Quarterly Report (10-q)

Date : 02/11/2019 @ 10:11PM
Source : Edgar (US Regulatory)
Stock : STERIS plc (STE)
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Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2018
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 1-37614
STERIS plc
(Exact name of registrant as specified in its charter)

England and Wales
 
98-1203539
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
Rutherford House Stephensons Way Chaddesden, Derby, England

 
DE21 6LY
(Address of principal executive offices)
 
(Zip code)
44 1332 387100
(Registrant’s telephone number, including area code)
____________________________________________________
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 (§232.405 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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or “emerging growth company,” and Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   x
  
Accelerated Filer   o
Non-Accelerated Filer   o

  
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
The number of ordinary shares outstanding as of February 8, 2019 : 84,587,442

1


STERIS plc and Subsidiaries
Form 10-Q
Index
 


2


PART 1—FINANCIAL INFORMATION
As used in this Quarterly Report on Form 10-Q, STERIS plc and its subsidiaries together are called “STERIS,” the “Company,” “we,” “us,” or “our,” unless otherwise noted.

ITEM 1.
FINANCIAL STATEMENTS

STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
December 31,
2018
 
March 31,
2018
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
224,906

 
$
201,534

Accounts receivable (net of allowances of $10,161 and $12,472, respectively)
 
509,859

 
528,066

Inventories, net
 
227,626

 
205,731

Prepaid expenses and other current assets
 
58,132

 
54,326

Total current assets
 
1,020,523

 
989,657

Property, plant, and equipment, net
 
989,044

 
1,010,524

Goodwill and intangibles, net
 
2,945,214

 
3,160,764

Other assets
 
51,609

 
39,389

Total assets
 
$
5,006,390

 
$
5,200,334

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
136,723

 
$
135,866

Accrued income taxes
 

 
379

Accrued payroll and other related liabilities
 
79,598

 
94,000

Accrued expenses and other
 
181,698

 
168,217

Total current liabilities
 
398,019

 
398,462

Long-term indebtedness
 
1,246,308

 
1,316,001

Deferred income taxes, net
 
153,158

 
159,971

Other liabilities
 
96,598

 
108,600

Total liabilities
 
$
1,894,083

 
$
1,983,034

Commitments and contingencies (see Note 8)
 

 

Preferred shares, with £0.10 par value; 100 shares authorized; 100 issued and outstanding
 
15

 
15

Ordinary shares, with £0.10 par value; £17,006 shares aggregate par amount authorized; 84,570 and 84,747 ordinary shares issued and outstanding, respectively
 
2,018,045

 
2,048,037

Retained earnings
 
1,253,501

 
1,146,223

Accumulated other comprehensive (loss) income
 
(167,025
)
 
11,685

Total shareholders’ equity
 
3,104,536

 
3,205,960

Noncontrolling interests
 
7,771

 
11,340

Total equity
 
3,112,307

 
3,217,300

Total liabilities and equity
 
$
5,006,390

 
$
5,200,334


See notes to consolidated financial statements.

3


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Product
 
$
327,639

 
$
309,461

 
$
921,088

 
$
869,623

Service
 
368,599

 
352,439

 
1,092,869

 
1,034,400

Total revenues
 
696,238

 
661,900

 
2,013,957

 
1,904,023

Cost of revenues:
 
 
 
 
 
 
 
 
Product
 
182,229

 
162,611

 
500,938

 
458,467

Service
 
227,012

 
221,072

 
672,308

 
645,175

Total cost of revenues
 
409,241

 
383,683

 
1,173,246

 
1,103,642

Gross profit
 
286,997

 
278,217

 
840,711

 
800,381

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
176,099

 
159,664

 
496,817

 
469,879

Research and development
 
15,167

 
15,195

 
47,160

 
43,173

Restructuring expenses
 
26,147

 
78

 
26,147

 
156

Total operating expenses
 
217,413

 
174,937

 
570,124

 
513,208

Income from operations
 
69,584

 
103,280

 
270,587

 
287,173

Non-operating expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
10,879

 
12,461

 
34,014

 
37,610

Interest and miscellaneous expense (income), net
 
945

 
(1,117
)
 
503

 
(3,974
)
Total non-operating expenses, net
 
11,824

 
11,344

 
34,517

 
33,636

Income before income tax expense
 
57,760

 
91,936

 
236,070

 
253,537

Income tax expense (benefit)
 
9,334

 
(3,404
)
 
39,871

 
35,538

Net income
 
48,426

 
95,340

 
196,199

 
217,999

Less: Net income attributable to noncontrolling interests
 
568

 
559

 
893

 
682

Net income attributable to shareholders
 
$
47,858

 
$
94,781

 
$
195,306

 
$
217,317

 
 
 
 
 
 
 
 
 
Net income per share attributed to shareholders
 
 
 
 
 
 
 
 
Basic
 
$
0.57

 
$
1.12

 
$
2.31

 
$
2.55

Diluted
 
$
0.56

 
$
1.11

 
$
2.28

 
$
2.53

Cash dividends declared per share ordinary outstanding
 
$
0.34

 
$
0.31

 
$
0.99

 
$
0.90


See notes to consolidated financial statements.


4


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
48,426

 
$
95,340

 
$
196,199

 
$
217,999

  Less: Net income (loss) attributable to noncontrolling
  interests
 
568

 
559

 
893

 
682

Net income attributable to shareholders
 
47,858

 
94,781

 
195,306

 
217,317

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized gain on available for sale securities, (net of taxes of $0, $693, $0 and $1,179, respectively)
 

 
2,738

 

 
4,509

Amortization of pension and postretirement benefit plans costs, (net of taxes of $169, $250, $507 and $749, respectively)
 
(415
)
 
(404
)
 
(1,238
)
 
(1,212
)
Change in cumulative currency translation adjustment
 
(39,830
)
 
22,742

 
(175,502
)
 
182,422

Total other comprehensive income (loss)
 
(40,245
)
 
25,076

 
(176,740
)
 
185,719

Comprehensive income
 
$
7,613

 
$
119,857

 
$
18,566

 
$
403,036


See notes to consolidated financial statements.




