filings.toolsSteris 10-K 2019-03-31
Filed 2019-05-30. 22 sections, 457K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
United States Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
x Annual Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended March 31, 2019
OR
o Transition Report Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission file number 001-38848
STERIS plc
(Exact name of registrant as specified in its charter)
| Ireland | 98-1455064 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 70 Sir John Rogerson's Quay, Dublin 2, Ireland (Address of principal executive offices) | D02 R296 (Zip Code) | 353 1 232 2000 (Registrant’s telephone number including area code) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
| Title of each class | Trading symbol(s) | Name of Exchange on Which Registered |
| Ordinary Shares, $0.001 par value | STE | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer x | Accelerated Filer o | |
| Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o | |
| Emerging Growth Company o | ||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x As of September 30, 2018, the aggregate market value of shares held by non-affiliates of STERIS plc, a public limited company organized under the laws of England and Wales (the predecessor issuer pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934), based upon the closing sale price of its shares on September 30, 2018, was approximately $9,552.1 million.
The number of Ordinary Shares outstanding as of May 24, 2019: 84,541,998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2019 Annual Meeting – Part III
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Table of Contents
PART I
Throughout this Annual Report, references to STERIS plc, "STERIS," "us," or "our," mean STERIS Ireland and its subsidiaries for periods from and after the Redomiciliation and STERIS UK and its subsidiaries for periods prior to the Redomiciliation (as such terms are hereinafter defined), unless otherwise noted. References in this Annual Report to a particular "year," "fiscal," "fiscal year," or "year-end" mean our fiscal year, which ends on March 31. For example, fiscal year 2019 ended on March 31, 2019.
Item 1. BUSINESS
INTRODUCTION
STERIS plc is a leading provider of infection prevention and other procedural products and services. Our MISSION IS TO HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare and life science product and service solutions around the globe. We offer our Customers a unique mix of innovative capital equipment products, such as sterilizers and washers, surgical tables, lights and equipment management systems and connectivity solutions such as operating room integration; consumable products including detergents and gastrointestinal endoscopy accessories and other products; services, including equipment installation and maintenance, microbial reduction of medical devices, instrument and scope repair solutions, laboratory services and outsourced instrument reprocessing.
On March 28, 2019, STERIS plc, a public limited company organized under the laws of England and Wales (“STERIS UK”), completed a redomiciliation from the United Kingdom to Ireland (the “Redomiciliation”). The Redomiciliation was achieved through the insertion of a new Irish public limited holding company (“STERIS Ireland”) on top of STERIS UK pursuant to a court-approved scheme of arrangement under English law (the “Scheme”). Following the Scheme effectiveness, STERIS UK was re-registered as a private limited company with the name STERIS Limited, and STERIS Emerald IE Limited, a company established in Ireland and a wholly-owned direct subsidiary of STERIS Ireland, was interposed as the direct parent company of STERIS UK.
STERIS plc's registered office is located in Dublin, Ireland. STERIS plc has approximately 12,000 employees worldwide. Through our field sales and service and a network of dealers and distributors, we serve Customers in more than 100 countries around the world.
We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. We disclose 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 Company. In fiscal 2019, we ceased the allocation of certain corporate costs to our segments to align with internal management measures. The prior period operating income measures have been recast for comparability.
The bulk of our revenues are derived from healthcare provider, pharmaceutical and medical device Customers. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and are dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. The pharmaceutical industry has been impacted by increased regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. Within healthcare, there is concern regarding the level of hospital acquired infections around the world; increased demand for medical procedures, including preventive screenings such as endoscopies and colonoscopies; and a desire by our Customers to operate more efficiently, all of which are driving increased demand for many of our products and services.
INFORMATION RELATED TO BUSINESS SEGMENTS
Our chief operating decision maker is our President and Chief Executive Officer (“CEO”). The CEO is responsible for performance assessment and resource allocation. The CEO regularly receives discrete financial information about each reportable segment and uses this information to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements titled, “Nature of Operations and Summary of Significant Accounting Policies,” of this Annual Report. Segment performance information for fiscal years 2019, 2018, and 2017 is presented in Note 11 to our Consolidated Financial Statements titled, “Business Segment Information” and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), of this Annual Report.
HEALTHCARE PRODUCTS SEGMENT
Description of Business. Our Healthcare Products segment provides a broad portfolio of infection prevention, procedural and GI solutions including; consumable products, equipment maintenance and installation services, and capital equipment to acute care hospitals, ambulatory surgery centers and GI clinics. These solutions aid our Customers in improving the safety, quality, productivity, and utility consumption of their surgical, sterile processing, gastrointestinal, and emergency environments.
Products Offered. Our solutions include cleaning chemistries and sterility assurance products, accessories for GI procedures, washers, sterilizers and other pieces of capital equipment essential to the operations of a sterile processing department ("SPD") and equipment used directly in the operating room, including surgical tables, lights, equipment management services, and connectivity solutions.
Services Offered. Our Healthcare Products segment service associates install, maintain, upgrade, repair, and troubleshoot capital equipment throughout the world. We offer various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime.
Customer Concentration. Our Healthcare Products segment sells consumables, services and capital equipment, to Customers in many countries throughout the world. For the year ended March 31, 2019, no Customer represented more than 10% of the Healthcare Product segment's total revenues.
Competition. We compete with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. On a product basis, competitors include 3M, Belimed, Cantel Medical, Ecolab, Getinge, Hill-Rom, Fortive, Stryker and Skytron.
HEALTHCARE SPECIALTY SERVICES SEGMENT
Description of Business. Our Healthcare Specialty Services segment provides a range of solutions and managed services including; hospital sterilization services and instrument and scope repairs to acute care hospitals and other healthcare settings that aid our Customers in improving the safety, quality and productivity of their operations.
Services Offered. Our Healthcare Specialty Services segment provides comprehensive instrument and endoscope repair and maintenance solutions (on-site or at one of our dedicated facilities), custom process improvement consulting and outsourced instrument sterile processing (on-site at the hospital and in off-site reprocessing centers). Linen Management Services were divested during fiscal 2017.
Customer Concentration. Our Healthcare Specialty Services segment offers an array of services to Customers in many countries throughout the world. For the year ended March 31, 2019, no Customer represented more than 10% of the Healthcare Specialty Services segment's total revenues.
Competition. We compete with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited service offerings and operations in one or a limited number of countries. On a service line basis, competitors include BBraun, Berendsen plc, CleanLease (Clean Lease Fortex), Karl Storz, Mobile, Northfield, Olympus, Owens & Minor, Pentax, Rentex Awé and Rentex Floren and Sterilog Limited.
LIFE SCIENCES SEGMENT
Description of Business. Our Life Sciences segment designs, manufactures and sells consumable products, equipment maintenance, specialty services and capital equipment primarily to pharmaceutical manufacturers around the world.
Products Offered. These solutions include formulated cleaning chemistries, barrier products, sterility assurance products, steam and vaporized hydrogen peroxide sterilizers and washer disinfectors.
Services Offered. Our Life Sciences segment service associates install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We offer various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime.
Customer Concentration. Our Life Sciences segment sells consumables, services and capital equipment, to Customers in many countries throughout the world. For the year ended March 31, 2019, no Customer represented more than 10% of the Life Sciences segment’s total revenues.
Competition. Our Life Sciences segment operates in highly regulated environments where the most intense competition results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. We compete for pharmaceutical Customers with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. Competitors include Belimed, Ecolab, Fedegari, Getinge, MECO, Stilmas, and Techniplast.
APPLIED STERILIZATION TECHNOLOGIES SEGMENT
Description of Business. Our Applied Sterilization Technologies ("AST") segment provides contract sterilization services through a network of over 50 contract sterilization and laboratory facilities worldwide. As a technology neutral service provider, we offer unbiased technology assessments dependent on the individual requirements of each product. Our Customers are primarily medical device and pharmaceutical manufacturers.
Services Offered. We offer a wide range of sterilization modalities as well as an array of laboratory testing services that complements the manufacturing of sterile products. Our locations are in major population centers and core distribution corridors throughout the Americas, Europe and Asia. Our technical services group supports Customers in all phases of product development, materials testing, and process validation.
Customer Concentration. Our Applied Sterilization Technologies segment’s services are offered to Customers throughout the world. For the year ended March 31, 2019, no Customer represented more than 10% of the segment’s revenues.
Competition. Applied Sterilization Technologies operates in a highly regulated industry and competes with Sterigenics International, Inc., other smaller contract sterilization companies and manufacturers that sterilize products in-house.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Sources and Availability of Raw Materials. We purchase raw materials, sub-assemblies, components, and other supplies needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials and supplies used in our operations include stainless and carbon steel, organic and inorganic chemicals, fuel, and plastic components. These raw materials and supplies are generally available from several suppliers and in sufficient quantities that we do not currently expect any significant sourcing problems in fiscal 2020. We have long-term supply contracts for certain materials for which there are few suppliers, or those that are single-sourced in certain regions of the world, such as EO and cobalt-60, which are necessary to our AST operations. In addition, we have developed a plan to expand our irradiation processing capacity with accelerator-based technologies, which may reduce the potential supply risk.
