Document
Table of Contents

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

For the quarterly period ended December 31, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______            

Commission File Number 1-37614
STERIS plc
(Exact name of registrant as specified in its charter)

United Kingdom
 
98-1203539
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
Chancery House, 190 Waterside Road, Hamilton Industrial Park Leicester
 
LE51QZ
(Address of principal executive offices)
 
(Zip code)
44-116-276-8636
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
  
Accelerated Filer  o
Non-Accelerated Filer  o
(Do not check if a smaller reporting company)
  
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of ordinary shares outstanding as of February 3, 2017: 84,932,972

1

Table of Contents

STERIS plc and Subsidiaries
Form 10-Q
Index
 
 
 
Page
 
 
 
 
 


2

Table of Contents

PART 1—FINANCIAL INFORMATION

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

ITEM 1.
FINANCIAL STATEMENTS


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
December 31,
2016
 
March 31,
2016
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
264,857

 
$
248,841

Accounts receivable (net of allowances of $8,819 and $11,185, respectively)
 
443,661

 
471,523

Inventories, net
 
209,714

 
192,792

Prepaid expenses and other current assets
 
52,109

 
59,369

Total current assets
 
970,341

 
972,525

Property, plant, and equipment, net
 
939,590

 
1,064,319

Goodwill and intangibles, net
 
2,941,933

 
3,279,942

Other assets
 
35,082

 
29,630

Total assets
 
$
4,886,946

 
$
5,346,416

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
122,469

 
$
139,572

Accrued income taxes
 

 
13,683

Accrued payroll and other related liabilities
 
71,448

 
93,976

Accrued expenses and other
 
156,136

 
153,375

Total current liabilities
 
350,053

 
400,606

Long-term indebtedness
 
1,507,039

 
1,567,796

Deferred income taxes, net
 
186,536

 
254,824

Other liabilities
 
73,208

 
84,298

Total liabilities
 
$
2,116,836

 
$
2,307,524

Commitments and contingencies (see Note 9)
 

 

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

 
15

Ordinary shares, with £0.10 par value; £17,006 shares aggregate par amount authorized; 84,928 and 85,920 ordinary shares issued and outstanding, respectively
 
2,082,921

 
2,151,719

Retained earnings
 
950,300

 
939,459

Accumulated other comprehensive loss
 
(274,558
)
 
(68,159
)
Total shareholders’ equity
 
2,758,678

 
3,023,034

Noncontrolling interests
 
11,432

 
15,858

Total equity
 
2,770,110

 
3,038,892

Total liabilities and equity
 
$
4,886,946

 
$
5,346,416


See notes to consolidated financial statements.

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Table of Contents

STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Product
 
$
302,260

 
$
305,156

 
$
866,226

 
$
811,608

Service
 
344,514

 
313,532

 
1,065,341

 
736,879

Total revenues
 
646,774

 
618,688

 
1,931,567

 
1,548,487

Cost of revenues:
 
 
 
 
 
 
 
 
Product
 
152,879

 
165,575

 
450,688

 
443,519

Service
 
236,286

 
214,932

 
735,372

 
473,376

Total cost of revenues
 
389,165

 
380,507

 
1,186,060

 
916,895

Gross profit
 
257,609

 
238,181

 
745,507

 
631,592

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
158,760

 
177,319

 
474,326

 
476,613

Goodwill impairment loss
 
58,356

 

 
58,356

 

Research and development
 
14,591

 
14,334

 
43,636

 
42,354

Restructuring expenses
 
18

 
(194
)
 
220

 
(976
)
Total operating expenses
 
231,725

 
191,459

 
576,538

 
517,991

Income from operations
 
25,884

 
46,722

 
168,969

 
113,601

Non-operating expenses, net:
 
 
 
 
 
 
 
 
Interest expense
 
10,980

 
17,706

 
32,975

 
31,312

Interest income and miscellaneous expense
 
(539
)
 
(406
)
 
(1,317
)
 
(1,116
)
Total non-operating expenses, net
 
10,441

 
17,300

 
31,658

 
30,196

Income before income tax expense
 
15,443

 
29,422

 
137,311

 
83,405

Income tax expense
 
19,790

 
8,268

 
52,745

 
29,689

Net (loss) income
 
(4,347
)
 
21,154

 
84,566

 
53,716

Less: Net income attributable to noncontrolling interests
 
649

 
1,109

 
744

 
693

Net (loss) income attributable to shareholders
 
$
(4,996
)
 
$
20,045

 
$
83,822

 
$
53,023

 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
Basic
 
$
(0.06
)
 
$
0.26

 
$
0.98

 
$
0.81

Diluted
 
$
(0.06
)
 
$
0.26

 
$
0.97

 
$
0.80

Cash dividends declared per share outstanding
 
$
0.28

 
$
0.25

 
$
0.81

 
$
0.73


See notes to consolidated financial statements.


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Table of Contents

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

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(4,347
)
 
$
21,154

 
$
84,566

 
$
53,716

  Less: Net income attributable to noncontrolling
  interests
649

 
1,109

 
744

 
693

Net (loss) income attributable to shareholders
(4,996
)
 
20,045

 
83,822

 
53,023

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
 
 
Unrealized loss on available for sale securities, (net of taxes of $29, $6, $143, and $251, respectively)
(55
)
 
11

 
(149
)
 
(1,389
)
Amortization of pension and postretirement benefit plans costs, (net of taxes of $241, $233, $723, and $468, respectively)
(391
)
 
(377
)
 
(1,171
)
 
(757
)
Pension settlement, (net of taxes of $0, $0, $0, and $10,563, respectively)

 

 

 
17,029

Change in cumulative foreign currency translation adjustment
(180,084
)
 
(14,593
)
 
(205,079
)
 
(22,636
)
Total other comprehensive loss
(180,530
)
 
(14,959
)
 
(206,399
)
 
(7,753
)
Comprehensive (loss) income
$
(185,526
)
 
$
5,086

 
$
(122,577
)
 
$
45,270


See notes to consolidated financial statements.




