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 June 30, 2020

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 July 31, 2020: 85,053,103

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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
Part II—Other Information
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
	Signature	41

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)

	June 30, 2020			March 31, 2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	255,627		$	319,581
Accounts receivable (net of allowances of $10,839 and $12,051 respectively)	503,172			586,481
Inventories, net	276,970			248,259
Prepaid expenses and other current assets	61,359			54,430
Total current assets	1,097,128			1,208,751
Property, plant, and equipment, net	1,148,052			1,111,855
Lease right-of-use assets, net	143,463			131,837
Goodwill	2,371,789			2,356,085
Intangibles, net	551,526			565,473
Other assets	51,969			51,581
Total assets	$	5,363,927		$	5,425,582
Liabilities and equity
Current liabilities:
Accounts payable	$	133,532		$	149,341
Accrued income taxes	28,205			14,013
Accrued payroll and other related liabilities	82,039			128,261
Short-term indebtedness	35,000			—
Lease obligations due within one year	20,575			19,809
Accrued expenses and other	180,198			192,183
Total current liabilities	479,549			503,607
Long-term indebtedness	1,022,156			1,150,521
Deferred income taxes, net	160,972			160,270
Long-term lease obligations	125,151			114,114
Other liabilities	86,386			90,346
Total liabilities	$	1,874,214		$	2,018,858
Commitments and contingencies (see Note 8)
Ordinary shares, with $.001 par value; 500,000 shares authorized; 85,060 and 84,924 ordinary shares issued and outstanding, respectively	1,983,047			1,982,164
Retained earnings	1,699,971			1,647,175
Accumulated other comprehensive (loss)	(208,354		)	(235,463		)
Total shareholders’ equity	3,474,664			3,393,876
Noncontrolling interests	15,049			12,848
Total equity	3,489,713			3,406,724
Total liabilities and equity	$	5,363,927		$	5,425,582

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 June 30,
	2020			2019
Revenues:
Product	$	301,108		$	307,735
Service	367,824			389,068
Total revenues	668,932			696,803
Cost of revenues:
Product	156,555			160,959
Service	226,809			230,001
Total cost of revenues	383,364			390,960
Gross profit	285,568			305,843
Operating expenses:
Selling, general, and administrative	155,170			178,781
Research and development	16,231			15,585
Restructuring expenses	166			1,389
Total operating expenses	171,567			195,755
Income from operations	114,001			110,088
Non-operating expenses, net:
Interest expense	9,492			10,445
Interest (income) and miscellaneous expense	(2,289		)	233
Total non-operating expenses, net	7,203			10,678
Income before income tax expense	106,798			99,410
Income tax expense	18,674			14,633
Net income	88,124			84,777
Less: Net (loss) income attributable to noncontrolling interests	(66		)	187
Net income attributable to shareholders	$	88,190		$	84,590
Net income per share attributed to shareholders
Basic	$	1.04		$	1.00
Diluted	$	1.03		$	0.99
Cash dividends declared per share ordinary outstanding	$	0.37		$	0.34

See notes to consolidated financial statements.

4

STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(Unaudited)

	Three Months Ended June 30,
	2020			2019
Net income	$	88,124		$	84,777
Less: Net (loss) income attributable to noncontrolling   interests	(66		)	187
Net income attributable to shareholders	88,190			84,590
Other comprehensive income (loss)
Amortization of pension and postretirement benefit plans cost, (net of taxes of $174 and $170, respectively)	(510		)	(505		)
Change in cumulative currency translation adjustment	27,619			3,439
Total other comprehensive income	27,109			2,934
Comprehensive income	$	115,299		$	87,524

See notes to consolidated financial statements.