Intellectual Property. We protect our technology and products by, among other means, obtaining United States and foreign patents. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position.
As of March 31, 2019, we held approximately 400 United States patents and approximately 1,500 in other jurisdictions and had approximately 135 United States patent applications and 375 patent applications pending in other jurisdictions. Patents for individual products extend for varying periods according to the date of filing or grant and legal term of patents in various countries where a patent is obtained. The actual protection a patent provides varies from country to country and depends in part upon the type of patent, the scope of its coverage, and the availability of legal remedies in each country.
Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of March 31, 2019, we had a total of approximately 1,550 trademark registrations worldwide.
Quality Assurance. We manufacture, assemble, and package products in several countries. Each of our production facilities are dedicated to particular processes and products. Our success depends upon Customer confidence in the quality of our production process and the integrity of the data that supports our product safety and effectiveness. We have implemented quality assurance procedures to support the quality and integrity of scientific information and production processes.
Government Regulation. Our business is subject to various degrees of governmental regulation in the countries in which we operate. In the United States, the United States Food and Drug Administration (“FDA”), the United States Environmental Protection Agency (“EPA”), the United States Nuclear Regulatory Commission (“NRC”), and other governmental authorities regulate the development, manufacture, sale, and distribution of our products and services. Our international operations also are subject to a significant amount of government regulation, including country-specific rules and regulations and U.S. regulations applicable to our international operations. Government regulations include detailed inspection of, and controls over, research and development, clinical investigations, product approvals and manufacturing, marketing and promotion, sampling, distribution, record-keeping, storage, and disposal practices.
Compliance with applicable regulations is a significant expense for us. Past, current or future regulations, their interpretation, or their application could have a material adverse impact on our operations. Also, additional governmental regulation may be passed that could prevent, delay, revoke, or result in the rejection of regulatory clearance of our products. We cannot predict the effect on our operations resulting from current or future governmental regulation or the interpretation or application of these regulations.
If we fail to comply with any applicable regulatory requirements, sanctions could be imposed on us. For more information about the risks we face regarding regulatory requirements, see Part I, Item 1A of this Annual Report titled, "Risk Factors". We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition, or value.
In the past, we have received warning letters, paid civil penalties, conducted product recalls and field corrections, and been subject to other regulatory sanctions. We believe that we are currently compliant in all material respects with applicable regulatory requirements. However, there can be no assurance that future or current regulatory, governmental, or private action will not have a material adverse affect on us or on our performance, results, or financial condition.
Environmental Matters. We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health in Ireland, the United States and in other countries. We have made, and continue to make, significant investments to comply with these laws and regulations. We cannot predict the future capital expenditures or operating costs required to comply with environmental laws and regulations. We believe that we are currently compliant with applicable environmental, health, and safety requirements in all material respects. However, there can be no assurance that future or current regulatory, governmental, or private action will not have a material adverse affect on our performance, results, or financial condition. Please refer to Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" for further information.
In the future, if a loss contingency related to environmental matters, employee safety, health or conditional asset retirement obligations is significantly greater than the current estimated amount, we would record a liability for the obligation and it may result in a material impact on net income for the annual or interim period during which the liability is recorded. The investigation and remediation of environmental obligations generally occur over an extended period of time, and therefore we do not know if these events would have a material adverse affect on our financial condition, liquidity, or cash flow, nor can there be any assurance that such liabilities would not have a material adverse affect on our performance, results, or financial condition.
Competition. The markets in which we operate are highly competitive and generally highly regulated. Competition is intense in all of our business segments and includes many large and small competitors. Brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support are important competitive factors to us. We expect to face continued competition in the future as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services enter the market. We believe many organizations are working with a variety of technologies and sterilizing agents. Also, a number of companies have developed disposable medical instruments and other devices designed to address the risk of contamination.
We believe that our long-term competitive position depends on our success in discovering, developing, and marketing innovative, cost-effective products and services. We devote significant resources to research and development efforts and we believe STERIS is positioned as a global competitor in the search for technological innovations. In addition to research and development, we invest in quality control, Customer programs, distribution systems, technical services, and other information services.
There can be no assurance that we will develop significant new products or services, or that the new products or services we provide or develop in the future will be more commercially successful than those provided or developed by our competitors. In addition, some of our existing or potential competitors may have greater resources than us. Therefore, a competitor may succeed in developing and commercializing products more rapidly than we do. Competition, as it relates to our business segments and product categories, is discussed in more detail in the section above titled, “Information Related to Business Segments.”
Employees. As of March 31, 2019, we had approximately 12,000 employees throughout the world including certain locations subject to collective bargaining agreements and works council representation. We believe we generally have good relations with our employees.
Methods of Distribution. Sales and service activities are supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house Customer service and field support departments. We also contract with distributors and dealers in select markets.
Customer training is important to our business. We provide a variety of courses at Customer locations, at our training and education centers, and over the internet. Our training programs help Customers understand the science, technology, and operation of our products and services. Many of our operator training programs are approved by professional certifying organizations and offer continuing education credits to eligible course participants.
Seasonality. Our financial results have been, from time to time, subject to seasonal patterns. We cannot assure you that these patterns will continue.
Backlog. We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2019, we had a backlog of $215.2 million. Of this amount, $154.5 million and $60.7 million related to our Healthcare Products and Life Sciences segments, respectively. At March 31, 2018, we had backlog orders of $193.9 million. Of this amount, $133.0 million and $60.8 million related to our Healthcare Products and Life Sciences segments, respectively. A significant portion of the backlog orders at March 31, 2019 is expected to ship in fiscal 2020.
Availability of Securities and Exchange Commission Filings. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). You may access these documents, as well as other SEC filings related to the Company, on the Investor Relations page of our website at http://www.steris-ir.com. You may also obtain copies of these documents by accessing the SEC’s website at http://www.sec.gov. The content on or accessible through any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Code of Ethics, and our Code of Business Conduct, as well as the Charters of the Audit Committee, the Compensation and Organization Development Committee, the Nominating and Governance Committee, and the Compliance Committee of the Company’s Board of Directors.
Executive Officers of the Registrant. The following table presents certain information regarding our executive officers at March 31, 2019. All executive officers serve at the pleasure of the Board of Directors.
| Name | Age | Position | ||
| Kathleen L. Bardwell | 63 | Senior Vice President and Chief Compliance Officer | ||
| Karen L. Burton | 51 | Vice President, Controller and Chief Accounting Officer | ||
| Daniel A. Carestio | 46 | Senior Vice President and Chief Operating Officer | ||
| Dr. Adrian Coward | 49 | Senior Vice President, Healthcare Specialty Services | ||
| Michiel de Zwaan | 47 | Vice President and Chief Human Resources Officer | ||
| Gulam A. Khan | 52 | Senior Vice President, Procedural Solutions | ||
| Cary L. Majors | 44 | Vice President, North America Commercial Operations | ||
| Walter M Rosebrough, Jr. | 65 | President and Chief Executive Officer | ||
| Renato G. Tamaro | 50 | Vice President and Corporate Treasurer | ||
| Michael J. Tokich | 50 | Senior Vice President and Chief Financial Officer | ||
| J. Adam Zangerle | 52 | Senior Vice President, General Counsel, and Secretary |
The following discussion provides a summary of each executive officer's recent business experience through March 31, 2019:
Kathleen L. Bardwell serves as Senior Vice President and Chief Compliance Officer. She assumed this role in February 2014. From March 2008 to February 2014, she served as Vice President, Chief Compliance Officer. Mrs. Bardwell is a Director of First Financial Bancorp.
Karen L. Burton serves as Vice President, Controller and Chief Accounting Officer. She assumed this role in January 2017. She served as Vice President, Corporate Controller from May 2008 to January 2017.
Daniel A. Carestio serves as Senior Vice President and Chief Operating Officer. He assumed this role in August 2018. From February 2018 to August 2018 he served as Senior Vice President, Sterilization and Disinfection. From August 2015 to February 2018, he served as Senior Vice President, STERIS Applied Sterilization Technologies and Life Sciences. From 2011 to August 2015, he served as Vice President, Sales and Marketing for Isomedix Services and General Manager of Life Sciences.
Dr. Adrian Coward serves as Senior Vice President, Healthcare Specialty Services. He assumed this role in November 2015. From April 2014 to November 2015, he served as Chief Operating Officer of Synergy Health plc. From April 2010 to March 2014, Dr. Coward served as CEO of UK & Ireland of Synergy Health plc.
Michiel de Zwaan serves as Vice President and Chief Human Resources Officer. He assumed this role in September 2017. He served as Senior Vice President and Chief Human Resources Officer at Hill-Rom Inc. from August 2014 through December 2015, and as Vice President of Human Resources, International, at Hill-Rom Europe B.V. from September 2011 through July 2014.
Gulam A. Khan serves as Senior Vice President, Procedural Solutions. He assumed this role in August 2015. He served as Chief Executive Officer of United States Endoscopy Group, Inc. from January 2003, prior to its acquisition by STERIS in
August 2012, remaining with STERIS until June 2013. From April 2014 until August 2015, he provided independent consulting services to corporations, including business integration consulting services to STERIS.
Cary L. Majors serves as Vice President, North American Commercial Operations. He assumed this role in April 2014. From June 2012 through April 2014 he served as Vice President, Sales & Marketing Strategy.