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Table of Contents

STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Nine Months Ended December 31,
 
 
2016
 
2015
Operating activities:
 
 
 
 
Net income
 
$
84,566

 
$
53,716

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
135,245

 
90,925

Deferred income taxes
 
46,753

 
(3,037
)
Share-based compensation expense
 
14,393

 
12,240

Pension settlement expense
 

 
26,470

Pension contributions made in settlement
 

 
(4,641
)
Loss on the disposal of property, plant, equipment, and intangibles, net
 
394

 
352

Excess tax benefit from share-based compensation
 

 
(5,909
)
Loss on sale of businesses, net
 
42,771

 

Goodwill impairment loss
 
58,356

 

Other items
 
(26,637
)
 
(18,163
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable, net
 
(213
)
 
(3,070
)
Inventories, net
 
(27,368
)
 
(15,481
)
Other current assets
 
4,223

 
(5,070
)
Accounts payable
 
(5,778
)
 
(17,893
)
Accruals and other, net
 
(37,300
)
 
(5,820
)
Net cash provided by operating activities
 
289,405

 
104,619

Investing activities:
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(112,225
)
 
(82,117
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
4,785

 
400

Proceeds from the sale of businesses
 
136,255

 

Purchase of investments
 
(6,356
)
 

Acquisition of businesses, net of cash acquired
 
(65,322
)
 
(604,682
)
Net cash used in investing activities
 
(42,863
)
 
(686,399
)
Financing activities:
 
 
 
 
Proceeds from issuance of long-term obligations
 

 
350,000

Payments on long-term obligations
 
(15,000
)
 

(Payments) proceeds under credit facilities, net
 
(30,879
)
 
348,670

Deferred financing fees and debt issuance costs
 

 
(5,094
)
Acquisition related deferred or contingent consideration
 
(6,352
)
 

Repurchases of ordinary shares
 
(95,188
)
 
(14,069
)
Cash dividends paid to ordinary shareholders
 
(69,411
)
 
(43,728
)
Proceeds from issuance of equity to minority shareholders
 
5,022

 
488

Stock option and other equity transactions, net
 
3,221

 
10,944

Excess tax benefit from share-based compensation
 

 
5,909

Net cash (used in) provided by financing activities
 
(208,587
)
 
653,120

Effect of exchange rate changes on cash and cash equivalents
 
(21,939
)
 
(7,669
)
Increase in cash and cash equivalents
 
16,016

 
63,671

Cash and cash equivalents at beginning of period
 
248,841

 
167,689

Cash and cash equivalents at end of period
 
$
264,857

 
$
231,360

See notes to consolidated financial statements.

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Table of Contents

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, unless noted and except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

STERIS plc (“Parent”) was organized in 2014 under the name Solar New HoldCo Limited as a private limited company for the purpose of effecting under the laws of England and Wales the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). Effective November 2, 2015 the Parent was re-registered as a public company under the name STERIS plc and the Combination closed. As a result of the Combination closing, STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name of Synergy Health Limited. The acquisition of Old STERIS was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015, are considered to be the historical financial statements of STERIS plc. Due to the timing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward which affects comparability to the prior period historical operations of the Company throughout this Quarterly Report on Form 10-Q.

STERIS offers Customers capital equipment products, such as sterilizers and surgical tables; connectivity solutions such as operating room integration; consumable products, such as detergents, gastrointestinal 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, among other services.

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, 2016 dated May 31, 2016. The Consolidated Balance Sheet at March 31, 2016 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.







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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



Use of Estimates

We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three and nine month periods ended December 31, 2016 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2017.


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 recently been adopted
ASU 2015-05, "Goodwill and other-Internal-Use Software" (Subtopic 350-40)
 
April 2015
 
The standard provides guidance on a customer's accounting for fees paid in cloud computing arrangements. Previously, there was no U.S. GAAP guidance on accounting for such fees from the customer's perspective. Under the standard, customers will apply the same criteria as vendors to determine whether the arrangement contains a software license or is solely a service contract. The determination could impact the classification of advance payments in the statements of financial position and cash flows as well as the classification of the expenses in the results of operations. The standard is effective for annual periods beginning after December 15, 2015 and interim periods within that period. Early adoption is permitted.
 
First Quarter Fiscal 2017
 
The adoption of this standard did not have a material impact on our statements of consolidated financial position, results of operations and cash flows.
ASU 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" (Topic 718)
 
March 2016
 
The update simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016 and interim periods within that period. Early adoption is permitted.
 
First Quarter Fiscal 2017
 
As a result of the adoption of this standard, we recorded $4.3 million of excess tax benefits associated with share based compensation in the statement of income for the nine months ended December 31, 2016 and have included the associated cash flows as cash provided by operating activities. Prior periods have not been restated.
Standards that have yet to be adopted

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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



ASU 2014-09, "Revenue from Contracts with Customers"
 
May 2014
 
The standard will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. The standard update is effective for annual periods beginning after December 15, 2017 and interim periods within that period, early adoption is not permitted before the original public entity effective date of December 15, 2016.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our consolidated financial position, results of operations and cash flows.
ASU 2016-02, "Leases" (Topic 842)
 
February 2016
 
The update will require lessees to record all leases, whether finance or operating, on the balance sheet. An asset will be recorded to represent the right to use the leased asset, and a liability will be recorded to represent the lease obligation. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our statements of consolidated financial position, results of operations and cash flows.
ASU 2016-07, "Investments - Equity Method and Joint Ventures, Simplifying the Transition to the Equity Method of Accounting" (Topic 323)
 
March 2016
 
The update replaces the previous requirement to retroactively adopt the equity method. The new standard requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for annual periods beginning after December 15, 2016 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We do not expect the adoption of this standard to have a material impact on our statements of consolidated financial position, results of operations and cash flows.

ASU 2016-15, "Statement of Cash Flows"
(Topic 230)
 
August 2016
 
This update provides guidance on the following several specific cash flow issues: Debt prepayment or debt extinguishment costs, Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The standard is effective for annual periods beginning after December 15, 2017 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our statement of cash flows.

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, 2016 dated May 31, 2016. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2016.


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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)




2. Business Acquisitions and Divestitures
Fiscal 2017 Acquisitions
Compass Medical Inc
On September 16, 2016, we purchased the assets of Compass Medical, Inc., for approximately $16.0 million. The purchase price was financed with credit facility borrowings. Compass Medical, Inc. specializes in the sale and repair of flexible endoscopes. On an annual basis, Compass Medical, Inc. has generated revenues of approximately $6.0 million and will be integrated into our Healthcare Specialty Services segment.
Phoenix Surgical Holdings, Ltd. and Endo-Tek LLP
On August 31, 2016, we purchased 100% of the shares of Phoenix Surgical Holdings, Ltd. and the assets of Endo-Tek LLP for approximately $14.3 million combined, net of cash acquired. The purchase price was financed with cash on hand. On an annual basis, these operations, which specialize in the repair of endoscopes, generated approximately $8.0 million in combined revenue and will be integrated into our Healthcare Specialty Services segment.
Medisafe
On July 22, 2016, we purchased 100% of the shares of Medisafe Holdings, Ltd., a U.K. manufacturer of washer/disinfector equipment and related consumables and services for approximately $34.3 million, net of cash acquired. The purchase price was financed with cash on hand. On an annual basis, the Medisafe product line has generated approximately $18.0 million in revenue. The acquisition of Medisafe provides washer manufacturing and research and development capabilities in the U.K. Medisafe's products and services will be integrated into our Healthcare Products segment.
The Consolidated Financial Statements include the operating results of acquisitions from the acquisition dates. The table below summarizes the preliminary allocation of the purchase price to the net assets acquired based on fair values at the acquisition date for fiscal 2017 acquisitions.
 
