net of cash acquired — ( 547,353 )
Net cash used in investing activities ( 109,417 ) ( 603,532 )
Financing activities:
Proceeds from issuance of senior public notes — 1,350,000
Proceeds from term loan — 650,000
Payments on term loan ( 111,875 ) ( 125,000 )
Payments on long-term obligations
— ( 721,284 )
Proceeds (payments) under credit facilities, net 37,011 ( 249,421 )
Deferred financing fees and debt issuance costs
— ( 17,227 )
Acquisition related deferred or contingent consideration
( 84 ) ( 25,150 )
Repurchases of ordinary shares
( 24,679 ) ( 10,670 )
Cash dividends paid to ordinary shareholders
( 43,008 ) ( 34,148 )
Stock option and other equity transactions, net
1,221 1,710
Net cash (provided by) used in financing activities ( 141,414 ) 818,810
Effect of exchange rate changes on cash and cash equivalents ( 12,908 ) 1,539
Increase (decrease) in cash and cash equivalents ( 31,993 ) 314,243
Cash and cash equivalents at beginning of period 348,320 220,531
Cash and cash equivalents at end of period $ 316,327 $ 534,774
See notes to consolidated financial statements.
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STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
(Unaudited)
Ordinary Shares Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Non-controlling
Interest Total
Equity
Number Amount
Balance at March 31, 2022 100,067 4,742,920 $ 1,999,244 $ ( 209,808 ) $ 12,281 $ 6,544,637
Comprehensive income:
Net income (loss) — — 111,262 — ( 507 ) 110,755
Other comprehensive income (loss) — — — ( 178,565 ) — ( 178,565 )
Repurchases of ordinary shares ( 126 ) ( 14,356 ) ( 10,323 ) — — ( 24,679 )
Equity compensation programs and other 149 10,182 — — — 10,182
Cash dividends – $ 0.43 per ordinary share
— — ( 43,008 ) — — ( 43,008 )
Other changes in noncontrolling interest — — — — ( 194 ) ( 194 )
Balance at June 30, 2022 100,090 $ 4,738,746 $ 2,057,175 $ ( 388,373 ) $ 11,580 $ 6,419,128
Ordinary Shares Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Non-controlling
Interest Total
Equity
Number Amount
Balance at March 31, 2021 85,353 2,002,825 $ 1,939,408 $ ( 61,243 ) $ 10,478 $ 3,891,468
Comprehensive income:
Net income (loss) — — ( 21,807 ) — ( 95 ) ( 21,902 )
Other comprehensive income — — — 24,426 — 24,426
Repurchases of ordinary shares ( 60 ) ( 1,776 ) ( 8,894 ) — — ( 10,670 )
Equity compensation programs and other 156 28,299 — — 28,299
Cash dividends –$ 0.40 per ordinary share
— — ( 34,148 ) — — ( 34,148 )
Issuance of shares for acquisition of Cantel Medical LLC ("Cantel") 14,297 2,689,317 — — — 2,689,317
Consideration related to equity component of Cantel convertible debt — 175,555 — — — 175,555
Consideration related to Cantel equity compensation programs — 18,173 — — — 18,173
Reclassification to Cantel convertible debt, premium liability — ( 175,555 ) — — — ( 175,555 )
Other changes in noncontrolling interest — — — — 52 52
Balance at June 30, 2021 99,746 $ 4,736,838 $ 1,874,559 $ ( 36,817 ) $ 10,435 $ 6,585,015
See notes to consolidated financial statements.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, unless noted and except per share amounts)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
STERIS is a leading global provider of products and services that support patient care with an emphasis on infection prevention. WE HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare, life sciences and dental products and services. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal (“GI”) endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, dental instruments and tools, instrument and scope repair, laboratory testing services, outsourced reprocessing, and capital equipment products, such as sterilizers and surgical tables, automated endoscope reprocessors, and connectivity solutions such as operating room (“OR”) integrati on.
We operate and report in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences, and Dental. We describe our business segments in Note 9 titled, "Business Segment Information."
Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:
Interim Financial Statements
We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.
These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. The Consolidated Balance Sheet at March 31, 2022 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Principles of Consolidation
We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating polices, are accounted for primarily using the equity method. These investments are immaterial to the Company's Consolidated Financial Statements.
