STERIS Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone, and welcome to the STERIS plc Third Quarter 2023 Conference Call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I'd like to turn the floor over to Julie Winter, Investor Relations. Ma'am, please go ahead.

[Julie Winter, Investor Relations at STERIS]

Thank you, Jamie, and good morning, everyone. As usual, speaking on our call today will be Mike Tokich, Senior Vice President and CFO; and Dan Carestio, our President and CEO. I do have a few words of caution before we open for comments. This webcast contains time-sensitive information that is accurate only as of today.

Any redistribution, retransmission or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website.

In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth, and free cash flow will be used. Additional information regarding these measures, including definitions, is available in our release as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. With those cautions, I will hand the call over to Mike.

[Michael Tokich, Chief Financial Officer at STERIS]

Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our third quarter performance. For the quarter, constant currency organic revenue increased 7% driven by volume as well as 300 basis points of price. As anticipated, the divestiture of the Renal Care business impacted our revenue comparisons to the prior year by about $47 million which is detailed in the press release tables.

This is the last quarter of a year-over-year impact for the Renal Care business as we divested it in January of last year. The integration of Cantel Medical continues to go well. We achieved approximately $10 million of cost synergies in the third quarter, bringing our year-to-date total to about $45 million. We are well on track to achieve our stated goal of approximately $50 million in fiscal year 2023. As anticipated, gross margin for the quarter decreased 200 basis points compared with the prior year to 43.1% as pricing, currency and the favorable impact from the divestiture of Renal Care were more than offset by lower productivity, unfavorable mix and higher material and labor costs.

Sequentially, the impact of material and labor costs have improved and totaled about $15 million in the quarter compared to the prior year. This puts us at about $75 million year-to-date with our outlook of $90 million for the year remaining unchanged. EBIT margin declined 10 basis points to 23.9% of revenue compared with the third quarter last year which reflects the gross margin pressures mentioned earlier, which were partially offset by lower SG&A expenses. The adjusted effective tax rate in the quarter was 23.4% higher than the prior year due primarily to geographic mix and favorable discrete items which occurred in last year's third quarter.

Net income in the quarter was $202.4 million and earnings were $2.02 per diluted share, reflecting the lower anticipated volume. Capital expenditures for the first nine months totaled $290.5 million, while depreciation and amortization totaled $410.7 million. Year-to-date, our capital expenditure spending has been higher than anticipated primarily due to timing of our investments within the AST segment. We still expect our full year capital expenditures to be approximately $330 million. Total debt increased slightly in the third quarter to just over $3 billion, reflecting borrowings to fund a few small acquisitions and share repurchases.

Total debt-to-EBITDA is slightly over 2.3x gross leverage. Free cash flow in the first nine months of the year was $263 million. Free cash flow was limited by higher-than-planned capital spending mainly due to timing and higher levels of inventory. With continued pressure on working capital, in particular, inventory and now accounts receivables, we now anticipate the free cash flow for the full year will be about $500 million or a reduction of about $100 million based on our last guidance. With that, I will turn the call over to Dan for his remarks.

[Daniel Carestio, Chief Operating Officer at STERIS]

Thanks, Mike, and good morning, everyone. Thank you for taking the time to participate in our third quarter call. I will cover a few highlights from the quarter and then address our revised outlook for the fiscal year. Starting with health care. The segment grew 10% on a constant currency organic basis in the quarter. This was driven by high-teens growth in capital equipment, in particular, improved shipments in our IPT business were driven by operational and supply chain improvements in core washing and steam products.

In addition, we saw double-digit revenue growth in our surgical products. Our main supply chain issue continues to be with electronic components. We are working hard to resolve these issues. And as we have discussed, we are working with existing and new suppliers where possible to ensure the availability of parts in order to meet customer demand. The Healthcare Services business delivered double-digit constant currency organic revenue growth, driven by increased demand and improved pricing. We also saw a sequential improvement in consumables.

Consumables constant currency organic revenue grew low single digits compared with third quarter of last year. Supporting that growth, U.S. procedure volumes improved in the quarter, with recovery outside the U.S. still lagging. The underlying dynamics of our Healthcare segment remains very favorable. Hospital capital spending remained stable as evidenced by our healthcare backlog, which totaled over $500 million at the end of the quarter.

