ste-20200930

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 September 30, 2020


☐			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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” and 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 October 30, 2020: 85,324,006

Table of Contents

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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

Part II—Other Information
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6.	Exhibits	46
	Signature	47

Table of Contents

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)


	September 30, 2020		March 31, 2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	312,028	$	319,581
Accounts receivable (net of allowances of $10,276 and $12,051 respectively)	503,724		586,481
Inventories, net	278,593		248,259
Prepaid expenses and other current assets	55,965		54,430
Total current assets	1,150,310		1,208,751
Property, plant, and equipment, net	1,176,066		1,111,855
Lease right-of-use assets, net	143,041		131,837
Goodwill	2,417,956		2,356,085
Intangibles, net	550,022		565,473
Other assets	55,172		51,581
Total assets	$	5,492,567	$	5,425,582
Liabilities and equity
Current liabilities:
Accounts payable	$	124,944	$	149,341
Accrued income taxes	15,831		14,013
Accrued payroll and other related liabilities	114,781		128,261
Lease obligations due within one year	20,971		19,809
Accrued expenses and other	158,891		192,183
Total current liabilities	435,418		503,607
Long-term indebtedness	1,020,554		1,150,521
Deferred income taxes, net	164,727		160,270
Long-term lease obligations	124,337		114,114
Other liabilities	85,076		90,346
Total liabilities	$	1,830,112	$	2,018,858
Commitments and contingencies (see Note 8)
Ordinary shares, with $0.001 par value; 500,000 shares authorized; 85,251 and 84,924 ordinary shares issued and outstanding, respectively	1,990,880		1,982,164
Retained earnings	1,786,878		1,647,175
Accumulated other comprehensive loss	(130,613)		(235,463)
Total shareholders’ equity	3,647,145		3,393,876
Noncontrolling interests	15,310		12,848
Total equity	3,662,455		3,406,724
Total liabilities and equity	$	5,492,567	$	5,425,582

See notes to consolidated financial statements.

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STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
Revenues:
Product	$	339,504	$	337,666	$	640,612	$	645,401
Service	416,628		399,174		784,452		788,242
Total revenues	756,132		736,840		1,425,064		1,433,643
Cost of revenues:
Product	175,798		183,600		332,353		344,559
Service	250,297		234,573		477,106		464,574
Total cost of revenues	426,095		418,173		809,459		809,133
Gross profit	330,037		318,667		615,605		624,510
Operating expenses:
Selling, general, and administrative	172,707		175,959		327,877		354,740
Research and development	16,143		16,249		32,374		31,834
Restructuring expenses	(76)		(274)		90		1,115
Total operating expenses	188,774		191,934		360,341		387,689
Income from operations	141,263		126,733		255,264		236,821
Non-operating expenses, net:
Interest expense	8,665		10,444		18,157		20,889
Interest (income) and miscellaneous expense	(1,188)		(1,018)		(3,477)		(785)
Total non-operating expenses, net	7,477		9,426		14,680		20,104
Income before income tax expense	133,786		117,307		240,584		216,717
Income tax expense	27,778		22,165		46,452		36,798
Net income	106,008		95,142		194,132		179,919
Less: Net income attributable to noncontrolling interests	150		373		84		560
Net income attributable to shareholders	$	105,858	$	94,769	$	194,048	$	179,359

Net income per share attributed to shareholders
Basic	$	1.24	$	1.12	$	2.28	$	2.12
Diluted	$	1.23	$	1.11	$	2.26	$	2.09
Cash dividends declared per share ordinary outstanding	$	0.40	$	0.37	$	0.77	$	0.71

See notes to consolidated financial statements.

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STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(Unaudited)


	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
Net income	$	106,008	$	95,142	$	194,132	$	179,919
Less: Net income attributable to noncontrolling interests	150		373		84		560
Net income attributable to shareholders	105,858		94,769		194,048		179,359

Other comprehensive income (loss)
Amortization of pension and postretirement benefit plan costs, (net of taxes of $173, $171, $347 and $341, respectively)	(510)		(506)		(1,020)		(1,011)
Change in cumulative currency translation adjustment	78,251		(68,367)		105,870		(64,928)
Total other comprehensive income (loss)	77,741		(68,873)		104,850		(65,939)
Comprehensive income	$	183,599	$	25,896	$	298,898	$	113,420

See notes to consolidated financial statements.