Use of Estimates
We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three month period ended June 30, 2022 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2023.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Revenue Recognition and Associated Liabilities
Revenue is recognized when obligations under the terms of the contract are satisfied and control of the promised products or services have transferred to the Customer. Revenues are measured at the amount of consideration that we expect to be paid in exchange for the products or services. Product revenue is recognized when control passes to the Customer, which is generally based on contract or shipping terms. Service revenue is recognized when the Customer benefits from the service, which occurs either upon completion of the service or as it is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Our standard return and restocking fee policies are applied to sales of products. Shipping and handling costs charged to Customers are included in Product revenues. The associated expenses are treated as fulfillment costs and are included in Cost of revenues. Revenues are reported net of sales and value-added taxes collected from Customers.
We have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances in the same period the related revenues are recorded. The reduction in revenue for these items is estimated based on historical experience and trend analysis to the extent that it is probable that a significant reversal of revenue will not occur. Estimated returns are recorded gross on the Consolidated Balance Sheets.
In transactions that contain multiple performance obligations, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each performance obligation based on its relative standalone selling price, which is the price for the product or service when it is sold separately.
Payment terms vary by the type and location of the Customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. We do not evaluate whether the selling price contains a financing component for contracts that have a duration of less than one year.
We do not capitalize sales commissions as substantially all of our sales commission programs have an amortization period of one year or less.
Certain costs to fulfill a contract are capitalized and amortized over the term of the contract if they are recoverable, directly related to a contract and generate resources that we will use to fulfill the contract in the future. At June 30, 2022, assets related to costs to fulfill a contract were not material to our Consolidated Financial Statements.
Refer to Note 9, titled "Business Segment Information" for disaggregation of revenue.
Product Revenue
Product revenues consist of revenues generated from sales of consumables and capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer or Group Purchasing Organization ("GPO") agreement. We recognize revenue for sales of product when control passes to the Customer, which generally occurs either when the products are shipped or when they are received by the Customer. Revenue related to capital equipment products is deferred until installation is complete if the capital equipment and installation are highly integrated and form a single performance obligation.
Service Revenue
Within our Healthcare and Life Sciences segments, service revenues include revenue generated from parts and labor associated with the maintenance, repair and installation of capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer, or Group Purchasing Organization ("GPO") agreement. For maintenance, repair and installation of capital equipment, revenue is recognized upon completion of the service. Healthcare service revenues also include outsourced reprocessing services and instrument repairs. Contracts for outsourced reprocessing services are primarily based on an agreement with a Customer, ranging in length from several months to 15 years. Outsourced reprocessing services revenue is recognized ratably over the contract term using a time-based input measure, adjusted for volume and other performance metrics, to the extent that it is probable that a significant reversal of revenue will not occur. Contracts for instrument repairs are primarily based on a Customer’s purchase order, and the associated revenue is recognized upon completion of the repair.
We also offer preventive maintenance and separately priced extended warranty agreements to our Customers, which require us to maintain and repair our products over the duration of the contract. Generally, these contract terms are cancellable
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
without penalty and range from one to five years. Amounts received under these Customer contracts are initially recorded as a service liability and are recognized as service revenue ratably over the contract term using a time-based input measure.
Within our Applied Sterilization Technologies segment, service revenues include contract sterilization and laboratory services. Sales contracts for contract sterilization and laboratory services are primarily based on a Customer’s purchase order and associated Customer agreement and revenues are generally recognized upon completion of the service.
Contract Liabilities
Payments received from Customers are based on invoices or billing schedules as established in contracts with Customers. Deferred revenue is recorded when payment is received in advance of performance under the contract. Deferred revenue is recognized as revenue upon completion of the performance obligation, which generally occurs within one year. During the first three months of fiscal 2023, $ 57,528 of the March 31, 2022 deferred revenue balance was recorded as revenue. During the first three months of fiscal 2022, $ 35,722 of the March 31, 2021 deferred revenue balance was recorded as revenue.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Deferred revenue balances.
Service Liabilities
Payments received in advance of performance for cancellable preventive maintenance and separately priced extended warranty contracts are recorded as service liabilities. Service liabilities are recognized as revenue as performance is rendered under the contract.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Service liability balances.
