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


For the quarterly period ended December 31, 2019

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______            
Commission File Number 001-38848
STERIS plc
(Exact name of registrant as specified in its charter)
Ireland
 
98-1455064
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
70 Sir John Rogerson's Quay,
Dublin 2,
Ireland
 
D02 R296
(Address of principal executive offices)
 
(Zip code)
 
 
 
353 1 232 2000
(Registrant’s telephone number, including area code)
_______________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Trading symbol(s)
Name of Exchange on Which Registered
Ordinary Shares, $0.001 par value
STE
New York Stock Exchange
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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
  
Accelerated Filer
Non-Accelerated Filer 

  
Smaller Reporting Company
 
 
 
Emerging Growth Company
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      No  x
The number of ordinary shares outstanding as of February 5, 2020: 84,813,121

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 consolidated 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,
2019
 
March 31,
2019
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
199,230

 
$
220,633

Accounts receivable (net of allowances of $10,973 and $9,645 respectively)
 
544,405

 
564,830

Inventories, net
 
252,046

 
208,243

Prepaid expenses and other current assets
 
57,190

 
60,029

Total current assets
 
1,052,871

 
1,053,735

Property, plant, and equipment, net
 
1,102,604

 
1,031,582

Lease right-of-use assets, net
 
123,080

 

Goodwill
 
2,403,503

 
2,322,928

Intangibles, net
 
594,167

 
604,614

Other assets
 
59,356

 
60,212

Total assets
 
$
5,335,581

 
$
5,073,071

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
139,808

 
$
152,913

Accrued income taxes
 
12,916

 
15,460

Accrued payroll and other related liabilities
 
101,246

 
109,058

Lease obligations due within one year
 
19,189

 

Accrued expenses and other
 
177,647

 
187,765

Total current liabilities
 
450,806

 
465,196

Long-term indebtedness
 
1,136,964

 
1,183,227

Deferred income taxes, net
 
156,333

 
151,038

Long-term lease obligations
 
104,064

 

Other liabilities
 
91,348

 
87,812

Total liabilities
 
$
1,939,515

 
$
1,887,273

Commitments and contingencies (see Note 8)
 

 

Ordinary shares, with $0.001 and $75.00 par value, respectively; 500,000 shares authorized; 84,791 and 84,517 ordinary shares issued and outstanding, respectively
 
1,987,107

 
1,998,564

Retained earnings
 
1,544,495

 
1,339,024

Accumulated other comprehensive loss
 
(148,922
)
 
(159,778
)
Total shareholders’ equity
 
3,382,680

 
3,177,810

Noncontrolling interests
 
13,386

 
7,988

Total equity
 
3,396,066

 
3,185,798

Total liabilities and equity
 
$
5,335,581

 
$
5,073,071


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,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Product
 
$
363,795

 
$
327,639

 
$
1,009,196

 
$
921,088

Service
 
410,466

 
368,599

 
1,198,708

 
1,092,869

Total revenues
 
774,261

 
696,238

 
2,207,904

 
2,013,957

Cost of revenues:
 
 
 
 
 
 
 
 
Product
 
195,105

 
182,229

 
539,664

 
500,938

Service
 
247,803

 
227,012

 
712,377

 
672,308

Total cost of revenues
 
442,908

 
409,241

 
1,252,041

 
1,173,246

Gross profit
 
331,353

 
286,997

 
955,863

 
840,711

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
172,927

 
176,099

 
527,667

 
496,817

Research and development
 
16,487

 
15,167

 
48,321

 
47,160

Restructuring expenses
 
(448
)
 
26,147

 
667

 
26,147

Total operating expenses
 
188,966

 
217,413

 
576,655

 
570,124

Income from operations
 
142,387

 
69,584

 
379,208

 
270,587

Non-operating expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
9,813

 
10,879

 
30,702

 
34,014

Interest income and miscellaneous expense
 
(1,378
)
 
945

 
(2,163
)
 
503

Total non-operating expenses, net
 
8,435

 
11,824

 
28,539

 
34,517

Income before income tax expense
 
133,952

 
57,760

 
350,669

 
236,070

Income tax expense
 
29,285

 
9,334

 
66,083

 
39,871

Net income
 
104,667

 
48,426

 
284,586

 
196,199

Less: Net (loss) income attributable to noncontrolling interests
 
(263
)
 