Medisafe (1)
 
Compass (1)
 
Phoenix and Endo-Tek (1)
Cash
$
3,767

 
$

 
$
769

Accounts receivable
3,703

 
629

 
1,123

Inventory
2,500

 
659

 
950

Property, plant and equipment
642

 
13

 
1,092

Other assets

 
31

 
46

Intangible assets
12,239

 
5,992

 

Goodwill
20,706

 
8,987

 
12,794

Total Assets
43,557

 
16,311

 
16,774

 
 
 
 
 
 
Current liabilities
(5,281
)
 
(309
)
 
(1,373
)
 
 
 
 
 
 
Non-current liabilities
(227
)
 

 
(295
)
Total Liabilities
(5,508
)
 
(309
)
 
(1,668
)
 
 
 
 
 
 
Net Assets
$
38,049

 
$
16,002

 
$
15,106

(1) Purchase price allocations are still preliminary as of December 31, 2016, as valuations have not been finalized.

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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



Fiscal 2016 Acquisitions
Synergy Health plc
On November 2, 2015, STERIS acquired all outstanding shares of Synergy in a cash and stock transaction valued at £24.80 ($38.17) per Synergy share, or a total of approximately $2.3 billion based on the low trading price of Old STERIS’s stock of $73.02 per share on November 2, 2015. The Combination brought together businesses that generate revenues from over 100 countries and that are geographically complementary. The Combination is expected to result in cost savings from optimizing global back-office infrastructure, leveraging best-demonstrated practices across plants, in-sourcing consumables, and eliminating redundant public company costs. Total costs of approximately $63,789 before tax, were incurred during fiscal year 2016 related to the Combination and are reported in Selling, general and administrative expense.
The acquisition of Synergy has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired, liabilities assumed and noncontrolling interests be recognized at their respective fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates.

During the fiscal 2017 third quarter, adjustments were made to finalize the opening balance sheet fair value estimates. Adjustments related primarily to property, plant and equipment, intangible assets, and goodwill. The cumulative impact of the final purchase price allocation resulted in a cumulative decrease in depreciation, amortization and depletion expense of approximately $20 million, of which approximately $17 million was recorded within Selling, general and administrative expense and approximately $3 million was recorded within Cost of revenues on the Consolidated Statements of Income. The cumulative foreign currency translation adjustment recorded as a result of the balance sheet adjustments was approximately $170 million. The purchase price allocation below represents Synergy’s opening balance sheet as of November 2, 2015.
 
November 2, 2015
 
 
 
November 2, 2015
 
(as previously reported)
 
Adjustments
 
(revised)
Cash
$
53,057

 
$

 
$
53,057

Accounts receivable
107,341

 
(4,248
)
 
103,093

Inventory
30,074

 

 
30,074

Property, plant and equipment
534,879

 
(38,324
)
 
496,555

Other assets
19,708

 
(533
)
 
19,175

Intangible assets
806,526

 
(302,330
)
 
504,196

Goodwill
1,411,781

 
273,743

 
1,685,524

Total Assets
2,963,366

 
(71,692
)
 
2,891,674

 
 
 
 
 
 
Current liabilities
(108,192
)
 
260

 
(107,932
)
 
 
 
 
 
 
Long-term indebtedness
(321,082
)
 

 
(321,082
)
Non-current liabilities
(230,544
)
 
71,432

 
(159,112
)
Total Liabilities
(659,818
)
 
71,692

 
(588,126
)
 
 
 
 
 
 
Net Assets
$
2,303,548

 
$

 
$
2,303,548

The fair value of machinery and equipment was primarily determined using the cost approach, considering replacement cost, reproduction costs and trend factors based on price indices, which are classified as level 2 inputs within the fair value hierarchy.

11

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



The fair values of intangible assets were determined using an income approach considering useful lives, future revenues and margins, and a risk-adjusted discount rate, which are classified as level 3 inputs within the fair value hierarchy. The estimated fair values and useful lives of these intangible assets are as follows:

 
Total
 
Useful Life
Customer relationships
$
459,074

 
15 years
Trade names
19,404

 
15 years
Technology
25,718

 
6 years
Total intangible assets acquired
$
504,196

 
 
During the third quarter of fiscal 2017, we adopted a new branding strategy change as part of the integration of certain Synergy Health operations into the Healthcare Specialty Services Segment. Under this new branding strategy, hospital sterilization services and instrument repair services will utilize the STERIS Instrument Management Services brand name. The Synergy Health trade name will be phased out with regard to these services by the end of fiscal 2017. As a result, we have shortened the estimated useful life of the Synergy Health trade name and have accelerated the corresponding amortization expense over the remainder of fiscal 2017. During the current-year quarter, $7,117 of additional amortization expense was recorded within the Selling, general and administrative expense line on the Consolidated Statements of Income.
Goodwill was allocated to the Applied Sterilization Technologies and Healthcare Specialty Services segments. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce, which are further described above. Goodwill recognized as a result of the acquisition is not deductible for income tax reporting purposes.

Divestitures
US Linen Management Services
On November 3, 2016 we sold our Synergy Health US Linen Management Services business to SRI Healthcare LLC. Annual revenues for the US Linen Management Services were approximately $50 million and were included in the Healthcare Specialty Services segment. We recorded proceeds of $4.5 million and recognized a pre-tax loss on the sale, subject to final adjustments, of $29 million in Selling, general, and administrative expense in the Consolidated Statement of Income.
Synergy Health Labs
On September 2, 2016 we sold Synergy Health Laboratory Services to SYNLAB International. Annual revenues for the Synergy Health Labs were approximately $15 million and were included in the Applied Sterilization Technologies segment. We recorded proceeds of $25.0 million, net of cash divested, and recognized a pre-tax gain on the sale of $17.4 million in Selling, general, and administrative expense in the Consolidated Statement of Income.
Applied Infection Control
On August 31, 2016 we completed the sale of our Applied Infection Control ("AIC") product line to DEB USA, Inc., a wholly-owned subsidiary of S.C Johnson & Son, Inc. Annual revenues for the AIC product line were typically less than $50 million and were included in the Healthcare Products segment. We recorded proceeds of $41.8 million and recognized a pre-tax gain on the sale of $35.2 million in Selling, general, and administrative expense in the Consolidated Statement of Income.
UK Linen Management Services
On July 1, 2016 we sold our Synergy Health UK Linen Management Services business to STAR Mayan Limited. Annual revenues for the UK Linen Management Services were approximately $50 million and were included in the Healthcare Specialty Services segment. We recorded proceeds of $65.0 million, net of cash divested, and recognized a pre-tax loss on the sale of $66.4 million after allocation of a portion of the identified intangibles and goodwill associated with the Combination with Synergy in Selling, general, and administrative expense in the Consolidated Statement of Income.