Orders for the quarter remain at approximately a 60-40 split for replacement in large projects, and we are not seeing any order cancellations at this time. Although we still have some delays, our capital shipments have improved dramatically from prior quarters. Approximately $30 million in capital equipment shipments were delayed into the fourth quarter. Overall, our third quarter health care performance showed nice improvement. Opportunities remain from a supply chain perspective, which we anticipate will take some time to fully work through. Our expectations for the fourth quarter reflect a conservative outlook on how quickly we can recover from these challenges and difficult comparisons in AST and Life Sciences.

Our AST segment grew 7% on a constant currency organic basis. Despite a reduction in demand for bioprocessing disposables and delayed shipments from MevX, our capital equipment business. On the bioprocessing side, our second quarter this year was a peak level for biopharma within AST. We are hearing from customers that they are resetting their expectations due to a reduction in vaccine production. Importantly, we are not seeing declines in total revenue at this time, but rather a flattening of growth.

Positively, we anticipate that our core medical device customers will benefit from improvement in procedures which we expect will help AST continue to perform at historic levels. Regarding MevX, a large ebeam capital equipment order of approximately $10 million was delayed into Q4 as our customer was not ready to receive the unit. Turning to Life Sciences, constant currency organic revenue was down about 1% for the quarter with declines in capital equipment and consumables somewhat offset by growth in service.

The same factors impacting the bioprocessing demand in AST are also impacting our life sciences consumables volume. In addition, we have difficult comparison with strong consumables growth in the third quarter of last year. That said, we do anticipate that this is a matter of timing as cell and gene therapies continue to increase in demand, which should help offset the reduction in vaccine production. We remain confident in the long-term growth drivers within the customer base for both AST and the Life Science segments.

In addition, Life Sciences had an unanticipated shipping challenge out of Europe that limited capital equipment growth in the quarter by about $10 million. Positively, backlog remains at near historic levels at over $100 million. Dental increased 1% on a constant currency organic revenue basis in the quarter. Procedure volumes remain at approximately 95% of pre-COVID levels due to the broader economic pressures impacting consumer spending.

Based on market data, STERIS is performing better than market and benefiting from pricing and modest share gains. As you heard from Mike, gross margins remain under pressure as anticipated. Despite the impact of lower gross margins and increased pressure from foreign currency, we held EBIT margins about flat in the quarter as SG&A was lower than planned, largely driven by lower incentive compensation. With added pressure on interest rates and taxes, our adjusted earnings per diluted share for the quarter came in at $2.02. As a result of our performance to date and our expectations for the fourth quarter, we are revising our full year guidance.

As reported revenue is now anticipated to grow 6% compared with prior expectations of 8% growth. Based on foreign currency forward rates through March 31, 2023, currency is now anticipated to negatively impact revenue by approximately $110 million this fiscal year, a decline from expectations of approximately $150 million. Constant currency organic revenue is now anticipated to grow approximately 7% compared with prior expectations of 10%.

With one quarter left, this revision and outlook implies the challenges which limit our performance in the third quarter to continue. Reflecting on the lower revenue, adjusted earnings per diluted share are now anticipated to be in the range of $8 to $8.10. Our long-term expectations for the business remain unchanged. We continue to be very strongly confident and believe that STERIS is capable in generating mid- to high single-digit constant currency organic revenue growth and double-digit earnings growth into the future. With that, I will turn the call back over to Julie to open up for Q&A.

[Julie Winter, Investor Relations at STERIS]

Thanks, Dan and Mike, for your comments. Jamie, if you give the instructions, we can open up for Q&A.

Questions and Answers

[Operator]

[Operator Instructions] Our first question today comes from Dave Turkaly from JMP Securities. Please go ahead with your questions.

[Dave Turkaly, Analyst at JMP Securities]

Great. Thanks. Hi. I just wanted to confirm something here, Dan. So you called out $30 million in delayed capital shipment in healthcare, I think, and then $10 million from AST and then $10 million, I think, from Life Science. So if I look at those and add them up and get to 50, I mean that seems to be about -- the mix might have been different, but about what you were shy of the Street. Are we thinking about that correctly?

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes, you are, Dave. That's correct.