568

 
297

 
893

Net income attributable to shareholders
 
$
104,930

 
$
47,858

 
$
284,289

 
$
195,306

 
 
 
 
 
 
 
 
 
Net income per share attributed to shareholders
 
 
 
 
 
 
 
 
Basic
 
$
1.24

 
$
0.57

 
$
3.35

 
$
2.31

Diluted
 
$
1.23

 
$
0.56

 
$
3.32

 
$
2.28

Cash dividends declared per share ordinary outstanding
 
$
0.37

 
$
0.34

 
$
1.08

 
$
0.99


See notes to consolidated financial statements.


4


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

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
104,667

 
$
48,426

 
$
284,586

 
$
196,199

  Less: Net income (loss) attributable to noncontrolling
  interests
 
(263
)
 
568

 
297

 
893

Net income attributable to shareholders
 
104,930

 
47,858

 
284,289

 
195,306

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Amortization of pension and postretirement benefit plans costs, (net of taxes of $170, $169, $512 and $507, respectively)
 
(504
)
 
(415
)
 
(1,515
)
 
(1,238
)
Change in cumulative currency translation adjustment
 
77,299

 
(39,830
)
 
12,371

 
(175,502
)
Total other comprehensive income (loss)
 
76,795

 
(40,245
)
 
10,856

 
(176,740
)
Comprehensive income
 
$
181,725

 
$
7,613

 
$
295,145

 
$
18,566


See notes to consolidated financial statements.




5



STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Nine Months Ended December 31,
 
 
2019
 
2018
Operating activities:
 
 
 
 
Net income
 
$
284,586

 
$
196,199

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
146,294

 
175,658

Deferred income taxes
 
(1,139
)
 
2,218

Share-based compensation expense
 
18,862

 
18,357

(Gain) on the disposal of property, plant, equipment, and intangibles, net
 
(540
)
 
(208
)
Loss (gain) on sale of businesses, net
 
2,553

 
(508
)
Other items
 
(2,506
)
 
(9,767
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable, net
 
29,860

 
9,318

Inventories, net
 
(32,816
)
 
(32,083
)
Other current assets
 
3,615

 
(5,816
)
Accounts payable
 
(18,610
)
 
5,119

Accruals and other, net
 
(38,833
)
 
2,092

Net cash provided by operating activities
 
391,326

 
360,579

Investing activities:
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(153,649
)
 
(113,236
)
Proceeds from the sale of property, plant, equipment and intangibles
 
387

 
5,563

Proceeds from the sale of businesses
 
439

 
(196
)
Purchase of investments
 

 
(4,955
)
Acquisition of businesses, net of cash acquired
 
(107,166
)
 
(13,313
)
Other
 

 
(13,425
)
Net cash used in investing activities
 
(259,989
)
 
(139,562
)
Financing activities:
 
 
 
 
Payments on long-term obligations
 

 
(85,000
)
(Payments) proceeds under credit facilities, net
 
(48,467
)
 
35,416

Deferred financing fees and debt issuance costs
 
(1,206
)
 
(298
)
Acquisition related deferred or contingent consideration
 
(452
)
 
(1,277
)
Repurchases of ordinary shares
 
(40,322
)
 
(56,254
)
Cash dividends paid to ordinary shareholders
 
(91,595
)
 
(83,750
)
Distributions to noncontrolling interest
 
(840
)
 
(255
)
Contributions from noncontrolling interest
 
6,050

 

Stock option and other equity transactions, net
 
22,958

 
7,610

Net cash used in financing activities
 
(153,874
)
 
(183,808
)
Effect of exchange rate changes on cash and cash equivalents
 
1,134

 
(13,837
)
(Decrease) increase in cash and cash equivalents
 
(21,403
)
 
23,372

Cash and cash equivalents at beginning of period
 
220,633

 
201,534

Cash and cash equivalents at end of period
 
$
199,230

 
$
224,906

See notes to consolidated financial statements.