5


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Nine Months Ended December 31,
 
 
2018
 
2017
Operating activities:
 
 
 
 
Net income
 
$
196,199

 
$
217,999

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
175,658

 
133,855

Deferred income taxes
 
2,218

 
(27,318
)
Share-based compensation expense
 
18,357

 
17,041

(Gain) loss on the disposal of property, plant, equipment, and intangibles, net
 
(208
)
 
819

(Gain) loss on sale of businesses, net
 
(508
)
 
12,538

Other items
 
(9,767
)
 
11,410

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable, net
 
9,318

 
15,149

Inventories, net
 
(32,083
)
 
(21,567
)
Other current assets
 
(5,816
)
 
(4,843
)
Accounts payable
 
5,119

 
(10,601
)
Accruals and other, net
 
2,092

 
(16,627
)
Net cash provided by operating activities
 
360,579

 
327,855

Investing activities:
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(113,236
)
 
(113,511
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
5,563

 
2,094

Proceeds from the sale of businesses
 
(196
)
 
8,907

Purchase of investments
 
(4,955
)
 

Acquisition of businesses, net of cash acquired
 
(13,313
)
 
(46,323
)
Other
 
(13,425
)
 

Net cash used in investing activities
 
(139,562
)
 
(148,833
)
Financing activities:
 
 
 
 
Payments on long-term obligations
 
(85,000
)
 
(22,500
)
Proceeds (payments) under credit facilities, net
 
35,416

 
(58,729
)
Deferred financing fees and debt issuance costs
 
(298
)
 
(44
)
Acquisition related deferred or contingent consideration
 
(1,277
)
 
(2,064
)
Repurchases of ordinary shares
 
(56,254
)
 
(43,851
)
Cash dividends paid to ordinary shareholders
 
(83,750
)
 
(76,633
)
Stock option and other equity transactions, net
 
7,355

 
8,005

Net cash used in financing activities
 
(183,808
)
 
(195,816
)
Effect of exchange rate changes on cash and cash equivalents
 
(13,837
)
 
17,720

Increase in cash and cash equivalents
 
23,372

 
926

Cash and cash equivalents at beginning of period
 
201,534

 
282,918

Cash and cash equivalents at end of period
 
$
224,906

 
$
283,844

See notes to consolidated financial statements.

6


STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, unless noted and except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
STERIS plc (“Parent”) was organized in 2014 under the name Solar New HoldCo Limited as a private limited company for the purpose of effecting under the laws of England and Wales the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). Effective November 2, 2015 the Parent was re-registered as a public company under the name STERIS plc and the Combination closed. As a result of the Combination closing, STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name of Synergy Health Limited.
The Company is a leading provider of infection prevention and other procedural products and services. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal ("GI") endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, 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.
Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:
Interim Financial Statements
We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.
These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2018 dated May 30, 2018 . The Consolidated Balance Sheet at March 31, 2018 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Principles of Consolidation
We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating polices, are accounted for primarily using the equity method. These investments are immaterial to the Company's Consolidated Financial Statements.
Use of Estimates
We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three and nine month periods ended December 31, 2018 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2019.
Revenue Recognition and Associated Liabilities
We adopted Accounting Standards Update ("ASU") 2014-09 “Revenue from Contracts with Customers” and the subsequently issued amendments on April 1, 2018 using the modified retrospective approach to contracts that were not

7

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



completed as of April 1, 2018. Under this standard, certain capital equipment contracts are comprised of a single performance obligation, resulting in the deferral of the corresponding capital equipment revenue and cost of revenues until installation is complete. Previously, these capital equipment revenues and cost of revenues were recognized based upon shipping terms. We recorded a cumulative effect adjustment in the beginning of fiscal 2019 to Retained earnings of $5,637 , based on the current terms and conditions for certain open capital equipment contracts as of March 31, 2018. The impact of the adoption of this standard on our Consolidated Balance Sheets at December 31, 2018 is reflected in the table below. The adoption of this standard did not have a material impact on our Consolidated Statements of Income for the quarter-to-date and year-to-date periods ending December 31, 2018 . Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
 
As Reported December 31,
Total
ASC 605 December 31,
Balance Sheet
2018
Adjustments
2018
 
 
 
 
Total assets
$
5,006,390

$
(7,714
)
$
4,998,676

Total liabilities
1,894,083

(13,809
)
1,880,274

Total equity
3,112,307

6,095

3,118,402

Revenue is recognized when obligations under the terms of the contract are satisfied and control of the promised products or services have transferred to the Customer. Revenues are measured at the amount of consideration that we expect to be paid in exchange for the products or services. Product revenue is recognized when control passes to the Customer, which is generally based on contract or shipping terms. Service revenue is recognized when the Customer benefits from the service, which occurs either upon completion of the service or as it is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Our standard return and restocking fee policies are applied to sales of products. Shipping and handling costs charged to Customers are included in Product revenues. The associated expenses are treated as fulfillment costs and are included in Cost of revenues. Revenues are reported net of sales and value-added taxes collected from Customers.
We have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances in the same period the related revenues are recorded. The reduction in revenue for these items is estimated based on historical experience and trend analysis to the extent that it is probable that a significant reversal of revenue will not occur. Estimated returns are recorded gross on the Consolidated Balance Sheets.
In transactions that contain multiple performance obligations, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each performance obligation based on its relative standalone selling price, which is the price for the product or service when it is sold separately.
Payment terms vary by the type and location of the Customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. We do not evaluate whether the selling price contains a financing component for contracts that have a duration of less than one year.
We do not capitalize sales commissions as substantially all of our sales commission programs have an amortization period of one year or less.
Certain costs to fulfill a contract are capitalized and amortized over the term of the contract if they are recoverable, directly related to a contract and generate resources that we will use to fulfill the contract in the future. At December 31, 2018 , assets related to costs to fulfill a contract were not material to our Consolidated Financial Statements.
Refer to Note 9, titled "Business Segment Information" for disaggregation of revenue.
Product Revenue
Product revenues consist of revenues generated from sales of consumables and capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer or Group Purchasing Organization ("GPO") agreement. We recognize revenue for sales of product when control passes to the Customer, which generally occurs