Remaining Performance Obligations
Remaining performance obligations reflect only the performance obligations related to agreements for which we have a firm commitment from a Customer to purchase and exclude variable consideration related to unsatisfied performance obligations. With regard to products, these remaining performance obligations include capital equipment and consumable orders which have not shipped. With reg ard to service, these remaining performance obligations primarily include installation, certification, and outsourced reprocessing services. As of June 30, 2022, the transaction price allocated to remaining performance obligations was approximately $ 1,574,000 . We expect to recognize approximately 62 % of the transaction price within one year and approximately 31 % beyond one year. The remainder has yet to be scheduled for delivery.
Recently Issued Accounting Standards Impacting the Company
Recently Issued Accounting Standards Impacting the Company are presented in the following table:
Standard Date of Issuance Description Date of Adoption Effect on the financial statements or other significant matters
Standards that have been adopted in fiscal 2023
ASU 2021-08 "Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. October 2021 The standard provides guidance to improve the accounting for acquired revenue contracts with Customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. First Quarter Fiscal 2023 We adopted this standard effective April 1, 2022 with no material impact to our consolidated financial statements.
A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2022.
2. Business Acquisitions and Divestitures
Acquisitions
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
On June 2, 2021, we acquired all outstanding equity interests in Cantel Medical LLC ("Cantel") through a U.S. subsidiary. The total consideration for Cantel common stock and s tock equivalents was $ 3,599,471 . We funded the cash portion of the transaction consideration and repayment of a significant amount of Cantel’s existing debt obligations with a portion of the proceeds from new debt, which is described in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
In addition to the total purchase consideration, STERIS assumed and repaid $ 721,284 of existing Cantel debt obligations and assumed Cantel's obligations associated with convertible senior notes issued on May 15, 2020, which is described our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
Fair Value of Assets Acquired and Liabilities Assumed
The table below presents the allocation of fair values of assets acquired and liabilities assumed on the acquisition date.
March 31, 2022
(As previously reported) Adjustments Final
Cash $ 169,073 $ — $ 169,073
Accounts receivable 172,226 — 172,226
Inventory 249,221 — 249,221
Property, plant and equipment 267,360 ( 1,282 ) 266,078
Lease right-of-use assets, net 59,720 — 59,720
Other assets 72,864 — 72,864
Intangible assets 2,942,000 — 2,942,000
Goodwill 1,522,381 22,088 1,544,469
Total assets acquired 5,454,845 20,806 5,475,651
Convertible debt, par value 168,000 — 168,000
Other current liabilities 247,549 5,595 253,144
Long-term lease obligations 47,856 — 47,856
Deferred income taxes, net 670,685 15,211 685,896
Long-term indebtedness 721,284 — 721,284
Total liabilities assumed 1,855,374 20,806 1,876,180
Net assets acquired $ 3,599,471 $ — $ 3,599,471
Fiscal 2023 and 2022 first quarter acquisition and integration expenses totaled $ 9,832 and $ 140,996 , respectively and were primarily related to the acquisition and integration of Cantel. Acquisition and integration expenses are reported in the selling, general and administrative expenses line of our Consolidated Statements of Income and include but are not limited to investment banker, advisory, legal, other professional fees, and certain employee-related expenses.