5

STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended June 30,
	2020			2019
Operating activities:
Net income	$	88,124		$	84,777
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization	48,954			47,102
Deferred income taxes	(189		)	(612		)
Share-based compensation expense	5,962			5,537
Loss on the disposal of property, plant, equipment, and intangibles, net	237			61
Loss on sale of businesses, net	10			2,426
Other items	6,842			596
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	84,665			57,620
Inventories, net	(27,015		)	(24,622		)
Other current assets	(6,729		)	(2,480		)
Accounts payable	(17,011		)	(17,276		)
Accruals and other, net	(49,728		)	(43,792		)
Net cash provided by operating activities	134,122			109,337
Investing activities:
Purchases of property, plant, equipment, and intangibles, net	(66,861		)	(49,794		)
Proceeds from the sale of property, plant, and equipment	137			18
Proceeds from the sale of businesses	—			439
Acquisition of businesses, net of cash acquired	—			(34,970		)
Net cash used in investing activities	(66,724		)	(84,307		)
Financing activities:
Proceeds (payments) under credit facilities, net	(95,837		)	27,861
Deferred financing fees and debt issuance costs	—			(1,206		)
Acquisition related deferred or contingent consideration	(21		)	(452		)
Repurchases of ordinary shares	(14,296		)	(14,886		)
Cash dividends paid to ordinary shareholders	(31,471		)	(28,823		)
Contributions from non-controlling interest	2,258			—
Stock option and other equity transactions, net	5,367			9,899
Net cash used in financing activities	(134,000		)	(7,607		)
Effect of exchange rate changes on cash and cash equivalents	2,648			11
Increase in cash and cash equivalents	(63,954		)	17,434
Cash and cash equivalents at beginning of period	319,581			220,633
Cash and cash equivalents at end of period	$	255,627		$	238,067

See notes to consolidated financial statements.

6

STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except per share amounts)

(Unaudited)

	Ordinary Shares					Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total Equity
	Number		Amount
Balance at March 31, 2020	84,924		1,982,164			$	1,647,175		$	(235,463	)	$	12,848		$	3,406,724
Comprehensive income:
Net income (loss)	—		—			88,190			—			(66		)	88,124
Other comprehensive income	—		—			—			27,109			—			27,109
Repurchases of ordinary shares	(98	)	(10,373		)	(3,923		)	—			—			(14,296		)
Equity compensation programs and other	234		11,256			—			—			—			11,256
Cash dividends – $0.37 per ordinary share	—		—			(31,471		)	—			—			(31,471		)
Contributions from non-controlling interest	—		—			—			—			2,258			2,258
Other changes in noncontrolling interest	—		—			—			—			9			9
Balance at June 30, 2020	85,060		$	1,983,047		$	1,699,971		$	(208,354	)	$	15,049		$	3,489,713

	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	—		—			84,590			—			187			84,777
Other comprehensive income	—		—			—			2,934			—			2,934
Repurchases of ordinary shares	(127	)	(17,485		)	2,599			—			—			(14,886		)
Equity compensation programs and other	364		15,275			—			—			—			15,275
Cash dividends – $0.34 per ordinary share	—		—			(28,823		)	—			—			(28,823		)
Other changes in noncontrolling interest	—		—			—			—			(73		)	(73		)
Balance at June 30, 2019	84,754		$	1,996,354		$	1,397,390		$	(156,844	)	$	8,102		$	3,245,002

See notes to consolidated financial statements.

7

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, unless noted and except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

STERIS plc is a leading provider of infection prevention and other procedural products and services. Our MISSION IS TO HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD by providing innovative healthcare and life science product and service solutions around the globe. We offer our Customers a unique mix of innovative consumable products, such as detergents, gastrointestinal ("GI") endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, instrument and scope repair solutions, laboratory testing services, on-site and off-site reprocessing, and capital equipment products, such as sterilizers and surgical tables, and connectivity solutions such as operating room (“OR”) integration.

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:

Interim Financial Statements

We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, and cash flows for the periods presented.

These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2020 dated May 29, 2020. The Consolidated Balance Sheet at March 31, 2020 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 month period ended June 30, 2020 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2021.