Walter M Rosebrough, Jr. serves as President and Chief Executive Officer. He assumed this role when he joined STERIS in October 2007. Mr. Rosebrough is a Director of Varex Imaging Corporation.
Renato G. Tamaro serves as Vice President and Corporate Treasurer. He assumed this role in August 2017. From March 2006 to July 2017, he served as Assistant Treasurer.
Michael J. Tokich serves as Senior Vice President and Chief Financial Officer. He assumed this role in August 2017. From February 2014 to July 2017, he served as the Senior Vice President, Chief Financial Officer and Treasurer. From March 2008 to February 2014, he served as Senior Vice President and Chief Financial Officer.
J. Adam Zangerle serves as Senior Vice President, General Counsel, and Secretary. He assumed this role in July 2018. From July 2013 to July 2018 he served as Vice President, General Counsel, and Secretary. From May 2007 to July 2013 he served as Associate General Counsel and Group General Counsel, Healthcare.
Item 1A. RISK FACTORS
This section describes certain risk factors that could affect our business, financial condition and results of operations. You should consider these risk factors when evaluating the forward-looking statements contained in this Annual Report on Form 10-K, because our actual results and financial condition might differ materially from those projected in the forward-looking statements should these risks occur. We face other risks besides those highlighted below. These other risks include additional uncertainties not presently known to us or that we currently believe are immaterial, but may ultimately have a significant impact. Should any of these risks, described below or otherwise, actually occur, our business, financial condition, performance, prospects, value, or results of operations could be negatively affected.
MARKET RISKS
| Risk or uncertainty | Discussion |
| Doing business internationally | |
| We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated with doing business internationally. Implementation and achievement of international growth objectives also may be impeded by political, social, and economic uncertainties or unrest in countries in which we conduct operations or market or distribute our products. | We maintain significant international operations, including operations in the U.S., Canada, Mexico, Europe, Asia Pacific and Latin America. As a result, we are subject to a number of risks and complications associated with international manufacturing, sales, services, and other operations. These include: risks associated with currency exchange rate fluctuations; difficulties in enforcing agreements and collecting receivables through some foreign legal systems; enhanced credit risks in certain European countries as well as emerging market regions; Customers with longer payment cycles than Customers in the United States; significant variations in tax rates among the countries in which we do business, and tax withholding obligations in respect of our earnings; tax laws that restrict our ability to use tax credits, offset gains, or repatriate funds; tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country; general economic and political conditions in countries where we operate or where end users of our products are situated, including the potential implications of the U.K. “Brexit”, for the U.K. and/or regional or global economies, or the withdrawal from the EU of other member countries; difficulties associated with managing a large organization spread throughout various countries; difficulties in enforcing intellectual property rights or weaker intellectual property right protections in some countries and difficulties associated with compliance with a variety of laws and regulations governing international trade, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act and laws and regulations dealing with trade with persons in sanctioned countries. |
| Compliance with multiple, and potentially conflicting, international laws and regulations, import and export limitations, anti-corruption laws, and exchange controls may be difficult, burdensome or expensive. | We are subject to compliance with various laws and regulations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. We are also subject to limitations on trade with persons in sanctioned countries. While our employees and agents are required to comply with these laws, we cannot assure you that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. |
| Risk or uncertainty | Discussion |
| Economic conditions and financial market access | |
| Changes in economic climate may adversely affect us. | Adverse economic cycles or conditions, and Customer, regulatory or government response to those cycles or conditions, could affect our results of operations. The onset of these cycles or conditions may not be foreseeable and there can be no assurance when they will begin to improve after they occur. There also can be no assurance as to the strength or length of any recovery from a business downturn or recession. Credit and liquidity problems may make it difficult for some businesses to access credit markets and obtain financing and may cause some businesses to curtail spending to conserve cash in anticipation of persistent business slowdowns and liquidity needs. If our Customers have difficulty financing their purchases due to tight credit markets or related factors or because of other operational or utilization problems they may be experiencing or otherwise decide to curtail their purchases, our business could be adversely affected. Our exposure to bad debt losses could also increase if Customers are unable to pay for products previously ordered and delivered. Many of our Customers are governmental entities or other entities that rely on government healthcare systems or government funding. If government funding for healthcare becomes limited or restricted in countries in which we operate, our Customers may be unable to pay their obligations on a timely basis or to make payment in full and it may become necessary to increase reserves. In addition, there can be no assurance that there will not be an increase in collection difficulties. Prospectively, additional adverse effects resulting from these conditions may include decreased healthcare utilization, further pricing pressure on our products and services, and/or weaker overall demand for our products and services, particularly capital products. |
| Our acquisition activity and ability to grow organically may be adversely affected if we are unable to continue to access the financial markets. | Our recent acquisitions have been financed largely through cash on hand and borrowings under our bank credit facilities. Future acquisitions or other capital requirements will necessitate additional cash. To the extent our existing sources of cash are insufficient to fund these or other future activities, we may need to raise additional funds through new or expanded borrowing arrangements or equity. There can be no assurance that we will be able to obtain additional funds beyond those available under existing bank credit facilities on terms favorable to us, or at all, or that such facilities can be replaced when they terminate. |
LEGAL, REGULATORY AND TAX RISKS
| Risk or uncertainty | Discussion |
| Healthcare laws and reimbursement | |
| Changes in healthcare laws or government and other third-party payor reimbursement levels to healthcare providers, or failure to meet healthcare reimbursement or other requirements, might negatively impact our business. | We sell many of our products and services to hospitals and other healthcare providers and pharmaceutical manufacturers. Many of these Customers are subject to or supported by government programs or receive reimbursement for services from third-party payors, such as government programs, including Medicare and Medicaid in the U.S., private insurance plans, and managed care programs. Reimbursement systems vary significantly by country. Government-managed healthcare systems control reimbursement for healthcare services in many countries. Public budgetary constraints may significantly impact the ability of hospitals, pharmaceutical manufacturers, and other Customers supported by such systems to purchase our products. Government or other third-party payors may deny or change coverage, reduce their current levels of reimbursement for healthcare services, or otherwise implement measures to regulate pricing or contain costs. In addition, our costs may increase more rapidly than reimbursement levels or permissible pricing increases or we may not satisfy the standards or requirements for reimbursement. Among other provisions, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, imposed an excise tax on medical devices manufactured or offered for sale in the United States. Early in 2018, U.S. Congress enacted legislation that extended the suspension of the excise tax, which suspension had been in place in since the beginning of calendar year 2016, for 2018 and 2019. Should the U.S. Congress take no further action with regard to this tax we will begin to incur excise tax in the fourth quarter of fiscal 2020. We incurred $5.8 million in medical device excise taxes for fiscal 2016. In addition, we have been required to commit significant resources to “Sunshine Act” compliance. Various additional health care reform proposals have emerged at the federal and state level, and we are unable to predict which, if any, of those proposals will be enacted. |
| Risk or uncertainty | Discussion |
| Product and service related regulations and claims | |
| We are subject to extensive regulatory requirements and must receive and maintain regulatory clearance or approval for many products and operations. Failure to receive or maintain, or delays in receiving, clearance or approvals may hurt our revenues, profitability, financial condition, or value. | Our operations are subject to extensive regulation in the countries where we do business. In the United States, our products and services are regulated by the FDA and other regulatory authorities. In many foreign countries, sales of our products and services are subject to extensive regulations that may or may not be comparable to those of the FDA. In Europe, our products are regulated primarily by country and community regulations of those countries within the European Economic Area and must conform to the requirements of those authorities. Government regulation applies to nearly all aspects of testing, manufacturing, safety, labeling, storing, recordkeeping, reporting, promoting, distributing, and importing or exporting of medical devices, products, and services. In general, unless an exemption applies, a sterilization, decontamination or medical device or product or service must receive regulatory approval or clearance before it can be marketed or sold. Modifications to existing products or the marketing of new uses for existing products also may require regulatory approvals, approval supplements or clearances. If we are unable to obtain any required approvals, approval supplements or clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and sale, or recall or restrict the use of such modified device, pay fines, or take other action until such time as appropriate clearance or approval is obtained. Regulatory agencies may refuse to grant approval or clearance, or review and disagree with our interpretation of approvals or clearances, or with our decision that regulatory approval is not required or has been maintained. Regulatory submissions may require the provision of additional data and may be time consuming and costly, and their outcome is uncertain. Regulatory agencies may also change policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay approval or clearance of devices, or could impact our ability to market a previously cleared, approved, or unregulated device. Our failure to comply with the regulatory requirements of the FDA or other applicable regulatory requirements in the United States or elsewhere might subject us to administratively or judicially imposed sanctions. These sanctions include, among others, warning letters, fines, civil penalties, criminal penalties, injunctions, debarment, product seizure or detention, product recalls and total or partial suspension of production, sale and/or promotion. |
