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

		Page
Part I—Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
Part II—Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48
	Signature	49

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:

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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".

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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

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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.

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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.

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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