Revenue Recognition and Associated Liabilities

We adopted Accounting Standards Update ("ASU") 2014-09 “Revenue from Contracts with Customers” and the subsequently issued amendments on April 1, 2018. At the time of adoption, certain of our capital equipment contracts were comprised of a single integrated performance obligation, which resulted in the deferral of the corresponding capital equipment revenue and cost of revenues until installation was complete. Since the adoption of the standard, there have been changes made in our selling philosophy, product architecture, and manufacturing processes with respect to this product line, that impact whether the promises to transfer the individual goods or services to the Customer are separately identifiable from other promises in the contract. After review of these changes, we have concluded that these contracts consist of multiple performance obligations that are capable of being distinct and meet the criteria for revenue to be recognized when the Customer obtains

8

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

control of the asset, which is upon delivery of each performance obligation. Revenues and costs of revenues related to these contracts totaling $14,609 and $7,560, respectively, that had previously been deferred were recognized in our fiscal 2021 first quarter.

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 June 30, 2020, 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 capital equipment products is deferred until installation is complete if the capital equipment and installation are highly integrated and form a single performance obligation.

Service Revenue

Within our Healthcare 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 Group Purchasing Organization ("GPO") agreement. For maintenance, repair and installation of capital equipment, revenue is recognized upon completion of the service. Healthcare service revenues also include 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.

9

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(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 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 three months of fiscal 2021, $30,804 of the March 31, 2020 deferred revenue balance was recorded as revenue. During the first three months of fiscal 2020, $39,484 of the March 31, 2019 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 preventive 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 June 30, 2020, the transaction price allocated to remaining performance obligations was approximately $930,000. We expect to recognize approximately 48% of the transaction price within one year and approximately 46% 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:

Standard	Date of Issuance	Description	Date of Adoption	Effect on the financial statements or other significant matters
Standards that have been adopted in fiscal 2021
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments"	June 2016	The standard required 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 was effective for annual periods beginning after December 15, 2019.	First Quarter Fiscal 2021	We adopted this standard effective April 1, 2020 with no material impact to our consolidated financial statements.

10

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(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 modified 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 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.	First Quarter Fiscal 2021	We adopted this standard effective April 1, 2020 with no 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 modified 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 clarified disclosure requirements for defined benefit pension plans relating to the projected benefit obligation and accumulated benefit obligation.  The standard was effective for fiscal years ending after December 15, 2019.	First Quarter Fiscal 2021	We adopted this standard effective April 1, 2020 with no 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 aligned 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 was effective for fiscal years beginning after December 15, 2019.	First Quarter Fiscal 2021	We adopted this standard on April 1, 2020 using the prospective method. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.
Standards that have not yet been adopted
ASU 2019-12 "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 beginning 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.

11

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(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, 2020 dated May 29, 2020. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2020.

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 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 $44,017 related to these restructuring actions, of which $31,826 was recorded as restructuring expenses and $12,191 was recorded in cost of revenues, with a total of $33,819, $7,798 and $668 related to the Healthcare, Applied Sterilization Technologies and Life Sciences segments, respectively. Corporate related restructuring charges were $1,732. Additional restructuring expenses related to this plan are not expected to be material to our results of operations.

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 remaining liability balances at June 30, 2020 and March 31, 2020 are not material.

For more information relating to our restructuring efforts, please refer to our Annual Report on Form 10-K for the year ended March 31, 2020, dated May 29, 2020.

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:

	June 30, 2020			March 31, 2020
Raw materials	$	104,557		$	94,321
Work in process	40,833			35,643
Finished goods	167,277			151,381
LIFO reserve	(18,753		)	(16,937		)
Reserve for excess and obsolete inventory	(16,944		)	(16,149		)
Inventories, net	$	276,970		$	248,259

Inventory has increased since March 31, 2020 for several reasons including our desire to ensure adequate supply of materials and level loading production in our facilities.