12

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



3. Property, Plant and Equipment

Information related to the major categories of our depreciable assets is as follows:
 
 
 
December 31,
2016
 
March 31,
2016
Land and land improvements (1)
 
$
48,321

 
$
39,051

Buildings and leasehold improvements
 
417,373

 
446,277

Machinery and equipment
 
562,485

 
580,962

Linens
 
11,126

 
42,354

Information systems
 
124,467

 
126,180

Radioisotope
 
413,095

 
434,152

Construction in progress (1)
 
69,309

 
79,291

Total property, plant, and equipment
 
1,646,176

 
1,748,267

Less: accumulated depreciation and depletion
 
(706,586
)
 
(683,948
)
Property, plant, and equipment, net
 
$
939,590

 
$
1,064,319

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

4. Inventories, Net

Inventories, net are stated at the lower of cost or market. We use the last-in, first-out (“LIFO”) and first-in, first-out cost methods. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
 
 
 
December 31,
2016
 
March 31,
2016
Raw materials
 
$
67,105

 
$
62,673

Work in process
 
27,071

 
19,614

Finished goods
 
151,151

 
146,820

LIFO reserve
 
(17,299
)
 
(17,608
)
Reserve for excess and obsolete inventory
 
(18,314
)
 
(18,707
)
Inventories, net
 
$
209,714

 
$
192,792



13

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



5. Debt

Indebtedness was as follows:
 
 
 
December 31,
2016
 
March 31,
2016
Private Placement
 
$
666,000

 
$
666,000

Deferred financing costs
 
(3,057
)
 
(3,420
)
Credit Agreement
 
844,096

 
905,216

Total long term debt
 
$
1,507,039

 
$
1,567,796


On January 23, 2017 we entered into a Note Purchase Agreement with various institutional investors providing for the private issuance and sale on February 27, 2017 of our fixed-rate Series A Senior Notes in the aggregate principal amount of $95 million, €99 million and £75 million, or a total of approximately $296 million based upon closing exchange rates as of the date of signing of the Note Purchase Agreement. The Company's obligations under the Note Purchase Agreement and the Senior Notes are unsecured but guaranteed by certain of the Company's subsidiaries pursuant to an Affiliate Guaranty, which also was executed on January 23, 2017. All or substantially all of the net proceeds of the sales will be used to repay floating-rate bank debt under the Company's bank credit facility, thereby increasing the Company's proportion of fixed-rate debt. Total debt levels for the Company are expected to remain relatively unchanged after giving effect to these actions.
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, 2016 dated May 31, 2016.

14

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



6. Additional Consolidated Balance Sheet Information

Additional information related to our Consolidated Balance Sheets is as follows:
 
 
 
December 31,
2016
 
March 31,
2016
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
26,345

 
$
30,175

Accrued vacation/paid time off
 
11,580

 
14,368

Accrued bonuses
 
16,359

 
31,502

Accrued employee commissions
 
13,380

 
13,809

Other postretirement benefit obligations-current portion
 
2,463

 
2,463

Other employee benefit plans obligations-current portion
 
1,321

 
1,659

Total accrued payroll and other related liabilities
 
$
71,448

 
$
93,976

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
64,574

 
$
56,238

Self-insured risk reserves-current portion
 
9,771

 
8,266

Accrued dealer commissions
 
14,953

 
12,717

Accrued warranty
 
6,576

 
5,909

Other
 
60,262

 
70,245

Total accrued expenses and other
 
$
156,136

 
$
153,375

Other liabilities:
 
 
 
 
Self-insured risk reserves-long-term portion
 
$
13,257

 
$
13,257

Other postretirement benefit obligations-long-term portion
 
14,545

 
15,932

Defined benefit pension plans obligations-long-term portion
 
20,097

 
25,301

Other employee benefit plans obligations-long-term portion
 
3,879

 
4,366

Accrued long-term income taxes
 
2,100

 

Asset retirement obligation-long-term portion
 
9,482

 
10,342

Other
 
9,848

 
15,100

Total other liabilities
 
$
73,208

 
$
84,298


7. Income Tax Expense

The effective income tax rate for continuing operations for the three month period ended December 31, 2016 was 128.1% compared with 28.1% for the same prior year period. The effective income tax rates for the nine month periods ended December 31, 2016 and 2015 were 38.4% and 35.6%, respectively. The fiscal 2017 rates were unfavorably impacted by non-deductible goodwill impairment charges occurring in the third quarter. The impairment charge was treated as a discrete item, as we have no history of goodwill impairment and there is presently no reasonable expectation of goodwill impairments in the future. The Combination with Synergy, the adoption of ASU 2016-09: "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" (Topic 718), and discrete item adjustments related to future tax rate changes in the United Kingdom continue to favorably impact the fiscal 2017 rates.

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.


15

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local authorities, as well as foreign jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2013 and, with limited exceptions, we are no longer subject to United States state and local or non-United States income tax examinations by tax authorities for years before fiscal 2012. We remain subject to tax authority audits in various jurisdictions wherever we do business. We do not expect the results of these examinations to have a material adverse affect on our consolidated financial statements.
8. Benefit Plans

In the United States we sponsor an unfunded postretirement welfare benefits plan for two groups of former employees. Benefits under this plan include retiree life insurance and retiree medical coverage, including prescription drug coverage.
During the second quarter of fiscal 2009, we amended our United States post-retirement welfare benefits plan, reducing the benefits to be provided to retirees under the plan and increasing their share of the costs. The amendments resulted in a decrease of $46,001 in the accumulated post-retirement benefit obligation. The impact of this change was recognized in our Consolidated Balance Sheets in fiscal 2009 and is being amortized as a component of the annual net periodic benefit cost over a period of approximately thirteen years.
In July 2014, the Board of Directors of American Sterilizer Company (“AMSCO”) approved the termination of the American Sterilizer Company Retirement Income Plan (“Plan”) effective October 1, 2014.  The Pension Benefit Guaranty Corporation ("PBGC") did not object to this termination and AMSCO received a favorable determination from the IRS regarding the termination. On August 19, 2015, AMSCO agreed to purchase an annuity contract from Massachusetts Mutual Life Insurance Company to provide Plan benefits. Plan assets were converted to cash to fund the purchase. The purchase price of the annuity contract was $51,805. An additional employer contribution of $4,641 was made to the Plan to fund the annuity purchase obligation on August 26, 2015. As a result of the purchase of the annuity, we recognized a pension settlement of $26,470 in fiscal 2016. In addition, plan benefits and benefit administration became the responsibility of the annuity provider. Additional information regarding this defined benefit pension plan and other postretirement benefits plan is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
In the United Kingdom, we sponsor a defined benefit arrangement administered by a single group of trustees. The arrangement is comprised of three merged schemes. The trustees hold the pension assets to meet long-term pension liabilities for past and present employees. The level of retirement benefit is principally based on the terms of the scheme and the final pensionable salary prior to leaving active service, and is linked to changes in inflation up to retirement.
In previous years, Synergy sponsored a funded defined benefit arrangement in the Netherlands. This was a separate fund holding the pension scheme assets to meet long-term pension liabilities for past and present employees. Accrual of benefits ceased under the scheme effective January 1, 2013.
The Synergy Radeberg and Synergy Allershausen Schemes are German defined benefit funded pension schemes which are closed to new entrants.
The Synergy Daniken Scheme is a Swiss defined benefit funded pension scheme.
Components of the net periodic benefit cost for our defined benefit pension plans and other postretirement medical benefits plan were as follows:
 