8

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



either when the products are shipped or when they are received by the Customer. Revenue related to certain capital equipment products is deferred until installation is complete as the capital equipment and installation are highly integrated and form a single performance obligation.
Service Revenue
Within our Healthcare Products and Life Sciences segments, service revenues consist of revenue generated from parts and labor associated with the maintenance, repair and installation of capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer, or GPO agreement. For maintenance, repair and installation of capital equipment, revenue is recognized upon completion of the service.
We also offer preventive maintenance and separately priced extended warranty agreements to our Customers, which require us to maintain and repair our products over the duration of the contract. Generally, these contract terms are cancelable without penalty and range from one to five years. Amounts received under these Customer contracts are initially recorded as a service liability and are recognized as service revenue ratably over the contract term using a time-based input measure.
Within our Healthcare Specialty Services segment, revenues relate primarily to outsourced reprocessing services and instrument repairs. Contracts for outsourced reprocessing services are primarily based on an agreement with a Customer, ranging in length from several months to 15 years. Outsourced reprocessing services revenue is recognized ratably over the contract term using a time-based input measure, adjusted for volume and other performance metrics, to the extent that it is probable that a significant reversal of revenue will not occur. Contracts for instrument repairs are primarily based on a Customer’s purchase order, and the associated revenue is recognized upon completion of the repair.
Within our Applied Sterilization Technologies segment, service revenues include contract sterilization and laboratory services. Sales contracts for contract sterilization and laboratory services are primarily based on a Customer’s purchase order and associated Customer agreement and revenues are generally recognized upon completion of the service.
Contract Liabilities
Payments received from Customers are based on invoices or billing schedules as established in contracts with Customers. Deferred revenue is recorded when payment is received in advance of performance under the contract. Deferred revenue is recognized as revenue upon completion of the performance obligation, which generally occurs within one year. During the first nine months of fiscal 2019, we recognized revenue of $25,590 that was included in our contract liability balance at the beginning of the period.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Deferred revenue balances.
Service Liabilities
Payments received in advance of performance for cancelable preventative maintenance and separately priced extended warranty contracts are recorded as service liabilities. Service liabilities are recognized as revenue as performance is rendered under the contract. Prior to the adoption of Accounting Standards Codification ("ASC") 606, these amounts were included in Deferred revenues.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Service liability balances.
Remaining Performance Obligations
Remaining performance obligations reflect only the performance obligations related to agreements for which we have a firm commitment from a Customer to purchase and exclude variable consideration related to unsatisfied performance obligations. With regard to products, these remaining performance obligations include capital equipment and consumable orders which have not shipped. With regard to service, these remaining performance obligations primarily include installation, certification, and outsourced reprocessing services. As of December 31, 2018 , the transaction price allocated to remaining performance obligations was approximately $780,000 . We expect to recognize approximately 53% of the transaction price within one year and approximately 39% beyond one year. The remainder has yet to be scheduled for delivery.

Recently Issued Accounting Standards Impacting the Company
Recently Issued Accounting Standards impacting or that may impact the Company are presented in the following table:

9

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



Standard
 
Date of Issuance
 
Description
 
Date of Adoption
 
Effect on the financial statements or other significant matters
Standards that have recently been adopted
ASU 2014-09, "Revenue from Contracts with Customers" and subsequently issued amendments
 
May 2014
 
The standard replaced existing revenue recognition standards and significantly expands the disclosure requirements for revenue arrangements.
 
First Quarter Fiscal 2019
 
Additional information is disclosed in Footnote 1 under the heading, "Revenue Recognition and Associated Liabilities".
ASU 2016-01, "Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Liabilities"
(Subtopic
825-10)
 
January 2016
 
The standard changed how equity investments are measured and presented changes in the fair value of financial liabilities measured under the fair value option. Presentation and disclosure requirements for financial instruments were also affected. Entities are required to measure equity investments that do not result in consolidation and are not recorded under the equity method at fair value with changes in fair value recognized in net income. The standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.
 
First Quarter Fiscal 2019
 
We adopted the standard on a modified retrospective basis at the beginning of fiscal 2019 and we recorded a cumulative effect adjustment to our opening retained earnings balance of $1,970 that increased retained earnings and decreased accumulated other comprehensive income.

ASU 2016-15, "Statement of Cash Flows"
(Topic 230)
 
August 2016
 
This standard provides guidance on the following specific cash flow issues: Debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.
 
First Quarter Fiscal 2019
 
We adopted this standard effective April 1, 2018. The impact will depend on the future occurrence of the relevant transactions or conditions addressed by the standard.
ASU 2016-16, "Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory"
(Topic 740)
 
October 2016
 
The standard improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new standard requires the recognition of income tax consequences resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs.
 
First Quarter Fiscal 2019
 
We adopted this standard effective April 1, 2018 with no material impact to our Consolidated Balance Sheets. The impact to our Consolidated Statements of Income will depend on the value of future intra-entity transfers.

10

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



ASU 2017-01 "Clarifying the Definition of a Business"
 
January 2017
 
The standard update narrows the definition of a business by providing a screen to determine when an integrated set of assets and activities is not a business.  The screen specifies that an integrated set of assets and activities is not a business if substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single or a group of similar identifiable assets. 
 
First Quarter Fiscal 2019
 
We adopted this standard effective April 1, 2018. The impact will depend on the future occurrence of the relevant transactions or conditions addressed by the standard.
ASU 2017-07
"Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension and Net Periodic Postretirement Benefit Cost"
(Topic 715)
 
March 2017
 
This standard requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented.
 