12

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

4. Property, Plant and Equipment

Information related to the major categories of our depreciable assets is as follows:

	June 30, 2020			March 31, 2020
Land and land improvements (1)	$	66,390		$	65,994
Buildings and leasehold improvements	534,095			531,267
Machinery and equipment	692,188			682,488
Information systems	180,378			181,112
Radioisotope	524,356			508,593
Construction in progress (1)	198,600			159,731
Total property, plant, and equipment	2,196,007			2,129,185
Less: accumulated depreciation and depletion	(1,047,955		)	(1,017,330		)
Property, plant, and equipment, net	$	1,148,052		$	1,111,855

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

5. Debt

Indebtedness was as follows:

	June 30, 2020			March 31, 2020
Short term debt
Private Placement	$	35,000		$	—
Total short term debt	$	35,000		$	—
Long term debt
Credit Agreement	$	180,574		$	275,449
Private Placement	844,765			878,409
Deferred financing costs	(3,183		)	(3,337		)
Total long term debt	$	1,022,156		$	1,150,521
Total debt	$	1,057,156		$	1,150,521

At March 31, 2020, we classified the notes maturing in August 2020, as long term indebtedness. At that time, due to significant uncertainty at the onset of the COVID-19 pandemic, there was no intention to use current working capital to settle the notes given the availability under our credit facility. However, after review of our financial position and cash flows as of and for the three months ended June 30, 2020, management concluded that we will not refinance the senior note due in August 2020 and will use cash on hand to satisfy the obligation.

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, 2020 dated May 29, 2020.

13

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

6. Additional Consolidated Balance Sheet Information

Additional information related to our Consolidated Balance Sheets is as follows:

	June 30, 2020		March 31, 2020
Accrued payroll and other related liabilities:
Compensation and related items	$	45,787	$	42,205
Accrued vacation/paid time off	10,899		9,917
Accrued bonuses	12,621		53,041
Accrued employee commissions	8,876		19,298
Other postretirement benefit obligations-current portion	1,488		1,488
Other employee benefit plans obligations-current portion	2,368		2,312
Total accrued payroll and other related liabilities	$	82,039	$	128,261
Accrued expenses and other:
Deferred revenues	$	39,975	$	53,299
Service liabilities	45,423		47,505
Self-insured risk reserves-current portion	7,942		7,342
Accrued dealer commissions	18,841		15,827
Accrued warranty	7,002		7,381
Asset retirement obligation-current portion	908		2,671
Other	60,107		58,158
Total accrued expenses and other	$	180,198	$	192,183
Other liabilities:
Self-insured risk reserves-long-term portion	$	17,452	$	17,452
Other postretirement benefit obligations-long-term portion	9,012		9,880
Defined benefit pension plans obligations-long-term portion	11,632		10,987
Other employee benefit plans obligations-long-term portion	2,371		2,333
Accrued long-term income taxes	11,991		11,959
Asset retirement obligation-long-term portion	11,120		9,843
Other	22,808		27,892
Total other liabilities	$	86,386	$	90,346

7. Income Tax Expense

The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduced the 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 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 June 30, 2020 and 2019 were 17.5% and 14.7%, respectively. The fiscal 2021 effective tax rate increased when compared to fiscal 2020 primarily due to an increased percentage of profits earned and taxed in jurisdictions with a higher tax rate.

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various

14

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(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. Notices have not been received for subsequent periods. 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.

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, 2020 dated May 29, 2020: Item 1 titled “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factors” in Item 1A titled "Product related regulations and claims".

From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.

We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 7 to our consolidated financial statements titled, “Income Tax Expense” in this Quarterly Report on Form 10-Q.

9. Business Segment Information

15

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

We operate and report our financial information in three reportable business segments: Healthcare, Applied Sterilization Technologies and Life Sciences. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.

Prior to April 1, 2020, we operated and reported our financial information in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. The Healthcare Products and Healthcare Specialty Services segments were combined and are now reported as one segment, simply called Healthcare, consistent with the way management now operates and views the business. Prior periods have been recasted in the financial tables below for comparability.

