Fitch has affirmed STERIS plc (STERIS), STERIS Limited and STERIS Corporation's Issuer Default Ratings (IDRs) at 'BBB', all with Stable Rating Outlooks, as well as the 'BBB' ratings of their unsecured debt.

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 STERIS plc, STERIS Limited, STERIS Irish FinCo Unlimited Company and STERIS Corporation. The ratings also reflect the company's post-acquisition leverage and sufficient financial flexibility. Fitch expects leverage will be between 2.0x and 3.0x depending on acquisitions and settle around 2.5x as Fitch believes the rationale for strategic M&A will remain intact.

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 Dec. 31, 2021. STERIS's services offering and long-term customer relationships and contracts also provides stickiness for the business. Fitch expects the combined company to generate EBITDA margins around 27%-30% and FCF margins between 8%-10% in fiscal years 2022-2023. Health care providers will remain the company's largest customer group, and the acquisition of Cantel should help STERIS achieve integration synergies, supporting the assumption for stable EBITDA margins.

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 $2 billion of debt and 2.1x at Dec. 31, 2020. Fitch views STERIS's cost synergy guidance of $110 million with roughly half achieved in the first two years to be achievable. This view is supported by management's track record with realizing cost synergies and reducing leverage after previous acquisitions, albeit ones not as large. The capital structure allows for continued flexibility to sufficiently invest, both internally and externally, while maintaining the 'BBB' IDR.

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

STERIS plc (BBB/ROS) is a leading provider of infection prevention and procedural products and services. While STERIS has leading national scale and global reach, it is smaller and has a narrower focus than its largest medical device competitors. STERIS's demand is normally relatively reliable although somewhat sensitive to the macroeconomic environment and procedure volumes.

The ratings of STERIS's medical device peers, Zimmer Biomet Holdings, Inc. (BBB/ROS) and Boston Scientific Corp. (BBB/ROP), are considered in the analysis but product offerings vary widely across the group and these issuers have greater global scale. Fitch also considers peers PerkinElmer, Inc. (BBB/ROS) and Bio-Rad Laboratories, Inc. (BBB/ROS) given similar scale and highly recurring revenue sources, but notes greater end market diversification among these diagnostic peers. Fitch looks for all of these peers to maintain gross debt/EBITDA between 2.5x-3.0x.

Parent Subsidiary Linkage

The approach taken is a weak parent (STERIS plc)/strong subsidiary (STERIS Corporation). Using Fitch's PSL criteria, Fitch concludes there is open ring fencing and open access & control. As such, Fitch rates the parent and subsidiary at the consolidated level with no notching between the two.

The approach taken is a weak parent (STERIS plc)/strong subsidiary (STERIS Limited). Using Fitch's PSL criteria, Fitch concludes there is open ring fencing and open access & control. As such, Fitch rates the parent and subsidiary at the consolidated level with no notching between the two.

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 $110 million of synergies over four years, with 50% achieved in first two years;

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Solid: STERIS has a solid liquidity profile at Dec. 31, 2021, with $359 million of cash on hand and $1.2 billion availability on its $1.25 billion unsecured committed revolver due March 2026. Stable FCF generation and access to liquidity should be sufficient to support operating requirements, capex and common dividends. The company generated $253 million in FCF for the LTM period, ended Dec. 31, 2021.

Maturities Laddered: STERIS generally has a well-laddered maturity schedule, with $128 million maturing in 2022, $60 million in 2023 and $158 million in 2024. Fitch expects some debt reduction through term loan amortization and some private placement repayment upon maturity, depending on the level of M&A activity.

Issuer Profile

STERIS plc (STE) is a leading provider of infection prevention and procedural products and services, focused primarily on the health care, pharmaceutical and research and medical device markets. STERIS generates about $4 billion in revenue, with 80% coming from recurring sources and 20% coming from capital equipment (sterilizers, surgical tables). The company reports in four segments, health care (62% of revenue), applied sterilization technologies (AST; 19%), life sciences (11%) and dental (8%).

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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