| Our products are subject to recalls and restrictions, even after receiving United States or foreign regulatory clearance or approval. | Ongoing medical device reporting regulations require that we report to appropriate governmental authorities in the United States and/or other countries when our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to a death or serious injury if the malfunction were to recur. Governmental authorities can require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues. For the same reasons, we may voluntarily elect to recall or restrict the use of a product. Any recall or restriction could divert managerial and financial resources and might harm our reputation among our Customers and other healthcare professionals who use or recommend our products and services. |
| We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters. | We face an inherent business risk of exposure to product liability claims and other legal and regulatory actions. A significant increase in the number, severity, amount, or scope of these claims and actions may, as described above with respect to recalls and restrictions, result in substantial costs and harm our reputation or otherwise adversely affect product sales and our business. Product liability claims and other legal and regulatory actions may also distract management from other business responsibilities. We are also subject to a variety of other types of claims, proceedings, investigations, and litigation initiated by government agencies or third parties and other potential risks and liabilities. These include compliance matters, product regulation or safety, taxes, employee benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar or different matters. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial costs, restrictions on product use or sales, or otherwise injure our business. Administratively or judicially imposed or agreed sanctions might include warning letters, fines, civil penalties, criminal penalties, loss of tax benefits, injunctions, product seizure, recalls, suspensions or restrictions, re-labeling, detention, and/or debarment. We also might be required to take actions such as payment of substantial amounts, or revision of financial statements, or to take, or be subject to, the following types of actions with respect to our products, services, or business: redesign, re-label, restrict, or recall products; cease manufacturing and selling products; seizure of product inventory; comply with a court injunction restricting or prohibiting further marketing and sale of products or services; comply with a consent decree, which could result in further regulatory constraints; dedication of significant internal and external resources and costs to respond to and comply with legal and regulatory issues and constraints; respond to claims, litigation, and other proceedings brought by Customers, users, governmental agencies, and others; disruption of product improvements and product launches; discontinuation of certain product lines or services; or other restrictions or limitations on product sales, use or operation, or other activities or business practices. Some product replacements or substitutions may not be possible or may be prohibitively costly or time consuming. The impact of any legal, regulatory, or compliance claims, proceeding, investigation, or litigation, is difficult to predict. We maintain product liability and other insurance with coverages believed to be adequate. However, product liability or other claims may exceed insurance coverage limits, fines, penalties and regulatory sanctions may not be covered by insurance, or insurance may not continue to be available or available on commercially reasonable terms. Additionally, our insurers might deny claim coverage for valid or other reasons or may become insolvent. |
| Our business and financial condition could be adversely affected by difficulties in acquiring or maintaining a proprietary intellectual ownership position. | To maintain our competitive position for our products, we need to obtain patent or other proprietary rights for new and improved products and to maintain and enforce our existing patents and other proprietary rights. We typically apply for patents in the United States and in strategic other countries. We may also acquire patents through acquisitions. We may encounter difficulties in obtaining or protecting patents. We rely on a combination of patents, trademarks, trade secrets, know-how, and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information. Litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of our proprietary rights. Litigation may also be brought against us claiming that we have violated the intellectual property rights of others. Litigation may be costly and may divert management’s attention from other matters. Additionally, in some foreign countries with weaker intellectual property rights, it may be difficult to maintain and enforce patents and other proprietary rights or defend against claims of infringement. |
| Tax and trade risks | |
| Current economic and political conditions make tax rules in any jurisdiction subject to significant change. | The U.S. Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Guidance continues to be issued clarifying the application of this new legislation. We cannot predict the overall impact that the additional guidance may have on our business. It is reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the TCJA. In addition, further changes in the tax laws of other jurisdictions could arise, including as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organization for Economic Cooperation and Development (OECD). The OECD, which represents a coalition of member countries, has issued recommendations that, in some cases, would make substantial changes to numerous long-standing tax positions and principles. These contemplated changes, to the extent adopted by OECD members and/or other countries, could increase tax uncertainty and may adversely impact our provision for income taxes. |
| Our tax rate is uncertain and may vary from expectations, which could have a material impact on our results of operations and earnings per share. | There can be no assurance that we will be able to maintain any particular worldwide effective corporate tax rate. We cannot give any assurance as to what our effective tax rate will be in the future because of, among other things, uncertainty regarding the tax policies of the jurisdictions in which we and our affiliates operate. Our actual effective tax rate may vary from our expectations, and such variance may be material. Additionally, tax laws or their implementation and applicable tax authority practices in any particular jurisdiction could change in the future, possibly on a retroactive basis, and any such change could have a material adverse impact on us and our affiliates. |
| Changes in tax treaties and trade agreements could negatively impact our costs, results of operations and earnings per share. | Legislative and regulatory action may be taken in the U.S. which, if ultimately adopted, could override or otherwise adversely impact tax treaties upon which we rely or broaden the circumstances under which STERIS plc would be considered a U.S. resident, each of which could materially and adversely affect our tax obligations. We cannot predict the outcome of any specific legislative or regulatory proposals. However, if proposals were adopted that had the effect of disregarding our organization in Ireland or limiting our ability as an Irish company to take advantage of tax treaties with the U.S., we could be subject to increased taxation and/or potentially significant expense. Existing free trade laws and regulations provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws and regulations or policies governing the terms of foreign trade, and in particular, increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products could have a material adverse impact on our business and financial results. |
| Proposed legislation relating to the denial of U.S. federal or state governmental contracts to U.S. companies that redomicile abroad could adversely affect our business. | Various U.S. federal and state legislative proposals that would deny governmental contracts to redomiciled companies may adversely affect us if adopted into law. We are unable to predict the likelihood that any such proposed legislation might become law, the nature of regulations that may be promulgated under any future legislative enactments, or the effect such enactments or increased regulatory scrutiny could have on our business. |
| The U.S. Internal Revenue Service (the “IRS”) may not agree that we are a foreign corporation for U.S. federal tax purposes. | Although we are organized under the laws of Ireland and are a tax resident in Ireland for Irish tax purposes, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code” and such Section, “Section 7874”). For U.S. federal tax purposes, a company generally is considered to be a tax resident in the jurisdiction of its organization. Because we are organized under the laws of Ireland, we would generally be classified as a non-U.S. corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874, however, provides an exception to this general rule under which a non-U.S. organized entity may be treated as a U.S. corporation for U.S. federal tax purposes. If we were to be treated as a U.S. corporation for U.S. federal tax purposes, we could be subject to substantial additional U.S. tax liability. Additionally, if we were treated as a U.S. corporation for U.S. federal tax purposes, non-U.S. holders of our ordinary shares would be subject to U.S. withholding tax on the gross amount of any dividends we paid to such shareholders. For Irish tax purposes, we are expected, regardless of any application of Section 7874, to be treated as an Ireland tax resident. Consequently, if we are treated as a U.S. corporation for U.S. federal tax purposes under Section 7874, we could be liable for both U.S. and Ireland taxes, which could have a material adverse effect on our financial condition and results of operations. |