First Quarter Fiscal 2019
 
We retrospectively adopted the standard in the first quarter of fiscal 2019. Prior periods have been recast for the adoption of this standard. Changes have been reflected in the Cost of Revenues, Selling, general and administrative expense, and Interest income and miscellaneous expense lines of our Consolidated Statements of Income. Amounts are not considered material for additional disclosure.

                                                                                                                                        
ASU 2017-09 "Compensation - Stock Compensation" (Topic 718)
 
May 2017
 
The standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.

 
First Quarter Fiscal 2019
 
We adopted this standard effective April 1, 2018. The impact will depend on the future occurrence of the relevant terms or conditions addressed by the standard.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



 
 
 
 
 
 
 
 
 
Standards that have not yet been adopted
ASU 2016-02, "Leases"
(Topic 842)
 
February 2016
 
The standard will require lessees to record all leases, whether finance or operating, on the balance sheet. An asset will be recorded to represent the right to use the leased asset, and a liability will be recorded to represent the lease obligation. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We are currently evaluating the impact that the standard will have on our consolidated financial statements. We are also evaluating our lease portfolio, software packages, process and policy change requirements. We expect to adopt this standard using the additional, optional transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs of leases, and the transitional practical expedient for the treatment of existing land easements. We anticipate that most of our operating leases will result in the recognition of additional assets and corresponding liabilities in our Consolidated Balance Sheet, however we do not expect the standard to have a material impact on our financial position. The actual impact will depend on our lease portfolio at the time of adoption. For more information regarding our total operating lease commitments refer to Note 5, "Property, Plant and Equipment" of our Annual Report on Form 10-K for the year ended March 31, 2018 dated May 30, 2018.

ASU 2016-13, "Measurement of Credit Losses on Financial Instruments"
 
June 2016
 
The standard requires a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our consolidated financial statements.

12

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



ASU 2017-12 "Targeted Improvements to Accounting for Hedging Activities" (Topic 815)
 
August 2017
 
The standard provides targeted improvements to accounting for hedging activities by expanding an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any interim period after issuance of the standard. The standard should be applied using a modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption, and prospectively for presentation and disclosure requirements.

 
N/A
 
We do not expect this standard to have a material impact on our consolidated financial statements.
ASU 2018-02
"Income Statement - Reporting Comprehensive Income" (Topic 220)
 
February 2018
 
The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA") and requires certain disclosures about stranded tax effects. The underlying guidance requiring that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our consolidated financial statements.
ASU 2018-13 "Fair Value Measurement (Topic 820) Disclosure Framework- Changes to Disclosure Requirements for Fair Value Measurement”

 
August 2018
 
The standard modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for fair value measurements for assets and liabilities disclosed within the fair value hierarchy.  The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted.

 
N/A
 
We do not expect this standard to have a material impact on our consolidated financial statements as it modifies disclosure requirements only.
ASU 2018-14 "Compensation- Retirement Benefits - Defined Benefit Plans- General Topic (715-20): Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans"
 
August 2018
 
The standard modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for employers that sponsor defined benefit pension or other post-retirement benefit plans.  The standard also clarifies disclosure requirements for defined benefit pension plans relating to the projected benefit obligation and accumulated benefit obligation.  The standard is effective for fiscal years ending after December 15, 2019 and early adoption is permitted.

 
N/A
 
We do not expect this standard to have a material impact on our consolidated financial statements as it modifies disclosure requirements only.

13

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



ASU 2018-15 "Intangibles- Goodwill and Other- Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract"
 
August 2018
 
The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software. The standard is effective for fiscal years ending after December 15, 2019 and early adoption is permitted.

 
N/A
 
We do not expect this standard to have a material impact on our consolidated financial statements.
A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2018 dated May 30, 2018 . With the exception of the adoption of ASU 2014-09, as discussed in Footnote 1 under the heading, "Revenue Recognition and Associated Liabilities", our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2018 .

14

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



2. Restructuring

Fiscal 2019 Restructuring Plan

During the third quarter of fiscal 2019, we adopted and announced a targeted restructuring plan (the "2019 Restructuring Plan"), which includes the closure of two manufacturing facilities, one in Brazil and one in England, as well as other actions including, the rationalization of certain products. Fewer than 200 positions will be eliminated. The Company will relocate the production of certain impacted products to other existing manufacturing operations during fiscal 2020. These restructuring actions are designed to enhance profitability and improve efficiency.

We have incurred pre-tax expenses totaling $35,243 related to these restructuring actions, of which $26,147 was recorded as restructuring expenses and $9,096 was recorded in cost of revenues, with restructuring expenses of $23,308 , $2,436 , $665 , and $7,805 related to the Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies segments, respectively. Corporate related restructuring charges were $1,029 . We expect to incur additional restructuring expenses related to this plan of approximately $6,000 to $7,000 in the fourth quarter of fiscal 2019 and beyond.
The following table summarizes our total pre-tax restructuring expenses for the third quarter of fiscal 2019:
Three and Nine Months Ended December 31, 2018
Fiscal 2019
Restructuring
Plan (1)
Severance and other compensation related costs
$
2,743

Accelerated depreciation and amortization
15,251

         Asset impairment
4,312

Lease termination costs and other
3,841

Product rationalization
9,096

Total restructuring expenses (1)
$
35,243

(1) Includes $9,096 in expense recorded to cost of revenues on Consolidated Statements of Income.

Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following table summarizes our restructuring liability balances:
Fiscal 2019 Restructuring Plan
 
December 31,
2018
Severance and termination benefits
 
$
(2,504
)
Lease termination obligations and other
 
(1,819
)
Total
 
$
(4,323
)
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.