[Michael Tokich, Chief Financial Officer at STERIS]

Dave, I would also add in there the reduction in bioprocessing was another $10 million roughly, and that was split about evenly between AST and Life Sciences, just so that we're all on the same page.

[Dave Turkaly, Analyst at JMP Securities]

No, I appreciate that. And I guess one for Dan, too. I mean, obviously, the good news is this is not a common occurrence with you guys. But if we look at this, I think it even said growth in bioprocessing customers, but you explained that the vaccine was the main driver. But how does that sort of -- I guess, what is the lead time there? How does it sort of maybe sneak up probably not the right word, but on use of that, we didn't know this last quarter, and now we do.

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes. So let me give you a little background. So our customers are typically at least in AST, where we took the biggest hit are typically the manufacturers of single-use technologies that are sterile technologies that are used in aseptic manufacturing for vaccines and biopharmaceuticals. What we saw -- what we have seen for the last couple of years is high double-digit growth on a year-over-year basis in that sector within AST. It's been one of our larger growers. And depending on the quarter, it's contributed anywhere from 1.5% to 2.5% growth on top of the normal growth that we've seen in AST.

That peaked in Q2, which would be at the end of the summer, early fall, which would be logical going into high vaccine production sort of season. Our customers had built a lot of inventory, and with the slowdown in either vaccine reluctancy or just vaccine production in general, they were stranded with a lot of inventory. And consequently, our volumes in Q3 went down significantly. So we started to see it in the beginning of Q3. At that point, there's nothing we could do to adjust. And we think this is something that will work its way through as the inventories burn down. And the underlying supporting growth for single-use technologies and bioprocessing remains. It's -- once we work through the tough comparison of the vaccine spike that was anticipated.

[Dave Turkaly, Analyst at JMP Securities]

Thank you.

[Operator]

And our next question comes from Matthew Mishan from KeyBanc. Please go ahead with your questions.

[Matthew Mishan, Analyst at KeyBanc]

Hi, good morning Dan. Good morning Julie. I just wanted to take a step back, Dan, can you just -- could you just kind of frame for us what you think the normalized growth profile for Steris is over the next several years? I imagine you really don't think it's a 10%, 11% grower, and where you're coming in this year is probably more in line with what kind of longer term, how you look at the business?

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes. I mean, our stated objective is to grow high single digits on the top line and low double digits on the bottom line. And we believe with a high degree of confidence, that's something we can continue to do even in the current market conditions over the long haul.

[Matthew Mishan, Analyst at KeyBanc]

And then as you think about going out to next year versus that high single digits, what looks, I guess, better or worse? As you think about next year?.

[Daniel Carestio, Chief Operating Officer at STERIS]

Well, Matt, we've got to get through Q4 at this point. And so we're not doing any guidance for next fiscal year. A few comments I would say that are -- this is preliminary, but encouraging is -- and you've heard some of our other med tech peers mention that they're optimistic about procedural recovery in the second half of the calendar year. We believe things started in Q3 to recover back to pre-covid levels in healthcare, particularly in the U.S., it's still lagging pretty significantly outside of the U.S. But assuming that holds and improves in the second half of the calendar year, since we're largely a procedure-driven company, that would be beneficial to us.

[Michael Tokich, Chief Financial Officer at STERIS]

And Matt, I would just also add, obviously, our backlog remains at least at healthcare at record levels and within Life Sciences near record levels. And you have seen that we are getting through some of the supply chain constraints we did ship more sequentially. That $30 million of capital deferral in healthcare was $60 million last quarter. We are seeing progression there. So that does give us -- as we look out further, more confidence for next year.

[Matthew Mishan, Analyst at KeyBanc]

Okay. And I guess just the last one, just on the order environment. I mean your backlog did go up sequentially. It typically does on a seasonal basis. But as you're shipping out more from supply chain improving, but how should we think about the order environment and your ability to replenish those?

[Daniel Carestio, Chief Operating Officer at STERIS]

It's remained very strong at this point, which I know is a bit in the face of everything we read about the financial performance of a lot of the hospital systems these days. But they seem to be still willing to significantly invest in the future capacity requirements, for procedures. And keep in mind, largely everything that we sell in terms of capital into hospital systems, it's almost like infrastructure in order for them to perform at a higher rate of sort of volume they've got to have more sterilizers. They've got to have more washers. They have to have more OR tables and like. So I think our equipment is -- it's not a luxury, it's a utility in many respects.