BUSINESS AND OPERATIONAL RISKS
| Risk or uncertainty | Discussion |
| Competition | |
| Our businesses are highly competitive, and if we fail to compete successfully, our revenues and results of operations may be hurt. | We operate in a highly competitive global environment. Our businesses compete with other broad-line manufacturers, as well as many smaller businesses specializing in particular products or services, primarily on the basis of brand, design, quality, safety, ease of use, serviceability, price, product features, warranty, delivery, service, and technical support. We face increased competition from new infection prevention, sterile processing, contamination control, surgical support, cleaning consumables, gastrointestinal endoscopy accessories, contract sterilization, and other products and services entering the market. Competitors and potential competitors also are attempting to develop alternate technologies and sterilizing agents, as well as disposable medical instruments and other devices designed to address the risk of contamination. |
| Consolidations among our healthcare and pharmaceutical Customers may result in a loss of Customers or more significant pricing pressures. | A number of our Customers have consolidated. These consolidations are due in part to healthcare cost reduction measures initiated by competitive pressures as well as legislators, regulators and third-party payors. This may result in greater pricing pressures on us and in some cases loss of Customers. Additional consolidations could result in a loss of Customers or more significant pricing pressures. |
| Decreased availability or increased costs of raw materials or energy supplies or other supplies might increase our production costs or limit our production capabilities or curtail our operations. | We purchase raw materials, fabricated and other components, and energy supplies from a variety of suppliers. Key materials include stainless steel, organic and inorganic chemicals, fuel, cobalt-60, EO, and plastic components. The availability and prices of raw materials and energy supplies are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, anticipated or perceived shortages, and other factors. Also, certain of our key materials and components have a limited number of suppliers. Some are single-sourced in certain regions of the world, such as cobalt-60 and EO, which are necessary to our AST operations. Changes in regulatory requirements regarding the use of, the unavailability or short supply of these products might disrupt or cause shutdowns of portions of our AST operations or have other adverse consequences. We have developed a plan to expand our irradiation processing capacity with accelerator-based technologies which may reduce the potential supply risk. Shortages in supply, increased regulatory or security requirements, or increases in the price of raw materials, components and energy supplies may adversely affect us. |
| Our operations, and those of our suppliers, are subject to a variety of business continuity hazards and risks, any of which could interrupt production or operations or otherwise adversely affect our performance, results, or value. | Business continuity hazards and other risks include: explosions, fires, earthquakes, inclement weather, and other disasters; utility or other mechanical failures; unscheduled downtime; labor difficulties; inability to obtain or maintain any required licenses or permits; disruption of communications; data security, preservation and redundancy disruptions; inability to hire or retain key management or employees; disruption of supply or distribution; and regulation of the safety, security or other aspects of our operations. The occurrence of any of these or other events might disrupt or shut down operations, or otherwise adversely impact the production or profitability of a particular facility, or our operations as a whole. Certain casualties also might cause personal injury and loss of life, or severe damage to or destruction of property and equipment, and for casualties occurring at our facilities, result in liability claims against us. Although we maintain property and casualty insurance and liability and similar insurance of the types and in the amounts that we believe are customary for our industries, our insurance coverages have limits and we are not fully insured against all potential hazards and risks incident to our business. |
| We engage in acquisitions and affiliations, divestitures, and other business arrangements. Our growth may be adversely affected if we are unable to successfully identify, price, and integrate strategic business candidates or otherwise optimize our business portfolio. | Our success depends, in part, on strategic acquisitions and joint ventures, which are intended to complement or expand our businesses, divestiture of non-strategic businesses, and other actions intended to optimize our portfolio of businesses. This strategy depends upon our ability to identify, appropriately price, and complete these types of business development transactions or arrangements and to obtain any necessary financing. In the last several fiscal years we have made a number of acquisitions. We also completed several divestitures of non-strategic businesses or product lines during the last several years. Our success with respect to these recent and future acquisitions will depend on our ability to integrate the businesses acquired, retain key personnel, realize identified cost synergies and otherwise execute our strategies. Our success will also depend on our ability to develop satisfactory working arrangements with our strategic partners in joint ventures or other affiliations, or to divest or realign businesses. Competition for strategic business candidates may result in increases in costs and price for acquisition candidates and market valuation issues may reduce the value available for divestiture of non-strategic businesses. These types of transactions are also subject to a number of other risks and uncertainties, including: delays in realizing or failure to realize anticipated benefits of the transactions; diversion of management’s time and attention from other business concerns; difficulties in retaining key employees, Customers, or suppliers of the acquired or divested businesses; difficulties in maintaining uniform standards, controls, procedures and policies, or other integration or divestiture difficulties; adverse effects on existing business relationships with suppliers or Customers; other events contributing to difficulties in generating future cash flows; risks associated with the assumption of contingent or other liabilities of acquisition targets or retention of liabilities for divested businesses and difficulties in obtaining financing. |
| If our continuing efforts to create a lean business and in-source production to reduce costs are not successful, our profitability may be hurt or our business otherwise might be adversely affected. | We have undertaken various activities to create a lean business, including in-sourcing. We continue to look for opportunities to in-source production that is currently provided by third parties.These activities may not produce the full efficiencies and cost reduction benefits that we expect or efficiencies and benefits might be delayed. Implementation costs also might exceed expectations. |
| Our business and results of operations may be adversely affected if we are unable to recruit and retain qualified management and other personnel or other compliance matters adversely impact our personnel. | Our continued success depends, in large part, on our ability to hire and retain highly qualified people and if we are unable to do so, our business and operations may be impaired or disrupted. Competition for highly qualified people is intense and there is no assurance that we will be successful in attracting or retaining replacements to fill vacant positions, successors to fill retirements or employees moving to new positions, or other highly qualified personnel. In addition, legal, regulatory or compliance matters create significant distraction or diversion of significant or unanticipated resources or attention that could have a material adverse effect on the responsibilities and retention of qualified employees. |
| We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers. | We rely extensively on information technology (IT) systems to conduct business. In addition, we rely on networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our data. While we have made investments seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers, the techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action. Enforcement of the General Data Protection Regulation (“GDPR”) was effective as of May 2018. The GDPR is focused on the protection of personal data not merely the privacy of personal data. The GDPR creates a range of new compliance obligations and will significantly increase financial penalties for noncompliance (including possible fines of up to 4% of global annual revenues for the preceding financial year or €20 million (whichever is higher) for the most serious infringements). |
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The following table sets forth the principal plants and other materially important properties of the Company and its subsidiaries as of March 31, 2019. The Company believes that its facilities are adequate for operations and are maintained in good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially reasonable rates.
In the table below, “Contract Sterilization” refers to locations of the Applied Sterilization Technologies segment. “Manufacturing,” “Warehousing,” “Operations,” or “Sales Offices” refer to locations serving one or more of the Healthcare Products, Healthcare Specialty Services and Life Sciences segments.
| Ireland (IE), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL) | ||||||
| Location | IE /U.S./INTL* | Use | Owned/Leased | |||
| Montgomery, AL | U.S. | Manufacturing | Owned | |||
| Ontario, CA | U.S. | Contract Sterilization | Owned | |||
| San Diego, CA | U.S. | Contract Sterilization | Owned | |||
| Temecula, CA | U.S. | Contract Sterilization | Owned | |||
| Libertyville, IL (2) | U.S. | Contract Sterilization | Owned | |||
| Northborough, MA | U.S. | Contract Sterilization | Owned | |||
| Brooklyn Park, MN | U.S. | Contract Sterilization | Owned | |||
| St. Louis, MO (4) | U.S. | Manufacturing | Owned | |||
| South Plainfield, NJ | U.S. | Contract Sterilization | Owned | |||
| Whippany, NJ | U.S. | Contract Sterilization | Owned | |||
| Chester, NY (2) | U.S. | Contract Sterilization | Owned |
| Ireland (IE), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL) | ||||||
| Location | IE /U.S./INTL* | Use | Owned/Leased | |||
| Groveport, OH | U.S. | Contract Sterilization | Owned | |||
| Mentor, OH (13) | U.S. | Operations | Owned | |||
| U.S. | Sales Offices | Owned | ||||
| U.S. | Manufacturing/Warehousing | Owned | ||||