For more information on the acquisition of Cantel, refer to our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
3. Inventories, Net
Inventories are stated at the lower of their cost and net realizable value determined by the first-in, first-out (“FIFO”) cost method. Inventory costs include material, labor, and overhead. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
June 30,
2022 March 31,
2022
Raw materials $ 211,453 $ 195,035
Work in process 107,267 76,021
Finished goods 341,109 334,880
Reserve for excess and obsolete inventory ( 39,425 ) ( 30,937 )
Inventories, net $ 620,404 $ 574,999
4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
June 30,
2022 March 31,
2022
Land and land improvements (1)
$ 82,795 $ 84,015
Buildings and leasehold improvements 651,071 654,851
Machinery and equipment 899,970 903,649
Information systems 223,455 222,620
Radioisotope 603,761 597,641
Construction in progress (1)
402,795 356,013
Total property, plant, and equipment 2,863,847 2,818,789
Less: accumulated depreciation and depletion ( 1,290,510 ) ( 1,266,213 )
Property, plant, and equipment, net $ 1,573,337 $ 1,552,576
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
5. Debt
Indebtedness was as follows:
June 30,
2022 March 31,
2022
Short-term debt
Term Loan, current portion $ 27,500 $ 27,500
Delayed Draw Term Loan, current portion 32,500 24,375
Private Placement Senior Notes 91,000 91,000
Total short-term debt $ 151,000 $ 142,875
Long-term debt
Private Placement Senior Notes $ 745,032 $ 758,726
Revolving Credit Facility 92,642 58,908
Deferred financing costs ( 24,353 ) ( 25,278 )
Term Loan 65,625 177,500
Delayed Draw Term Loan 617,500 625,625
Senior Public Notes 1,350,000 1,350,000
Total long-term debt $ 2,846,446 $ 2,945,481
Total debt $ 2,997,446 $ 3,088,356
Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
6. Additional Consolidated Balance Sheet Information
Additional information related to our Consolidated Balance Sheets is as follows:
June 30,
2022 March 31,
2022
Accrued payroll and other related liabilities:
Compensation and related items $ 83,416 $ 71,878
Accrued vacation/paid time off 14,108 13,669
Accrued bonuses 23,174 64,702
Accrued employee commissions 13,598 30,171
Other postretirement benefit obligations-current portion 1,190 1,190
Other employee benefit plans obligations-current portion 2,094 2,111
Total accrued payroll and other related liabilities $ 137,580 $ 183,721
Accrued expenses and other:
Deferred revenues $ 100,617 $ 110,791
Service liabilities 47,737 51,365
Self-insured risk reserves-current portion 11,421 8,995
Accrued dealer commissions 34,450 31,700
Accrued warranty 13,443 14,108
Asset retirement obligation-current portion 517 1,181
Accrued interest 18,073 10,014
Other 91,385 78,390
Total accrued expenses and other $ 317,643 $ 306,544
Other liabilities:
Self-insured risk reserves-long-term portion $ 19,213 $ 19,213
Other postretirement benefit obligations-long-term portion 7,070 7,335
Defined benefit pension plans obligations-long-term portion 3,601 1,772
Other employee benefit plans obligations-long-term portion 1,183 1,360
Accrued long-term income taxes 12,502 12,225
Asset retirement obligation-long-term portion 11,897 12,362
Other 17,609 21,312
Total other liabilities $ 73,075 $ 75,579
7. Income Tax Expense
The effective income tax rates for the three-month periods ended June 30, 2022 and 2021 were 17.9 % and 24.4 %, respectively. The fiscal 2023 effective tax rate decreased when compared to fiscal 2022, primarily due to nonrecurring unfavorable items reported in the prior fiscal year.
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
We operate in numerous t axing jurisdictions and are subject to regular examinations by various United States federal, state and local, as well as foreign jurisdictions. With the exception of formal acceptance of the settlement noted below, we are no longer subject to United States federal examinations for years before fiscal 2016 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2016. We remain subject to tax authority audits in various jurisdictions wherever we do business.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
In the fourth quarter of fiscal 2021, we completed an appeals process with the U.S. Internal Revenue Service (the “IRS”) regarding proposed audit adjustments related to deductibility of interest paid on intercompany debt for fiscal years 2016 through 2017. An agreement was reached on final interest rates, which also impacts subsequent years through 2020. We estimate the total federal, state, and local tax impact of the settlement to be approximately $ 12,000 , for the fiscal years 2016 through 2020, of which approximately $ 7,500 has been paid through June 30, 2022.
In May 2021, we received two notices of proposed tax adjustment from the IRS regarding deemed div idend inclusions and associated withholding tax. The notices relate to the fiscal and calendar year 2018. The IRS adjustments would result in a cumulative tax liability of approximately $ 50,000 . We are contesting the IRS’s assertions, and intend to pursue available remedies such as appeals and litigation, if necessary. We have not established reserves related to these notices. An unfavorable outcome is not expected to have a material adverse impact on our consolidated financial position but could be material to our consolidated results of operations and cash flows for any one period.
8. Commitments and Contingencies
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
Civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022, Item 1 titled "Business - Information with respect to our Business in General - Government Regulation" and "- Environmental Matters", and the "Risk Factors" in Item 1A titled "Product and service related regulations and claims".