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STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended September 30,
	2020		2019
Operating activities:
Net income	$	194,132	$	179,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization	103,372		96,736
Deferred income taxes	1,101		(766)
Share-based compensation expense	13,901		13,276
Loss on the disposal of property, plant, equipment, and intangibles, net	178		45
Loss on sale of businesses, net	5		2,476
Other items	5,460		939
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	88,134		54,547
Inventories, net	(25,266)		(26,328)
Other current assets	(355)		2,885
Accounts payable	(27,545)		(19,059)
Accruals and other, net	(57,044)		(44,670)
Net cash provided by operating activities	296,073		260,000
Investing activities:
Purchases of property, plant, equipment, and intangibles, net	(110,746)		(98,168)
Proceeds from the sale of property, plant, equipment and intangibles	275		206
Proceeds from the sale of businesses	—		439

Acquisition of businesses, net of cash acquired	—		(87,935)
Other	(2,392)		—
Net cash used in investing activities	(112,863)		(185,458)
Financing activities:

Payments on long-term obligations	(35,000)		—
Proceeds (payments) under credit facilities, net	(107,162)		13,240
Deferred financing fees and debt issuance costs	—		(1,206)
Acquisition related deferred or contingent consideration	(42)		(452)
Repurchases of ordinary shares	(14,434)		(37,866)
Cash dividends paid to ordinary shareholders	(65,560)		(60,220)
Contributions from noncontrolling interest	2,258		—
Stock option and other equity transactions, net	20,621		22,975
Net cash used in financing activities	(199,319)		(63,529)
Effect of exchange rate changes on cash and cash equivalents	8,556		(6,110)
Increase (decrease) in cash and cash equivalents	(7,553)		4,903
Cash and cash equivalents at beginning of period	319,581		220,633
Cash and cash equivalents at end of period	$	312,028	$	225,536

See notes to consolidated financial statements.

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STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30, 2020
	Ordinary Shares			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Non-controlling Interest		Total Equity
	Number	Amount
Balance at June 30, 2020	85,060	$	1,983,047	$	1,699,971	$	(208,354)	$	15,049	$	3,489,713
Comprehensive income:
Net income	—	—		105,858		—		150		106,008
Other comprehensive income	—	—		—		77,741		—		77,741
Repurchases of ordinary shares	(13)	(15,276)		15,138		—		—		(138)
Equity compensation programs and other	204	23,109		—		—		—		23,109
Cash dividends – $0.40 per ordinary share	—	—		(34,089)		—		—		(34,089)
Other changes in noncontrolling interest	—	—		—		—		111		111
Balance at September 30, 2020	85,251	$	1,990,880	$	1,786,878	$	(130,613)	$	15,310	$	3,662,455


	Six Months Ended September 30, 2020
	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	—	—		194,048		—		84		194,132
Other comprehensive income	—	—		—		104,850		—		104,850
Repurchases of ordinary shares	(111)	(25,649)		11,215		—		—		(14,434)
Equity compensation programs and other	438	34,365		—		—		—		34,365
Cash dividends – $0.77 per ordinary share	—	—		(65,560)		—		—		(65,560)
Contributions from noncontrolling interest	—	—		—		—		2,258		2,258
Other changes in noncontrolling interest	—	—		—		—		120		120
Balance at September 30, 2020	85,251	$	1,990,880	$	1,786,878	$	(130,613)	$	15,310	$	3,662,455

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STERIS PLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30, 2019
	Ordinary Shares			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Non-controlling Interest		Total Equity
	Number	Amount
Balance at June 30, 2019	84,754	$	1,996,354	$	1,397,390	$	(156,844)	$	8,102	$	3,245,002
Comprehensive income:
Net income	—	—		94,769		—		373		95,142
Other comprehensive income	—	—		—		(68,873)		—		(68,873)
Repurchases of ordinary shares	(152)	(34,944)		11,963		—		—		(22,981)
Equity compensation programs and other	195	20,250		—		—		—		20,250
Cash dividends $0.37 per ordinary share	—	—		(31,397)		—		—		(31,397)
Other changes in noncontrolling interest	—	—		—		—		502		502
Balance at September 30, 2019	84,797	$	1,981,660	$	1,472,725	$	(225,717)	$	8,977	$	3,237,645


	Six Months Ended September 30, 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	—	—		179,359		—		560		179,919
Other comprehensive income	—	—		—		(65,939)		—		(65,939)
Repurchases of ordinary shares	(279)	(52,428)		14,562		—		—		(37,866)
Equity compensation programs and other	559	35,524		—		—		—		35,524
Cash dividends – $0.71 per ordinary share	—	—		(60,220)		—		—		(60,220)
Other changes in noncontrolling interest	—	—		—		—		429		429
Balance at September 30, 2019	84,797	$	1,981,660	$	1,472,725	$	(225,717)	$	8,977	$	3,237,645

STERIS PLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Months Ended September 30, 2020 and 2019

(dollars in thousands, except as noted)

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 and six month periods ended September 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 control of the asset, which is upon delivery of each performance obligation. Revenues and costs of revenues related to these

Table of Contents

STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 30, 2020 and 2019

(dollars in thousands, except as noted)

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 September 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.

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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 cancellable 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 six months of fiscal 2021, $36,768 of the March 31, 2020 deferred revenue balance was recorded as revenue. During the first six months of fiscal 2020, $42,923 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 cancellable 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 September 30, 2020, the transaction price allocated to remaining performance obligations was approximately $971,000. We expect to recognize approximately 49% of the transaction price within one year and approximately 45% 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.

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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.