15

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



3. Inventories, Net
We use the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods to value inventory. Inventory valued using the LIFO cost method is stated at the lower of cost or market. Inventory valued using the FIFO cost method is stated at the lower of cost or net realizable value. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
 
 
December 31,
2018
 
March 31,
2018
Raw materials
 
$
88,413

 
$
83,741

Work in process
 
31,238

 
34,904

Finished goods
 
146,121

 
124,005

LIFO reserve
 
(17,800
)
 
(17,280
)
Reserve for excess and obsolete inventory
 
(20,346
)
 
(19,639
)
Inventories, net
 
$
227,626

 
$
205,731


4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
 
 
December 31,
2018
 
March 31,
2018
Land and land improvements (1)
 
$
64,000

 
$
55,417

Buildings and leasehold improvements
 
427,889

 
449,316

Machinery and equipment
 
591,905

 
575,607

Information systems
 
156,674

 
145,726

Radioisotope
 
486,866

 
476,578

Construction in progress (1)
 
130,142

 
87,745

Total property, plant, and equipment
 
1,857,476

 
1,790,389

Less: accumulated depreciation and depletion
 
(868,432
)
 
(779,865
)
Property, plant, and equipment, net
 
$
989,044

 
$
1,010,524

(1)  
Land is not depreciated. Construction in progress is not depreciated until placed in service.

5. Debt
Indebtedness was as follows:
 
 
December 31,
2018
 
March 31,
2018
Credit Agreement
 
$
364,853

 
$
331,206

Private Placement Notes
 
884,409

 
988,190

Deferred financing costs
 
(3,008
)
 
(3,395
)
Other
 
54

 

Total long term debt
 
$
1,246,308

 
$
1,316,001

Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2018 , dated May 30, 2018 .

16

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



6. Additional Consolidated Balance Sheet Information
Additional information related to our Consolidated Balance Sheets is as follows:
 
 
December 31,
2018
 
March 31,
2018
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
26,065

 
$
30,270

Accrued vacation/paid time off
 
11,514

 
11,011

Accrued bonuses
 
23,628

 
31,716

Accrued employee commissions
 
14,681

 
17,168

Other postretirement benefit obligations-current portion
 
1,907

 
1,906

Other employee benefit plans obligations-current portion
 
1,803

 
1,929

Total accrued payroll and other related liabilities
 
$
79,598

 
$
94,000

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
58,827

 
$
31,621

Service liabilities
 
41,549

 
43,077

Self-insured risk reserves-current portion
 
8,082

 
7,349

Accrued dealer commissions
 
14,016

 
16,121

Accrued warranty
 
7,116

 
6,872

Asset retirement obligation-current portion
 
1,763

 
1,798

Other
 
50,345

 
61,379

Total accrued expenses and other
 
$
181,698

 
$
168,217

Other liabilities:
 
 
 
 
Self-insured risk reserves-long-term portion
 
$
15,008

 
$
15,008

Other postretirement benefit obligations-long-term portion
 
10,350

 
12,194

Defined benefit pension plans obligations-long-term portion
 
24,146

 
29,407

Other employee benefit plans obligations-long-term portion
 
2,551

 
3,221

Accrued long-term income taxes
 
16,546

 
18,922

Asset retirement obligation-long-term portion
 
9,484

 
9,841

Other
 
18,513

 
20,007

Total other liabilities
 
$
96,598

 
$
108,600


7. Income Tax Expense
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% , requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company applied the guidance in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act when accounting for the enactment-date effects of the TCJA. At December 31, 2018, the Company has completed its accounting for the tax effects of the TCJA.  During the nine months ended December 31, 2018, the Company recorded an immaterial favorable adjustment to the provisional amounts recorded as of March 31, 2018 for remeasurement of the Company’s deferred tax balances and the one-time transition tax.
The TCJA also subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries and allows a benefit for foreign-derived intangible income (“FDII”). The Company has made sufficient progress in its calculation to reasonably estimate the tax impact related to GILTI and FDII for the year ended March 31, 2019 and included it in the estimated annual effective tax rate. The impact of GILTI and FDII was not significant for the first nine

17

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



months ended December 31, 2018 . With the closure of the SAB 118 period, the Company is confirming its policy decision to treat GILTI as a period expense in the period the tax is incurred.
We consider the tax expense recorded for the TCJA to be complete at this time. However, it is possible that additional legislation, regulations and/or guidance may be issued in the future that may result in additional adjustments to the tax expense recorded related to the TCJA.  We will continue to monitor and assess the impact of any new developments.
The effective income tax rates for the three month periods ended December 31, 2018 and 2017 were 16.2% and (3.7)% , respectively. The effective income tax rates for the nine month periods ended December 31, 2018 and 2017 were 16.9% and 14.0% , respectively. The fiscal 2019 periods were favorably impacted by discrete item adjustments. The lower effective tax rates in the fiscal 2018 periods are primarily attributable to the enactment of the TCJA, resulting in a decrease in the U.S. federal statutory tax rate.
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local, as well as non-United States jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2016 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2012. We remain subject to tax authority audits in various jurisdictions wherever we do business. We do not expect the results of these examinations to have a material adverse effect on our consolidated financial statements.
8. Commitments and Contingencies
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
Civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.

18

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2018, dated May 30, 2018: Item 1 titled “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factors” in Item 1A titled "Product related regulations and claims".
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 7 to our consolidated financial statements titled, “Income Tax Expense” in this Quarterly Report on Form 10-Q.
9. Business Segment Information
We operate and report our financial information in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Corporate, which is presented separately, contains costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including consumable products, equipment maintenance and installation services, and capital equipment.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, and instrument and scope repairs.
Our Life Sciences segment offers consumable products, equipment maintenance and specialty services for pharmaceutical manufacturers and research facilities, and capital equipment.
Our Applied Sterilization Technologies segment offers contract sterilization and laboratory services for medical device and pharmaceutical Customers and others.
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.
Segment income is calculated as the segment’s gross profit less direct costs and indirect costs if the resources are dedicated to a single segment. Corporate costs include corporate and administrative functions, public company costs, legacy post-retirement benefits, and certain services and facilities related to distribution and research and development that are shared by multiple segments. Adjustments include acquisition related costs, amortization of acquired intangibles, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by adjusting for these items they gain better insight and greater transparency into the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making.
For the three and nine months ended December 31, 2018 , revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2018 , dated May 30, 2018 .