6


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended December 31, 2019
 
Ordinary Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interest
Total
Equity
  
Number
Amount
 
 
 
 
Balance at September 30, 2019
84,797

$
1,981,660

$
1,472,725

$
(225,717
)
$
8,977

$
3,237,645

Comprehensive income:
 
 
 
 
 
 
Net income


104,930


(263
)
104,667

Other comprehensive income



76,795


76,795

Repurchases of ordinary shares
(25
)
(669
)
(1,785
)


(2,454
)
Equity compensation programs and other
19

6,116




6,116

Cash dividends – $0.37 per ordinary share


(31,375
)


(31,375
)
Distributions to noncontrolling interest




(840
)
(840
)
Contributions from noncontrolling interest




6,050

6,050

Other changes in noncontrolling interest




(538
)
(538
)
Balance at December 31, 2019
84,791

$
1,987,107

$
1,544,495

$
(148,922
)
$
13,386

$
3,396,066



 
Nine Months Ended December 31, 2019
 
Ordinary Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interest
Total
Equity
  
Number
Amount
 
 
 
 
Balance at March 31, 2019
84,517

$
1,998,564

$
1,339,024

$
(159,778
)
$
7,988

$
3,185,798

Comprehensive income:
 
 
 
 
 
 
Net income


284,289


297

284,586

Other comprehensive income



10,856


10,856

Repurchases of ordinary shares
(304
)
(53,099
)
12,777



(40,322
)
Equity compensation programs and other
578

41,642




41,642

Cash dividends – $1.08 per ordinary share


(91,595
)


(91,595
)
Distributions to noncontrolling interest




(840
)
(840
)
Contributions from noncontrolling interest




6,050

6,050

Other changes in noncontrolling interest




(109
)
(109
)
Balance at December 31, 2019
84,791

$
1,987,107

$
1,544,495

$
(148,922
)
$
13,386

$
3,396,066













7


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended December 31, 2018
 
Ordinary Shares
Preferred Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interest
Total
Equity
  
Number
Amount
Number
Amount
 
 
 
 
Balance at September 30, 2018
84,495

$
2,012,566

100

$
15

$
1,232,062

$
(126,780
)
$
7,114

$
3,124,977

Comprehensive income:
 
 
 
 
 
 
 
 
Net income




47,858


568

48,426

Other comprehensive income





(40,245
)

(40,245
)
Repurchases of ordinary shares
(9
)
(2,680
)


2,326



(354
)
Equity compensation programs and other
84

8,159






8,159

Cash dividends – $0.34 per ordinary share




(28,745
)


(28,745
)
Distributions to noncontrolling interest






(255
)
(255
)
Other changes in noncontrolling interest






344

344

Balance at December 31, 2018
84,570

$
2,018,045

100

$
15

$
1,253,501

$
(167,025
)
$
7,771

$
3,112,307


 
Nine Months Ended December 31, 2018
 
Ordinary Shares
Preferred Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interest
Total
Equity
  
Number
Amount
Number
Amount
 
 
 
 
Balance at March 31, 2018
84,747

$
2,048,037

100

$
15

$
1,146,223

$
11,685

$
11,340

$
3,217,300

Comprehensive income:
 
 
 
 
 
 
 
 
Net income




195,306


893

196,199

Other comprehensive income





(176,740
)

(176,740
)
Repurchases of ordinary shares
(556
)
(55,643
)


(611
)


(56,254
)
Equity compensation programs and other
379

25,651






25,651

Cash dividends – $0.99 per ordinary share




(83,750
)


(83,750
)
Adoption of Accounting Standards (ASC 2014-09 and ASC 2017-07)




(3,667
)
(1,970
)