 
 
Other Defined Benefit Pension Plan
 
Other Postretirement Benefits Plan
Three Months Ended December 31,
 
2016
2015
 
2016
2015
Service cost
 
$
472

$
324

 
$

$

Interest cost
 
189

641

 
139

148

Expected return on plan assets
 

(506
)
 


Amortization of loss
 


 
184

207

Amortization of prior service cost
 


 
(816
)
(815
)
Net periodic benefit cost
 
$
661

$
459

 
$
(493
)
$
(460
)

16

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



 
 
AMSCO Plan
 
Other Defined Benefit Pension Plan
 
Other Postretirement Benefits Plan
Nine Months Ended December 31,
 
2016
2015
 
2016
2015
 
2016
2015
Service cost
 
$

$
27

 
$
1,416

$
324

 
$

$

Interest cost
 

560

 
567

641

 
416

444

Expected return on plan assets
 

(1,008
)
 

(506
)
 


Amortization of loss
 

602

 


 
554

621

Settlement
 

26,470

 


 


Amortization of prior service cost
 


 


 
(2,447
)
(2,445
)
Net periodic benefit cost
 
$

$
26,651

 
$
1,983

$
459

 
$
(1,477
)
$
(1,380
)

We contribute amounts to the defined benefit pension plans at least sufficient to meet the minimum requirements of applicable employee benefit laws and local tax laws. We record liabilities for the difference between the fair value of the plan assets and the benefit obligation (the projected benefit obligation for pension plan and the accumulated postretirement benefit obligation for other postretirement benefits plan) on our accompanying Consolidated Balance Sheets.

Finally, the Dutch linen business acquired in the Synergy combination participates in a multi-employer industry-wide defined benefit scheme. Participation in this pension plan is mandatory. The pension scheme is an average pay scheme with a conditional fee (indexation). Indexation of assets and liabilities granted under the pension scheme takes place only if and insofar as the resources of the fund allow for it and this decision is taken by the pension fund. The pension entitlements under the pension plan are fully reinsured. It is not possible to identify the share of the underlying assets, liabilities, and overall surplus/deficit of the scheme attributable to the business, because the scheme is industry-wide. Under the guidance provided in ASC 715, "Compensation-Retirement Benefits", the scheme is treated as a defined contribution scheme within our financial statements. The total cost charged to the Consolidated Statements of Income in respect to this scheme was $1,983 for the nine months ended December 31, 2016.

9. Commitments and Contingencies

We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.

We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.

17

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



On December 19, 2014, a purported shareholder of Old STERIS filed a Verified Stockholder Derivative Complaint in the Court of Common Pleas, Cuyahoga County, Ohio (the "Court"), against the members of Old STERIS’s board of directors and certain officers of Old STERIS, challenging the excise tax make-whole payments approved by Old STERIS’s board in connection with the Combination. Old STERIS was named as a nominal defendant in the action. The case is captioned St. Lucie County Fire District Firefighters’ Pension Trust Fund v. Rosebrough, Jr., et al., Case No. CV 14 837749 (the "Action"). On September 28, 2015, the defendants reached an agreement in principle with plaintiff, regarding a settlement of the Action, and that agreement is reflected in a memorandum of understanding. In connection with the contemplated settlement, Old STERIS agreed to make certain additional disclosures related to the make-whole payments, which disclosures were reported on Old STERIS's Form 8-K dated September 28, 2015, and also agreed not to grant any new stock compensation subject to
Section 4985 of the Internal Revenue Code to any of the individual defendants in the Action until six months following the closing date of the Combination. The parties have subsequently entered into and executed a stipulation of settlement, on a combined class and derivative basis, including agreement on a maximum fee/expense award to plaintiff's counsel. The stipulation of settlement, which was subject to customary conditions including approval of the Court following notice and hearing, was filed with the Court along with a request for preliminary approval and the setting of a hearing date. A hearing on this matter was held by the Court on November 10, 2016, and an order and judgment approving the settlement was issued on November 15, 2016.
Other 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, 2016 dated May 31, 2016: “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters.
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 foreign 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.
Additional information regarding our contingencies is included in Item 2 titled, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations" under "Contingencies".

10. Business Segment Information

We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including capital equipment and related maintenance and installation services, as well as consumables.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, instrument and scope repairs, and linen management.
Our Life Sciences segment offers capital equipment and consumable products, and equipment maintenance and specialty services for pharmaceutical manufacturers and research facilities.
Our Applied Sterilization Technologies segment offers contract sterilization and laboratory services for medical device and pharmaceutical Customers and others.

18

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



The accounting policies for reportable segments are the same as those for the consolidated Company. Management evaluates performance and allocates resources based on a segment operating income measure. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which result in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare Products segment is responsible for the management of all but two manufacturing facilities and uses standard cost to sell products to the other segments. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. Segment operating income excludes certain adjustments which include acquisition and integration related costs, amortization of acquired intangibles, gains or losses on divestiture of businesses, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by excluding these items they gain better insight and greater transparency of the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making.
For the three and nine month periods ended December 31, 2016, 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 its Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
Financial information for each of our segments is presented in the following table:
 
 
 
Three Months Ended December 31,
 
 Nine Months Ended December 31,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
323,364

 
$
316,251

 
$
909,459

 
$
869,060

Healthcare Specialty Services
 
133,485

 
129,135

 
434,148
 
267,942
Life Sciences
 
78,274

 
82,702

 
240,948
 
210,514
Applied Sterilization Technologies
 
110,401

 
90,225

 
342,575
 
199,753
Corporate and other
 
1,250

 
375

 
4,437

 
1,218

Total revenues
 
$
646,774

 
$
618,688

 
$
1,931,567

 
$
1,548,487

Segment operating income:
 
 
 
 
 
 
 
 
Healthcare Products
 
$
65,213

 
$
52,158

 
$
149,965

 
$
121,930

Healthcare Specialty Services
 
2,211

 
7,372

 
7,704

 
16,364

Life Sciences
 
23,937

 
24,115

 
71,171

 
58,448

Applied Sterilization Technologies
 
36,492

 
26,766

 
116,856

 
60,802

Corporate and other
 
(2,135
)
 
(2,648
)
 
(7,372
)
 
(8,580
)
Total segment operating income
 
$
125,718

 
$
107,763

 
$
338,324

 
$
248,964

Less: Adjustments
 
 
 
 
 
 
 
 
Restructuring charges (1)
 
$
18

 
$
(193
)
 
$
220

 
$
(657
)
Amortization of acquired intangible assets (2)
 
5,598

 
15,494

 
42,908

 
28,194

Acquisition and integration related charges (3)
 
7,032

 
41,726

 
18,893

 
77,254

          Loss on fair value adjustment of acquisition related contingent consideration
 

 

 
1,850

 

 Net loss on divestiture of businesses (2)
 
28,969

 

 
42,771

 

Amortization of inventory and property "step up" to fair value (2)
 
(139
)
 
4,060

 
4,357

 
4,102

Settlement of pension obligation (4)
 

 
(46
)
 

 
26,470

Goodwill impairment loss (5)
 
58,356

 

 
58,356

 

Total operating income
 
$
25,884

 
$
46,722

 
$
168,969

 
$
113,601


19

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



(1) For more information related to restructuring, see our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
(2) For more information regarding our recent acquisitions and divestitures see Note 2 titled, "Business Acquisitions and Divestitures", as well as our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
(3) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(4) For more information regarding the settlement of our pension obligation see Note 8 titled "Benefit Plans", as well as our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
(5) For more information regarding the impairment of goodwill see Note 18 titled "Goodwill".