19

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



Financial information for each of our segments is presented in the following table:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
338,264

 
$
324,895

 
$
951,779

 
$
916,053

Healthcare Specialty Services
 
127,761

 
117,389

 
374,564

 
346,934
Life Sciences
 
93,451

 
90,895

 
275,571

 
261,291
Applied Sterilization Technologies
 
136,762

 
128,721

 
412,043

 
379,745
Total revenues
 
$
696,238

 
$
661,900

 
$
2,013,957

 
$
1,904,023

Segment operating income:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
82,820

 
$
81,502

 
$
217,011

 
$
207,787

Healthcare Specialty Services
 
16,007

 
13,720

 
44,422

 
44,014

Life Sciences
 
33,129

 
31,245

 
96,260

 
89,418

Applied Sterilization Technologies
 
54,798

 
48,191

 
164,417

 
144,713

Corporate
 
(42,025
)
 
(38,140
)
 
(135,053
)
 
(122,147
)
Total segment operating income
 
$
144,729

 
$
136,518

 
$
387,057

 
$
363,785

Less: Adjustments
 
 
 
 
 
 
 
 
Restructuring charges (1)
 
$
35,243

 
$
78

 
$
35,243

 
$
156

Amortization of acquired intangible assets (2) (3)
 
33,894

 
16,700

 
68,907

 
50,173

Acquisition and integration related charges (4)
 
1,816

 
4,428

 
6,197

 
11,850

          (Gain) on fair value adjustment of acquisition related contingent consideration (2)
 

 

 
(842
)
 

Net (gain) loss on divestiture of businesses (2)
 
(1,170
)
 
11,405

 
(508
)
 
12,538

Amortization of property "step up" to fair value (2)
 
615

 
627

 
1,840

 
1,895

Redomiciliation costs (5)
 
4,747

 

 
5,633

 

Total operating income
 
$
69,584

 
$
103,280

 
$
270,587

 
$
287,173


(1) For more information regarding restructuring see Note 2 titled, "Restructuring".
(2) For more information regarding our recent acquisitions and divestitures see Note 17 titled, "Business Acquisitions and Divestitures", as well as our Annual Report on Form 10-K for the year ended March 31, 2018 , dated May 30, 2018 .
(3) We evaluate the recoverability of indefinite-lived assets annually during the third quarter, or when evidence of potential impairment exists. During the third quarter of fiscal 2019, management adopted a branding strategy that included phasing out the usage of a tradename associated with certain products in the Healthcare Products business segment. As a result, management recorded an impairment charge of $16,249 , which is included within the Selling, general, and administrative line of the Consolidated Statements of Income. The remaining fair value of the asset was calculated using the income approach (the relief from royalty method). The remaining fair value was not material and will be amortized over the asset's remaining useful life. Fair value calculated using this approach is classified within Level 3 of the fair value hierarchy and requires several assumptions.
(4) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(5) Costs incurred in connection with the proposal to redomicile. For more information see Note 19 titled, "Proposal to Redomicile ".
    


Additional information regarding our revenue is disclosed in the following tables:

20

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
Healthcare Products:
 
 
 
 
 
 
 
 
Capital equipment
 
$
143,180

 
$
134,196

 
$
384,086

 
$
359,196

Consumables
 
107,451

 
106,406

 
309,545

 
310,938

Service
 
87,633

 
84,293

 
258,148

 
245,919

Total Healthcare Products Revenues
 
$
338,264

 
$
324,895

 
$
951,779

 
$
916,053

Total Healthcare Specialty Services Revenues
 
$
127,761

 
$
117,389

 
$
374,564

 
$
346,934

Life Sciences:
 
 
 
 
 
 
 
 
Capital equipment

 
$
23,363

 
$
25,337

 
$
72,289

 
$
67,093

Consumables
 
41,157

 
37,875
 
119,844

 
113,833
Service
 
28,931

 
27,683
 
83,438

 
80,365
Total Life Sciences Revenues
 
$
93,451

 
$
90,895

 
$
275,571

 
$
261,291

Applied Sterilization Technologies Service Revenues
 
$
136,762

 
$
128,721

 
$
412,043

 
$
379,745

Total Revenues
 
$
696,238

 
$
661,900

 
$
2,013,957

 
$
1,904,023

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
United Kingdom
$
46,067

 
$
50,902

 
$
138,074

 
$
158,211

United States
494,328

 
465,228

 
1,423,101

 
1,334,895

Other locations
155,843

 
145,770

 
452,782

 
410,917

Total Revenues
$
696,238

 
$
661,900

 
$
2,013,957

 
$
1,904,023

10. Shares and Preferred Shares
Ordinary shares
We calculate basic earnings per share based upon the weighted average number of shares outstanding. We calculate diluted earnings per share based upon the weighted average number of shares outstanding plus the dilutive effect of share equivalents calculated using the treasury stock method.