Our Healthcare segment offers infection prevention and procedural solutions for healthcare providers worldwide, including consumable products, equipment maintenance and installation services, and capital equipment. The segment also provides a range of specialty services for healthcare providers including hospital sterilization services and instrument and scope repairs.

Our Applied Sterilization Technologies ("AST") segment provides contract sterilization and testing services for medical device and pharmaceutical manufacturers.

Our Life Sciences segment designs, manufactures and sells consumable products, equipment maintenance, specialty services and capital equipment primarily to pharmaceutical manufacturers around the world.

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 months ended June 30, 2020, 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, 2020, dated May 29, 2020.

16

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

Financial information for each of our segments is presented in the following table:

	Three Months Ended June 30,
	2020			2019
Revenues:
Healthcare	$	399,658		$	445,732
Applied Sterilization Technologies	152,362			154,286
Life Sciences	116,912			96,785
Total revenues	$	668,932		$	696,803
Operating income (loss):
Healthcare	$	82,357		$	90,515
Applied Sterilization Technologies	63,955			68,035
Life Sciences	48,461			33,039
Corporate	(52,367		)	(55,397		)
Total operating income before adjustments	$	142,406		$	136,192
Less: Adjustments
Amortization of acquired intangible assets (1)	$	17,500		$	16,949
Acquisition and integration related charges (2)	1,286			1,917
Redomiciliation and tax restructuring costs (3)	170			1,770
Net loss on divestiture of businesses (1)	10			2,426
Amortization of property "step up" to fair value (1)	603			735
COVID-19 incremental costs (4)	8,670			—
Restructuring charges (5)	166			2,307
Total operating income	$	114,001		$	110,088

⁽¹⁾ For more information regarding our recent acquisitions and divestitures refer to our Annual Report on Form 10-K for the year ended March 31, 2020, dated May 29, 2020.

⁽²⁾ Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.

⁽³⁾ Costs incurred in connection with the Redomiciliation.

⁽⁴⁾ COVID-19 incremental costs includes the additional costs attributable to COVID-19 such as enhanced cleaning protocols, personal protective equipment for our employees, event cancellation fees, and payroll costs associated with our response to COVID-19, net of any government subsidies available.

⁽⁵⁾ For more information regarding our restructuring efforts refer to Note 2 titled, "Restructuring".

Additional information regarding our fiscal 2021 and fiscal 2020 first quarter revenue is disclosed in the following tables:

	Three Months Ended June 30,
	2020		2019
Healthcare:
Consumables	$	83,754	$	116,082
Capital equipment	128,082		120,855
Service	187,822		208,795
Total Healthcare Revenues	$	399,658	$	445,732
Applied Sterilization Technologies Service Revenues	$	152,362	$	154,286
Life Sciences:
Consumables	$	58,842	$	44,029
Capital equipment	30,430		26,769
Service	27,640		25,987
Total Life Sciences Revenues	$	116,912	$	96,785
Total Revenues	$	668,932	$	696,803

17

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

	Three Months Ended June 30,
	2020		2019
Revenues:
Ireland	$	14,373	$	15,108
United States	491,708		511,152
Other locations	162,851		170,543
Total Revenues	$	668,932	$	696,803

Assets include the current and long-lived assets directly attributable to the segment based on the management of the location or on utilization. Certain corporate assets were allocated to the reportable segments based on revenues. Assets attributed to sales and distribution locations are only allocated to the Healthcare and Life Sciences segments.

Individual facilities, equipment, and intellectual properties are utilized for production by both the Healthcare and Life Sciences segments at varying levels over time. As a result, an allocation of total assets, capital expenditures, and depreciation and amortization is not meaningful to the individual performance of the Healthcare and Life Sciences segments. Therefore, their respective amounts are reported together.