(5,637
)
Distributions to noncontrolling interest






(255
)
(255
)
Other changes in noncontrolling interest






(4,207
)
(4,207
)
Balance at December 31, 2018
84,570

$
2,018,045

100

$
15

$
1,253,501

$
(167,025
)
$
7,771

$
3,112,307









8


STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, unless noted and except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
 On March 28, 2019, STERIS plc, a public limited company organized under the laws of England and Wales (“STERIS UK”), completed a redomiciliation from the United Kingdom to Ireland (the “Redomiciliation”). The Redomiciliation was achieved through the insertion of a new Irish public limited holding company (“STERIS plc”) on top of STERIS UK pursuant to a court-approved scheme of arrangement under English law (the “Scheme”). Following the Scheme effectiveness, STERIS UK was re-registered as a private limited company with the name STERIS Limited, and STERIS Emerald IE Limited, a company established in Ireland and a wholly-owned direct subsidiary of STERIS plc, was interposed as the direct parent company of STERIS UK.
STERIS is a leading provider of infection prevention and other procedural products and services. Our focus is primarily on healthcare, pharmaceutical and medical device Customers. We offer Customers a unique mix of innovative capital equipment products, such as sterilizers and washers, surgical tables, lights and equipment management systems and connectivity solutions such as operating room integration; consumable products such as detergents and gastrointestinal endoscopy accessories and other products; and services, including capital equipment installation and maintenance, contract sterilization and microbial reduction of medical devices, instrument and scope repair solutions, testing and validation services and instrument reprocessing.
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, cash flows and shareholders' equity 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, 2019, dated May 30, 2019. The Consolidated Balance Sheet at March 31, 2019 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, 2019 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2020.
Revenue Recognition and Associated Liabilities

9

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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 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.
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, 2019, 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 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.

10

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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 2020, $46,744 of the March 31, 2019 deferred revenue balance was recorded as revenue. During the first nine months of fiscal 2019, $25,590 of the March 31, 2018 deferred revenue balance was recorded as revenue.
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.
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, 2019, the transaction price allocated to remaining performance obligations was approximately $960,000. We expect to recognize approximately 48% of the transaction price within one year and approximately 44% beyond one year. The remainder has yet to be scheduled for delivery.

Recently Issued Accounting Standards Impacting the Company

Recently Issued Accounting Standards Impacting the Company are presented in the following table:







11

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(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 2016-02, "Leases"
(Topic 842)
 
February 2016
 
The standard requires 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.
 
First Quarter Fiscal 2020
 
We adopted this standard, and related amendments, effective April 1, 2019 using the modified retrospective transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing or expired agreements. We made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less and elected to not separate non-lease components from lease components to which they relate for all asset classes. We recorded lease right-of-use assets and lease liabilities for operating leases totaling $120,562. The adoption of the standard did not have a material impact to the Consolidated Statements of Income or Cash Flows. Additional information is disclosed in Note 8 under the heading "Leases".



12

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(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.
 
First Quarter Fiscal 2020
 
We adopted this standard effective April 1, 2019 with no material impact to our Consolidated Balance Sheets. The impact to our Consolidated Statements of Income will depend on the value of future hedging activities.
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.
 
First Quarter Fiscal 2020
 
We have elected not to reclassify the income tax effects of the TCJA from Accumulated Other Comprehensive Income ("AOCI") to retained earnings. Our policy is to release income tax effects from AOCI when individual units of account are sold or terminated.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standards that have not yet been adopted
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.
 
 
 
 
 
 
 
 
 


13

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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.
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 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.
ASU 2018-12 “Income Taxes (Topic 740)
 
December 2019
 
The standard provides final guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance simplifies accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years ending after December 15, 2020 and 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.


14

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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, 2019, dated May 30, 2019. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2019.
2. Restructuring
Fiscal 2019 Restructuring Plan. During the third quarter of fiscal 2019, we adopted and announced a targeted restructuring plan (the "Fiscal 2019 Restructuring Plan"), which included 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 were eliminated. The Company has relocated the production of certain impacted products to other existing manufacturing operations during fiscal 2020. These restructuring actions were designed to enhance profitability and improve efficiency.
Since inception of the Fiscal 2019 Restructuring Plan we have incurred pre-tax expenses totaling $44,036 related to these restructuring actions, of which $31,654 was recorded as restructuring expenses and $12,382 was recorded in cost of revenues, with a total of $31,278, $2,518, $668 and $7,798 related to the Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies segments, respectively. Corporate related restructuring charges were $1,774. Additional restructuring expenses related to this plan are not expected to be material to our results of operations.
The following table summarizes our total pre-tax restructuring expenses for fiscal 2020 and 2019:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Fiscal 2019 Restructuring Plan
 
 
 
 
 
 
 
Severance and other compensation related costs
$
(696
)
 
$
2,743

 
$
1,407

 
$
2,743

Loss (gain) on disposal of asset

 
15,251

 
(1,164
)
 