[Matthew Mishan, Analyst at KeyBanc]

I will jump back in the queue. Thanks guys.

[Operator]

Our next question comes from Jacob Johnson from Stephens. Please go ahead with your questions.

[Jacob Johnson, Analyst at Stephens]

Hi, thanks. Good morning. A couple on the bioprocessing market. First, Mike, if I heard you correctly, $10 million headwind in 3Q. Is that the right way to think about 4Q? And then as I kind of listen to what your customers are talking about, they're seeing some near-term headwinds from COVID, but -- and inventories, but they're kind of looking to the back half of this calendar year where things will normalize again. Is that maybe the right way to think about it for you all? Or is there some kind of lag in terms of what they're seeing versus when the demand comes to you all?

[Michael Tokich, Chief Financial Officer at STERIS]

I think what you're going to see as it relates to bioprocessing is you're going to see pretty tough comps leading up to Q2 of this past year, the year that we're currently in. So I think as we burn those down and get back to what is the normalized growth rate for bioprocessing, which is still in the mid- to higher double digits, but it's going to take some time to burn through the inventory and to burn through what was a spike in vaccine production demands.

[Jacob Johnson, Analyst at Stephens]

Okay. Thanks for that. And then my follow-up, which you may have answered about [indecipherable], just on the AST side of things, the slowdown due to COVID impact any of your kind of capital allocation plans, especially as I think about X-ray capacity.

[Daniel Carestio, Chief Operating Officer at STERIS]

No. I mean it's -- we're obviously looking at our capital spending and adjusting the timing of when we build and add this -- the infrastructure into our capacity. The market and just the inconvenience of supply chain and construction has helped us defer capital a bit just because it's been a challenging time to build anything. But no, our plans remain largely unchanged. Maybe different prioritizations of what comes online first. But other than that, the projects are still in play, and we're very confident about those.

[Jacob Johnson, Analyst at Stephens]

Got it. I will leave it there. Thanks.

[Operator]

Our next question comes from Mike Matson from Needham & Company. Please go ahead with your question.

[Mike Matson, Analyst at Needham & Company LLC]

Yeah, good morning. Thanks for taking my question. I want to ask one about the backlog in healthcare, I understand you don't want to give guidance for '24 yet, but just not -- without specifying a time frame, I guess, it just seems like you kind of expected some above-normal growth this year and given the backlog and that didn't happen mainly because of the supply chain, I guess. But is there still potential for you to as you catch up on sort of that backlog to see above normal growth in the healthcare business at some point.

[Daniel Carestio, Chief Operating Officer at STERIS]

What I would -- yes, at some point, and we're not defining that point at this time. We expect sequential improvement in our capital shipments as we look to the quarter that we're in currently. And as we look into next fiscal year, we continue to believe things are improving, and that would lead one to believe that we will deliver a disproportionate amount of capital in that backlog in the first half of the year, but we have not modeled that out, and we have not done our planning yet on that.

[Mike Matson, Analyst at Needham & Company LLC]

No, I understand. And then just as far as pricing, I mean, good to see that's the 300 basis points, again, without asking for a specific number for '24, but just I'm wondering about the sustainability of kind of that higher level of price increases. Is that with your contracting and everything that's in place? I mean, is that something that's got some legs to it that could continue for a while? Or is it more like a one-year bump and then kind of goes back to like normal levels.

[Daniel Carestio, Chief Operating Officer at STERIS]

I think that largely is determined by what happens or continues to happen with inflationary pressures. To the extent that we need to push through pricing, and it makes sense to do so in order to protect our margins and still remain competitive in the marketplace, that's something that we'll do and we have always done consistently at STERIS.

[Mike Matson, Analyst at Needham & Company LLC]

Okay. Got it. And then my final question is just on the AST business. just given what's happened with your primary competitor there with all the EO litigation and everything. I wanted to see if you've seen any -- I'm not asking about the litigation specifically, but just have you seen any kind of movement away from them or any impact on your business because of what's happened with them?