| U.S. | Manufacturing/Operations | Owned | ||||
| Philadelphia, PA | U.S. | Manufacturing/Warehousing | Owned | |||
| Spartanburg, SC | U.S. | Contract Sterilization | Owned | |||
| El Paso, TX (2) | U.S. | Contract Sterilization | Owned | |||
| Grand Prairie, TX | U.S. | Contract Sterilization | Owned | |||
| Sandy, UT | U.S. | Contract Sterilization | Owned | |||
| Minneapolis, MN (2) | U.S. | Contract Sterilization | Owned | |||
| Birmingham, AL (5) | U.S. | Operations/Warehousing | Owned | |||
| Vega Alta, PR | U.S. | Contract Sterilization | Owned | |||
| Sharon Hill, PA | U.S. | Manufacturing/Warehousing | Owned | |||
| Feasterville, PA | U.S. | Warehousing | Owned | |||
| Tullamore, Ireland | IE | Contract Sterilization | Owned | |||
| Westport, Ireland | IE | Contract Sterilization | Owned | |||
| Berkshire, England | INTL | Contract Sterilization | Owned | |||
| Derby, England (2) | INTL | Operations | Owned | |||
| Lancing, England | INTL | Manufacturing/Operations | Owned | |||
| Swindon, England (2) | INTL | Contract Sterilization | Owned | |||
| Yorkshire, England (3) | INTL | Contract Sterilization | Owned | |||
| Northamptonshire, England | INTL | Contract Sterilization | Owned | |||
| Mogi das Cruzes, Brazil | INTL | Manufacturing/Sales Office | Owned | |||
| Quebec City, Canada | INTL | Manufacturing | Owned | |||
| Whitby, Canada | INTL | Contract Sterilization | Owned | |||
| Suzhou, China | INTL | Contract Sterilization/ Operations | Owned | |||
| Alajuela, Costa Rica (2) | INTL | Contract Sterilization | Owned | |||
| Velka Bites, Czech Republic | INTL | Contract Sterilization | Owned | |||
| Tuusula, Finland | INTL | Manufacturing/Sales Office | Owned | |||
| Bordeaux, France | INTL | Manufacturing/Sales Office | Owned | |||
| Calcinate, Italy | INTL | Contract Sterilization | Owned | |||
| Bastia di Rovolon, Italy | INTL | Contract Sterilization | Owned | |||
| Rawang, Malaysia (2) | INTL | Contract Sterilization | Owned | |||
| Etten-Leur, Netherlands (3) | INTL | Contract Sterilization | Owned | |||
| Venlo, Netherlands | INTL | Contract Sterilization | Owned | |||
| Michalovce, Slovakia | INTL | Contract Sterilization | Owned | |||
| Johannesburg, South Africa | INTL | Contract Sterilization | Owned | |||
| Daniken, Switzerland (2) | INTL | Contract Sterilization | Owned | |||
| Chonburi, Thailand | INTL | Contract Sterilization | Owned | |||
| Radeberg, Germany | INTL | Contract Sterilization | Owned | |||
| Komenda, Slovenia | INTL | Contract Sterilization | Owned | |||
| Bitterfeld-Wolfen, Germany | INTL | Contract Sterilization | Owned |
| Ireland (IE), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL) | ||||||
| Location | IE /U.S./INTL* | Use | Owned/Leased | |||
| Ede, Netherlands | INTL | Contract Sterilization | Owned | |||
| Chusclan, France | INTL | Contract Sterilization | Owned | |||
| Marseille, France | INTL | Manufacturing/Warehousing | Owned | |||
| Kuala Ketil, Malaysia | INTL | Contract Sterilization | Owned | |||
| Kulim, Malaysia | INTL | Contract Sterilization | Owned | |||
| Leicester, England (2) | INTL | Warehousing/Operations | Owned | |||
| St. Louis, MO (2) | U.S. | Warehousing/Operations | Leased | |||
| Reno, NV | U.S. | Warehousing | Leased | |||
| Cleveland, Ohio | U.S. | Operations | Leased | |||
| Stow, OH | U.S. | Sales Office/Operations | Leased | |||
| Hillsborough, NJ | U.S. | Sales Office/Operations | Leased | |||
| Keller, TX (2) | U.S. | Sales Office/Operations | Leased | |||
| Tustin, CA | U.S. | Sales Office/Operations | Leased | |||
| Melville, NY | U.S. | Sales Office/Operations | Leased | |||
| Santa Clara, CA | U.S. | Sales Office | Leased | |||
| Chesterfield, MO | U.S. | Sales Office/Operations | Leased | |||
| Cooper City, FL | U.S. | Operations | Leased | |||
| Rockville, MD | U.S. | Operations | Leased | |||
| Springdale, OH | U.S. | Operations/Warehousing | Leased | |||
| Franklin Park, IL | U.S. | Manufacturing/ Operations | Leased | |||
| Bensenville, IL | U.S. | Operations/Warehousing | Leased | |||
| Montgomery, AL | U.S. | Operations/Warehousing | Leased | |||
| Ooltewah, TN | U.S. | Operations/Warehousing | Leased | |||
| Bethlehem, PA | U.S. | Sales Office/Operations | Leased | |||
| Point Richmond, CA (3) | U.S. | Manufacturing/ Operations /Sales Offices/ Warehousing | Leased | |||
| San Diego, CA | U.S. | Contract Sterilization | Leased | |||
| Denver, CO | U.S. | Contract Sterilization | Leased | |||
| Lima, OH | U.S. | Contract Sterilization | Leased | |||
| Saxonburg, PA (2) | U.S. | Contract Sterilization | Leased | |||
| Petaluma, CA | U.S. | Contract Sterilization | Leased | |||
| Tampa, FL (2) | U.S. | Operations | Leased | |||
| Temple Terrace, FL | U.S. | Operations | Leased | |||
| Hamilton, OH | U.S. | Operations/Warehouse | Leased | |||
| Henrico, VA | U.S. | Operations | Leased | |||
| Rochester, NY | U.S. | Operations | Leased | |||
| Birmingham, AL | U.S. | Warehouse | Leased | |||
| Long Island City, NY | U.S. | Operations | Leased | |||
| Chattanooga, TN (2) | U.S. | Operations | Leased | |||
| Durham, NC | U.S. | Operations | Leased | |||
| Cheektowaga, KY | U.S. | Sales Office | Leased | |||
| Louisville, KY | U.S. | Warehousing | Leased | |||
| Philadelphia, PA | U.S. | Sales Office | Leased |
| Ireland (IE), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL) | ||||||
| Location | IE /U.S./INTL* | Use | Owned/Leased | |||
| Mentor, OH | U.S. | Warehousing | Leased | |||
| Sturbridge, MA | U.S. | Operations | Leased | |||
| Galway, Ireland | IE | Lab | Leased | |||
| Tullamore, Ireland (3) | IE | Sales Office | Leased | |||
| Calcinate, Italy | INTL | Contract Sterilization | Leased | |||
| Riyadh, Saudi Arabia | INTL | Operations | Leased | |||
| Toronto, Canada | INTL | Operations | Leased | |||
| Antwerpen, Belgium | INTL | Sales Office/Operations | Leased | |||
| Sao Paulo, Brazil (2) | INTL | Sales Office | Leased | |||
| Mississauga, Canada | INTL | Sales Office/Warehousing | Leased | |||
| Beijing, China | INTL | Sales Office | Leased | |||
| Nanjing, China | INTL | Operations | Leased | |||
| Shanghai, China (4) | INTL | Sales Office/ Manufacturing | Leased | |||
| Suzhou, China | INTL | Operations | Leased | |||
| La Chapelle St. Mesmin, France | INTL | Sales Office | Leased | |||
| Marseille, France | INTL | Contract Sterilization | Leased | |||
| Paris, France | INTL | Sales Office | Leased | |||
| Toussieu, France | INTL | Warehousing | Leased | |||
| Allershausen, Germany (2) | INTL | Contract Sterilization | Leased | |||
| Cologne, Germany (2) | INTL | Sales Office | Leased | |||
| Gokul Nagar, India | INTL | Sales Office | Leased | |||
| Poggio Rusco, Italy | INTL | Contract Sterilization | Leased | |||
| Segrate, Italy | INTL | Sales Office | Leased | |||
| Seriate, Italy | INTL | Contract Sterilization/Operations | Leased | |||
| Trescore Balneario, Italy | INTL | Operations | Leased | |||
| Tokyo, Japan | INTL | Sales Office | Leased | |||
| MINT Bangi, Malaysia | INTL | Contract Sterilization | Leased | |||
| Petaling Jaya, Malaysia | INTL | Sales Office | Leased | |||
| Guadalupe, Mexico | INTL | Manufacturing | Leased | |||
| Utrecht, Netherlands | INTL | Operations | Leased | |||
| Moscow, Russia | INTL | Sales Office | Leased | |||
| Singapore | INTL | Sales Office/Warehousing | Leased | |||
| Madrid, Spain | INTL | Sales Office | Leased | |||
| Dubai, United Arab Emirates | INTL | Sales Office | Leased | |||
| Tuusula, Finland | INTL | Sales Office | Leased | |||
| Bihwandi, India | INTL | Warehousing | Leased | |||
| Bitterfeld-Wolfen, Germany (2) | INTL | Warehousing | Leased | |||
| New Cross, England | INTL | Operations | Leased | |||
| Basingstoke, England | INTL | Sales Office | Leased | |||
| Hoddesdon, England (2) | INTL | Operations | Leased | |||
| Leicester, England | INTL | Warehousing/Operations | Leased | |||
| Lincoln, England | INTL | Operations | Leased | |||
| Grimsby England | INTL | Operations | Leased |
| Ireland (IE), United States (U.S.) Locations (including Puerto Rico) and International Locations (INTL) | ||||||
| Location | IE /U.S./INTL* | Use | Owned/Leased | |||
| Knowsley, England | INTL | Operations | Leased | |||
| Oxfordshire, England | INTL | Contract Sterilization | Leased | |||
| Sheffield, England | INTL | Operations | Leased | |||
| Strathclyde, Scotland | INTL | Operations | Leased | |||
| Swindon, England | INTL | Operations | Leased | |||
| Wythenshawe, England | INTL | Operations | Leased | |||
| Bishop Stortford, England (4) | INTL | Manufacturing/Warehousing/Operations | Leased | |||
| Pitsford, England | INTL | Operations | Leased | |||
| Harrow, England | INTL | Operations | Leased | |||
| Didcot, England (2) | INTL | Operations | Leased | |||
| Sao Jose Dos Campos, Brazil | INTL | Warehousing | Leased |
- International includes all countries other than Ireland and the U.S.
Item 3. LEGAL PROCEEDINGS
Information regarding our legal proceedings is included in Item 7 of Part II, Management's Discussion and Analysis ("MD&A"), and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies," and is incorporated herein by reference thereto.
Item 4. MINE SAFETY DISCLOSURES
None.
PART II
Item 5. MARKET FOR REGISTRANT’S ORDINARY EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our ordinary shares are traded on the New York Stock Exchange under the symbol “STE.”
Holders. As of March 31, 2019, there were approximately 936 holders of record of our ordinary shares.
Dividend Policy. The Company’s Board of Directors decides the timing and amount of any dividends we may pay. The Board expects to be able to continue to pay cash dividends for the foreseeable future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. On August 9, 2016, STERIS UK announced that its Board of Directors had authorized the purchase of up to $300.0 million (net of taxes, fees and commissions) of our ordinary shares. As a result of the Redomiciliation, this authorization terminated.
On May 7, 2019, our Board of Directors authorized the continuation of the foregoing share repurchase program by STERIS Ireland. There is approximately $80.0 million (net of taxes, fees and commissions) of remaining availability under the authorization. Under the authorization, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. The repurchase program may be suspended or discontinued at any time.
We purchased 651,093 of our ordinary shares during fiscal 2019 for the aggregate amount of $72.1 million.
The following table presents information with respect to purchases STERIS made of its ordinary shares during the fourth quarter of fiscal year 2019:
| (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans at Period End (dollars in thousands) | |||||||||||
| January 1-31 | — | $ | — | — | $ | 103,979 | ||||||||
| February 1-28 | 96,500 | 121.88 | 96,500 | 92,217 | ||||||||||
| March 1-31 | 108,893 | 121.57 | 108,893 | 78,979 | ||||||||||
| Total | 205,393 | (1) | $ | 121.72 | (1) | 205,393 | $ | 78,979 |
(1) Does not include 11 shares purchased during the quarter at an average price of $116.62 per share by the STERIS Corporation 401(k) Plan on behalf of an executive officer of the Company who may be deemed to be an affiliated purchaser.