	June 30, 2020		March 31, 2020
Assets:
Healthcare and Life Sciences	$	2,607,490	$	2,705,377
Applied Sterilization Technologies	2,756,437		2,720,205
Total assets	$	5,363,927	$	5,425,582

10. Shares and Preferred Shares

Ordinary shares

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

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 June 30,
Denominator (shares in thousands):	2020	2019
Weighted average shares outstanding—basic	84,959	84,638
Dilutive effect of share equivalents	717	928
Weighted average shares outstanding and share equivalents—diluted	85,676	85,566

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 June 30,
(shares in thousands)	2020	2019
Number of share options	330	122

Additional Authorized Shares

18

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

 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 May 7, 2019, our Board of Directors authorized a share repurchase program resulting in a share repurchase authorization of approximately $78,979 (net of taxes, fees and commissions). On July 30, 2019, our Board of Directors approved an increase in the May 7, 2019 authorization of an additional amount of $300,000 (net of taxes, fees and commissions). As of June 30, 2020, there was approximately $333,932 (net of taxes, fees and commissions) of remaining availability under a Board authorized share repurchase program. The share repurchase program has no specified expiration date.

Under the authorization, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any share repurchases may be activated, suspended or discontinued at any time. Due to the uncertainty surrounding the COVID-19 pandemic, share repurchases were suspended on April 9, 2020.

During the first three months of fiscal 2021 through April 9, 2020, we repurchased 35,000 of our ordinary shares for the aggregate amount of $5,047 (net of fees and commissions) pursuant to the authorizations. During the first three months of fiscal 2020, we repurchased 60,000 of our ordinary shares for the aggregate amount of $8,612 (net of fees and commissions) pursuant to the authorizations.

During the first three months of fiscal 2021 we obtained 63,150 of our ordinary shares in the aggregate amount of $9,248 in connection with share based compensation award programs. During the first three months of fiscal 2020, we obtained 66,745 of our ordinary shares in the aggregate amount of $7,446 in connection with share based compensation award programs.

12. Share-Based Compensation

We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Compensation Committee of the Board of Directors, 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 option 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 June 30, 2020, 3,554,149 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 three months of fiscal 2021 and 2020:

	Fiscal 2021		Fiscal 2020
Risk-free interest rate	0.46	%	2.27	%
Expected life of options	6.0 years		6.2 years
Expected dividend yield of stock	0.96	%	1.23	%
Expected volatility of stock	23.04	%	20.27	%

19

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

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 2.78% and 2.77% was applied in fiscal 2021 and 2020, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.

A summary of share option activity is as follows:

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2020	1,796,126		$	91.29
Granted	278,364		182.22
Exercised	(96,435	)	59.65
Forfeited	(1,951	)	97.56
Outstanding at June 30, 2020	1,976,104		$	105.64	7.2 years	$	102,472
Exercisable at June 30, 2020	1,173,669		$	79.79	6.0 years	$	86,437

We estimate that 772,889 of the non-vested stock options outstanding at June 30, 2020 will ultimately vest.

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $153.44 closing price of our ordinary shares on June 30, 2020 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 three months of fiscal 2021 and fiscal 2020 was $9,581 and $18,843, respectively. Net cash proceeds from the exercise of stock options were $5,367 and $9,899 for the first three months of fiscal 2021 and fiscal 2020, respectively.

The weighted average grant date fair value of stock option grants was $27.44 and $23.19 for the first three months of fiscal 2021 and fiscal 2020, 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 June 30, 2020 and 2019 was $493 and $610, 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, 2020	575,830		30,894		$	98.07
Granted	129,495		5,952		165.30
Vested	(152,741	)	(7,857	)	80.34
Forfeited	(4,011	)	—		100.80
Non-vested at June 30, 2020	548,573		28,989		$	118.80

Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares and units that vested during the first three months of fiscal 2021 was $12,902.

As of June 30, 2020, there was a total of $63,875 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plan. We expect to recognize the cost over a weighted average period of 2.4 years.