15,251

         Asset impairment

 
4,312

 

 
4,312

Lease termination costs and other
248

 
3,841

 
424

 
3,841

Product rationalization (1)
833

 
9,096

 
2,661

 
9,096

Total restructuring expenses
$
385

 
$
35,243

 
$
3,328

 
$
35,243

(1) Recorded in cost of revenues on the 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
 
March 31,
2019
 
Provisions
 
Payments (1)
 
December 31,
2019
Severance and termination benefits
 
$
4,102

 
$
1,407

 
$
(4,279
)
 
$
1,230

Lease termination obligations and other
 
2,029

 
424

 
(2,020
)
 
433

Total
 
$
6,131


$
1,831


$
(6,299
)

$
1,663

(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, 2019 and 2018
(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,
2019
 
March 31,
2019
Raw materials
 
$
93,687

 
$
83,009

Work in process
 
35,936

 
30,694

Finished goods
 
158,889

 
131,051

LIFO reserve
 
(17,804
)
 
(16,757
)
Reserve for excess and obsolete inventory
 
(18,662
)
 
(19,754
)
Inventories, net
 
$
252,046

 
$
208,243



4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
 
 
December 31,
2019
 
March 31,
2019
Land and land improvements (1)
 
$
66,874

 
$
63,522

Buildings and leasehold improvements
 
510,027

 
480,359

Machinery and equipment
 
683,657

 
656,956

Information systems
 
174,945

 
169,711

Radioisotope
 
509,609

 
483,080

Construction in progress (1)
 
180,172

 
133,689

Total property, plant, and equipment
 
2,125,284

 
1,987,317

Less: accumulated depreciation and depletion
 
(1,022,680
)
 
(955,735
)
Property, plant, and equipment, net
 
$
1,102,604

 
$
1,031,582

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

5. Debt
Indebtedness was as follows:
 
 
December 31,
2019
 
March 31,
2019
Credit Agreement
 
$
255,217

 
$
301,846

Private Placement
 
885,237

 
884,967

Deferred financing costs
 
(3,490
)
 
(3,619
)
Other
 

 
33

Total long term debt
 
$
1,136,964

 
$
1,183,227


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, 2019, dated May 30, 2019.

16

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(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,
2019
 
March 31,
2019
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
29,744

 
$
37,251

Accrued vacation/paid time off
 
11,113

 
10,191

Accrued bonuses
 
40,902

 
40,194

Accrued employee commissions
 
15,808

 
17,854

Other postretirement benefit obligations-current portion
 
1,633

 
1,633

Other employee benefit plans obligations-current portion
 
2,046

 
1,935

Total accrued payroll and other related liabilities
 
$
101,246

 
$
109,058

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
45,355

 
$
55,333

Service liabilities
 
44,701

 
42,101

Self-insured risk reserves-current portion
 
7,475

 
6,537

Accrued dealer commissions
 
16,621

 
15,283

Accrued warranty
 
7,128

 
7,194

Asset retirement obligation-current portion
 
2,669

 
2,656

Other
 
53,698

 
58,661

Total accrued expenses and other
 
$
177,647

 
$
187,765

Other liabilities:
 
 
 
 
Self-insured risk reserves-long-term portion
 
$
14,445

 
$
14,445

Other postretirement benefit obligations-long-term portion
 
8,740

 
10,918

Defined benefit pension plans obligations-long-term portion
 
15,001

 
16,168

Other employee benefit plans obligations-long-term portion
 
2,645

 
4,711

Accrued long-term income taxes
 
13,586

 
13,515

Asset retirement obligation-long-term portion
 
10,077

 
9,730

Other
 
26,854

 
18,325

Total other liabilities
 
$
91,348

 
$
87,812


7. Income Tax Expense
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduced the maximum U.S. federal corporate income tax rate to 21.0%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created 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. We consider the tax expense recorded for the TCJA to be complete at this time. However, it is possible that additional legislation, regulations, interpretations 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, 2019 and 2018 were 21.9% and 16.2%, respectively. The effective income tax rates for the nine month periods ended December 31, 2019 and 2018 were 18.8% and 16.9%, respectively. The increase in the fiscal 2020 rates compared to the prior year periods is primarily attributable to increased profits earned in higher tax jurisdictions.
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