21

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
Denominator (shares in thousands):
 
2018
 
2017
 
2018
 
2017
Weighted average shares outstanding—basic
 
84,540

 
85,004

 
84,587

 
85,097

Dilutive effect of share equivalents
 
901

 
715

 
889

 
672

Weighted average shares outstanding and share equivalents—diluted
 
85,441

 
85,719

 
85,476

 
85,769

Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
(shares in thousands)
 
2018
 
2017
 
2018
 
2017
Number of share options
 
435
 
294
 
331
 
426
Preferred Shares
Pursuant to an engagement letter dated October 23, 2015, we issued 100,000 preferred shares, par value of £0.10 each, for an aggregate consideration of approximately $15 , in satisfaction of debt owed to a service provider. The holders of the preferred shares are entitled to a fixed cumulative preferential annual dividend of 5 percent on the amount paid periodically on the preferred shares respectively held by them. On a return of capital of the Company whether on liquidation or otherwise, the holders of the preferred shares shall be entitled to receive the sum of £0.10 per preferred share plus any accrued but unpaid dividends out of the assets of the Company available for distribution to its shareholders, but will not be entitled to any further participation in the assets of the Company. The holders of the preferred shares have no right to attend, speak or vote, whether in person or by proxy, at any general meeting of the Company or any meeting of a class of members of the Company in respect of the preferred shares and are not entitled to receive any notice of meetings.
11. Repurchases of Ordinary Shares
On August 9, 2016, the Company announced that its Board of Directors had authorized the purchase of up to $300 million of our ordinary shares. We may enter into share repurchase contracts until August 2, 2021 to effect these purchases. Shares may be repurchased from time to time through open market transactions, including 10b5-1 plans. The repurchase program may be suspended or discontinued at any time. During the first nine months of fiscal 2019 , we repurchased 445,700 of our ordinary shares for the aggregate amount of $47,331 pursuant to this authorization.
During the first nine months of fiscal 2019 , we obtained 110,445 of our ordinary shares in the aggregate amount of $8,151 in connection with share based compensation award programs.

22

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



12. Share-Based Compensation
We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Compensation Committee of the Board of Directors, or the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and share grants. We satisfy share award incentives through the issuance of new ordinary shares.
Stock options provide the right to purchase our shares at the market price on the date of grant, or for options granted in fiscal 2019, 110% of the market price on the date of grant, subject to the terms of the option plan and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date. As of December 31, 2018 , 4,401,238 shares remained available for grant under the long-term incentive plan.
The fair value of stock option awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during the first nine months of fiscal 2019 and 2018:
 
 
Fiscal 2019
 
Fiscal 2018
Risk-free interest rate
 
2.64%
 
2.01%
Expected life of options
 
6.2 years
 
5.7 years
Expected dividend yield of stock
 
1.47%
 
1.58%
Expected volatility of stock
 
19.91%
 
22.08%
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.37% and 2.25% was applied in fiscal 2019 and 2018 , respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at March 31, 2018
 
2,021,662

 
$
58.56

 
 
 
 
Granted
 
436,121

 
114.49

 
 
 
 
Exercised
 
(191,995
)
 
40.05

 
 
 
 
Forfeited
 
(17,740
)
 
79.91

 
 
 
 
Outstanding at December 31, 2018
 
2,248,048

 
$
70.83

 
6.8 years
 
$
84,291

Exercisable at December 31, 2018
 
1,307,946

 
$
56.03

 
5.5 years
 
$
66,631

We estimate that 919,536 of the non-vested stock options outstanding at December 31, 2018 will ultimately vest.

23

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



The aggregate intrinsic value in the table above represents the total pre-tax difference between the $106.85 closing price of our ordinary shares on December 31, 2018 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.
The total intrinsic value of stock options exercised during the first nine months of fiscal 2019 and fiscal 2018 was $13,773 and $12,495 , respectively. Net cash proceeds from the exercise of stock options were $7,534 and $9,080 for the first nine months of fiscal 2019 and fiscal 2018 , respectively.
The weighted average grant date fair value of stock option grants was $18.12 and $15.51 for the first nine months of fiscal 2019 and fiscal 2018 , respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of December 31, 2018 and 2017 was $692 and $1,733 , respectively.
A summary of the non-vested restricted share and restricted share unit activity is presented below:
 
 
Number of
Restricted
Shares
 
Number of Restricted Share Units
 
Weighted-Average
Grant Date
Fair Value
Non-vested at March 31, 2018
 
763,201

 
35,431

 
$
68.85

Granted
 
177,558

 
19,858

 
104.84

Vested
 
(233,095
)
 
(21,540
)
 
62.12

Forfeited
 
(30,469
)
 

 
76.62

Non-vested at December 31, 2018
 
677,195

 
33,749

 
$
80.72

Restricted shares and restricted share units granted are valued based on the closing stock price at the grant date. The value of restricted shares and restricted share units that vested during the first nine months of fiscal 2019 was $15,817 .
As of December 31, 2018 , there was a total of $43,979 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plan. We expect to recognize the cost over a weighted average period of 2.19 years .
13. Financial and Other Guarantees
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our warranty liability during the first nine months of fiscal 2019 were as follows:
 
Warranties
Balance, March 31, 2018
$
6,872

Warranties issued during the period
8,393

Settlements made during the period
(8,149
)
Balance, December 31, 2018
$
7,116


14. Derivatives and Hedging

24

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. During the first quarter of fiscal 2019, we also entered into forward foreign currency contracts in order to hedge a portion of our expected non-U.S. dollar denominated earnings against our reporting currency, the U.S. dollar. These foreign currency exchange contracts will mature during fiscal 2019. We did not elect hedge accounting for these forward foreign currency contracts; however, we may seek to apply hedge accounting in future scenarios. We do not use derivative financial instruments for speculative purposes.
These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At December 31, 2018 , we held foreign currency forward contracts to buy 152.2 million Mexican pesos and 8.9 million Canadian dollars; and to sell 2.0 million euros. At December 31, 2018 , we held commodity swap contracts to buy 789.9 thousand pounds of nickel.
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Fair Value at
 
Fair Value at
 
Fair Value at
 
Fair Value at
Balance sheet location
 
December 31, 2018
 
March 31, 2018
 
December 31, 2018
 
March 31, 2018
Prepaid & Other
 
$
267

 
$
187

 
$

 
$

Accrued expenses and other
 

 

 
462

 

The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
 
 
Location of gain (loss)
recognized in income
 
Amount of gain (loss) recognized in income
Three Months Ended December 31,
 
Nine Months Ended December 31,
2018
 
2017
 
2018
 
2017
Foreign currency forward contracts
 
Selling, general and administrative
 
$
(488
)
 
$
(842
)
 
$
(100
)
 
$
(1,358
)
Commodity swap contracts
 
Cost of revenues
 
$
(252
)
 
$
200

 
$
(283
)
 
$
226

Additionally, we hold our debt in multiple currencies to fund our operations and investments in certain subsidiaries. We designate portions of foreign currency denominated intercompany loans as hedges of portions of net investments in foreign operations. Net debt designated as non-derivative net investment hedging instruments totaled $52,253 at December 31, 2018 . These hedges are designed to be fully effective and any associated gain or loss is recognized in Accumulated Other Comprehensive Income and will be reclassified to income in the same period when a gain or loss related to the net investment in the foreign operation is included in income.