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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 $43,941 related to these restructuring actions, of which $31,750 was recorded as restructuring expenses and $12,191 was recorded in cost of revenues, with a total of $34,116, $7,474 and $668 related to the Healthcare, Applied Sterilization Technologies and Life Sciences segments, respectively. Corporate related restructuring charges were $1,683. 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 September 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:


	September 30, 2020		March 31, 2020
Raw materials	$	101,608	$	94,321
Work in process	40,617		35,643
Finished goods	172,483		151,381
LIFO reserve	(18,752)		(16,937)
Reserve for excess and obsolete inventory	(17,363)		(16,149)
Inventories, net	$	278,593	$	248,259

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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:


	September 30, 2020		March 31, 2020
Land and land improvements (1)	$	67,407	$	65,994
Buildings and leasehold improvements	546,273		531,267
Machinery and equipment	722,017		682,488
Information systems	182,104		181,112
Radioisotope	547,395		508,593
Construction in progress (1)	196,016		159,731
Total property, plant, and equipment	2,261,212		2,129,185
Less: accumulated depreciation and depletion	(1,085,146)		(1,017,330)
Property, plant, and equipment, net	$	1,176,066	$	1,111,855

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

5. Debt

Indebtedness was as follows:


	September 30, 2020		March 31, 2020
Credit Agreement	$	170,280	$	275,449
Private Placement	853,310		878,409
Deferred financing costs	(3,036)		(3,337)
Total long term debt	$	1,020,554	$	1,150,521

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.

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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:


	September 30, 2020		March 31, 2020
Accrued payroll and other related liabilities:
Compensation and related items	$	50,424	$	42,205
Accrued vacation/paid time off	14,227		9,917
Accrued bonuses	34,307		53,041
Accrued employee commissions	12,012		19,298

Other postretirement benefit obligations-current portion	1,488		1,488
Other employee benefit plans obligations-current portion	2,323		2,312
Total accrued payroll and other related liabilities	$	114,781	$	128,261
Accrued expenses and other:
Deferred revenues	$	35,035	$	53,299
Service liabilities	39,840		47,505
Self-insured risk reserves-current portion	7,773		7,342
Accrued dealer commissions	20,913		15,827
Accrued warranty	6,951		7,381
Asset retirement obligation-current portion	1,184		2,671
Other	47,195		58,158
Total accrued expenses and other	$	158,891	$	192,183
Other liabilities:
Self-insured risk reserves-long-term portion	$	17,452	$	17,452
Other postretirement benefit obligations-long-term portion	8,861		9,880
Defined benefit pension plans obligations-long-term portion	10,760		10,987
Other employee benefit plans obligations-long-term portion	2,266		2,333
Accrued long-term income taxes	10,841		11,959
Asset retirement obligation-long-term portion	11,560		9,843
Other	23,336		27,892
Total other liabilities	$	85,076	$	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 September 30, 2020 and 2019 were 20.8% and 18.9%, respectively. The effective income tax rates for the six month periods ended September 30, 2020 and 2019 were 19.3% and 17.0%, 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

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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 are scheduled for an initial appeals proceeding later in the 2021 fiscal year. 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

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 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 recast 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 and six months ended September 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.

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


	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
Revenues:
Healthcare	$	470,927	$	485,283	$	870,585	$	931,015
Applied Sterilization Technologies	169,547		152,907		321,909		307,193
Life Sciences	115,658		98,650		232,570		195,435
Total revenues	$	756,132	$	736,840	$	1,425,064	$	1,433,643
Operating income (loss):
Healthcare	$	104,796	$	103,035	$	187,153	$	193,550
Applied Sterilization Technologies	76,835		65,386		140,790		133,421
Life Sciences	46,433		32,315		94,894		65,354
Corporate	(58,155)		(50,956)		(110,522)		(106,353)
Total operating income before adjustments	$	169,909	$	149,780	$	312,315	$	285,972
Less: Adjustments
Amortization of acquired intangible assets (1)	$	21,955	$	18,952	$	39,455	$	35,901
Acquisition and integration related charges (2)	1,135		1,947		2,421		3,864
Redomiciliation and tax restructuring costs (3)	384		1,016		554		2,786

Net (gain) loss on divestiture of businesses (1)	(5)		50		5		2,476
Amortization of property "step up" to fair value (1)	714		446		1,317		1,181
COVID-19 incremental costs (4)	4,539		—		13,209		—
Restructuring charges (5)	(76)		636		90		2,943
Total operating income	$	141,263	$	126,733	$	255,264	$	236,821

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STERIS PLC AND SUBSIDIARIES

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

For the Three and Six Months Ended September 30, 2020 and 2019

(dollars in thousands, except as noted)

(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 revenue is disclosed in the following tables:


	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
Healthcare:
Capital equipment	$	131,673	$	152,631	$	259,755	273,486
Consumables	122,797		116,033		206,551		232,115
Service	216,457		216,619		404,279		425,414
Total Healthcare Revenues	$	470,927	$	485,283	$	870,585	$	931,015
Applied Sterilization Technologies Service Revenues	$	169,547	$	152,907	$	321,909	$	307,193
Life Sciences:
Capital equipment	$	29,241	$	26,462	$	59,671	$	53,231
Consumables	55,793		42,540		114,635		86,569
Service	30,624		29,648		58,264		55,635
Total Life Sciences Revenues	$	115,658	$