Item 6. SELECTED FINANCIAL DATA
| Years Ended March 31, | ||||||||||||||||||||
| (in thousands, except per share data) | 2019 (1) (2) | 2018 (1) (2) | 2017 (1) (2) | 2016 (1) (2) | 2015 (1) (2) | |||||||||||||||
| Statements of Income Data: | ||||||||||||||||||||
| Revenues | $ | 2,782,170 | $ | 2,619,996 | $ | 2,612,756 | $ | 2,238,764 | $ | 1,850,263 | ||||||||||
| Gross profit | 1,175,427 | 1,092,746 | 1,026,213 | 895,348 | 774,301 | |||||||||||||||
| Restructuring expenses | 30,987 | 103 | 215 | (820 | ) | (391 | ) | |||||||||||||
| Income from continuing operations | 411,465 | 399,883 | 226,206 | 237,576 | 225,214 | |||||||||||||||
| Income taxes | 64,394 | 63,360 | 74,015 | 60,299 | 73,756 | |||||||||||||||
| Net income attributable to shareholders | 304,051 | 290,915 | 109,965 | 110,763 | 135,064 | |||||||||||||||
| Basic income per ordinary share: | ||||||||||||||||||||
| Net income | $ | 3.59 | $ | 3.42 | $ | 1.29 | $ | 1.57 | $ | 2.27 | ||||||||||
| Shares used in computing net income per ordinary share – basic | 84,577 | 85,028 | 85,473 | 70,698 | 59,413 | |||||||||||||||
| Diluted income per ordinary share: | ||||||||||||||||||||
| Net income | $ | 3.56 | $ | 3.39 | $ | 1.28 | $ | 1.56 | $ | 2.25 | ||||||||||
| Shares used in computing net income per ordinary share – diluted | 85,468 | 85,713 | 86,094 | 71,184 | 60,045 | |||||||||||||||
| Dividends per ordinary share | $ | 1.33 | $ | 1.21 | $ | 1.09 | $ | 0.98 | $ | 0.90 | ||||||||||
| Balance Sheets Data: | ||||||||||||||||||||
| Working capital | $ | 588,539 | $ | 591,195 | $ | 636,219 | $ | 571,919 | $ | 437,101 | ||||||||||
| Total assets | 5,073,071 | 5,200,334 | 4,924,555 | 5,346,416 | 2,097,291 | |||||||||||||||
| Long-term indebtedness | 1,183,227 | 1,316,001 | 1,478,361 | 1,567,796 | 621,075 | |||||||||||||||
| Total liabilities | 1,887,273 | 1,983,034 | 2,114,422 | 2,307,524 | 1,023,645 | |||||||||||||||
| Total shareholders’ equity | $ | 3,177,810 | $ | 3,205,960 | $ | 2,798,602 | $ | 3,023,034 | $ | 1,071,632 |
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2) As a result of our adoption of ASU 2017-07, prior year amounts on our Consolidated Statements of Income have been reclassified to retroactively apply the components of the net periodic benefit cost of our defined benefit pension plans and our other post-retirements benefit plan.
.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
In Management’s Discussion and Analysis (“MD&A”), we explain the general financial condition and the results of operations for STERIS and its subsidiaries including:
| • | what factors affect our business; |
| • | what our earnings and costs were; |
| • | why those earnings and costs were different from the year before; |
| • | where our earnings came from; |
| • | how this affects our overall financial condition; |
| • | what our expenditures for capital projects were; and |
| • | where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchase ordinary shares, pay cash dividends and fund future working capital needs. |
The MD&A also analyzes and explains the annual changes in the specific line items in the Consolidated Statements of Income. As you read the MD&A, it may be helpful to refer to information in Item 1, “Business,” Item 6, “Selected Financial Data,” and our consolidated financial statements, which present the results of our operations for fiscal 2019, 2018 and 2017, as well as Part I, Item 1A, “Risk Factors” and Note 10 of our consolidated financial statements titled, "Commitments and Contingencies" for a discussion of some of the matters that can adversely affect our business and results of operations. This information, discussion, and disclosure may be important to you in making decisions about your investments in STERIS.
FINANCIAL MEASURES
In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We sometimes use the following financial measures in the context of this report: backlog; debt-to-total capital; and days sales outstanding. We define these financial measures as follows:
| • | Backlog – We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements. |
| • | Debt-to-total capital – We define debt-to-total capital as total debt divided by the sum of total debt and shareholders’ equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth. |
| • | Days sales outstanding (“DSO”) – We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters’ revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect. |
We, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the United States. Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies. Additional information regarding these financial measures, including reconciliations of each non- GAAP financial measure, is available in the subsection of MD&A titled, "Non-GAAP Financial Measures."
REVENUES– DEFINED
As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
| • | Revenues – Our revenues are presented net of sales returns and allowances. |
| • | Product Revenues – We define product revenues as revenues generated from sales of consumable and capital equipment products. |
| • | Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment. Service revenues also include hospital sterilization services, instrument and scope repairs, and linen management as well as revenues generated from contract sterilization and laboratory services offered through our Applied Sterilization Technologies segment. Linen management services were divested in fiscal 2017. |
| • | Capital Equipment Revenues – We define capital equipment revenues as revenues generated from sales of capital equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1 and 1E, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR. |
| • | Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products, which includes SYSTEM 1 and 1E consumables, V-PRO consumables, gastrointestinal endoscopy accessories, sterility assurance products, skin care products, cleaning consumables, barrier product solutions and surgical instruments. |
| • | Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues. |
GENERAL OVERVIEW AND EXECUTIVE SUMMARY
STERIS plc is a leading provider of infection prevention and other procedural products and services. Our MISSION IS TO HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare and life science product and service solutions around the globe. 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, instrument and scope repair solutions, laboratory testing services, on-site and off-site reprocessing, and capital equipment products, such as sterilizers and surgical tables, and connectivity solutions such as operating room (“OR”) integration.
On March 28, 2019, STERIS plc, a public limited company organized under the laws of England and Wales (“STERIS UK”), completed a redomiciliation from the United Kingdom to Ireland (the “Redomiciliation”). The Redomiciliation was achieved through the insertion of a new Irish public limited holding company (“STERIS Ireland”) on top of STERIS UK pursuant to a court-approved scheme of arrangement under English law (the “Scheme”). Following the Scheme effectiveness, STERIS UK was re-registered as a private limited company with the name STERIS Limited, and STERIS Emerald IE Limited, a company established in Ireland and a wholly-owned direct subsidiary of STERIS Ireland, was interposed as the direct parent company of STERIS UK.
We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. We describe our business segments in Note 11 to our consolidated financial statements, titled "Business Segment Information."
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven
Showing the first 8K of 117K characters. Open the full section
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to various risks, including, but not limited to, interest rate, foreign currency, and commodity risks. These risks are described in the sections that follow.
INTEREST RATE RISK
As of March 31, 2019, we had $885.0 million in fixed rate senior notes outstanding. As of March 31, 2019, we had $301.8 million in outstanding borrowings under our Credit Agreement which are exposed to changes in interest rates. We monitor our interest rate risk, but do not engage in any hedging activities using derivative financial instruments. For additional information regarding our debt structure, refer to Note 6 to our Consolidated Financial Statements titled, “Debt.”
FOREIGN CURRENCY RISK
We are exposed to the impact of foreign currency exchange fluctuations. This foreign currency exchange risk arises when we conduct business in a currency other than the U.S. dollar. For most operations, local currencies have been determined to be the functional currencies. The financial statements of subsidiaries are translated to their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities and at average currency exchange rates for revenues and expenses. Translation adjustments for subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within equity. Note 19 to our consolidated financial statements titled, “ Reclassifications out of Accumulated Other Comprehensive Income (Loss),” contains additional information about the impact of translation on accumulated other comprehensive income (loss) and equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the Consolidated Statements of Income. Since we operate internationally and approximately 30% of our revenues and 40% of our cost of revenues are generated outside the United States, foreign currency exchange rate fluctuations can significantly impact our financial position, results of operations, and competitive position.
We enter into foreign currency forward contracts to hedge monetary assets and liabilities denominated in foreign currencies, including inter-company transactions. We do not use derivative financial instruments for speculative purposes. At March 31, 2019, we held foreign currency forward contracts to buy 9.0 million Canadian dollars and 150.0 million Mexican pesos.