17

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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 foreign 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 2015. We remain subject to tax authority audits in various jurisdictions wherever we do business.
In May 2019, we received two notices of proposed tax adjustment from the U.S. Internal Revenue Service (the “IRS”) regarding the deductibility of interest paid on certain intercompany debt. The notices relate to fiscal years 2016 and 2017. In September 2019, we received another notice of proposed adjustment for the same issue, for the 2018 fiscal year. The IRS adjustments would result in a cumulative tax liability of approximately $40,000. We are contesting the IRS’s assertions, and intend to pursue available remedies such as appeals and litigation, if necessary. We have not established reserves related to these notices. An unfavorable outcome is not expected to have a material adverse impact on our consolidated financial position but could be material to our consolidated results of operations and cash flows for any one period.
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. 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.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019: Item 1 titled, "Business - Information with respect to our Business in General - Government Regulation", the "Risk Factors" in Item 1A thereof titled, "Product related regulations and claims", and the "Risk Factors", in Part II Item 1A hereof.
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.

18

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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.
Leases
We lease manufacturing, warehouse and office space, service facilities, vehicles, equipment and communication systems. Certain leases contain options that provide us with the ability to extend the lease term. Such options are included in the lease term when it is reasonably certain that the option will be exercised. We made an accounting policy election to not recognize lease assets or lease liabilities for leases with a lease term of twelve months or less.
We determine if an agreement contains a lease and classify our leases as operating or finance at the lease commencement date. Finance leases are generally those leases for which we will pay substantially all the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. Lease assets arising from finance leases are included in property, plant and equipment, net and the liabilities are included in other liabilities. For finance leases, we recognize interest expense using the effective interest method and we recognize amortization expense on the lease asset over the shorter of the lease term or the useful life of the asset. Our finance leases are not material as of December 31, 2019 and for the nine month period then ended.
Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, we estimate an incremental borrowing rate to determine the present value of lease payments. Our estimated incremental borrowing rate reflects a secured rate based on recent debt issuances, our estimated credit rating, lease term, as well as publicly available data for instruments with similar characteristics. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease. When accounting for leases, we combine payments for leased assets, related services and other components of a lease.
The components of operating lease expense are as follows:
 
Three months ended December 31, 2019
 
Nine months ended December 31, 2019
Fixed operating lease expense
$
7,079

 
$
20,894

Variable operating lease expense
1,981

 
4,240

Total operating lease expense
$
9,060

 
$
25,134



Supplemental cash flow information related to operating leases is as follows:
 
Nine months ended December 31, 2019
 
 
Cash paid for amounts included in the measurement of operating lease liabilities

$
20,656

Right-of-use assets obtained in exchange for operating lease obligations, net
$
27,089








19

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



Maturities of lease liabilities at December 31, 2019 are as follows:
 
December 31,
2019
Remainder of 2020:
$
6,732

2021
22,915

2022
18,564

2023
15,185

2024
12,647

2025 and thereafter
85,388

Total operating lease payments
161,431

Less imputed interest
38,178

Total operating lease liabilities
$
123,253


Supplemental information related to operating leases is as follows:
 
December 31,
 
2019
Weighted-average remaining lease term of operating leases
11.6 years

 
 
Weighted-average discount rate of operating leases
4.6
%

Prior to the adoption of ASU 2016-02, " Leases" (Topic 842) future minimum annual rentals payable under noncancelable operating lease agreements in excess of one year as of March 31, 2019 were as follows:
  
 
March 31, 2019
2020
 
$
24,008

2021
 
18,567

2022
 
13,917

2023
 
11,929

2024 and thereafter
 
93,939

Total minimum lease payments
 
$
162,360

In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign currencies have been calculated using March 31, 2019 foreign currency exchange rates.
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. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
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, specialty services and capital equipment for pharmaceutical manufacturers and research facilities.
Our Applied Sterilization Technologies segment offers contract sterilization and testing services for medical device and pharmaceutical manufacturers.