[Daniel Carestio, Chief Operating Officer at STERIS]

No, I wouldn't say so. I mean the current situation in the industry is the capacity is pretty tight, especially as it relates to ethylene oxide here in the U.S. So we have strong partners across med tech, and we're always striving to take a little more share of wallet wherever we can do that.

[Mike Matson, Analyst at Needham & Company LLC]

Okay, got it. Thank you.

[Operator]

Our next question comes from Jason Bednar from Piper Sandler. Please go ahead with your question.

[Jason Bednar, Analyst at Piper Sandler Companies]

Hi, good morning. Thanks for taking our questions. First one, I'll follow up on Matt Mishan's question earlier, but maybe take a different stab at this. I wanted to come back to some questions around guidance. A lot of things that are understandably outside your control, we've seen that here this year. But guidance is in your control, and this is the second time in three quarters where we've seen guidance lowered. So, since we're sitting just a few months away from fiscal '24 guidance, I guess, what learnings can you say that you've taken from this year that can help inform how you set your outlook for fiscal '24? And then I know a few others have asked, but I guess, just any early puts and takes we should be considering as we work through our models for next year, particularly on the equipment side?

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes, Jason, I'll make one comment, and then I'll let Mike add a few comments as well. I think we came into the year when we did our planning in our guidance with an awfully large backlog. And just -- and we're under the impression, because we had navigated COVID incredibly well at that point relative to supply chain and we really got -- we got tripped up pretty bad in Q1. And it exposed some vulnerabilities in our supply chains across our manufacturing network. What I can tell you is we're a lot more resilient now and we have a much better eye and a much better strategic focus on managing those supply chains and having much more resiliency, and I believe that will carry forward into next year. Now, having said that, just because you roll into the year with a large backlog, I think we need to be a little more cautiously optimistic and a little more metered in our expectations of how quickly that will shift.

[Michael Tokich, Chief Financial Officer at STERIS]

Yes. I think surgical procedure volume was the other thing that we anticipated was going to be much higher this year. And obviously, everybody knows how that is playing out, although from a favorability standpoint, we have seen some improvement in Q3 in the U.S. in particular. But again, there is just so many moving pieces here. And to Dan's point, I think conservatism at the end of the day is the norm for us, and we have put out an outlook for the fourth quarter that we believe is conservative in nature, based upon the facts that we continue to work with throughout the year.

[Jason Bednar, Analyst at Piper Sandler Companies]

All right. Very helpful, and that's good to hear. Okay. Then maybe one on free cash flow. I mean, we saw the pretty sizable reduction. I know we're talking, I think, some round numbers here, $500 million versus $600 million. But that is a much bigger drop than what's implied just from the EPS cut. I think, Mike, you mentioned some comments there around inventory running higher, receivable collections running lower. Maybe could you bucket those two? And does that reverse as we start thinking towards free cash flow then for next year, does working capital work lower?

[Michael Tokich, Chief Financial Officer at STERIS]

Yes. I would say that if we go back to the beginning of the year, we anticipated about $675 million in free cash flow. And obviously, we're down to $500 million. And I would bucket though, that inventory and receivables two-thirds, one-third. Inventory is remaining elevated. Obviously, as we have not been able to ship at the rates we anticipated, we are carrying more inventory, as we've talked many times the last couple of quarters. We continue to fill our manufacturing slots. So we're building, building, building, waiting for that golden screw. But that golden screw doesn't come, that product remains in inventory until we ship it. So, inventory has continued to be elevated. And then on the receivables side, it's not our inability to collect. It's just the timing of collections. We have about just under a 60-day DSO that we have collected. So, originally, we anticipated shipping earlier or more product in the third quarter. That has shifted to the fourth quarter, which pushes collections into the first quarter. So, free cash flow isn't lost. It's just more of a timing issue.

[Jason Bednar, Analyst at Piper Sandler Companies]

Okay. All right. Makes sense. I'll hop back in queue. Thanks so much.

[Operator]

[Operator Instructions] Our next question comes from Michael Polark from Wolfe Research. Please go ahead with your question.