COMMODITY RISK
We are dependent on basic raw materials, sub-assemblies, components, and other supplies used in our operations. Our financial results could be affected by the availability and changes in prices of these materials. Some of these materials are sourced from a limited number of suppliers or only a single supplier. These materials are also key source materials for our competitors. Therefore, if demand for these materials rises, we may experience increased costs and/or limited or unavailable supplies. As a result, we may not be able to acquire key production materials on a timely basis, which could impact our ability to produce products and satisfy incoming sales orders on a timely basis. In addition, the costs of these materials can rise suddenly and result in significantly higher costs of production. We believe that we have adequate sources of supply for many of our key materials and energy sources. Where appropriate, we enter into long-term supply contracts as a basis to guarantee a reliable supply. We may also enter into commodity swap contracts to hedge price changes in a certain commodity that impacts raw materials included in our cost of revenues. At March 31, 2019, we held commodity swap contracts to buy 652,900 pounds of nickel.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
STERIS plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of STERIS plc and subsidiaries (the Company) as of March 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 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 Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1989.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 30, 2019
STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
| March 31, | 2019 | 2018 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 220,633 | $ | 201,534 | ||||
| Accounts receivable (net of allowances of $9,645 and $12,472, respectively) | 564,830 | 528,066 | ||||||
| Inventories, net | 208,243 | 205,731 | ||||||
| Prepaid expenses and other current assets | 60,029 | 54,326 | ||||||
| Total current assets | 1,053,735 | 989,657 | ||||||
| Property, plant, and equipment, net | 1,031,582 | 1,010,524 | ||||||
| Goodwill | 2,322,928 | 2,433,784 | ||||||
| Intangibles, net | 604,614 | 726,980 | ||||||
| Other assets | 60,212 | 39,389 | ||||||
| Total assets | $ | 5,073,071 | $ | 5,200,334 | ||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 152,913 | $ | 135,866 | ||||
| Accrued income taxes | 15,460 | 379 | ||||||
| Accrued payroll and other related liabilities | 109,058 | 94,000 | ||||||
| Accrued expenses and other | 187,765 | 168,217 | ||||||
| Total current liabilities | 465,196 | 398,462 | ||||||
| Long-term indebtedness | 1,183,227 | 1,316,001 | ||||||
| Deferred income taxes, net | 151,038 | 159,971 | ||||||
| Other liabilities | 87,812 | 108,600 | ||||||
| Total liabilities | $ | 1,887,273 | $ | 1,983,034 | ||||
| Commitments and contingencies (see Note 10) | ||||||||
| Preferred shares, with $0.001 and £0.10 par value, respectively; 50,000 and 100 shares authorized, respectively; 0 and 100 issued and outstanding, respectively | — | 15 | ||||||
| Ordinary shares, with $75.00 and £0.10 par value, respectively; 500,000 shares and £17,006 shares aggregate par value authorized, respectively; 84,517 and 84,747 ordinary shares issued and outstanding, respectively | 1,998,564 | 2,048,037 | ||||||
| Retained earnings | 1,339,024 | 1,146,223 | ||||||
| Accumulated other comprehensive income (loss) | (159,778 | ) | 11,685 | |||||
| Total shareholders’ equity | 3,177,810 | 3,205,960 | ||||||
| Noncontrolling interests | 7,988 | 11,340 | ||||||
| Total equity | 3,185,798 | 3,217,300 | ||||||
| Total liabilities and equity | $ | 5,073,071 | $ | 5,200,334 |
See notes to consolidated financial statements.
STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Years Ended March 31, | 2019 | 2018 | 2017 | |||||||||
| Revenues: | ||||||||||||
| Product | $ | 1,296,025 | $ | 1,220,633 | $ | 1,198,319 | ||||||
| Service | 1,486,145 | 1,399,363 | 1,414,437 | |||||||||
| Total revenues | 2,782,170 | 2,619,996 | 2,612,756 | |||||||||
| Cost of revenues: | ||||||||||||
| Product | 702,295 | 646,177 | 624,020 | |||||||||
| Service | 904,448 | 881,073 | 962,523 | |||||||||
| Total cost of revenues | 1,606,743 | 1,527,250 | 1,58 |
Showing the first 8K of 196K characters. Open the full section
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the PEO and PFO have determined that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS
During the quarter ended March 31, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the PEO and PFO, we conducted an evaluation of the effectiveness of internal control over financial reporting as of March 31, 2019 based on the framework in 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation of internal control over financial reporting did not include the internal controls of the entity that was acquired during fiscal 2019. Total assets of the acquired business (inclusive of acquired intangible assets and goodwill) represented approximately 0.25 percent of our total assets as of March 31, 2019 and approximately 0.15 percent of our total revenues for the year ended March 31, 2019. Based on this evaluation under this framework, management concluded that the internal control over financial reporting was effective as of March 31, 2019.
The independent registered public accounting firm that audited the financial statements has issued an attestation report on internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of STERIS plc
Opinion on Internal Control over Financial Reporting
We have audited STERIS plc and subsidiaries’ internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, STERIS plc and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the entity that was acquired during the year ended March 31, 2019, which is included in the fiscal 2019 consolidated financial statements of the Company and constituted approximately 0.25% of total assets as of March 31, 2019 and approximately 0.15% of total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the entity that was acquired during the year ended March 31, 2019.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) and our report dated May 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 30, 2019
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This Annual Report on Form 10-K incorporates by reference the information appearing under the caption "Nominees for Election as Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," "Board Meetings and Committees" and "Shareholder Nominations of Directors and Nominee Criteria" of our definitive proxy statement to be filed with the SEC in connection with our 2019 Annual Meeting of Shareholders (the "Proxy Statement").
Our executive officers serve for a term of one year from the date of election to the next organizational meeting of the Board of Directors and until their respective successors are elected and qualified, except in the case of death, resignation, or removal. Information concerning our executive officers is contained in Item 1 of Part 1 of this Annual Report and is incorporated herein by reference. We have adopted a code of ethics, our Code of Business Conduct for Employees, that applies to our CEO and CFO and Principal Accounting Officer as well as all of our other employees. We have also adopted a code of ethics, our Director Code of Ethics, which applies to the members of the Company's Board of Directors, including our CEO. Our Code of Business Conduct for Employees and the Director Code of Ethics can be found on our Investor Relations website at www.steris-ir.com. Any amendments or waivers of either of these codes will be made available on this website.
Item 11. EXECUTIVE COMPENSATION
This Annual Report on Form 10-K incorporates by reference the information appearing beginning under the captions "Executive Compensation," "Non-Employee Director Compensation" and "Miscellaneous Matters" of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This Annual Report on Form 10-K incorporates by reference the information appearing under the captions "Ownership of Voting Securities" of the Proxy Statement.
The table below presents information concerning all equity compensation plans and individual equity compensation arrangements in effect as of our fiscal year ended March 31, 2019.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
| (a) | (b) | (c) | ||||
| Equity compensation plans approved by security holders | 2,104,685 | $72.82 | 4,400,306 | |||
| Equity compensation plans not approved by security holders | — | — | — | |||
| Total | 2,104,685 | $72.82 | 4,400,306 |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
RELATED PERSON TRANSACTIONS
This Annual Report on Form 10-K incorporates by reference the information beginning under the captions "Governance Generally", "Board Meetings and Committees" and "Miscellaneous Matters" of the Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This Annual Report on Form 10-K incorporates by reference the information relating to principal accountant fees and services appearing under the caption "Independent Registered Public Accounting Firm" of the Proxy Statement.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) The following consolidated financial statements of STERIS plc and subsidiaries are included in Item 8:
Consolidated Balance Sheets – March 31, 2019 and 2018.
Consolidated Statements of Income – Years ended March 31, 2019, 2018, and 2017.
Consolidated Statements of Comprehensive Income – Years ended March 31, 2019, 2018, and 2017.
Consolidated Statements of Cash Flows – Years ended March 31, 2019, 2018, and 2017.
Consolidated Statements of Shareholders’ Equity – Years ended March 31, 2019, 2018, and 2017.
Notes to Consolidated Financial Statements.
(a) (2) The following consolidated financial statement schedule of STERIS plc and subsidiaries is included in Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) Exhibits
Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
| STERIS plc (Registrant) | |||
| Date: | May 30, 2019 | By: | /S/ KAREN L. BURTON |
| Karen L. Burton | |||
| Vice President, Controller, and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| SIGNATURE | TITLE | DATE | ||
| /S/ WALTER M ROSEBROUGH, JR. | President, Chief Executive Officer and Director | May 30, 2019 | ||
| Walter M Rosebrough, Jr. | ||||
| /S/ MICHAEL J. TOKICH | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | May 30, 2019 | ||
| Michael J. Tokich | ||||
| /S/ KAREN L. BURTON | Vice President, Controller and Chief Accounting Officer | May 30, 2019 | ||
| Karen L. Burton | ||||
| * | Chairman and Director | May 30, 2019 | ||
| Mohsen M. Sohi | ||||
| * | Director | May 30, 2019 | ||
| Richard C. Breeden | ||||
| * | Director | May 30, 2019 | ||
| Cynthia L. Feldmann | ||||
| * | Director | May 30, 2019 | ||
| David B. Lewis | ||||
| * | Director | May 30, 2019 | ||
| Jacqueline B. Kosecoff | ||||
| * | Director | May 30, 2019 | ||
| Sir Duncan K. Nichol | ||||
| * | Director | May 30, 2019 | ||
| Nirav R. Shah | ||||
| * | Director | May 30, 2019 | ||
| Richard M. Steeves | ||||
| * | Director | May 30, 2019 | ||
| Loyal W. Wilson | ||||
| * | Director | May 30, 2019 | ||
| Michael B. Wood |
| * | The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named directors of the Registrant and filed with the Securities and Exchange Commission on behalf of such directors. |
| Date: | May 30, 2019 | By: | /S/ J. ADAM ZANGERLE |
| J. Adam Zangerle, Attorney-in-Fact for Directors |