20

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



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.
For the three and nine months ended December 31, 2019, 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, 2019, dated May 30, 2019.
Financial information for each of our segments is presented in the following table:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
365,353

 
$
338,264

 
$
1,025,421

 
$
951,779

Healthcare Specialty Services
 
143,869

 
127,761

 
414,816

 
374,564

Life Sciences
 
108,773

 
93,451

 
304,208

 
275,571

Applied Sterilization Technologies
 
156,266

 
136,762

 
463,459

 
412,043

Total revenues
 
$
774,261

 
$
696,238

 
$
2,207,904

 
$
2,013,957

Operating income (loss):
 
 
 
 
 
 
 
 
Healthcare Products
 
$
89,849

 
$
82,820

 
$
250,510

 
$
217,011

Healthcare Specialty Services
 
15,378

 
16,007

 
48,267

 
44,422

Life Sciences
 
37,731

 
33,129

 
103,085

 
96,260

Applied Sterilization Technologies
 
65,468

 
54,798

 
198,889

 
164,417

Corporate
 
(45,260
)
 
(42,025
)
 
(151,613
)
 
(135,053
)
Total operating income before adjustments
 
$
163,166

 
$
144,729

 
$
449,138

 
$
387,057

Less: Adjustments
 
 
 
 
 
 
 
 
Amortization of acquired intangible assets (1)
 
$
17,508

 
$
33,894

 
$
53,407

 
$
68,907

Acquisition and integration related charges (2)
 
1,721

 
1,816

 
5,585

 
6,197

Redomiciliation and tax restructuring costs (3)
 
487

 
4,747

 
3,274

 
5,633

(Gain) on fair value adjustment of acquisition related contingent consideration (1)
 

 

 

 
(842
)
Net loss (gain) on divestiture of businesses (1)
 
76

 
(1,170
)
 
2,553

 
(508
)
Amortization of property "step up" to fair value (1)
 
602

 
615

 
1,783

 
1,840

Restructuring charges (4)
 
385

 
35,243

 
3,328

 
35,243

Total operating income
 
$
142,387


$
69,584

 
$
379,208

 
$
270,587

(1) 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, 2019, dated May 30, 2019.
(2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in connection with the Redomiciliation.
(4) For more information regarding our restructuring activities see Note 2 titled, "Restructuring".

21

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)




Additional information regarding our fiscal 2020 and fiscal 2019 revenue is disclosed in the following tables:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
Healthcare Products:
 
 
 
 
 
 
 
 
Capital equipment
 
$
148,016

 
$
143,180

 
$
410,249

 
$
384,086

Consumables
 
121,517

 
107,451

 
338,691

 
309,545
Service
 
95,820

 
87,633

 
276,481

 
258,148

Total Healthcare Products Revenues
 
$
365,353

 
$
338,264

 
$
1,025,421

 
$
951,779

Total Healthcare Specialty Services Revenues
 
$
143,869

 
$
127,761

 
$
414,816

 
$
374,564

Life Sciences:
 
 
 
 
 
 
 
 
Capital equipment

 
$
31,762

 
$
23,363

 
$
84,993

 
$
72,289

Consumables
 
46,370

 
41,157

 
132,939

 
119,844

Service
 
30,641

 
28,931

 
86,276

 
83,438

Total Life Sciences Revenues
 
$
108,773

 
$
93,451

 
$
304,208

 
$
275,571

Applied Sterilization Technologies Service Revenues
 
$
156,266

 
$
136,762

 
$
463,459

 
$
412,043

Total Revenues
 
$
774,261

 
$
696,238

 
$
2,207,904

 
$
2,013,957



 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Ireland
$
16,126

 
$
14,215

 
$
46,405

 
$
40,873

United States
562,502

 
494,328

 
1,611,755

 
1,423,101

Other locations
195,633

 
187,695

 
549,744

 
549,983

Total Revenues
$
774,261

 
$
696,238

 
$
2,207,904

 
$
2,013,957



10. Shares and Preferred Shares
Ordinary shares
In connection with the Redomiciliation, STERIS UK shareholders received STERIS plc shares pursuant to a scheme of arrangement under UK law. Each STERIS UK ordinary shareholder received one ordinary share, par value $75.00, of STERIS plc for each STERIS UK ordinary share held, which STERIS UK shares were canceled. On May 3, 2019, the par value of STERIS plc shares issued pursuit to the scheme of arrangement was reduced to $0.001 per share.
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.