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 7 to our consolidated financial statements titled, “Income Tax Expense” in this Quarterly Report on Form 10-Q.
9. Business Segment Information
We report our financial information in four reportable business segments: Healthcare, Applied Sterilization Technologies, Life Sciences and Dental. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare segment provides a comprehensive offering for healthcare providers worldwide, focused on sterile processing departments and procedural centers, such as operating rooms and endoscopy suites. Our products and services range
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
from infection prevention consumables and capital equipment, as well as services to maintain that equipment; to the repair of re-usable procedural instruments; to outsourced instrument reprocessing services. In addition, our procedural solutions also include single-use devices and capital equipment infrastructure used primarily in operating rooms, ambulatory surgery centers, endoscopy suites, and other procedural areas.
Our Applied Sterilization Technologies ("AST") segment is a third-party service provider for contract sterilization, as well as testing services needed to validate sterility services for medical device and pharmaceutical manufacturers. Our technology-neutral offering supports Customers every step of the way, from testing through sterilization.
Our Life Sciences segment provides a comprehensive offering of products and services that support pharmaceutical manufacturing, primarily for vaccine and other biopharma Customers focused on aseptic manufacturing. These solutions include a full suite of consumable products, equipment maintenance and specialty services, and capital equipment.
Our Dental segment provides a comprehensive offering for dental practitioners and dental schools, offering instruments, infection prevention consumables and instrument management systems.
We d isclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated C ompany. Certain prior period costs were reallocated from the Healthcare segment to corporate to conform with current year presentation. The prior period segment operating income measure has been recast for comparability.
For the three months e nded June 30, 2022, revenues from a single Customer did not represent ten percent or more of the Healthcare, Applied Sterilization Technologies or Life Sciences segment revenues. Three Customers collectively and consistently account for approximately 40.0% of our Dental segment revenue. The percentage associated with these three Customers collectively in any one period may vary due to the buying patterns of these three Customers as well as other Dental Customers. These three Customers collectively accounted for appr oxi mately 38.6 % and 35.8 % o f our Dental segment revenues for the three months ended June 30, 2022 and 2021, respectively. A dditional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Financial information for each of our segments is presented in the following table:
Three Months Ended June 30,
2022 2021
Revenues:
Healthcare $ 698,526 $ 602,817
Applied Sterilization Technologies 220,911 208,902
Life Sciences 132,207 121,471
Dental 104,847 35,232
Total revenues $ 1,156,491 $ 968,422
Segment operating income (loss):
Healthcare $ 156,497 $ 138,373
Applied Sterilization Technologies 109,315 101,927
Life Sciences 55,305 49,088
Dental 19,596 10,119
Corporate ( 75,943 ) ( 77,273 )
Total segment operating income $ 264,770 $ 222,234
Less: Adjustments
Amortization of acquired intangible assets (1)
$ 93,929 $ 41,741
Acquisition and integration related charges (2)
9,832 140,996
Tax restructuring costs (3)
173 ( 49 )
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
( 3,100 ) —
Net loss on divestiture of businesses (1)
3,878 419
Amortization of inventory and property "step up" to fair value (1)
1,637 24,789
Restructuring charges (4)
26 14
Total income from operations $ 158,395 $ 14,324
(1) For more information regarding our recent acquisitions and divestitures refer to note 2 titled, "Business Acquisitions and Divestitures" of our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
(2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in tax restructuring.