[Michael Polark, Analyst at Wolfe Research]

Hi, good morning. Thank you. I want to follow up on bioprocess and AST and trying to put together some math, Dan, that you mentioned earlier in the Q&A. So, at one point, not long ago, it was contributing 1.5 points to 2 points of growth to the segment. I also heard that it's been growing high-double digits, which I would interpret as 16% to 20%. So, if I put those two data points together, bioprocess as a portion of total and AST is 10%. Is that a ballpark? The question is --

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes, ballpark. Maybe slightly less, but you're in the range.

[Michael Polark, Analyst at Wolfe Research]

Okay. The follow-up also AST. The Mevex $10 million slippage, I know this is a recent acquisition. It's been lumpy quarter-to-quarter. I had $10 million of revenue from this in the year-ago quarter. And now, you're calling -- while you were annualizing it in the numbers and now you're calling out a $10 million slippage out of this quarter, which I would interpret as Mevex was at or near zero in the quarter. So, the question is, what is the revenue headwind from this equipment line in AST year-on-year?

[Michael Tokich, Chief Financial Officer at STERIS]

Yes. Your math is about right. And in total, we're somewhere between $25 million and $30 million for the full year for Mevex. But yes, you're exactly right, Mike. It was near zero. So, that full $10 million is flipped from one quarter, third quarter to the fourth quarter. And again, it's the timing. It is lumpy, unfortunately. I know that AST has in the past been much more predictable for us, but Mevex has hurt us twice now with shipping issues.

But if you add the Mevex shipping issues, you take the biopharma processing, you're back to somewhere in the low-teens growth for AST. So, the trajectory hasn't changed dramatically, but it's the timing that is the concern, I think, from everybody's standpoint.

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes. Just to add to that, Mike, those systems for Mevex can be anywhere from $5 million or $6 million to $12 million, and they're large build systems with lots of conveyance and complicated electronics and control systems. And we rely on our customers to have the infrastructure in place before we can come install. And sometimes there's change in scope and sometimes, there's just delays in construction. So, it's as much as we try to stay on top of it and help project manage. Ultimately, it's in the hands of our customer as to when we can deliver.

[Michael Polark, Analyst at Wolfe Research]

Those two for me. I would hop back in queue and ask a few more, but I guess -- maybe I'll do that and come back in. So, thank you.

[Michael Tokich, Chief Financial Officer at STERIS]

You're welcome.

[Operator]

And our next question is a follow-up from Matthew Mishan from KeyBanc. Please go ahead with your question.

[Daniel Carestio, Chief Operating Officer at STERIS]

You there, Matt?

[Matthew Mishan, Analyst at KeyBanc]

Yes, sorry about that. I guess, we're going to be doing some follow-ups on this call. Just first on the consumables, the low-single digit growth you saw, kind of -- it's been lagging or like flat to low-single digit, maybe even a little bit of declining in a couple of quarters ago. Kind of what's your sense of hospital inventory of your consumables? Is it pure volumes, or has there been some destocking that's going on as well?

[Daniel Carestio, Chief Operating Officer at STERIS]

I think it's purely procedural volume-driven. They don't hold a lot of this, because it's heavy, it's bulky. It takes up a lot of space. So, it's not something that would carry a lot of excess inventory of.

[Matthew Mishan, Analyst at KeyBanc]

And is it across the board from core STERIS, Cantel, Key Surgical, or is there a little bit of mix change in pieces of the business that may be lagging versus others?

[Daniel Carestio, Chief Operating Officer at STERIS]

Being given[phonetic] is a really complex stratification of this. But in the end it is not really anyone particular piece described in one way or another, so I wouldn't say it's a mix issue. It's purely procedure-driven, certain procedures in terms of where we have a little more exposure with our endoscopy products, obviously, to endoscopy procedure rates. But generally speaking, it's all procedurally-driven demand.

[Matthew Mishan, Analyst at KeyBanc]

Okay. And then.

[Julie Winter, Investor Relations at STERIS]

We are heavy U.S. Right, compared to lot of other healthcare company, we're 80% U.S. in what we do. So, the trends here have the biggest impact on our performance.

[Matthew Mishan, Analyst at KeyBanc]

And then back to AST, I mean, does this open some capacity for AST with some slower growth in bioprocessing? I guess -- and my sense would be you could fill that fairly quickly if -- because there's like the shortage through the industry.