11. Shares and Preferred Shares

Common and Ordinary

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 December 31,
 
Nine Months Ended December 31,
 
 
2016
 
2015
 
2016
 
2015
Denominator (shares in thousands):
 
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
 
85,074

 
77,221

 
85,654

 
65,629

Dilutive effect of share equivalents
 
451

 
491

 
472

 
494

Weighted average shares outstanding and share equivalents—diluted
 
85,525

 
77,712

 
86,126

 
66,123


Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2016
 
2015
 
2016
 
2015
(shares in thousands)
 
 
 
 
 
 
 
 
Number of share options
 
683

 
293

 
558

 
254


Preferred Shares
Pursuant to an engagement letter dated October 23, 2015, we issued 100,000 preferred shares, par value of £0.10 ($0.15) each, for an aggregate consideration of approximately $15, in satisfaction of debt owed to a service provider. The holders of the preferred shares are entitled to a fixed cumulative preferential annual dividend of 5 percent on the amount paid periodically on the preferred shares respectively held by them. On a return of capital of the Company whether on liquidation or otherwise, the holders of the preferred shares shall be entitled to receive out of the assets of the Company available for distribution to its shareholders the sum of £0.10 ($0.15) per preferred share plus any accrued but unpaid dividends, but will not be entitled to any further participation in the assets of the Company. The holders of the preferred shares will have no right to attend, speak or vote, whether in person or by proxy, at any general meeting of the Company or any meeting of a class of members of the Company in respect of the preferred shares and will not be entitled to receive any notice of meetings.


20

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



12. Repurchases of Shares

On August 9, 2016, the Company announced that its Board of Directors had authorized the purchase of up to $300 million of our ordinary shares. We may enter into share repurchase contracts until August 2, 2021 to effect these purchases. Shares may be repurchased from time to time through open market transactions, including 10b5-1 plans. The repurchase program may be suspended or discontinued at any time. During the first nine months of fiscal 2017, we repurchased 1,254,821 of our ordinary shares pursuant to this authorization. During the first nine months of fiscal 2017, we obtained 160,798 of our ordinary shares in connection with share based compensation award programs.


13. 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.

Stock options provide the right to purchase our shares at the market price on the date of grant, subject to the terms of the option plan and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally may cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date. As of December 31, 2016, 5,621,002 shares remained available for grant under the long-term incentive plan.

The fair value of share-based compensation awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.

The following weighted-average assumptions were used for options granted during the first nine months of fiscal 2017 and 2016:
 
 
 
Fiscal 2017
 
Fiscal 2016
Risk-free interest rate
 
1.29
%
 
1.51
%
Expected life of options
 
5.66 years

 
5.69 years

Expected dividend yield of stock
 
1.54
%
 
1.40
%
Expected volatility of stock
 
22.92
%
 
25.06
%

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 1.85% and 1.55% was applied in fiscal 2017 and 2016, 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.


21

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



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, 2016
 
1,729,517

 
$
44.01

 
 
 
 
Granted
 
402,141

 
69.85

 
 
 
 
Exercised
 
(105,677
)
 
30.69

 
 
 
 
Forfeited
 
(19,851
)
 
61.95

 
 
 
 
Canceled
 
(470
)
 
25.98

 
 
 
 
Outstanding at December 31, 2016
 
2,005,660

 
$
49.71

 
6.4 years
 
$
36,537

Exercisable at December 31, 2016
 
1,184,761

 
$
39.82

 
5.0 years
 
$
32,819


We estimate that 806,760 of the non-vested stock options outstanding at December 31, 2016 will ultimately vest.

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $67.39 closing price of our ordinary shares on December 31, 2016 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.

The total intrinsic value of stock options exercised during the first nine months of fiscal 2017 and fiscal 2016 was $4,160 and $12,221, respectively. Net cash proceeds from the exercise of stock options were $3,221 and $10,908 for the first nine months of fiscal 2017 and fiscal 2016, respectively.

The weighted average grant date fair value of stock option grants was $13.42 and $14.66 for the first nine months of fiscal 2017 and fiscal 2016, respectively.

Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of December 31, 2016 and 2015 was $1,736 and $2,527, 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, 2016
 
872,972

 
41,641

 
$
51.98

Granted
 
238,653

 
19,634

 
69.98

Vested
 
(262,082
)
 
(20,424
)
 
40.32

Forfeited
 
(58,536
)
 
(5,327
)
 
62.98

Non-vested at December 31, 2016
 
791,007

 
35,524

 
$
60.74


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 nine months of fiscal 2017 was $11,391.

Restricted share units carry generally the same terms and vesting requirements as restricted stock except that they may be settled in stock or cash upon vesting. Those that are settled in cash are classified as liabilities. All outstanding cash-settled restricted share units vested during fiscal year 2016. The fair values of cash-settled restricted share units were revalued at each reporting date and the related liability and expense adjusted accordingly. All restricted shares outstanding will be settled in stock upon vesting.


22

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



The tax benefit from share-based compensation was $4,290 and $5,909 for the first nine months of fiscal 2017 and fiscal 2016, respectively.

As of December 31, 2016, there was a total of $37,511 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 2.15 years.

14. Financial and Other Guarantees

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

Changes in our warranty liability during the first nine months of fiscal 2017 were as follows:
 
 
Balance, March 31, 2016
$
5,909

Warranties issued during the period
8,386

Settlements made during the period
(7,719
)
Balance, December 31, 2016
$
6,576


We also sell product maintenance contracts to our Customers. These contracts range in terms from one to five years and require us to maintain and repair the product over the maintenance contract term. We initially record amounts due from Customers under these contracts as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” The liability recorded for such deferred service revenue was $33,467 and $33,416 as of December 31, 2016 and March 31, 2016, respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenue is excluded from the table presented above.

15. 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. We do not use derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At December 31, 2016, we held foreign currency forward contracts to buy 80.0 million Mexican pesos and 6.0 million Canadian dollars. At December 31, 2016 we held commodity swap contracts to buy 199.6 thousand pounds of nickel.
 