22

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(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):
 
2019
 
2018
 
2019
 
2018
Weighted average shares outstanding—basic
 
84,788

 
84,540

 
84,740

 
84,587

Dilutive effect of share equivalents
 
840

 
901

 
890

 
889

Weighted average shares outstanding and share equivalents—diluted
 
85,628

 
85,441

 
85,630

 
85,476


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)
 
2019
 
2018
 
2019
 
2018
Number of share options
 
347

 
435

 
270

 
331


Additional Authorized Shares
 The Company has an additional authorized share capital of 50,000,000 preferred shares of $0.001 par value each, plus 25,000 deferred ordinary shares of €1.00 par value each, in order to satisfy minimum statutory capital requirements for all Irish public limited companies.
11. Repurchases of Ordinary Shares
On August 9, 2016, STERIS UK announced that its Board of Directors had authorized the purchase of up to $300,000 (net of taxes, fees and commissions) of our ordinary shares. As a result of the Redomiciliation, that share repurchase authorization terminated.
On May 7, 2019, our Board of Directors authorized the continuation of the share repurchase program resulting in a share repurchase authorization of $78,979 (net of taxes, fees and commissions).
On July 30, 2019, our Board of Directors approved an increase to the May 7, 2019 authorization of an additional amount of $300,000 (net of taxes, fees and commissions). As of December 31, 2019, there was approximately $348,979 (net of taxes, fees and commissions) of remaining availability under the authorization.
Under the authorizations, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any repurchase program may be activated, suspended or discontinued at any time.
During the first nine months of fiscal 2020, we repurchased 205,059 of our ordinary shares for the aggregate amount of $30,000 (net of fees and commissions) pursuant to this authorization. During the first nine months of fiscal 2019, we repurchased 445,700 of our ordinary shares for the aggregate amount of $47,082 (net of fees and commissions) pursuant to the 2016 authorization.
During the first nine months of fiscal 2020, we obtained 100,124 of our ordinary shares in the aggregate amount of $10,318 in connection with share based compensation award programs. 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.

23

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(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 Board of Directors or Compensation Committee of 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 to employees in fiscal 2019 and thereafter, 110% of the market price on the date of grant, subject to the terms of the plan and agreements. Generally, one-fourth of the stock options granted to employees 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 year of employment after the grant date. As of December 31, 2019, 3,921,680 ordinary 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 2020 and 2019:
 
 
Fiscal 2020
 
Fiscal 2019
Risk-free interest rate
 
2.26
%
 
2.64
%
Expected life of options
 
6.2 years

 
6.2 years

Expected dividend yield of stock
 
1.22
%
 
1.47
%
Expected volatility of stock
 
20.27
%
 
19.91
%

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 2.77% and 2.37% was applied in fiscal 2020 and 2019, 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 Per Share
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at March 31, 2019
 
2,104,685

 
$
72.82

 
 
 
 
Granted
 
345,138

 
147.22

 
 
 
 
Exercised
 
(415,072
)
 
55.24

 
 
 
 
Forfeited
 
(13,264
)
 
102.06

 
 
 
 
Outstanding at December 31, 2019
 
2,021,487

 
$
88.94

 
6.9 years
 
$
128,323

Exercisable at December 31, 2019
 
1,120,722

 
$
68.12

 
5.7 years
 
$
94,476


We estimate that 879,534 of the non-vested stock options outstanding at December 31, 2019 will ultimately vest.

24

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)



The aggregate intrinsic value in the table above represents the total pre-tax difference between the $152.42 closing price of our ordinary shares on December 31, 2019 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 2020 and fiscal 2019 was $36,939 and $13,773, respectively. Net cash proceeds from the exercise of stock options were $22,958 and $7,534 for the first nine months of fiscal 2020 and fiscal 2019, respectively.
The weighted average grant date fair value of stock option grants was $23.52 and $18.12 for the first nine months of fiscal 2020 and fiscal 2019, 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, 2019 and 2018 was $629 and $692, respectively.
A summary of the non-vested restricted share and 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, 2019
 
676,373

 
33,219

 
$
80.86

Granted
 
156,126

 
13,081

 
135.65

Vested
 
(214,645
)