25

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions.
The following table shows the fair value of our financial assets and liabilities at December 31, 2018 and March 31, 2018 :
 
 
 
 
 
Fair Value Measurements
 
 
Carrying Value
 
Quoted Prices
in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
 
Level 1
 
Level 2
 
Level 3
December 31
March 31
 
December 31
March 31
 
December 31
March 31
 
December 31
March 31
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
224,906

$
201,534

 
$
224,906

$
201,534

 
$

$

 
$

$

Forward and swap contracts (1)
 
267

187

 


 
267

187

 


Equity Investments (2)
 
$
11,824

12,961

 
11,824

12,961

 


 


Other investments
 
2,010

3,421

1

2,010

3,421







Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Forward and swap contracts (1)
 
$
462

$

 
$

$

 
$
462

$

 
$

$

Deferred compensation plans (2)
 
1,505

1,694

 
1,505

1,694

 


 


Long term debt (3)
 
$
1,246,308

1,316,001

 


 
1,227,345

1,305,181

 


Contingent consideration obligations (4)
 
5,947

8,068

 


 


 
5,947

8,068

(1) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(2) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Beginning in fiscal 2019, changes in the fair value of these investments are recorded in the "Interest income and miscellaneous expense line" of the Consolidated Statement of Income. During the third quarter and first nine months of fiscal 2019, we recorded losses of $2,154 and $4,663 respectively, related to these investments.
(3) We estimate the fair value of our long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(4) Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.



26

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2018 are summarized as follows:
 
 
Contingent Consideration
Balance at March 31, 2018
 
$
8,068

Payments
 
(725
)
Reductions and adjustments
 
(1,415
)
Currency translation adjustments
 
19

Balance at December 31, 2018
 
$
5,947


16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three and nine months ended December 31, 2018 and 2017 were as follows:
 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Currency Translation (3)
Total Accumulated Other Comprehensive Income
(Loss)
 
Three Months
Nine Months
 
Three Months
Nine Months
 
Three Months
Nine Months
 
Three Months
Nine Months
Beginning Balance
$

$
1,970

 
$
(7,565
)
$
(6,742
)
 
$
(119,215
)
$
16,457

 
$
(126,780
)
$
11,685

Other Comprehensive Income (Loss) before reclassifications


 
148

452

 
(39,830
)
(175,502
)
 
(39,682
)
(175,050
)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss)


 
(563
)
(1,690
)
 


 
(563
)
(1,690
)
Net current-period Other Comprehensive Income (Loss)


 
(415
)
(1,238
)
 
(39,830
)
(175,502
)
 
(40,245
)
(176,740
)
Cumulative adjustment to Retained Earnings (1)
$

$
(1,970
)
 
$

$

 
$

$

 
$

$
(1,970
)
Balance at December 31, 2018
$

$

 
$
(7,980
)
$
(7,980
)
 
$
(159,045
)
$
(159,045
)
 
$
(167,025
)
$
(167,025
)
(1) As a result of the adoption of ASC 2016-01 we recorded a cumulative effect adjustment to our opening fiscal 2019 retained earnings balance that increased retained earnings and decreased accumulated other comprehensive income. See Footnote 1 titled "Nature of Operations and Summary of Significant Accounting Policies" for further details.

27

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



(2) Amortization (gain) of defined benefit plan items are reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(3) The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.

 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Currency Translation (3)
Total Accumulated Other Comprehensive Income
(Loss)
 
Three Months
Nine Months
 
Three Months
Nine Months
 
Three Months
Nine Months
 
Three Months
Nine Months
Beginning Balance
$
1,949

$
178

 
$
(3,163
)
$
(2,355
)
 
$
(78,845
)
$
(238,525
)
 
$
(80,059
)
$
(240,702
)
Other Comprehensive Income (Loss) before reclassifications
2,729

4,474

 
120

360

 
22,742

182,422

 
25,591

187,256

Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
9

35

 
(524
)
(1,572
)
 


 
(515
)
(1,537
)
Net current-period Other Comprehensive Income (Loss)
2,738

4,509

 
(404
)
(1,212
)
 
22,742

182,422

 
25,076

185,719

Balance at December 31, 2017
$
4,687

$
4,687

 
$
(3,567
)
$
(3,567
)
 
$
(56,103
)
$
(56,103
)
 
$
(54,983
)
$
(54,983
)

(1) Realized gain (loss) on available for sale securities is reported in the Interest income and miscellaneous expense line of the Consolidated Statements of Income.
(2) Amortization (gain) of defined benefit plan items are reported in the Selling, general and administrative expense line of the Consolidated Statements of Income.
(3) The effective portion of gain or loss on net debt designated as non-derivative net investment hedging instruments is recognized in Accumulated Other Comprehensive Income and is reclassified to income in the same period when a gain or loss related to the net investment is included in income.



28

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2018 and 2017
(dollars in thousands, except as noted)



17. Business Acquisitions and Divestitures

Fiscal 2019
During the third quarter of fiscal 2019, we completed a minor purchase to expand our service offerings in the Applied Sterilization Technologies segment. The total purchase price was $13,313 , which was financed with both cash on hand and with credit facility borrowings. Purchase price allocations will be finalized within a measurement period not to exceed one year from closing.
Fiscal 2018