 
Asset Derivatives
 
Liability Derivatives
Balance Sheet
 
Fair Value at
 
Fair Value at
 
Fair Value at
 
Fair Value at
Location
 
December 31, 2016
 
March 31, 2016
 
December 31, 2016
 
March 31, 2016
Prepaid & Other
 
$
172

 
$
145

 
$

 
$

Accrued expenses and other
 
$

 
$

 
$
73

 
$
122






23

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
 
 
Location of gain (loss)
recognized in income
 
Amount of gain (loss) recognized in income
Three Months Ended December 31,
 
Nine Months Ended December 31,
2016
 
2015
 
2016
 
2015
Foreign currency forward contracts
 
Selling, general and administrative
 
$
(945
)
 
$
(380
)
 
$
(2,495
)
 
$
(642
)
Commodity swap contracts
 
Cost of revenues
 
$
(24
)
 
$
(159
)
 
$
392

 
$
(491
)

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 $108,935 at December 31, 2016. 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.


16. Fair Value Measurements

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

The following table shows the fair value of our financial assets and liabilities at December 31, 2016 and March 31, 2016:
 
 
 
 
 
 
Fair Value Measurements at December 31, 2016
and March 31, 2016 Using
 
 
Carrying Value
 
Quoted Prices
in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
Level 1
 
Level 2
 
Level 3
December 31
March 31
December 31
March 31
 
December 31
March 31
 
December 31
March 31
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
 
$
264,857

$
248,841

 
$
264,857

$
225,090

 
$

$
23,751

 
$

$

Forward and swap contracts (2)
 
172

145

 


 
172

145

 


Investments (3)
 
11,309

6,192

 
11,309

6,192

 


 


Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Forward and swap contracts (2)
 
$
73

$
122

 
$

$

 
$
73

$
122

 
$

$

Deferred compensation plans (3)
 
1,757

1,765

 
1,757

1,765

 


 


Long term debt (4)
 
1,507,039

1,567,796

 


 
1,513,528

1,592,184

 


Contingent consideration obligations (5)
 
6,997

5,886

 


 


 
6,997

5,886


(1) Money market fund holdings are classified as level two as active market quoted prices are not available.
(2) 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.

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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)



(3) 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. Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying investments. 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 including an incremental investment of $4,564 made in April 2016.
(4) We estimate the fair value of our principal amount of long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(5) Contingent consideration obligations arise from prior 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.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized as follows:
 
Contingent Consideration
Balance at March 31, 2016
$
5,886

Additions
1,352

Payments
(667
)
Foreign currency translation adjustments (1)
426

Balance at December 31, 2016
$
6,997

(1) Reported in other comprehensive income (loss).

Information regarding our investments is as follows:
 
 
 
 
 
 
Investments at December 31, 2016 and March 31, 2016
 
 
Cost
 
Unrealized Gains
 
Unrealized Losses (2)
 
Fair Value
 
 
 
 
 
 
 
 
December 31
 
March 31
December 31
 
March 31
 
December 31
 
March 31
 
December 31
 
March 31
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities (1)
 
$
11,037

 
$
4,681

 
$

 
$

 
$
(1,405
)
 
$
(185
)
 
$
9,632

 
$
4,496

Mutual funds
 
1,200

 
1,289

 
477

 
407

 

 

 
1,677

 
1,696

Total available-for-sale securities
 
$
12,237

 
$
5,970

 
$
477

 
$
407

 
$
(1,405
)
 
$
(185
)
 
$
11,309

 
$
6,192

(1) Our marketable equity securities have been in a unrealized loss position for less than 12 months.
(2) Amounts reported include the impact of foreign currency movements relative to the U.S. dollar.


25

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)




17. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Foreign Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three and nine months ended December 31, 2016 were as follows:

 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Foreign Currency Translation (3)
 
Total Accumulated Other Comprehensive Income
(Loss)
 
Three Months
 
Nine Months
 
Three Months
 
Nine Months
 
Three Months
 
Nine Months
 
Three Months
 
Nine Months
Beginning Balance
$
(767
)
 
$
(673
)
 
$
4,328

 
$
5,108

 
$
(97,589
)
 
$
(72,594
)
 
$
(94,028
)
 
$
(68,159
)
Other Comprehensive Income (Loss) before reclassifications
(68
)
 
(199
)
 
102

 
308

 
(180,084
)
 
(205,079
)
 
(180,050
)
 
(204,970
)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
13

 
50

 
(493
)
 
(1,479
)
 

 

 
(480
)
 
(1,429
)
Net current-period Other Comprehensive (Loss)
(55
)
 
(149
)
 
(391
)
 
(1,171
)
 
(180,084
)
 
(205,079
)
 
(180,530
)
 
(206,399
)
Balance at December 31, 2016
$
(822
)
 
$
(822
)
 
$
3,937

 
$
3,937

 
$
(277,673
)
 
$
(277,673
)
 
$
(274,558
)
 
$
(274,558
)

Details of amounts reclassified from Accumulated Other Comprehensive Income (Loss) are as follows:

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


26

Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2016 and 2015
(dollars in thousands, except as noted)




18. Goodwill

Changes to the carrying amount of goodwill for the nine months ended December 31, 2016 are as follows:
  
Healthcare Products
Segment
 
Healthcare Specialty Services Segment
 
Life Sciences
Segment
 
Applied Sterilization Technologies Segment
 
Synergy Combination
 
Total
Balance at March 31, 2016
$
363,770

 
$
154,272

 
$
147,334

 
$
83,035

 
$
1,408,192

 
$
2,156,603

Goodwill acquired
20,706

 
21,781

 

 

 

 
42,487

Synergy allocation

 
376,807

 

 
1,308,717

 
(1,411,781
)
 
273,743

Divestitures

 
(85,806
)
 

 

 

 
(85,806
)
Impairment

 
(58,356
)
 

 

 

 
(58,356
)
Foreign currency translation adjustments
(10,011
)
 
(34,849
)
 
(1,176
)
 
(53,218
)
 
3,589

 
(95,665
)
Balance at December 31, 2016
$
374,465

 
$
373,849

 
$
146,158

 
$
1,338,534

 
$

 
$
2,233,006


During the first nine months of fiscal 2017, the increase in goodwill in the Healthcare Products segment primarily relates to the acquisition of Medisafe. The increase associated with the Healthcare Specialty Services and Applied Sterilization Technologies segments are primarily related to the allocation of Synergy goodwill after finalizing the opening balance sheet fair value estimates. The Healthcare Specialty Services segment was also impacted by the fiscal 2017 acquisitions of Compass Medical Inc. and Phoenix Surgical Holdings, Ltd. and Endo-Tek LLP, the UK Linen Management Services divestiture and the Synergy Health Netherlands goodwill impairment discussed below.