(4) For more information regarding our restructuring efforts refer to our Annual R eport on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on May 31, 2022.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Additional information regarding our fiscal 2023 and fiscal 2022 first quarter revenue is disclosed in the following tables:
Three Months Ended June 30,
2022 2021
Healthcare:
Consumables $ 252,032 $ 206,692
Capital equipment 179,134 150,890
Service 267,360 245,235
Total Healthcare Revenues
$ 698,526 $ 602,817
Total Applied Sterilization Technologies Revenues $ 220,911 $ 208,902
Life Sciences:
Consumables $ 59,557 $ 56,536
Capital equipment
40,499 32,745
Service 32,151 32,190
Total Life Sciences Revenues
$ 132,207 $ 121,471
Dental Revenues $ 104,847 $ 35,232
Total Revenues $ 1,156,491 $ 968,422
Additional geographic information regarding our revenues and property, plant and equipment, net is presented in the following tables:
Three Months Ended June 30,
2022 2021
Revenues:
Ireland $ 18,176 $ 21,945
United States 834,101 679,250
Other locations 304,214 267,227
Total Revenues
$ 1,156,491 $ 968,422
10. Shares and Preferred Shares
Ordinary shares
We calculate basic earnings per share based upon the weighted average number of shares outstanding. We calculate diluted earnings per share based upon the weighted average number of shares outstanding plus the dilutive effect of share equivalents calculated using the treasury stock method.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
Three Months Ended June 30,
Denominator (shares in thousands): 2022 2021
Weighted average shares outstanding—basic 100,082 90,152
Dilutive effect of share equivalents 640 840
Weighted average shares outstanding and share equivalents—diluted 100,722 90,992
Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:
Three Months Ended June 30,
(shares in thousands) 2022 2021
Number of share options 291 273
Additional Authorized Shares
The Company has an additional authorized share capital of 50,000,000 preferred shares of $ 0.001 par value each, plus 25,000 deferred ordinary shares of € 1.00 par value each, in order to satisfy minimum statutory capital requirements for all Irish public limited companies.
11. Repurchases of Ordinary Shares
On May 7, 2019, our Board of Directors authorized a share repurchase program resulting in a share repurchase authorization of approximately $ 78,979 (net of taxes, fees and commissions). On July 30, 2019, our Board of Directors approved an increase in the May 7, 2019 authorization of an additional amount of $ 300,000 (net of taxes, fees and commissions). As of June 30, 2022, there was approximately $ 294,649 (net of taxes, fees and commissions) of remaining availability under a Board authorized share repurchase program. The share repurchase program has no specified expiration date.
Under the authorization, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any share repurchases may be activated, suspended or discontinued at any time. Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended on April 9, 2020. The suspension was lifted effective February 10, 2022, enabling the Company to resume stock repurchases pursuant to the prior authorizations.
During the first three months of fiscal 2023, we repurchased 68,177 of our ordinary shares for the aggregate amount of $ 14,283 (net of fees and commissions) pursuant to the authorizations.
During the first three months of fiscal 2023, we obtained 57,704 of our ordinary shares in the aggregate amount of $ 11,737 in connection with share based compensation award programs. During the first three months of fiscal 2022, we obtained 59,648 of our ordinary shares in the aggregate amount of $ 10,670 in connection with share based compensation award programs.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
12. Share-Based Compensation
We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Compensation and Organizational Development Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and share grants. We satisfy share award incentives through the issuance of new ordinary shares.
Stock options provide the right to purchase our shares at the market price on the date of grant, or for options granted to employees in fiscal 2019 and thereafter, 110% of the market price on the date of grant, subject to the terms of the option plan and agreements. Generally, one-fourth of the stock options granted to employees become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each year of employment after the grant date. As of June 30, 2022, 2,812,252 ordinary shares remained available for grant under the long-term incentive plan.
The fair value of stock option awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during the first three months of fiscal 2023 and 2022:
Fiscal 2023 Fiscal 2022
Risk-free interest rate 2.41 % 1.16 %
Expected life of options 5.8 years 5.8 years
Expected dividend yield of stock 0.80 % 0.97 %
Expected volatility of stock 24.45 % 24.41 %
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.54 % and 2.85 % was applied in fiscal 2023 and 2022, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
Number of
Options Weighted
Average
Exercise
Price Average
Remaining
Contractual
Term Aggregate
Intrinsic
Value
Outstanding at March 31, 2022 1,560,954 $ 138.37
Granted 222,384 250.06
Exercised ( 20,640 ) 53.20
Forfeited ( 6,326 ) 200.62
Outstanding at June 30, 2022 1,756,372 $ 153.29 6.9 years $ 105,081
Exercisable at June 30, 2022 1,109,471 $ 118.70 5.8 years $ 97,397
We estimate that 624,686 of the non-vested stock options outstanding at June 30, 2022 will ultimately vest.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $ 206.15 closing price of our ordinary shares on June 30, 2022 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.