[Daniel Carestio, Chief Operating Officer at STERIS]

Yes. Well, keep in mind, all single-use technologies for bioprocessing only run in radiation, so not ethylene oxide, where there's real significant shortage. And really, the phenomena is, if we're running with a lot of product backlog, especially as we come up to the holiday seasons, in a typical year in AST, we would starve out our plants. So, we'd shut down a day or two and you either do it the Christmas week or you end up starving out, because it takes customers a longer time to start up production, because they've shut down factories before you see their supply chain start to flow in early January. In the case of the last couple of years, we've been sitting on so much backlog demand in bioprocessing that we ran at a number of our plants straight through the holidays, 24/7, 365. So, not doing that in this year's case; it's basically straight drop-through because of the high fixed cost model at AST.

[Matthew Mishan, Analyst at KeyBanc]

Okay. And then, Mike, if I'm looking at the balance sheet, right, it looks like the debt -- you've generated cash flow through the course of this year, even with the working capital build. Why -- I guess, why has the debt balance gone up? And why not pay some of that down to lower interest expense?

[Michael Tokich, Chief Financial Officer at STERIS]

Yes. So, the debt balance went up primarily for two reasons. One, we did some minor acquisitions, some tuck-ins that we paid cash for during the quarter. And then we continued to fulfill our dilution offset for share repurchases. And then we also were opportunistic during the quarter on the share repurchase side just due to the overhang that we were facing with the EO situation. So, in total, we spent about $88 million in the quarter on share repurchases and then another $50 million to $75 million of cost force acquisitions. So, those are the two main drivers that changed our profile of debt. We still are within the leverage ratio that we are very comfortable in. We're just over 2.3 times. We did pay off during the quarter a private placement note that was due, which was about $91 million. So, we actually just borrowed -- it was fixed versus floating. So, our interest rate ticked up just a tiny bit. Our average interest rate is just under 4%, as we sit here today.

[Matthew Mishan, Analyst at KeyBanc]

And then how much is left on your authorization for share repurchase?

[Michael Tokich, Chief Financial Officer at STERIS]

About $160 million remains under the current authorization.

[Matthew Mishan, Analyst at KeyBanc]

Okay. Thank you very much.

[Michael Tokich, Chief Financial Officer at STERIS]

You're welcome, Matt.

[Operator]

And our next question is also a follow-up from Michael Polark from Wolfe Research. Please go ahead with your follow-up.

[Michael Polark, Analyst at Wolfe Research]

Hi thank you. Just two. In Healthcare capital, given the supply chain strains, are you fully competing for new orders, or has the supply chain challenges impacted your kind of -- your ability to bid for new business?

[Michael Tokich, Chief Financial Officer at STERIS]

We're still fully competing. And you got to think of it this way. These are generally -- a significant portion of our business is long-term projects. And then the other portion is replacement, and that's largely replacement of equipment that we already have placed in the marketplace. So, if we have a longer term in terms of delivery for replacement unit, we tend to be able to work with the customer and manage that through our service arrangements and service contracts until we can replace that with a new system.

[Michael Polark, Analyst at Wolfe Research]

Makes sense. And the last one. The few small acquisitions in the quarter, anything to flag there? In what business segments and any revenue that we -- even if minor, any revenue that we should consider for our bridge work over the next year or so? Thank you.

[Julie Winter, Investor Relations at STERIS]

We called those out in the Q last night, Mike, some Healthcare and AST really small deals in some cases, buying out a former distributor, for example, where there's really no change in revenue to the company, but we're choosing to go direct to markets opportunistically.

[Michael Polark, Analyst at Wolfe Research]

Okay. Thank you so much.

[Operator]

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Julie Winter for any closing remarks.

[Julie Winter, Investor Relations at STERIS]

Thanks, everybody, for taking the time to join us this morning. If anyone would still like to chat, please let me know, and I'll be happy to do my best to accommodate you. Take care.

Participants

Corporate Executives

• Julie Winter, Investor Relations
• Michael Tokich, Chief Financial Officer
• Daniel Carestio, Chief Operating Officer

Analysts

• Dave Turkaly, JMP Securities
• Matthew Mishan, KeyBanc
• Jacob Johnson, Stephens
• Mike Matson, Needham & Company LLC
• Jason Bednar, Piper Sandler Companies
• Michael Polark, Wolfe Research