We evaluate the recoverability of recorded goodwill amounts annually during the third fiscal quarter, or when evidence of potential impairment exists. As a result of our annual goodwill impairment review for fiscal year 2017, we concluded that the carrying value of one our reporting units exceeded its fair value. The Synergy Health Netherlands linen management unit is reported within our Healthcare Specialty Services segment. Financial forecasts prepared for the annual assessment reflect pricing pressures, volume declines driven by overcapacity in the market, and a decline in the overall market size. These factors result in further degradation of the already low operating margin and cash flows of this unit. We incurred a goodwill impairment charge of $58,356 as a result, which is recorded within Goodwill impairment loss in the Consolidated Statements of Income. Fair market value of the reporting unit was determined using discounted cash flows and estimated fair market values. Fair value calculated using a discounted cash flow analysis is classified within level 3 of the fair value hierarchy and requires several assumptions including risk adjusted discount rates and financial forecasts.



27

Table of Contents


Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders of STERIS plc

We have reviewed the consolidated balance sheet of STERIS plc and subsidiaries (“the Company”) as of December 31, 2016, and the related consolidated statements of income and comprehensive (loss) income for the three- and nine-month periods ended December 31, 2016 and 2015, and the consolidated statements of cash flows for the nine-month periods ended December 31, 2016 and 2015. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of STERIS plc and subsidiaries as of March 31, 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated May 31, 2016. In our opinion, the accompanying consolidated balance sheet of STERIS plc and subsidiaries as of March 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.








/s/ Ernst & Young LLP



Cleveland, Ohio
February 8, 2017



28

Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), we explain the general financial condition and the results of operations for STERIS including:
 
what factors affect our business;
what our earnings and costs were in each period presented; 
why those earnings and costs were different from prior periods;
where our earnings came from;
how this affects our overall financial condition;
what our expenditures for capital projects were; and
where cash will come from to fund future debt principal repayments, growth outside of core operations, repurchases of shares, pay cash dividends and fund future working capital needs.

As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the third quarter and first nine months of fiscal 2017 and fiscal 2016. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in STERIS.

Financial Measures

In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We sometimes use the following financial measures in the context of this report: backlog; debt-to-total capital; net debt-to-total capital; and days sales outstanding. We define these financial measures as follows:
 
Backlog – We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements.
Debt-to-total capital – We define debt-to-total capital as total debt divided by the sum of total debt and shareholders’ equity. We use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth.
Net debt-to-total capital – We define net debt-to-total capital as total debt less cash (“net debt”) divided by the sum of net debt and shareholders’ equity. We also use this figure as a financial liquidity measure to gauge our ability to borrow and fund growth.
Days sales outstanding (“DSO”) – We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters’ revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect.

We, at times, may also refer to other financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the United States. Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies. Additional information regarding these financial measures, including reconciliations of each non-GAAP financial measure, is available in the subsection of MD&A titled, "Non-GAAP Financial Measures."

Revenues – Defined

As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:
 

29

Table of Contents

Revenues – Our revenues are presented net of sales returns and allowances.
Product Revenues – We define product revenues as revenues generated from sales of consumable and capital equipment products.
Service Revenues – We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment. Service revenues also include hospital sterilization services, instrument and scope repairs, and linen management as well as revenues generated from contract sterilization and laboratory services offered through our Applied Sterilization Technologies segment.
Capital Revenues – We define capital revenues as revenues generated from sales of capital equipment, which includes steam sterilizers, low temperature liquid chemical sterilant processing systems, including SYSTEM 1 and 1E, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.
Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products, which includes SYSTEM 1 and 1E consumables, V-Pro consumables, gastrointestinal endoscopy accessories, sterility assurance products, skin care products, cleaning consumables, surgical instruments, and barrier products.
Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues.

General Company Overview and Executive Summary

STERIS plc (“Parent”) was organized in 2014 under the name Solar New HoldCo Limited as a private limited company for the purpose of effecting under the laws of England and Wales the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). Effective November 2, 2015 the Parent was re-registered as a public company under the name STERIS plc and the Combination closed. As a result of the Combination closing, STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name of Synergy Health Limited. The acquisition of Old STERIS was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015, are considered to be the historical financial statements of STERIS plc.
Due to the timing of the closing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward, which will affect comparability to the prior period historical operations of the Company throughout this quarterly report on Form 10-Q.
As a result of the Combination, we have reorganized our operations into four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. We describe our business segments in Note 10 to our consolidated financial statements titled, “Business Segment Information.”
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. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, medical devices and services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. In addition, each of our core industries is experiencing specific trends that could increase demand. Within healthcare, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. The aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits processed by our Applied Sterilization Technologies segment.
We are actively pursuing new opportunities to adapt our proven technologies to meet the changing needs of the global marketplace. We are also executing on our strategic initiatives by expanding into adjacent markets with acquisitions, divesting non-core assets and integrating Synergy. During the first nine months of fiscal 2017, we divested our Applied Infection Control ("AIC") product line (annual revenues of approximately $50 million) and three businesses acquired in the Combination with Synergy: UK Linen Management Services business (annual revenues of approximately $50 million), US Linen Management Services business (annual revenues of approximately $50 million), and Synergy Health Laboratory Services (annual revenues of approximately $15 million).

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Fiscal 2017 third quarter revenues were $646.8 million, representing an increase of 4.5% over the fiscal 2016 third quarter revenues of $618.7 million. This increase was primarily attributable to recent acquisitions including the Combination with Synergy along with organic revenue growth in three of our four reportable business segments, partially offset by divestitures and the negative impact of foreign currency. Revenues for the first nine months of fiscal 2017 were $1,931.6 million representing an increase of 24.7% over the first nine months of fiscal 2016 revenues of $1,548.5 million, reflecting growth within all four business segments including growth resulting from the Combination, partially offset by divestitures and the negative impact of foreign currency.
Fiscal 2017 third quarter gross margin percentage was 39.8% compared with 38.5% for the fiscal 2016 third quarter. The increase was primarily due to divestitures of certain lower margin operations and the positive impact of foreign currency, partially offset by the addition of Synergy's hospital sterilization services and linen management businesses. During the first nine months of fiscal 2017, gross margin percentage was 38.6% compared with 40.8% for the first nine months of fiscal 2016 primarily due to the Combination. We have applied our "four walls" approach to the operations of Synergy, which reports all direct and indirect costs related to the delivery of services as costs of goods sold. This approach caused additional costs to be included in costs of goods sold rather than in selling, general and administrative costs as Synergy would have previously reported.
Fiscal 2017 third quarter operating income was $25.9 million, compared to fiscal 2016 third quarter operating income of $46.7 million. The decrease was primarily due to the goodwill impairment loss relative to the Synergy Health Netherlands linen management unit recorded in the third quarter of fiscal 2017. During the first nine months of fiscal 2017, operating income was $169.0 million, compared to $113.6 million for the first nine months of fiscal 2016. The year over year increase is attributable to growth, margin improvements, recent acquisitions, including the Combination and lower acquisition related expenses, partially offset by the goodwill impairment loss and the net loss recognized on the divestiture of certain non-core assets.

Cash flows from operations were $289.4 million and free cash flow was $182.0 million in the first