The total intrinsic value of stock options exercised during the first three months of fiscal 2023 and fiscal 2022 was $ 3,897 and $ 5,469 , respectively. Net cash proceeds from the exercise of stock options were $ 1,221 and $ 1,710 for the first three months of fiscal 2023 and fiscal 2022, respectively.
The weighted average grant date fair value of stock option grants was $ 50.04 and $ 36.24 for the first three months of fiscal 2023 and fiscal 2022, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. As of May 24, 2021, we no longer have
outstanding SARS.
A summary of the non-vested restricted share and share unit activity is presented below:
Number of
Restricted
Shares Number of Restricted Share Units Weighted-Average
Grant Date
Fair Value
Non-vested at March 31, 2022 485,510 33,677 $ 157.37
Granted 119,588 5,824 227.46
Vested ( 137,898 ) ( 6,218 ) 121.81
Forfeited ( 6,167 ) ( 766 ) 164.04
Non-vested at June 30, 2022 461,033 32,517 $ 155.01
Restricted shares and restricted share unit grants are valued based on the closing stock price at the grant date. The value of restricted shares and units that vested during the first three months of fiscal 2023 was $ 17,570 .
As of June 30, 2022, there was a total of $ 88,105 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plan. We expect to recognize the cost over a weighted average period of 2.4 years.
Cantel Share Based Compensation Plan
In connection with the acquisition of Cantel, outstanding, non-vested Cantel restricted share units were replaced with STERIS restricted share units.
A total of 280,402 STERIS restricted share units replaced Cantel awards based on a ratio of one Cantel restricted share unit to 0.4262 STERIS restricted share units. Cantel time based restricted share units were replaced with STERIS restricted share units with the same three-year pro-rata vesting terms based on the original award date. Performance based Cantel restricted share units were replaced with time based STERIS restricted share units that vest pro rata over the remaining one, two or three anniversaries from the original Cantel award date. The number of Cantel performance restricted share units was replaced based on the original target achievement level. All replacement restricted share units retained dividend accumulation rights.
The fair value of each STERIS restricted share unit awarded on June 2, 2021 to replace outstanding non-vested Cantel restricted share units was $ 191.18 based on the closing price of STERIS ordinary shares on June 2, 2021. Approximately $ 18,173 of the total $ 53,607 grant date fair value was attributable to pre-acquisition services provided and was recorded as a component of purchase consideration in connection with the acquisition of Cantel.
Recognition of unamortized share-based compensation expense totaling $ 197 and $ 18,545 , for the first quarter of fiscal 2023 and 2022, respectively was accelerated in connection with the planned termination of certain Cantel executive level employees in fiscal 2023 . As a result of the formal notices provided and the terms of the Cantel share based compensati on plans and Cantel Executive Severance and Change of Control Plan, the remaining service required under the awards became non-substantive requiri ng acceleration of the remaining related compensation cost.
As of June 30, 2022, there was a total of $ 4,438 in unrecognized compensation cost related to non-vested STERIS restricted share units awarded to replace Cantel restricted share units. We expect to recognize the cost over a weighted average of 1.0 year.
A summary of the non-vested restricted share units activity associated with the Cantel share-based compensation plans is presented below:
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
Number of Restricted Share Units Weighted-Average
Grant Date
Fair Value
Non-vested at March 31, 2022 45,722 $ 191.18
Vested ( 2,578 ) 191.18
Forfeited ( 1,318 ) 191.18
Non-vested at June 30, 2022 41,826 $ 191.18
13. Financial and Other Guarantees
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our warranty liability during the first three months of fiscal 2023 were as follows:
Warranties
Balance, March 31, 2022 $ 14,108
Warranties issued during the period 3,285
Settlements made during the period ( 3,950 )
Balance, June 30, 2022 $ 13,443
14. Derivatives and Hedging
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. During the first quarter of fiscal 2023, we also entered into forward foreign currency contracts in order to hedge a portion of our expected non-U.S. dollar denominated earnings against our reporting currency, the U.S. dollar. These foreign currency exchange contracts will mature during fiscal 2023. We did not elect hedge accounting for these forward foreign currency contracts; however, we may seek to apply hedge accounting in future scenarios. We do not use derivative financial instruments for speculative purposes.
