Fitch has affirmed
The 'BBB' IDR reflects the company's comprehensive product offering in infection prevention and leading national positions in its health care segment offset in part by a narrower product and geographic focus compared to other 'BBB' rated peers.
In addition, Fitch has assigned a 'BBB' rating to the senior unsecured revolver and term loans co-issued by
Key Rating Drivers
Growth Oriented; Moderately Diversified: STERIS's business model provides a broad and comprehensive selection of infection prevention and procedural products and services to hospitals, dental practitioners, medical device manufacturers and pharmaceutical production. The company's expanded product offering positions the company to meet more customer needs for the growth areas in health care, including procedures, devices, vaccines, biologics and dental and support at least mid-single digit growth profile over the long term.
The two relatively recent acquisitions of Cantel and Key Surgical better position the company to pursue growth in international markets. The acquisition of Cantel also increased the company's presence in endoscopy and creates the broadest infection prevention offering for national hospital providers. Cantel's dental business offers a new customer base for STERIS. However, Fitch views STERIS to be less diversified than comparably rated peers in terms of products and geographies.
Recurring Revenue Supports FCF: The company generate roughly 80% of revenue through recurring products and services, helping to support consistent EBITDA and FCF margins. In addition, backlogs increased by 68% at
Leverage Moderating: Fitch expects STERIS's leverage will decline towards 2.7x by FYE 2022 assuming realization of stated synergies and, revenue growth. This compares to leverage of approximately 3.0x at closing after the issuance of an additional
Acquisitive Posture: Fitch expects STERIS to maintain an acquisitive posture. The company has been a consolidator in the space but has been mindful of its balance sheet in the process. The use of equity to partially finance larger deals and a history of debt reduction following leveraging transactions supports this view. Fitch expects STERIS to maintain gross debt/EBITDA around 2.5x at the 'BBB' IDR. Leverage may fluctuate below this level during periods without M&A and above when consummating M&A, but anticipate the company will continue to deleverage following deals. Fitch also expects that STERIS will periodically prune its portfolio by divesting non-core assets, as evidenced by the divestiture of its Renal Business.
Increasing Material and Labor Costs: Fitch expects STERIS will continue to face supply chain and other input costs challenges in the near term. The company will work to mitigate these issues by exacting higher cost synergies from the Cantel integration and operational efficiency improvements. Higher costs of labor, transportation and supplies have been the primary drivers of the headwinds, although STERIS has managed to service its customers.
Coronavirus Impact Net Positive: The essential nature of STERIS's products presented both benefits and challenges to product demand during the pandemic and acquired revenue resulted in the solid growth for calendar year 2021. As there is a sizeable component of procedural-based demand in the health care segment (63% of pro forma revenue), deferred elective procedures can dampen revenue.
The Life Sciences and Applied Sterilization Technologies (AST) segments experienced increased demand for products and services focused on vaccines and biologics as well as testing materials and personal protective equipment. Heightened focus on infection prevention and sterilization post-pandemic coupled with expected business demand normalization through the company's FY 2022 should allow for the company to return to at least mid-single digit organic growth.
Derivation Summary
The ratings of STERIS's medical device peers,
Parent Subsidiary Linkage
The approach taken is a weak parent (
The approach taken is a weak parent (
Key Assumptions
COVID Impact mixed across segments with increased demand for infection prevention and sterilization products/services largely in health care end markets offset some pressures in medical device end markets and lower demand for capital equipment;
Mid- to high-single digit combined organic revenue growth largely driven by end market tailwinds, and some new product introduction;
EBITDA margins increase during the next two years, as the company extracts some operating costs; assumes
Assumes acquisitions resume in FY 2023; share repurchases at least to offset dilution;
FCF margins of mid single-digit to high single-digits, improving largely from stronger EBITDA margins.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
STERIS increases diversification through both product lines and geographic expansion, which would likely entail some M&A, while consistently maintaining gross debt/EBITDA below 2.5x;
STERIS exhibits strong operating performance and durable FCF, resulting in (cash from operations-capex)/debt at or above 15%.
While Fitch's forecasts indicate STE has the capacity to exceed these sensitivities, positive momentum would be governed by the expectation that the issuer would maintain these levels through-the-cycle due, in part, to a less acquisitive posture.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
STERIS operates with gross debt/EBITDA sustained above 3.0x, possibly due to sustained operational deterioration or a more aggressive capital deployment strategy;
STERIS fails to generate stable operating performance and FCF materially and durably deteriorates resulting in (cash from operations-capex)/debt sustained below 10%.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Liquidity Solid: STERIS has a solid liquidity profile at
Maturities Laddered: STERIS generally has a well-laddered maturity schedule, with
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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