20

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

13. Financial and Other Guarantees

We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Changes in our warranty liability during the first three months of fiscal 2021 were as follows:

	Warranties
Balance, March 31, 2020	$	7,381
Warranties issued during the period	2,234
Settlements made during the period	(2,613		)
Balance, June 30, 2020	$	7,002

14. Derivatives and Hedging

From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. During the first quarter of fiscal 2021, we also entered into forward foreign currency contracts in order to hedge a portion of our expected non-U.S. dollar denominated earnings against our reporting currency, the U.S. dollar. These foreign currency exchange contracts will mature during fiscal 2021. We did not elect hedge accounting for these forward foreign currency contracts; however, we may seek to apply hedge accounting in future scenarios. We do not use derivative financial instruments for speculative purposes.

None of these contracts are designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At June 30, 2020, we held foreign currency forward contracts to buy 99.0 million Mexican pesos, 6.3 million Canadian dollars; and to sell 11.3 million euros. At June 30, 2020 we held commodity swap contracts to buy 536.4 thousand pounds of nickel.

	Asset Derivatives				Liability Derivatives
	Fair Value at		Fair Value at		Fair Value at		Fair Value at
Balance sheet location	June 30, 2020		March 31, 2020		June 30, 2020		March 31, 2020
Prepaid & Other	$	451	$	124	$	—	$	—
Accrued expenses and other	$	—	$	—	$	777	$	912

The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:

	Location of gain (loss) recognized in income	Amount of gain (loss) recognized in income
		Three Months Ended June 30,
		2020		2019
Foreign currency forward contracts	Selling, general and administrative	$	143	$	406
Commodity swap contracts	Cost of revenues	$	364	$	(127	)

Additionally, we hold our debt in multiple currencies to fund our operations and investments in certain subsidiaries. We designate portions of foreign currency denominated intercompany loans as hedges of portions of net investments in foreign operations. Net debt designated as non-derivative net investment hedging instruments totaled $46,698 at June 30, 2020. These hedges are designed to be fully effective and any associated gain or loss is recognized in Accumulated Other Comprehensive Income and will be reclassified to income in the same period when a gain or loss related to the net investment in the foreign operation is included in income.

21

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

15. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions.

The following table shows the fair value of our financial assets and liabilities at June 30, 2020 and March 31, 2020:

					Fair Value Measurements
	Carrying Value				Quoted Prices in Active Markets for Identical Assets					Significant Other Observable Inputs					Significant Unobservable Inputs
					Level 1					Level 2					Level 3
	June 30,		March 31,		June 30,		March 31,			June 30,		March 31,			June 30,		March 31,
Assets:
Cash and cash equivalents	$	255,627	$	319,581	$	255,627	$	319,581		$	—	$	—		$	—	$	—
Forward and swap contracts (1)	451		124		—		—			451		124			—		—
Equity investments(2)	9,979		9,624		9,979		9,624		—	—		—		—	—		—
Other investments	2,550		2,507		2,550		2,507			—		—			—		—
Liabilities:
Forward and swap contracts (1)	$	777	$	912	$	—	$	—		$	777	$	912		$	—	$	—
Deferred compensation plans (2)	1,630		1,475		1,630		1,475			—		—			—		—
Total debt (3)	1,057,156		1,150,521		—		—			1,095,965		1,143,978			—		—
Contingent consideration obligations (4)	15,976		15,988		—		—			—		—			15,976		15,988

⁽¹⁾ The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.

⁽²⁾ We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Changes in the fair value of these investments are recorded in the "Interest income and miscellaneous expense line" of the Consolidated Statement of Income. During the first quarter of fiscal 2021 and 2020, we recorded a gains (losses) of $309 and $(1,758), respectively, related to these investments.

⁽³⁾ We estimate the fair value of our debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.

⁽⁴⁾ Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.

22

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three Months Ended June 30, 2020 and 2019

(dollars in thousands, except as noted)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at June 30, 2020 are summarized as follows:

	Contingent Consideration
Balance at March 31, 2020	$	15,988
Additions	111
Payments	(21		)
Currency translation adjustments