None of these contracts are designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At June 30, 2022, we held foreign currency forward contracts to sell 34.9 million euros. At June 30, 2022 we held commodity swap contracts to buy 601.2 thousand pounds of nickel.
Asset Derivatives Liability Derivatives
Fair Value at Fair Value at Fair Value at Fair Value at
Balance sheet location June 30, 2022 March 31, 2022 June 30, 2022 March 31, 2022
Prepaid & Other $ 1,330 $ 2,780 $ — $ —
Accrued expenses and other $ — $ — $ 783 $ 198
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
Location of gain (loss)
recognized in income Amount of gain (loss) recognized in income
Three Months Ended June 30,
2022 2021
Foreign currency forward contracts Selling, general and administrative $ 2,349 $ 1,428
Commodity swap contracts Cost of revenues $ ( 2,824 ) $ 664
15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions.
The following table shows the fair value of our financial assets and liabilities at June 30, 2022 and March 31, 2022:
Fair Value Measurements
Carrying Value Quoted Prices
in Active Markets
for Identical Assets Significant Other
Observable Inputs Significant
Unobservable
Inputs
Level 1 Level 2 Level 3
June 30, March 31, June 30, March 31, June 30, March 31, June 30, March 31,
Assets:
Cash and cash equivalents $ 316,327 $ 348,320 $ 316,327 $ 348,320 $ — $ — $ — $ —
Forward and swap contracts (1)
1,330 2,780 — — 1,330 2,780 — —
Equity investments (2)
7,178 8,520 7,178 8,520 — — — —
Other investments 2,140 2,272 2,140 2,272 — — — —
Liabilities:
Forward and swap contracts (1)
$ 783 $ 198 $ — $ — $ 783 $ 198 $ — $ —
Deferred compensation plans (2)
1,036 1,240 1,036 1,240 — — — —
Total debt (3)
2,997,446 3,088,356 — — 2,725,916 2,991,680 — —
Contingent consideration obligations (4)
7,518 10,550 — — — 7,518 10,550
(1) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(2) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Changes in the fair value of these investments are recorded in the "Interest income and miscellaneous expense line" of the Consolidated Statement of Income. During the first quarter of fiscal 2023 and 2022, we recorded a (losses) of $( 936 ) and $( 16 ), respectively, related to these investments.
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
(3) We estimate the fair value of our debt using discounted cash flow analyses, based on estimated current incremental borrowing rates for similar types of borrowing arrangement s.
(4) Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at June 30, 2022 are summarized as follows:
Contingent Consideration
Balance at March 31, 2022 $ 10,550
Adjustments ( 3,100 )
Additions 106
Payments ( 21 )
Currency translation adjustments ( 17 )
Balance at June 30, 2022 $ 7,518
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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2022 and 2021
(dollars in thousands, except as noted)
16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three months ended June 30, 2022 and 2021 were as follows:
Defined Benefit Plans (1)
Currency Translation (2)
Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2022 $ 1,276 $ ( 211,084 ) $ ( 209,808 )
Other Comprehensive (Loss) Income before reclassifications 154 ( 178,594 ) ( 178,440 )
Amounts reclassified from Accumulated Other Comprehensive (Loss) Income ( 125 ) — ( 125 )
Net current-period Other Comprehensive (Loss) Income 29 ( 178,594 ) ( 178,565 )
Balance at June 30, 2022 $ 1,305 $ ( 389,678 ) $ ( 388,373 )
(1) The amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(2) The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.
Defined Benefit Plans (1)
Currency Translation (2)
Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2021 $ ( 5,519 ) $ ( 55,724 ) $ ( 61,243 )
Other Comprehensive Income (Loss) before reclassifications 591 24,933 25,524
Amounts reclassified from Accumulated Other Comprehensive (Loss) ( 1,098 ) — ( 1,098 )
Net current-period Other Comprehensive (Loss) ( 507 ) 24,933 24,426
Balance at June 30, 2021 $ ( 6,026 ) $ ( 30,791 ) $ ( 36,817 )
(1) Amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(2) The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of STERIS plc
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of STERIS plc and subsidiaries (the Company) as of June 30, 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the three-month periods ended June 30, 2022 and 2021, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of March 31, 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended, and the related notes and schedule (not presented herein); and in our report dated May 31, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Cleveland, Ohio
August 8, 2022
26
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